Business Essentials, 13th Edition Ronald J. Ebert Solution Manuals.pdf

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Solution Manual

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Business Essentials

Edition: Author(s):

13th Edition Ronald J. Ebert Ricky W. Griffin

Instructor’s Manual for Business Essentials Carol Davis Wright

Business Essentials Thirteenth Edition

Ronald J. Ebert Ricky W. Griffin

For exam and test prep, contact excellentessaywriters@gmail.com

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, you’ll develop an understanding of the foundations of business and will be able to apply what you already know (or what you are starting to 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 successgoals and functions are, and how the external environments of business affect the 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. Small Group Discussion: Scanning the Environment 3. Up for Debate: Comparing Economic Systems

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Description Time Limit Students of knowledge assess abouttheir business leveland set their own learning goals for the class.

20 min.

Students consider how parts of the affect external environment 25 min. businesses and industries.

Teams of students discuss types of 30 min. economic systems.

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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, taxes to support government, 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.

3. Technological Environment. The technological environment generally includes all the ways by which firms create value for their constituents; technology includes human

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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.

The economic environment refers to relevant conditions that 6.Economic Environment. 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 Use In-Class Activity 2: Small Group Discussion: Scanning the Environment Time Limit: 25 minutes

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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 its individual citizens 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.

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Remind students that inputs used to produce outputs are also called factors of

production; they include labor, capital, entrepreneurship, physical resources, and information resources.

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?

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• 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.

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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.

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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

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business news!

Use In-Class Activity 3: Class Discussion: 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 U.S.? Why or why not?

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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 point at which the curves intersect is the market price (or equilibrium price). c. Surpluses and Shortages: With a surplus, the quantity supplied exceeds the quantity demanded; quantity demanded exceeds quantity supplied with 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? B. Private Enterprise and Competition in a Market Economy

Individuals pursue their own interests with minimal government restriction in a private

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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. 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.

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Remind students that monopolistic competition is characterized by (a) many buyers, (b)

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many sellers, and (c) products that are differentiated.

Reinforce that an oligopoly is characterized by (a) many buyers, (b) few sellers, (c) products meaning athat are quite similar, and (d) a change in price by one seller often

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change in price by all sellers.

Remind students that a monopoly is characterized by (a) many buyers, (b) only one

seller, QUICK QUESTION and (c) prices being set by the one seller.

• Which level of competition best describes the market in each of the following scenarios?

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o o o o o

Your local Pizza Hut (monopolistic competition) A local farmer selling apples for applesauce (perfect competition) Cell phone service (oligopoly) Apple store (monopolistic competition) Local utility/power company (monopoly)

HOMEWORK Visit a Shopping Mall!

Now is a good time to assign Application Exercise 1-9 from the end-of-chapter materials as homework. This assignment asks students to visit a local shopping mall and determine the degree of competition stores in the mall face in their immediate environment.

At-Home Completion Time: 1 to 1.5 hours

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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 These statistics 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.

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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. 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 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. In early 2010, during the Great Recession, unemployment in the U.S. was 10.2 percent. By November 2011, it was 8.7 percent. By the end of 2016, it was 4.9 percent. In early 2020, it was around 3.5 percent. By mid 2020, the impact of COVID-19 had pushed unemployment up to over 8 percent.

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 policiesmanage 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

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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.

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

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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.

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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.

country regardless of where they are produced; this figure does not include the value of products produced within the country by a foreign company.

HOMEWORK Interview a Business Owner Now is a good time to assign Application Exercise 1-10 from the end-of-chapter materials in the textbook. This assignment asks students to interview a business owner or senior manager and ask them how demand and supply affect their business, which essential factors of production are most central to the firm’s operations, and how fluctuations in economic indicators affect their business. At-Home Completion Time: 1–2 hours

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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.

Chapter 9 covers the decision-making process while Chapter 11 Critical Thinking: 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: application and computing skills is found in Chapter 14.

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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.

In-Class Activity 2: 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

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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 (for example: 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. Remind them that changes can occur quickly or slowly.

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.

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In-Class Activity 3: 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.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1-1.What are the benefits of businesses? Can a business negatively affect society? Give one example of a business that is benefiting society and one example of a negative effect. Try to identify one of each and then a third that is perhaps doing both.

The benefits of businesses are: businesses produce most of the goods and services consumed, employ most working people, create new innovations, and provide opportunities for new businesses to serve as suppliers. Further, businesses contribute to the quality of life and the standard of living.

A business can negatively affect society if it produces goods and services that harm consumers or the environment. An example would be a company that uses a hazardous chemical in its production process and dumps the chemical into a nearby lake causing serious illness. (Learning Objective 1-1, 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. What is a demand curve? A supply curve? How are they 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. Why is inflation both good and bad? How does the government try to control demand and supply curves?

Inflation is both good and bad because it can lead to a spiral of rising wages chasing rising prices, which decreases the standard of living. It is good because at moderate levels, it can signal the beginning of a period of economic growth. Monetary policy, particularly the ability to adjust interest rates, is government’s most powerful tool to control inflation.

(Learning Objective 1-4 – AACSB – application of knowledge)

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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. Visit a local shopping mall or shopping area. Pick three stores and determine what degree of competition each faces in its immediate environment. For example, if only one store in the mall sells shoes, that store represents a “local” monopoly.

Note businesses that have direct

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competitors (for instance, two gas stations or fast-food restaurants very near each other) and show how they compete with one another. Also speculate about why they might have located right next to each other. Answers will vary, but students should focus on the criteria for competition discussed in the chapter. For example, businesses with direct competitors operate within monopolistic competition; style, color, quality levels, and brand names often differentiate products. If only a few sellers of a product exist, as in an oligopoly, products will be quite similar, and a change in price by one seller will mean a change in price by all sellers. Also, students should identify areas of concentration of competitors, such as multiple fast-food providers in a limited geographic area, and should discuss probably cause for that, such as appeal to a common demographic, convenience, traffic flow, and simple competitiveness. (Learning Objective 1-3 – AACSB – application of knowledge)

1-10. Interview a business owner or senior manager. Ask this individual to describe for you the following things: (1) how demand and supply affect the business, (2) what essential factors of production are most central to the firm’s operations, and (3) how fluctuations in economic indicators affect his or her business or business decisions.

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 13 – 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?

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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?

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%, 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, non-price 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 non-coffee 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.

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EXERCISING YOUR ETHICS: GETTING CAUGHT OUT IN THE COLD (Learning Objective 1-2 and 1-3 – AACSB – ethical understanding and reasoning, reflective thinking) 1-19. What are the roles of supply and demand in this scenario?

Huma anticipates that the supply of heating oil will be higher this winter, resulting in the ability to charge less than last winter. She also believes that demand will increase by offering the ability to lock in a price, as that price is lower than people paid in the past. Paying a fixed price per gallon provides cost certainty to customers. Information resources are an important factor of production that leads to this recommendation.

1-20. What are the underlying ethical issues from both the consumer and the business owner’s perspective?

Underlying ethical issues revolve around generating maximum pricing versus generating an acceptable profit, while giving customers an even better deal than the locked in price of $2.40 per gallon.

1-21. What would you do if you were actually faced with this situation?

Answers will vary, but students should at least acknowledge the ethical issues.

CASES: REINVENTING AN AMERICAN ICON (Learning Objectives 1-3 and 1-4 AACSB – application of knowledge, reflective thinking) – 1-22.What are the major types of competition in a free market economy, and how do they differ? Students will need to discuss the four degrees of competition in a private enterprise system: perfect competition, monopolistic competition, oligopoly, and monopoly. Perfect competition exists when all firms in an industry are small, there exist many of them, and no single firm is powerful enough to influence prices. In monopolistic competition, numerous sellers try to differentiate their product from that of the other firms. An oligopoly exists when an industry has only a few sellers. It is usually quite difficult to enter the market and the firms tend to be large. A monopoly exists when there is only one seller in a market. A firm operating in a monopoly has complete control over the price of its products.

1-23. Explain how business managers might view the concepts of supply and demand, especially with regard to how they may influence those factors or be influenced by them.

Supply is the willingness and ability of producers to offer a good or service for sale.

Demand is the willingness and ability of buyers to purchase a product. Business managers will attempt to match the supply of a product with the demand for a product, specifically at the

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equilibrium price. Merchants may use information resources to quickly react as market forces affect the demand or supply of products.

1-24. What economic indicators would a business owner 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.

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. Should there be more government intervention in the markets and business dealings? Why or why not?

What role would the government play in regulating various industries and markets? There will be much debate about whether there should be government intervention in specific industries. Students should be asked if it is good for competition and society for the government to intervene. The discussion should focus on the long-run implications.

GAME THEORY IN THE VIDEO GAME CONSOLE INDUSTRY – (Learning Objectives 1-1 and 1-3 AACSB – application of knowledge, reflective thinking) 1-27. In terms of degrees of competition, how would you describe the market for game consoles? Do you think this will change in the next 5 years? If so, how?

Students should focus on the characteristics of the competitive structure and which best fits the video game market. Students should consider what alternatives are available now and what alternatives may become available in the future. For example, can online game competition become a viable competitor? What about virtual reality? Students will probably have varied responses depending on their perspective on the viability of virtual reality.

1-28. How hard would it be for a new company to get started in the game console industry?

What are the barriers to entry? What strategies would you suggest for someone with an idea for a new game console?

The information provided indicates that it will be very difficult for a new company to succeed, as the Ouya failed within two years of introduction. Barriers to entry include the ability to produce and promote the product and develop enough games to attract attention.

After so many years (since 2000), the three brands hold the entire market. There is no reason to expect that to change soon.

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1-29. Do you think that innovations, breakthroughs, and pricing strategies in the game console market are coordinated? Why, or why not?

Students should focus on the competitive, social, technological, and economic factors that will affect the success or failure of products in the game console 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. It is similar to the mobile phone market with which students are very familiar.

1-30. How do you think an alliance between Microsoft and Sony would affect competition in the video game console industry? Do you think it would be beneficial or harmful for consumers? Explain your position.

Since Microsoft has tended to focus on software and Sony more on hardware, it may be that an alliance will utilize each company’s strengths. Students should acknowledge that a strong alliance may change the industry from a three-company industry to something closer to a two-company industry. That will change competition, so students should discuss what those changes can mean for consumers. Will competition be monopolistic, an oligopoly, or a monopoly? Will prices increase or decrease?

1-31. Do you think that having more manufacturers in this industry would be positive or negative? Why? Since these three manufacturers have controlled the market for so many years, students may not consider it a negative to have only three choices. Similar to mobile phones, users frequently are very loyal to a certain brand.

Once students have answered the questions, discuss their answers as a class. As students discuss their answers, make sure they touch on some of the following points. Technological changes are frequent and sometimes market changing. How much does loyalty matter to users? Do specific features help create loyalty and preference?

1-32. Which game console do you think is superior? Give a short list of reasons for your opinion.

Answers will vary depending on students’ experiences with the various consoles and their own personal preferences for game play.

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Chapter 2: Understanding Business Ethics and Social Responsibility Chapter Overview Just because others see something as ethical doesn’t mean you will agree. There is not always a yes/no, right/wrong, black/white answer to everything. 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.

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

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity Description 1. Icebreaker: What’s Ethical in Students share their views on business ethics.

Business?

Students discuss how ethical norms 2. Class Discussion: Ethical affect ethical judgments.

Judgment Making 3. Up for Debate: Can Ethics Be Students discuss varying opinions on ethics training as a class.

Taught?

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Time Limit 20 min.

15 min.

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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.

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

2. 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.

B. 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

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countries.

C. Assessing Ethical Behavior 1. 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.

2.

3.

4.

Utility: Does a particular act optimize the benefits to those who are affected by it?

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

Justice: Is it consistent with what’s fair?

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

D. 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

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

1. 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.

2. 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.

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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?

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

Time Limit: 20 minutes 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

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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 its social responsibilities. A whistle-blower is an employee who discovers and tries to end a company’s unethical, illegal, or socially irresponsible actions by publicizing them.

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

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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 OrganizationsStance: 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

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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 bigbusiness 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

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Learning Objective 2-5 Explainthe 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.

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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, decisionmaking, consideration, and evaluation.

A. Formal Organizational Dimensions 1. Legal is theCompliance:Legal extent to whichcompliance 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 1. Organization LeadershipandCulture: 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.

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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) .

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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.

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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)

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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 statements.(Learning Objective 2-6 – AACSB – application of knowledge) responsibility 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)

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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 etc. 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 beyondObjective what is required of them in meeting the needs of stakeholders.

(Learning 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?

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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.

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, etc.

2-17. If you were your company’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. Choose an ethical dilemma from Step 1. How would you handle it? How far would you go to maintain your personal ethical standards, especially if your job and reputation were at stake?

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. For instance, in asserting that inflating sales and revenue data on official company statements to increase stock value potentially harms stakeholders and the reputation of the company, students should recognize that shareholders and upper management’s constant drive to increase share prices could put undue pressure on financial reporting staff, causing them to make mistakes of judgment. Students should also note the legal issues when responding to the ethical dilemmas.

EXERCISING YOUR ETHICS: YOU CAN’T HAVE YOUR CAKE (Learning Objective 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.

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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. 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: EPIPEN: BALANCING MORALS AND PROFITS (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 Mylan has an ethical obligation to keep prices down? 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 Mylan’s approach to social responsibility? How did it balance its responsibilities to shareholders with its responsibility to the public?

Stakeholders include customers, employees, investors, suppliers, and local communities.

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 Mylan is either obstructionist or defensive in its approach, and that the balance was tipped in favor of management (in the form of high compensation) and investors (profits).

2-24. Do you personally know anyone who depends on an expensive life-preserving drug or medical procedure? If so, how does that person pay for the product or service? What choices does that person have?

Answers will vary.

2-25. What recourse is available to you if you think a company is driving prices up artificially?

Students may identify alternatives to some products, however, in the case of the EpiPen, alternatives were limited. Therefore, students should explore advocacy, policy, government intervention, and other options.

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WHEN MOTHER NATURE STORMS IN (Learning Objective 2-5 – AACSB – application of knowledge, ethical understanding and reasoning) 2-26. After Hurricane Sandy hit, Lowe’s committed to maintaining prices on emergency goods.

Do you think that other retailers acted similarly? Why or why not?

Many students will probably respond that many retailers did not maintain prices but instead took of advantage of the situation. Other students will note that many other retailers acted ethically and responsively.

2-27. Do you think that social responsibility is good for business? What would motivate a profitseeking company like Whirlpool to incur the expense of donating appliances to the rebuilding effort?

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.

Besides generating goodwill for Whirlpool, the donation was a marketing coup that was highlighted in ads for Whirlpool.

2-28. How would you characterize Home Depot’s approach to social responsibility? Be sure to support your conclusion.

Home Depot’s approach to social responsibility would be characterized as a proactive stance where companies seek opportunities to contribute to the wellbeing of groups and individuals in its social environment.

2-29. Do you think that U.S. businesses have a greater responsibility to support rebuilding in New Jersey or Haiti? Defend your answer.

Answers will vary but many students will believe that U.S. businesses have a greater responsibility to support rebuilding in New Jersey rather than Haiti.

2-30. What is the appropriate role of government in the event of a natural disaster such as Hurricane Sandy?

Answers will vary but most students will answer that it is appropriate for the government to take a very active role in recovering from natural disasters. This is an opportunity to challenge students on their attitude toward taxes, government spending, and personal responsibility.

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Chapter 3: Entrepreneurship, New Ventures, and Business Ownership Chapter Overview Have you ever wanted to be your own boss? Think about getting to go to work when you want.

Think about getting to call your own shots. Although it’s anything but easy, starting your own 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 1. Icebreaker: The Role of Small Business 2. Up for Debate: The Wide World of Risk

Description Time Limit Students discuss the role of small business 15 min. in their communities.

Students are divided into groups to discuss ways in which the entrepreneurial spirit has been evident throughout U.S. 30 min. history, and how entrepreneurship is valuable to an economic system.

3.Small-Group Groups of students weigh the importance Discussion: of entrepreneurship in the development of Entrepreneurship and the fast-growing businesses.

Growth of Businesses Groups of students design a new business 4. Small-Group products/services and identify possible Discussion: What’s the being sold as well as possible customers.

Next Big Thing?

5. Small-Group Students identify the factors that help a Discussion: How Can We Succeed in the Software company in the software industry become a success.

Industry?

6. Class Discussion: Conjuring Up Profits?

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Students identify what makes a successful company, at least in terms of usage, financially successful.

20 min.

45 min.

30 min.

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? is independent A small business (that is, 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 35-45 percent of all new jobs in the high-technology sectors of the economy alone.

2. Innovation. Small business produces 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.

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%.

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.

3. Construction. About 9.6 percent of businesses with fewer than 20 employees are involved in 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. .

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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 customer relations 3. A desire to be their own bosses 4. The ability to handle uncertainty 5. A desire for risk-taking while not identifying it as such 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?

Use In-Class Activity 2: Up for Debate: The Wide World of Risk Time Limit: 30 minutes Use In-Class Activity 3: Small-Group Discussion: Entrepreneurship and the Growth of Businesses Time Limit: 20 minutes

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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.

An organization’s distinctive competencies are the aspects of business that the firm performs A. better Understanding Distinctive Competencies 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 well-defined 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 are larger organizations.

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

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: 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.

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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. Startup 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 two-thirds of all money invested; smaller portions of funding come from banks, independent investors, and government loans.

1. 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 SBA and invest it in or loan it to small businesses.

2. 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 micro-loan 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.

3. Other sources of financing include overseas financing and online companies that focus on small businesses.

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KEY TEACHING TIPS • Make sure that students understand that, as a general rule, 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.

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

QUICK QUESTIONS

• What is the purpose of a business plan?

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

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

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

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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 ongoing 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 make it for ten years or more.

B. Reasons for Failure Four general factors contribute to small-business failure: 1. Managerial incompetence or inexperience 2. Neglect 3. Weak control systems 4. Insufficient capital C. Reasons for Success Four general factors contribute to small-business success: 1. Hard work, drive, and dedication 2. Market demand for the products or services being provided 3. Managerial competence 4. Luck

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KEY TEACHING TIPS •

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

• Although starting a new business is risky, make sure you tell students that the smallbusiness failure rate has declined since the 1980s. The SBA estimates that one third of all new start-ups now survive ten 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 Succeed in the Software 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 owned is sole proprietorship 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 this form of ownership.

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 the general A most common partnership, type, is a sole proprietorship multiplied by the number of partnerowners. 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.

Master Limited Partnerships 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 of corporations. These groups of sole proprietorships or partnerships agree to work together for their common benefit. They give members greater production power, greater

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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?

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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 are publicly issued, the firm becomes a publicly held (or private) (or partnership. corporation.

In a When payingshares personal taxes only. is a hybrid of a private corporation and lawyers, accountants, or other public ) corporation.

The professionals.

S corporation A owners are taxed like partners, with each limited liability corporation, Professional corporations are most likely comprised of doctors, (or transnational) multinational 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 stockholders and other stakeholders, sets policies, and is legally responsible for corporate actions.

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3. Officers. Appointed by the board of directors,officers oversee the day-to-day operations of the corporation. The chief executive officer, or 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 ajoint 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 and Acquisitions: 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.

5. Divestitures and Spin-Offs: 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 aspin-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.

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

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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 fast-growing businesses; this activity is based on Application Exercise 10 of the end-of-chapter materials. 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 fastest-

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

Activity Overview: This activity is designed to encourage students to be innovative in designing a business.

Time Limit:45 minutes What to Do: 1. Place students in four-member groups and ask each group to come up with an innovative business idea. Groups should consider the following questions: (30 minutes) • 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?

2. Reassemble the class and ask each group to share their ideas. (15 minutes) Don’t Forget: Encourage students to be as innovative as possible in completing this activity; some of the seemingly silliest ideas have become multimillion-dollar ventures. If you want them to develop their ideas even more, you may want to assign Step 1 as group homework and then discuss their progress as a class the next time you meet.

Wrap-Up: Bring the activity to a close by taking a class vote on which idea is the best of those presented.

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In-Class Activity 5: Small-Group Discussion: How Can We Succeed in the Software Industry?

Activity Overview: This activity asks students to identify what helps a company become a success or a failure.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask each group to put together a list of factors that might mean the difference between the success and failure of a new company entering the business software industry. Can small start-ups realistically hope to compete with companies such as Microsoft? (15 minutes)

2. Reassemble the class and ask students to share their results. (15 minutes) Don’t Forget: No set pattern for success or failure has been established in any industry. Wrap-Up: Remind students that managerial incompetence, neglect, weak control systems, and insufficient capital are the primary reasons for business failure. Hard work, market demand for the products or services being provided, managerial competence, and luck contribute to business success.

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In-Class Activity 6: Conjuring up Profits?

This activity should generate a lot of discussion since most of the students have a Facebook account and have probably seen the movie, The Social Network.

Time Limit: 30 minutes

DISCUSSIONQUESTIONS 1. Why do you think Facebook has been so successful?

Answers will vary, but most students will cite the drive of its founder, the unique product, ease of use, etc.

2. Facebook is a corporation. Why do you think the firm uses this form of ownership?

Again, answers will vary but most students probably will cite limited liability due to the lawsuits when the company was founded. They will probably note the favorable financing for corporations and IPOs. 3. What threats might derail Facebook’s success? What steps might the firm take today in order to thwart those threats?

Answers will vary but most students will probably mention privacy issues, competitors, and decline in ad revenue.

4. Suppose Mark Zuckerberg asked you for advice on how to generate more profits from Facebook. What would you tell him?

This question gives students an opportunity to use their creativity to suggest future directions for Facebook.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 3-1. Why are small businesses important to the U.S. economy?

Small businesses create new jobs, foster entrepreneurship and innovation, and supply goods and services needed by larger businesses. (Learning Objective 3-1 – AACSB – application of knowledge) 3-2. Which industries are easiest for a small business to enter? Which are hardest? Why? The easiest industries for new start-ups include services, which is the fastest-growing segment of small business. In addition, start-ups in retailing, construction, and wholesaling are relatively easy. Start-ups in finance and insurance may be more difficult because these businesses are mostly affiliates of or agents for larger national firms. Start-ups in manufacturing and transportation are difficult because of the higher initial outlay of cash required.

(Learning Objective 3-4 – AACSB – application of knowledge) 3-3. What are the primary reasons for new business failure and success?

Reasons for failure include managerial incompetence or inexperience, neglect, weak control systems, and insufficient capital. Reasons for success include hard work and dedication, market demand for the products or services being provided, managerial competence, and luck. (Learning Objective 3-4 – AACSB – application of knowledge) 3-4. What are the basic forms of business ownership? What are the key advantages and disadvantages of each?

The basic forms of business ownership include proprietorships and partnerships, as well as cooperatives and corporations. Proprietors answer to no one but themselves, and they enjoy easy entry and exit into and out of the market. Further, tax laws permit owners to treat sales revenues and operating expenses as part of their personal finances, paying taxes based on their personal tax rate. However, proprietors experience unlimited liability, making them liable for all debts incurred by the business. Finally, proprietors face a potential lack of continuity and can depend only on their own resources and, perhaps, their limited managerial and financial capabilities. The partnership, on the other hand, can grow by being able to add new talent and money. In addition, the skills and experience of one partner can complement the skills and experience of another partner. As with the proprietorship, big drawbacks facing a partnership are unlimited liability and potential lack of continuity. Cooperatives combine the freedom of sole proprietorships with the financial power of corporations; they are a group of sole proprietorships or partnerships working together to gain greater production or marketing power. All corporations share legal status as separate entities, property rights and

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obligations, and indefinite life spans. Advantages of incorporation include limited liability, continuity, and the ability to sell stock to raise money. Disadvantages include high start-up costs, the possibility of being taken over against the will of its managers, regulations and legal requirements, and double taxation of profits. (Learning Objective 3-5 – AACSB – application of knowledge)

QUESTIONS FOR ANALYSIS 3-5. After considering the characteristics of entrepreneurs, do you think that you would be a good candidate to start your own business? Why or why not?

Answers will vary but many students want to start their own business so this question should generate a lively discussion. Their analysis should contrast their personality characteristics with those of successful entrepreneurs. (Learning Objective 3-2 – AACSB – analytical thinking, reflective thinking) 3-6. Choose a company in a highly competitive industry. What is its distinctive competence?

Students should (a) be able to identify a highly competitive industry, such as automobile manufacturing, and (b) be able to discern the niche or identified need that the company’s product meets. (Learning Objective 3-3 – AACSB – analytical thinking) 3-7. Identify three sources of funding for new businesses. What are the advantages and disadvantages of each?

Students should identify personal resources, borrowing, governmental assistance, and equity financing such as investors and venture capital. (Learning Objective 3-3 – AACSB − application of knowledge) 3-8. Why might a closely held corporation choose to remain private? Why might it choose to be publicly traded?

Such corporations may choose to remain private if control retention is the aim. Many closely (Learning held corporations choose to become public to generate additional funding.

Objective 3-6 – AACSB – application of knowledge) APPLICATION EXERCISES 3-9. Identify a publicly traded company. Research its original form of business and detail its transition from small, privately held company to its initial public offering.

Answers will vary, but most students will discover that small businesses started as proprietorships or partnerships because the owners were attracted to the simplicity in starting up and in being their own boss, in spite of the disadvantage of unlimited liability. Changing

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the form of business ownership took advantage of additional capital and/or forms of managerial expertise added to the business. Different businesses will have taken different paths and faced various obstacles that can be discussed. (Learning Objectives 3-5 and 3-6 – AACSB –application of knowledge) 3-10. Although more than half of all small businesses don’t survive 5 years, franchises have a much better track record. However, it can be difficult to buy a franchise. Research a popular food industry franchise, such as Panera Bread, Sonic, Five Guys, or Subway, and detail the requirements for net worth and liquid cash for the franchisee as well as up-front and annual fees.

This should be an interesting and eye-opening exercise. Students should carefully evaluate the costs and the various success rates among popular restaurant concepts. A good source of information for this exercise is Restaurant News. (Learning Objective 3-3 – AACSB – application of knowledge)

BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 3-11 TO 3-15 (Learning Objectives 3-2, 3-3, 3-4, and 3-5 – AACSB – application of knowledge, and interpersonal relations and teamwork) This exercise helps students focus on the reality of being an entrepreneur, the costs of starting a business, obtaining financing, and the steps that an entrepreneur has to follow to have any chance of success. Students should discuss the pros and cons of various forms of financing noting the likelihood of obtaining said financing, start-up costs, and the pros and cons of various forms of ownership. Although there are no right or wrong answers, students should have engaged in rigorous discussion and analysis before presenting their answers.

The starting point for nearly every new successful venture is a business plan. The key components include (a) setting out the goals and objectives of the new business, (b) what are the sales forecasts of the new business and (c) the business’s financial plan. The most important reason for writing a business plan is that it will help the entrepreneur really think through the viability of the business idea. Having to put ideas, plans, and expectation in writing is sobering, and the very step of writing a business plan will have prevented many would-be entrepreneurs from launching foolish ventures. The second reason for the business plan is to help attract financing for the new venture. This might come from friends, banks, or venture capitalists.

TEAM EXERCISE, A TASTY IDEA 3-16 TO 3-18 (Learning Objective 3-3 – AACSB – application of knowledge, analytical thinking, and interpersonal relations and teamwork) At the very least the business partners will be required to have a formal business plan that includes (a) setting out the goals and objectives of the new business, (b) what are the sales forecasts of the new business, and (c) the business’s financial plan. Students will identify a variety of sources of funding including loans, SBA-funded programs,

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venture capitalists, friends and family, internet sources, etc. Students should consider the pros and cons of the funding sources. For example, venture capital as a source may have “strings attached” that might interfere with plans for the business. However, if the terms were especially favorable (e.g., low interest rate, long life of loan) and the entrepreneur has future plans that would use the funds effectively, the venture capital may be welcomed.

When deciding on the form of business, students will need to carefully analyze the pros and cons of each focusing especially on unlimited liability, the role of decision making, dissolution, ease of start-up, cost, etc.

EXERCISING YOUR ETHICS: BREAKING UP IS HARD TO DO (Learning Objective 34, 3-5 – AACSB – ethical understanding and reasoning, analytical thinking) 3-19. What are the reasons the business has been successful? How did each partner contribute to the success? The business presumably is successful because it offers products and services that customers find valuable. Each partner contributed to the business based on the individual strengths they brought to the partnership. This led to a balance of contributions that worked well.

3-20. Looking ahead, what are the biggest risks to their venture?

Risks include Mark needing to perform well in areas that are not his strengths, but the biggest risk may be the status of Mark and Connie’s interpersonal relationship. This relationship was the basis for initially creating the partnership, so if the relationship changes, it can risk the success of the business.

3-21. Is it fair for Connie to work fewer hours than Mark? What changes could they make to create equity and fairness in their agreement? Answers will vary, but students will want to consider whether changes should be made to the partnership agreement to account for the changing contributions by Mark and Connie. If Mark feels the 50/50 arrangement is no longer appropriate, the two will need to determine what the new ratio should be. Connie will need to show how working only two days instead of the original four, plus the stated inventory and payment problems, justifies a continuation of the original agreement. For the partnership to continue, all tasks should be reviewed, and responsibilities evaluated and reassigned.

CASES: STAYING AHEAD OF THE CURVE (Learning Objective 3-3 – AACSB – analytical thinking, application of knowledge)

3-22. What are some of the primary reasons Netflix has been successful?

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Netflix has been successful because it has focused on convenience and ease of use for which consumers are very willing to pay. It continually innovates to stay ahead of competitors.

3-23. Netflix is a corporation. Why do you think the firm uses this form of ownership?

Netflix is structured as a corporation because it provides multiple advantages such as limited liability, easier access to financing, and continuity of operation.

3-24. What threats might derail Netflix’s success? What steps might the firm take today to thwart those threats? Just as Netflix drove Blockbuster out of business, it is possible that another competitor could emerge that would be a threat to Netflix. Students might suggest a strategic alliance with television and movie producers to secure Netflix’s position. Netflix is already taking steps in this direction with the original series it now offers.

3-25. Suppose Reed Hastings asked you for advice on how to make Netflix better. What would you tell him?

Answers will vary but students will probably focus on cost, ease of use, technology changes, competitors, etc.

ICE CREAM HEADACHE (Learning Objective 3-2 and 3-3 – AACSB – analytical thinking, application of knowledge) 3-26. What would be the advantages of buying a Cold Stone Creamery franchise as opposed to starting an ice cream shop from scratch?

Answers will vary, but some students may find the added difficulty in starting from scratch challenging, but preferable, due to the increased independence. Others will likely want to benefit from a well-established franchise. After all, the corporation provides start-up assistance, ongoing support and a solid reputation.

3-27. What are the disadvantages of buying a Cold Stone Creamery franchise?

Students will likely mention the start-up cost, ongoing costs, and loss of autonomy as disadvantages.

3-28. While franchise owners must have at least $100,000 of cash available, start-up costs can be more than four times this amount. What are the most likely sources of funding for a franchise?

The responses will include SBA programs, banks, personal savings, and franchiser-supplied financing.

3-29. In addition to the company website or marketing materials, gather the information you

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think you would need in deciding whether or not to invest in a Cold Stone Creamery franchise. What kind of information did you gather and what were your sources? A potential franchisee could contact the FTC for information, search the Internet for articles on a particular franchise, research Cold Stone Creamery’s own website, and contact current franchisees to hear about their experiences and concerns.

3-30. On the basis of your research, do you think that you would be interested in owning a Cold Stone Creamery franchise? Why or why not?

Answers will vary depending on students’ interest.

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Chapter 4: Understanding the Global Context of Business Chapter Overview The global market has evolved into major world marketplaces, held together by trade agreements and alliances. A number of factors affect how countries and businesses respond to the international environment. Further, managers and entrepreneurs find themselves challenged by a number of factors that influence their international involvement.

This chapter discusses the overall dynamic nature of international business and how it is shaped by social, cultural, economic, legal, and political differences among nations. We look at: • The rise of international business and describe the major world marketplaces, trade agreements, and alliances.

• How differences in import-export balances, exchange rates, and foreign competition determine the ways in which countries and businesses respond to the international environment.

•The factors involved in deciding to do business internationally and in selecting the appropriate levels of international involvement and international organizational structure.

The Business Plan Project is also introduced in this chapter. It is a substantial project that runs for the majority of the course, so it is important that you leave time in your lecture plan to introduce it properly. We have included a FAQ sheet to hand out to students. As an experienced instructor, you know that the better you are able to introduce the project now, the more comfortable students will be using it.

Learning Objectives 4-1. Discuss the rise of international business and describe the major world marketplaces, trade agreements, and alliances.

4-2. Explain how differences in import-export balances, exchange rates, and foreign competition determine the ways in which countries and businesses respond to the international environment.

4-3. Discuss the factors involved in deciding to do business internationally and in selecting the appropriate levels of international involvement and international organizational structure.

4-4. Explain the role and importance of the cultural environment in international business.

4-5. Describe some of the ways in which economic, legal, and political differences among nations affect international business. .

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: Shoes in the Global Marketplace

2. In-Class Activity: Assessing Your Own Culture

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Description Students discuss why certain countries produce labor-intensive products more than others in the global marketplace. Ask students to describe what a foreign manager might expect toindomestic experience our marketplace.

Time Limit 20 min.

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CHAPTER OUTLINE Learning Objective 4-1: Discuss the rise of international business and describe the major world marketplaces, trade agreements, and alliances. .The Contemporary Global Economy globalization Exports The total volume international is more thansystem $19.5 through trillion. are that of areis Theproducts world economy becoming antrade interdependent the process of made domestically and shipped for sale abroad; imports are products that are made abroad but sold domestically. International trade is becoming increasingly important to most nations and their businesses. Governments and businesses are more aware of the benefits of globalization to businesses and shareholders. New technologies have made travel, communication, and commerce faster and cheaper. In addition, competitive pressures push firms into foreign markets to keep up with competitors. However, critics charge that globalization allows businesses to exploit workers in less developed countries and bypass domestic environmental and tax regulations. Critics also claim that globalization leads to the loss of cultural heritage and often benefits the rich more than the poor.

A. Major World Marketplaces Managers involved with international businesses need to have a solid understanding of the global economy, including the major world marketplaces.

1. Distinctions Based on Wealth. The World Bank uses per capita income to make distinctions among countries. Current classifications include: • High-income countries • Upper-middle-income countries • Lower-middle-income countries • Low-income countries 2. Geographic Clusters. North America is the world’s largest marketplace and most stable economy. Europe includes both Western and Eastern regions. The European Union has helped to transform this region into a more integrated economic system. Though Japan has dominated Pacific Asia, other important commerce centers include China, Thailand, Malaysia, Singapore, Indonesia, South Korea, Taiwan, Vietnam, the Philippines, and Australia. China, one of the world’s most densely populated countries, now boasts one of the world’s largest economies. India, though not part of Pacific Asia, is also emerging as one of the most important economies.

B. Trade Agreements and Alliances Virtually every nation has formal treaties with other nations to promote free trade.

1. North American Free Trade Agreement (NAFTA)/United States-Mexico-Canada Agreement (USMCA). NAFTA removed most tariffs and other trade barriers among the United States, Canada, and Mexico and includes agreements on environmental issues and

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labor abuses. The USMCA intended to promote trade among the three nations, with a primary goal of increasing exports from the United States to Mexico and Canada.

2. The European Union (EU). The European Union includes most European nations; these countries have eliminated most quotas and set uniform tariff levels on products imported and exported within their group. The EU is now the largest free marketplace in the world.

3. The Association of Southeast Asian Nations (ASEAN). The ASEAN group was founded in 1967 to foster economic, political, social, and cultural cooperation. Because of its relative size, ASEAN holds less global economic significance than NAFTA/USMCA and the EU. 4. The World Trade Organization (WTO). The WTO promotes trade by encouraging members to adopt fair trade practices, reduces trade barriers by promoting multilateral negotiations, and establishes fair procedures to solve disputes.

KEY TEACHING TIPS • Emphasize that one of the key roles of the World Trade Organization is to expand international trade.

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Make sure that students understand the World Bank classification method of highincome, upper-middle-income, lower-middle-income, and low-income countries.

Remind students that the world economy revolves around three major marketplaces of North America, Europe, and Asia, which are home to most of the largest economies and corporations, most influential financial markets, and highest-income consumers.

Make sure that students understand that trade agreements remove tariffs and other trade barriers to promote free trade among countries.

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Learning Objective 4-2: Explain how differences in import-export balances, exchange rates, and foreign competition determine the ways in which countries and businesses respond to the international environment.

International Trade Critical in global business is a country’s acceptable balance between imports and exports. An import-export relationship can be measured through a country’s balance of trade and balance of payments.

A. Balance of Trade. A country’s balance of trade is the total economic value of all the products that it exports minus the economic value of all the products that it imports. A trade deficit occurs when a country’s imports exceed its exports. A trade surplus occurs when a country’s exports exceed its imports.

B. Balance of Payments. Balance of payments refers to the flow of money into or out of a country. A country’s balance of payments results primarily from its balance of trade, though other contributing factors include money spent by tourists, foreign aid programs, and the buying and selling of currency.

C. Exchange Rates An exchange rate is the rate at which a nation’s currency can be exchanged for the currency of another. Fluctuations in exchange rates can greatly affect a country’s balance of trade. With fixed exchange rates, the value of a country’s currency remains relatively constant to that of another country. With floating exchange rates, the value of a country’s currency relative to another currency varies with market conditions. The United States has criticized China over the years for its inflexible exchange rate policy— China being one of the few countries that still uses fixed exchange rates. When the value of a currency rises, companies based in that country find it harder to export products to foreign markets and easier for foreign companies to enter local markets. When the currency value declines, the opposite occurs. In this situation, the country’s balance of trade usually improves because domestic companies should experience a boost in exports.

D. Forms of Competitive Advantage Managers need to understand forms of competitive advantage when making decisions about international competition. Countries tend to export what they can produce better or less expensively, and import what they can’t produce as effectively.

1. Absolute Advantage. A country enjoys an absolute advantage when it can produce something that is cheaper or of higher quality than any other country.

2. Comparative Advantage. A country has a comparative advantage in goods that it can produce more efficiently or better than other nations.

3. National Competitive Advantage. National competitive advantage derives from factor conditions (labor, capital, entrepreneurs, physical resources, and information resources),

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demand conditions, related and supporting industries (strong local or regional suppliers or industrial customers), and strategies, structures, and rivalries (firms and industries that stress cost reduction, product quality, higher productivity, and innovative products).

KEY TEACHING TIPS • Students often confuse balance of trade with balance of payments. Make sure they understand that a country’s balance of trade is the difference between that country’s exports and imports.

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Make sure that students understand that the balance of payments reflects the inflow and

outflow of money as a result of a country’s balance of trade.

Make sure students understand that when the value of exports exceeds the value of • imports, a country enjoys a trade surplus; when the value of imports exceeds the value of exports, a country suffers from a trade deficit.

QUICK QUESTIONS • What are some of the forces that spark and sustain globalization?

• What are some of the features that distinguish the three major marketplaces from one another?

• What countries are currently members of the European Union?

Use In-Class Activity 1: Icebreaker: Shoes in the Global Marketplace Time Limit: 20 minutes

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Learning Objective 4-3: Discuss the factors involved in deciding to do business internationally and in selecting the appropriate levels of international involvement and international organizational structure.

International Business Management The primary key to a firm’s success is based largely on how well the firm is managed. The three basic go decisions that a company must make when considering globalization are whether to Not every at business prepared to go international.

A major decision factor is the business international all, theislevel of international involvement, and the organizational structure climate of other countries. Other factors include demand and product adaptations. that will best meet the firm’s global needs.

1. Gauging International Demand. Products that are successful in one country may be A. Going International useless in another or need to be marketed differently. Determining international demand may require market research and/or prior market entry of competitors.

2. Adapting to Customer Needs. Product modifications may be required to meet the standards and customer needs of various countries.

3. Outsourcing and Offshoring. Outsourcing is the practice of paying suppliers and distributors to perform certain business processes or to provide needed materials or services. Offshoring involves outsourcing to other countries.

KEY TEACHING TIPS • A company must make three decisions when considering globalization: o Whether to go international at all o Its level of international involvement o Its organizational structure • Make sure students do not confuse outsourcing with offshoring. A U.S. company can outsource to another U.S. company. Offshoring always implies outsourcing to other countries. Students typically confuse these two terms, so it is worth emphasizing the difference.

QUICK QUESTION • How might a U.S. food manufacturer have to change its products in order to successfully export to Asia?

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B. Levels of International Involvement A firm may enter the global marketplace through different levels of involvement.

1. Exporters and Importers Representing the lowest level of global involvement, exporters and importers conduct only a small part of their business globally. An exporter makes products in one country to distribute and sell in others. An importer buys products in foreign markets and then imports them for resale in its home country. Both conduct most of their business in their home nations.

2. International Firms More complex than exporters and importers, international firms conduct a significant portion of their business in foreign countries. These firms basically remain domestic with global operations.

3. Multinational Firms Multinational firms (firms that design, produce, and market products in many nations) do not ordinarily think of themselves as having domestic and international divisions. Planning and decision-making are geared to international markets. Headquarters locations are almost irrelevant. It is important not to underestimate the economic impact of multinational firms.

In 2019, the largest 500 multinationals accounted for nearly $1.65 trillion in profits from $29.4 trillion total revenues. They employed tens of millions of people, paid billions in taxes, and bought equipment and services from thousands of other firms across the world.

C. International Organizational Structures Different levels of international involvement entail different kinds of organizational structures.

1. Independent Agents. Independent agents are foreign individuals or organizations that agree to represent the exporter’s interests, including assisting in product sales, collection of payments, and in helping to ensure customer satisfaction.

2. Licensing Arrangements. In licensing arrangements, firms give individuals or companies in a foreign country the right to manufacture or market the firm’s products. In return, the licensor typically receives a fee and royalties, which are usually calculated as a percentage of the license holder’s sales.

3. Branch Offices. To gain more direct control than it has over agents or license holders and a more tangible presence in foreign countries, a firm will send some of its own managers to overseas branch offices with this arrangement.

4. Strategic Alliances. Strategic alliances include a company and a foreign partner that combine resources and capital to begin a new business. In many countries, laws make alliances the only way to do international business.

5. Foreign Direct Investment. Foreign direct investment means buying or establishing

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tangible assets such as manufacturing plants in a foreign country.

KEY TEACHING TIPS •

Emphasize that firms have the least control when using independent agents or licensing arrangements. Branch offices and strategic alliances provide the firm with more direct control.

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Emphasize that international strategic partnerships are a good way to develop local knowledge to gauge market demand. Often, local experts are in a better position to gauge likely market demand and future trends because they can understand and interpret

how • local cultural factors can affect demand issues.

Remind students that independent agents often act as sales representatives.

QUICK QUESTIONS • What are licensing arrangements?

• What are some advantages of forming a strategic alliance with another firm?

• How many U.S. multinational companies can you name?

• How many Japanese multinational companies can you name?

• How many European companies can you name?

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Learning Objective 4-4: Explain the role and importance of the cultural environment in international business.

A major factor in the success—or failure—of international business activity is having a deep understanding of the cultural environment and how it affects business.

A. Values, Symbols, Beliefs, and Language Cultural values and beliefs are often unspoken; they may even be taken for granted by those who live in a particular country. Cultural factors do not necessarily cause problems for managers when the cultures of two countries are similar. Difficulties can arise, however, when there is little overlap between the home culture of a manager and the culture of the country in which business is to be conducted. Culture includes the values, symbols, beliefs, and language that guide behavior.

B. Employee Behavior across Cultures Managers in international business have to understand that there are differences in what motivates people in different cultures. Although it’s impossible to predict exactly how people from different cultures will react in the workplace, some insights have been developed from research on individual behaviors and attitudes across different cultures. There are five important dimensions along which people seem to differ across cultures.

1. The first dimension is social orientation. Social orientation is a person’s beliefs about the relative importance of the interests of the individual versus the interests of the group. The extremes are individualism and collectivism.

2. A second important dimension is power orientation, the beliefs that people in a culture hold about the appropriateness of power and authority differences in hierarchies such as business organizations, ranging from power respect to power tolerance.

3. The third basic dimension of individual differences is uncertainty orientation.

Uncertainty orientation is the feeling individuals have regarding uncertainty and ambiguous situations, ranging from uncertainty acceptance to uncertainty avoidance.

4. The fourth dimension of cultural values is goal orientation. In this context, goal orientation is the manner in which people are motivated to work toward different kinds of goals. Aggressive goal behavior (high premium on material possessions and assertiveness) is one extreme while passive goal behavior places a higher value on social relationships and quality of life.

5. A fifth dimension is called time orientation. Time orientation is the extent to which members of a culture adopt a long-term versus a short-term outlook on work, life, and other elements of society. A long-term outlook values dedication and hard work to achieve goals, while a short-term outlook values more immediate rewards.

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Use In-Class Activity 2: Assessing Your Own Culture Discussion Time Limit: 20 minutes Students often think of how different other cultures are from the U.S. culture. This discussion helps students recognize how foreign the U.S. culture really is to business managers from other countries. Ask students to form groups and identify parts of U.S. culture that might appear interesting, strange, or very uncomfortable for a businessperson from overseas. If you have international students in your class this will add to the reality of the discussion.

HOMEWORK Now is a good time to assign Application Exercise 4-10 that asks students to research China and the five cultural dimensions.

At-Home Completion Time: 30 minutes

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Learning Objective 4-5: Describe some of the ways in which economic, legal, and political differences among nations affect international business.

Barriers to International Trade Success in foreign markets depends upon a firm’s ability to respond to social, cultural, economic, legal, and political differences.

A. Economic Differences When trading with different types of economic systems, firms must be aware of when, and to what extent, the government is involved in a given industry.

B. Legal and Political Differences Governments can present many trade barriers in international business, including the control of the flow of capital and the use of tax legislation to encourage or discourage activity in given industries. They can set conditions for doing business within their borders or even prohibit doing business altogether. They can even confiscate property of foreign-owned companies.

1. Quotas, Tariffs, and Subsidies. A quota restricts the number of products of a certain type that can be imported into a country, thereby raising the price of those products. The ultimate quota is an embargo—a government order forbidding exportation and/or importation of a particular product (or even all products) from a specific country. A tariff is a tax placed on imports; tariffs directly affect prices by raising the price of imports. A subsidy, a form of indirect tariff, is a government payment to help a domestic firm compete with foreign firms.

2. The Protectionism Debate. Protectionism is the practice of protecting domestic business at the expense of free market competition and is controversial. Supporters argue that tariffs and quotas protect domestic firms and jobs, whereas critics cite protectionism as a source of friction between nations and increasing prices by reducing competition.

3. Local Content Laws. Many countries, including the United States, have local content laws—requirements that products sold in a particular country are partially made there. This guarantees that a percentage of the profits remain in that country.

4. Business Practice Laws. Many businesses entering new markets encounter problems in complying with stringent regulations and bureaucratic obstacles. Such practices are affected by the business practice laws by which host countries govern business practices within their jurisdictions.

Sometimes, legal practices in one country are illegal in another. Bribery of officials is an example. Cartels are associations of producers that control supply and prices. Many (but not all) countries forbid dumping—selling a product abroad for less than the cost of production at home. United States law forbids both cartels and dumping. The U.S. forbids bribery, cartels, and dumping.

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KEY TEACHING TIPS •

Remind students that economic differences can be much more apparent than cultural differences and focus on the level of involvement of the government in an industry.

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Governments can affect international business in many ways. They can set conditions for doing can business within their borders and even prohibit doing business altogether. They

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control the flow of capital and use tax legislation to discourage or encourage activity

in a given industry. They can even confiscate the property of foreign-owned companies.

QUICK QUESTIONS Quotas, tariffs, subsidies, protectionism, local content laws, and business practice • Do you think the United States should impose import quotas on goods made overseas to laws protect U.S. jobs? are all methods used by governments to influence international business.

• How do you feel when another country puts quotas on U.S. exports?

• How might U.S. foreign policy help or hinder the ability of U.S. companies to be successful in international trade?

HOMEWORK Now is a good time to assign Application Exercise 4-9 from the end-of-chapter materials as homework. The assignment asks students to research countries of origin of parts of a particular familiar product, At-Home Completion Time: 45 minutes

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Shoes in the Global Marketplace Activity Overview: This activity asks students to think about why certain countries produce more labor-intensive products than others in the global marketplace.

Time Limit: 20 minutes What to Do: 1. Ask students to remove their shoe and note the country in which it was made. Go around the class and keep a tally of country of origin. Most students will likely have shoes from China. (5 minutes) Ask students why they think shoes are often made in China. Possible answers will include low wages and a workforce willing to perform this type of work. (5 2. minutes) Examine how other countries on the list are similar to China. Point out that shoes are labor intensive and cost savings can be significant. (10 minutes) 3.

Don’t Forget: If students can’t find the country of origin on their shoes, they can use another article of clothing or other belonging, such as their backpacks or handbags.

Wrap-Up: Wrap up the discussion by discussing what social, cultural, political, economic, and legal variables may affect one country producing more shoes than another.

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In-Class Activity 2: Class Discussion: Assessing Your Own Culture Activity Overview: Students often think of how different other cultures are to the U.S. culture. This discussion helps students recognize how foreign the U.S. culture is to business managers from other countries.

Time Limit: 20 minutes What to Do: 1. Ask students to form groups.

2. Identify parts of U.S. culture that might appear interesting, strange, or very uncomfortable for

a businessperson from overseas.

3. If you have international students in your class this will add to the reality of the discussion.

Don’t Forget: How many of your students have had experience with foreign business managers? What about their families?

Wrap-Up: Bring the discussion to a close by asking students for suggestions as to how to acclimate business managers to different cultures.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 4-1.What are the advantages and disadvantages of globalization? Give examples.

Governments and businesses are more aware of the benefits of globalization to businesses and shareholders. These benefits include the potential for higher standards of living and improved business profitability. New technologies have made international travel, communication, and commerce faster and cheaper than ever before. Finally, there are competitive pressures; sometimes a firm must expand into foreign markets simply to keep up with competitors.

Critics would say the disadvantages include the possibility of businesses exploiting workers in less-developed countries and bypassing domestic environmental and tax regulations. Another possibility is that globalization might lead to the loss of cultural heritages and often benefits the rich more than the poor. (Learning Objective 4-1 – AACSB – analytical thinking) 4-2. What are the three possible levels of involvement in international business? Give examples of each.

The three levels are importing/exporting, international business, and multinational business.

Examples will vary. (Learning Objective 4-3 – AACSB – analytical thinking) 4-3. What are the elements of national competitive advantage? Give a current, real-world example of each condition.

The elements of national competitive advantage are factor conditions, demand conditions, related and supporting industries, and strategies, structures, and rivalries. Answers to the second part of this question should indicate that the student can identify specific factors in the global economy. For instance, when giving an example of a country with favorable factor conditions, such as a highly skilled workforce or an abundance or raw materials, or even low wages, the student should pinpoint the exact factor leading to competitive advantage and discuss, briefly, how that factor applies. (Learning Objective 4-2 – AACSB – application of knowledge) 4-4. Describe the five international organizational structures.

Students should focus on the levels of involvement and organizational structures discussed in the chapter. Some firms merely import or export. Others may utilize an independent agent that represents the company in foreign markets. Licensing allows a company to grant exclusive rights to a foreign company to manufacture or market their products. Branch offices allow the domestic company to maintain its own employee base overseas. Finally, a strategic alliance allows a domestic company to partner with a foreign company in working toward a common purpose. (Learning Objective 4-3 – AACSB – application of knowledge)

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QUESTIONS FOR ANALYSIS 4-5. Make a list of five things you own, such as an item of furniture, a vehicle, electronics, and other consumer goods, making sure that each one was made in a different country. Develop a hypothesis about why each product was made in that particular country.

Answers will vary, but students may indicate that many electronics items, for example, are imported from Japan, South Korea, China, and Taiwan; technological expertise among companies there is often perceived as being superior. Linens and clothing have likely been imported from a variety of countries. (Learning Objective 4-4 – AACSB –analytical thinking)

4-6. Choose a current trade agreement or alliance and describe current events and their effect on international trade between the parties.

Answers will vary depending on the trade agreements and alliances chosen. Students may highlight quotas, tariffs, subsidies, and local content and business practices. They may also address protectionism and differences in international law. Alliances may include USMCA, ASEAN, and EU, and students should address current events shaping and transforming those alliances. (Learning Objective 4-5 – AACSB – analytical thinking) 4-7. Research and identify a protectionist tariff imposed by the United States. Do you support that tariff? If so, why?

Answers will vary, but students should identify a specific product from a specific country, such as clothing from Mexico, and estimate the amount of tariff and hypothesize what might happen if the tariff did not apply. They should also comment on the effects of unrestricted imports on the domestic economy and the effect of tariffs on prices, employment, and competition. Unrestricted imports certainly increase competition and can alter employment levels eventually. Also, pricing on domestically produced goods will likely be held lower in order to compete with the foreign goods and the increase in supply in some instances. On the other hand, protectionist tariffs make domestic products look more attractive in terms of price and limit consumers’ product options. (Learning Objective 4-5 – AACSB – reflective thinking) 4-8. Do you think that a firm operating internationally is better advised to adopt a single standard of ethical conduct or to adapt to local conditions? What are the advantages and disadvantages of adapting to local conditions?

Answers will vary, but students should comment on the possibility that conduct considered unethical in the home country will damage the firm’s reputation, backfire abroad, or lead to situations in which the legality of its actions could be called into question. (Learning Objective 4-5 – AACSB – reflective thinking)

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APPLICATION EXERCISES 4-9. Identify a manufactured product (car, bike, computer, etc.) you think is made in the United States. Do some research and try to determine where the component parts are made. How much of your chosen product is actually made in the United States? List the parts and their countries of origin and identify the competitive advantage that you believe each place holds.

Answers will vary, but students may indicate that many components are imported from Japan, South Korea, China, and Taiwan because labor is cheaper than it is in the United States. They may also address the ethics of labeling a product as “Made in USA” when in fact it is merely assembled in the United States. (Learning Objective 4-5 – AACSB – analytical thinking) 4-10. China is one of the fastest-growing markets in the world. Use Web or database research to uncover how to best describe China according to the five cultural dimensions. Cite the sources for your information.

Answers and sources will vary, but students should focus on cultural dimension differences (Learning Objective 4-4 – AACSB – and the impact on businesses operating in China. analytical thinking, application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 4-11 TO 4-13 (Learning Objective 4-2 – AACSB – analytical thinking, application of knowledge) Answers will vary depending on the type of business venture. With e-commerce, many students may source products internationally. With e-commerce, they also may very well identify export opportunities. The product or service will determine whether market adaptation is needed and whether social, cultural, economic, legal or political differences may affect its success.

TEAM EXERCISE: WEIGHING THE TRADE-OFFS 4-14 TO 4-17 (Learning Objective 4-3 – AACSB – application of knowledge, interpersonal relations and teamwork, ethical understanding and reasoning) This exercise should generate a lively discussion with passionate arguments since many students may have experienced outsourcing firsthand or know someone who has been outsourced.

Students may have a tendency to look at this issue as either “black or white” but need to be encouraged to explore all aspects of this situation.

Outsourcing offers advantages of helping firms focus on their core activities and avoid getting sidetracked on secondary activities and reducing costs by locating certain business functions in areas where costs are low. Offshoring carries the practice of outsourcing to other countries.

However, disadvantages include limitations depending on the need for personalized assistance.

Students, as required in the questions, also need to look beyond simply the cost benefits to the organization, and look at the impacts on the various stakeholders, including the employees and the community.

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EXERCISING YOUR ETHICS: PAYING HEED TO FOREIGN PRACTICES (Learning Objective 4-4 – AACSB – application of knowledge, ethical understanding and reasoning) 4-18. What are the key ethical issues in this situation?

The key ethical issue is whether to pay bribes to establish your business in this foreign country. Does it make sense to extend the U.S. sense of ethical behavior, codified in law (i.e., never pay bribes), to a country that doesn’t consider bribes to be unethical or illegal?

4-19. What do you think most managers would do in this situation?

Answers will vary, but students may address the temptation that comes from an undetectable source of funds, the responsibility to adhere to U.S. law forbidding bribery domestically or abroad, and the possibility that some managers would hire an intermediary to “do the dirty work” for them.

4-20. What would you do?

Answers will vary, but students should touch on the main ethical issues discussed in the exercise.

CASES: NOTHING MAGICAL ABOUT ALIBABA (Learning Objectives 4-2, 4-3, 4-4 and 4-5 – AACSB – application of knowledge, ethical understanding and reasoning) 4-21. How has the rise of Alibaba affected the way China operates as an economic entity? How do you reconcile your preconceived notions of China, if you had any, with the reality of China as a world economy?

Students will have differing answers based on their preconceived notions of China. They should be able to discuss China’s current economic situation and compare that to other nations and to their prior ideas. They should also address China’s rising economic advantage.

4-22. Why do you think companies like Starbucks have a hard time gaining a foothold in China?

Why do you think Alibaba is not actively selling in the United States? Do you think either of those situations will change in the near future? If so, why?

Students should address perceived cultural differences (e.g. coffee v. tea, leisure v. business, and separation of professional and private lives) and how those issues are evolving. In addition, they should address the effect of tariffs and import laws that restrict or dissuade foreign companies from globalizing.

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4-23. How might U.S. businesses best prepare themselves for doing business in foreign countries? How might they best protect themselves from competition from foreign countries wanting to expand into the United States?

The students should explore a variety of options including international alliances and research the steps that companies in other countries used to gain a foothold in places like Southeast Asia, South America, and Europe. Students should examine the pros and cons of protectionism as they discuss discouraging competition.

GENERAL MOTORS OUTSOURCING TO MEXICO (Learning Objective 4-4 AACSB – analytical thinking) – 4-24. What effect will the United States–Mexico–Canada Agreement (USMCA) have on GM’s short- and long-term plans to shift manufacturing to Mexico and to Canada?

Answers may vary, but students should address the differences between NAFTA and USMCA, as well as the effect of current events, the political environment, consumer preferences, balances of trade, and supply and demand and other market forces.

4-25. Is “offshoring” good for the consumer? Is it good for the nation as a whole? What competitive advantage do Mexico and Canada have over the United States that would cause GM to shift operations to those countries?

Answers will vary depending on student opinion, but students may address import/export balances, foreign competition, labor costs, and other factors of production such as the cost of land. They may also bring up protectionism and the value of items “Made in the USA.” 4-26. How is foreign competition driving GM’s decisions to move manufacturing out of the United States and shutter plants? What other economic factors are at play in that decision?

Answers will vary depending on student opinion, but students may address import/export balances, foreign competition, labor costs, and other factors of production such as the cost of land. They should bring up the corporate manifesto to produce profits as a driving factor in outsourcing.

4-27. What role does the current cultural environment in the United States play in GM’s decision to manufacture cars and parts in other countries? Is the culture in the United States static or dynamic? How does that affect GM’s decision-making process?

Answers will vary depending on student perspective but should include non-economic factors such as the environment and social responsibility, as well as past, current, and possible future focuses on both “Made in the USA” and globalization.

4-28. Describe the interplay between the economic, legal, and political environments in the three countries of USMCA. Does the new treaty address these issues? If so, which ones, and how?

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Students should address the obvious differences in the economies, such as wages, standards of living, and even population, as well as development of capitalism. In addition, students should address level of government involvement/interference in the capital market process. Finally, students should tie these issues back to the provisions of the USMCA trade agreement.

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PART 1 INTEGRATIVE LEARNING PORTFOLIO THE CONTEMPORARY BUSINESS ENVIRONMENT CRAFTING A BUSINESS PLAN You will already have seen that a central part of the experiential learning approach of Business Essentials is the Business Planning Project. Now is the ideal time to introduce the project and assign Part 1 to students to complete as homework.

The business plan project for Business Essentials is divided into six parts, corresponding to the book’s six parts. The first part of the project is found here. Refer to the Business Plan portion of this Instructor’s Manual for all remaining parts.

For a Sample Syllabus Business Plan Project Outline, see the instructor resource guide in the Business Plan Project document (located within this Instructor’s Manual).

In addition to giving a general overview of the business planning project, you should copy and distribute the following documents to students: • Student FAQs for the Business Plan Project • Student Business Plan Project Template Part 1: The Contemporary Business Environment PART 1 THE CONTEMPORARY BUSINESS ENVIRONMENT This part of the business plan asks students to come up with a “great idea” for a business, creating an identity and forming a concrete notion of what the business will do. The first part of the plan also asks students to identify the type of ownership the business will take and briefly looks at who the firm’s ideal customers are. This part of the plan also looks at how the business will interact with the community and demonstrate social responsibility, and includes a perspective on the impact of global business.

The first part of the plan should take approximately 1 to 3 hours. However, completion times will vary greatly based on what the individual student brings to the class. Students who already have a “big idea” will have a head start on those who do not.

HOMEWORK DELIVERABLE FROM STUDENTS Each business plan is a unique document, so some variance in response lengths should be expected. As a result, you may not wish to designate a minimum number of pages for the assignment. Keep in mind that students who display a grasp of the concepts and demonstrate higher-level thinking may write 20 to 26 pages during the project. For Part 1, expect an approximate range of 2 to 4 pages.

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STUDENT FAQs FOR THE BUSINESS PLAN PROJECT 1. Where do I begin?

This project will challenge you to think about all the parts that are necessary for a business to succeed. You should start by thinking of a business that you would like to begin. Do not use a product that already exists, such as Coca-Cola. Learning comes through the process of using your own ideas, not by imitating others. Each section of the business plan connects with the information that is discussed in class and in the textbook.

2. What should my business plan look like?

There are six parts to the business plan. Your instructor will provide you with the “Business Plan Project Student Template” file; you’ll need to complete each part.

Answer the questions that make up each part in the order that they are shown. Note that the template includes hints that will help you answer each question. Once you are done answering the question, you can delete the question and the tip, leaving just your answer behind. Your instructor may also provide you with a sample business plan for you to use as a guide. Note that your plan does not have to look exactly like the sample, but you need to show good organizational skills. Note that each of the six parts of the business plan project is fully explained in the Business Plan portion of this Instructor’s Manual.

3. After I finish each part of the plan, what do I do with my assignment?

Your instructor will give you instructions as to how he or she would like you to submit each part of the plan. You will most likely be given a chance to make improvements to your plan throughout the grading period.

Note: You will be using the same student template file to complete the entire plan.

Therefore, after completing each part of the plan, you need to save the file on a disk or to your hard drive.

4. How will I know if I’m doing the plan correctly?

Your instructor will provide feedback to you about your plan. Students who successfully complete the plan have these two qualities in common: They do not procrastinate. A well-written business plan cannot be written overnight, as it requires a good deal of thought and creativity.

They ask a lot of questions. If a term is used in the business plan template that confuses you, check in your textbook or ask your instructor for an explanation.

5. How many pages are needed for a good grade?

It depends on the business that you will be starting. A good explanation normally requires between 12 to 15 pages. This sounds like a lot, but most sections will average 2 to 3 pages.

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STUDENT BUSINESS PLAN PROJECT TEMPLATE PART 1: THE CONTEMPORARY BUSINESS ENVIRONMENT BUSINESS NAME P1-1. What is the name of your business?

Hint: When you think of the name of your business, make sure it captures the spirit of the business you’re creating.

Note to students: Once you have inserted your answer, delete the question and the tip provided here and leave just the heads so your business plan will look more professional.

DESCRIPTION OF BUSINESS P1-2. What will your business do?

Hint: Imagine you are explaining your idea to a family member or a friend. The business should be easy to explain. Keep your description to 30 words or fewer.

FORM OF BUSINESS OWNERSHIP P1-3. What form of business ownership (sole proprietorship, partnership, or corporation) will your business take? Why did you choose this form?

Hint: For more information on the types of business ownership, refer to the discussion in Chapter 3.

IDEAL CUSTOMER P1-4. Briefly describe your ideal customer. What would he or she be like in terms of age, income level, and so on?

Hint: You don’t have to give too much detail in this part of the plan; you’ll provide more details about customers and marketing in later parts of the plan.

OUR ADVANTAGES P1-5. Why will customers choose to buy from your business instead of your competition?

Hint: In this section, describe what will be unique about your business. For example, is the product special or will you offer the product at a lower price?

ETHICAL ISSUES P1-6. All businesses have to deal with ethical issues. One way to address these issues is to create a code of ethics. List three core principles your business will follow.

Hint: To help you consider the ethical issues that your business might face, refer to the discussion in Chapter 2.

SOCIAL RESPONSIBILITY P1-7. A business shows social responsibility by respecting all of its stakeholders. What steps will you take to create a socially responsible business? Hint: Refer to the discussion of social responsibility in Chapter 2. What steps can you take to be a “good citizen” in the community? Consider also how you may need to be socially responsible toward your customers and, if applicable, investors, employees, and suppliers.

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GLOBAL ISSUES P1-8. Will you sell your product in another country? If so, what countries and why? What challenges will you face? Hint: To help you consider issues of global business, refer to Chapter 4. Consider how you will expand internationally (e.g., independent agent, licensing). Do you expect global competition for your product? What advantages will foreign competitors have?

CASE PART 1: FORD MOTOR COMPANY P1-9. Think of an entrepreneur currently in the news, or someone you admire. What qualities and traits does that person demonstrate that make him or her entrepreneurial? Are those traits different today than they were in the time of Ford and Edison?

Answers will vary, but students should be able to identify traits of an entrepreneur and be able to identify those traits in Ford and Edison, as well as traits that were perhaps less than ideal. (Learning Objective 3-2 – AACSB – analytical thinking)

P1-10. How are the current economic, political, and social environments of today different from those of 125 years ago? How are they similar? Answers will vary, but students should be able to explain the importance of the economic, political, and social environments and how they shape business, and the historical significance of things like the Spanish flu, and how development of the internet was both similar to and different than the creation of road, for instance. (Learning Objective 1-4 – AACSB – analytical thinking)

P1-11. Do you think that Ford and Edison were unique in some way, or were they just in the right place at the right time? Answers will vary, but students should reflect on the combination of being in the right place at the right time and the entrepreneurial spirit, as well as the knack for finding a need and a way to fill that need. (Learning Objective 3-2 – AACSB – reflective thinking)

P1-12. What is the corporate form of ownership? What are the economic, social, and ethical benefits and drawbacks of running a business as a corporation? Students should be able to describe how a corporation is a separate legal entity with many of the same rights as a person, to be able to buy and sell assets, incur debt, sue and be sued. However, unlike a person, a corporation has a theoretically unlimited life span, and in many cases cannot be held accountable for crimes, other than paying a fine (cannot be incarcerated, although sometimes the officers and directors can be held personally accountable.) In many

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cases, the ownership through shares is protected though from legal liability like debt and crimes. (Learning Objective 3-6 – AACSB – analytical thinking) P1-13. Does demand have to precede supply, or can a company create demand by creating supply? What do you think were the significant events that created demand for automobiles back in the early 1900s? Are the concepts of supply and demand different today than they were in Ford’s time?

Answers will vary, but students should be able to identify the relationship between supply and demand, and to differentiate between demand and amount demanded, and between supply and amount supplied. In addition, students should be able to demonstrate some knowledge of the evolution of the concepts of supply and demand, as well as to apply the concepts to the supply of automobiles increasing the availability of good roads, which led to more demand, which led to more supply, and be able to extend that thinking to current times, for instance, with computers, cell phones, and other technology. (Learning Objective 1-3 – AACSB – analytical thinking)

P1-14. Can a corporation act ethically? Do you think that Ford should have paid a higher price for cheating in the 1909 race? If so, what would that be, and how would it be assessed?

Answers will vary based on each student’s personal ethics and opinion, but students should be able to articulate the problems with a corporation being held to ethical standards, as opposed to the people in management, leadership, and even line positions being held to (Learning Objective 2-2 – AACSB – ethical understanding and ethical standards. reasoning) FINDING YOUR PATH Careers in Business Most experts agree that the people with the most successful careers are those who make an effort to plan them, not just plan for their first job. You may discover new interests and may need to revisit your career path as your interests change and as the nature of jobs and organizations evolves. Making Yourself Employable One big part of a successful career is having options. To give yourself the best opportunity for this, remember that learning and skill development are not passive. Focus on continuing to learn, to develop and enhance your skills, and to think about where you might go next. Make yourself a valuable asset so that employers will actively want you to join them. A. “Big Picture” Economic Issues

Keep abreast of “big picture” economic issues. You may not need to know exact details, but should know basic trends. You’ll likely take economics courses in your program.

B. Ethics and Social Responsibility

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Plan to do a candid self-assessment of your values, ethical standards, and stance on social responsibility and then be able to articulate them. Be aware of how others see you in this context. Be careful when posting on social media. Ethics courses can be found in business departments and philosophy departments.

C. New Ventures and Entrepreneurship If you start your career with a smaller firm or intend to launch your own business in the future, you need to be informed about how new and small businesses get started, how they grow, and why they succeed or fail. Courses on new ventures and entrepreneurship are increasingly available.

D. Global Issues The global context of business is more important today than ever before. It is important to be knowledgeable about the global economy as well as economic issues like the balance of payments and its impact on business. International business courses are often required. Foreign language skills will be an asset for you, and something you can bring to your company.

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Chapter 5: Managing the Business Chapter Overview What makes a good manager? Think back to a favorite manager with whom you have worked. What made that manager effective? Perhaps the manager assigned special roles in setting organizational goals. Or perhaps he or she was an exceptional communicator, expressed empathy, or was an effective motivator. Now think back to a “poor” manager you’ve worked with. What made that manager ineffective? Maybe he or she was too controlling, lacked communication skills, or showed favoritism toward subordinates.

Whatever the reason, many people’s future managerial roles will be affected by their past experiences. This chapter presents an introduction to the foundations of effective management. It describes the nature of management and identifies the four basic functions that constitute the management process and the different types of managers likely to be found in an organization. It discusses the basic skills required of managers, the importance of strategic management and effective goal setting in organizational success (as well as contingency planning and crisis management), and the importance of corporate culture.

Learning Objectives 5-1. Describe the nature of management and identify the four basic functions that constitute the management process.

5-2. Identify different types of managers likely to be found in an organization by level and area.

5-3. Describe the basic roles and skills required of managers.

5-4. Explain the importance of strategic management and effective goal setting in organizational success.

5-5. Discuss contingency planning and crisis management in today’s business world.

5-6. Describe the development and explain the importance of corporate culture.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity Description Time Limit 1. Icebreaker: The Management Students work in groups to discuss the 30 min. management process and how it works.

Process Students write down their short-term, 2. Class Discussion: How Do 30 min. intermediate, and long-term goals.

Your Goals Stack Up? Students brainstorm in small groups in 3. Small-Group Discussion: 30 min. order to complete a SWOT analysis.

SWOT Analysis 4. Up for Debate: I Can’t Believe Students are divided into teams to discuss 20 min. crisis management.

This Has Happened!

5. Up for Debate: Who Creates Students work in small groups to share 30 min. their thoughts on corporate culture.

Corporate Culture?

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CHAPTER OUTLINE Learning Objective 5-1: Describe the nature of management and identify the four basic functions that constitute the management process.

The Management Process All corporations depend on effective management; the principles of management apply to all kinds and sizes of organizations. Managers are among an organization’s most important resources. A. Basic Management Functions Management is the process of planning, organizing, leading, and controlling an organization’s financial, physical, human, and resources to achieve its goals.

1. Planning Determining what the organization needs to do and how best to get it done requires planning. Planning begins with determining the firm’s goals, followed by development of a comprehensive strategy for achieving those goals, and designing tactical and operational plans for implementing the strategy.

2. Organizing Organizing involves arranging an organization’s people and resources into a coherent structure. Organization charts help everyone understand roles and reporting relationships, key parts of the organizing function.

3. Leading When leading, a manager works to guide and motivate employees to meet the organization’s objectives. The best managers have the capacity to unite their employees in a clear and targeted manner and motivate them to work in the best interests of their employer.

4. Controlling Controlling is the process of monitoring an organization’s performance to make sure that it is meeting its goals. Managers must establish standards and then measure actual performance against those standards, adjusting activities if needed.

B. The Science and the Art of Management science and art.

Effective management is a blend of both 1. The Science of Management Many management problems and issues can be approached in ways that are rational, logical, objective, and systematic. Managers can gather data, facts, and objective information, and use quantitative models and decision-making techniques to arrive at “correct” decisions.

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2. The Art of Management Even though managers may try to be scientific as often as possible, they must frequently make decisions and solve problems on the basis of intuition, experience, instinct, and personal insights. Relying heavily on conceptual, communication, interpersonal, and time- management skills, a manager may have to decide among multiple courses of action that look equally attractive. Managers must blend intuition and personal insight with hard data and objective facts.

C. Becoming a Manager Although there are as many variations as there are managers, the most common path involves a combination of education and experience.

1. The Role of Education A college degree has become almost a requirement for career advancement in business, and virtually all CEOs in the United States have a college degree; an MBA is common.

2. The Role of Experience Management skills must also be learned through experience. Most managers advanced to their present positions from other jobs. Only by experiencing the day-to-day pressures a manager faces and by meeting a variety of managerial challenges can an individual develop insights into the real nature and character of managerial work.

KEY TEACHING TIPS •

Point out that planning, organizing, leading, and controlling—the “functions of management”—are carried out by managers at all levels of the organization.

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Reinforce that planning involves determining what the organization needs to do and how best to get it done.

Make sure students understand that organizing is the process of determining the best way to arrange a business’s resources and activities into a coherent structure.

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• Remind students that when leading, a manager guides and motivates employees to meet the firm’s objectives.

• Identify controlling as the process of monitoring a firm’s performance to ensure it is meeting its goals; actual performance is measured against set standards.

• Confirm that education and experience assist people in developing the skills to be a successful manager.

Use In-Class Activity 1: Icebreaker: The Management Process Time Limit: 30 minutes

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Learning Objective 5-2: Identify different types of managers likely to be found in an organization by level and area.

Types of Managers Although all managers plan, organize, lead, and control, not all managers have the same degree of responsibility for these activities. Thus, it is helpful to classify managers according to levels and areas of responsibility.

A. Levels of Management The three basic levels of management are top, middle, and first-line management. The power of managers and the complexity of their duties increase as they move up the ladder.

1. Top Managers. This level is responsible for the firm’s overall performance and effectiveness. Top managers set general policies and formulate strategies, approve all significant decisions, and represent the company in dealing with other firms and government bodies. Common titles for top managers include president, vice president, treasurer, chief executive officer (CEO), and chief financial officer (CFO).

2. Middle Managers. This level is responsible for implementing the strategies and working toward the goals set by top managers. Titles such as plant manager, operations manager, and division manager designate middle-management slots.

3. First-Line Managers. Duties of managers at this level depend on the job, though first-line managers spend most of their time working with and supervising the employees who report to them. Those who hold such titles as supervisor, office manager, project manager, and group leader are first-line managers.

B. Areas of Management In any large company, top, middle, and first-line managers work in a variety of areas.

1. Human Resource Managers. These managers hire and train employees, evaluate performance, and determine compensation.

2. Operations Managers. These managers are responsible for production, inventory, and quality control.

3. Marketing Managers. These managers are responsible for the development, pricing, promotion, and distribution of goods and services.

4. Information Managers. These managers design and implement systems to gather, organize, and distribute information.

5. Financial Managers. These managers are responsible for the firm’s accounting functions and financial resources.

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6. Other Managers. Some firms employ various types of specialized managers, such as public relations managers or research and development managers.

QUICK QUESTION What are some of the kinds of managerial responsibilities associated with each level of management?

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Learning Objective 5-3: Describe the basic roles and skills required of managers.

Management Roles and Skills Regardless of their levels or areas within an organization, all managers must play certain roles and exhibit certain skills if they are to be successful.

A. Managerial Rolesa number of interesting insights into the nature of managerial roles.

Research offers Based on detailed observations of what executives do, it appears that many of their activities fall into 10 different roles in three basic categories.

1. There are three interpersonal roles inherent in the manager’s job.

First, the manager is often expected to serve as a figurehead—taking visitors to dinner, attending ribbon-cutting ceremonies, and the like. The manager is also expected to serve as a leader—hiring, training, and motivating employees. Managers can have a liaison role. This role often involves serving as a coordinator or link among people, groups, or organizations.

2. Informational Roles The three informational roles flow naturally from the interpersonal roles just discussed.

The process of carrying out the interpersonal roles places the manager at a strategic point to gather and disseminate information. The first informational role is that of monitor, one who actively seeks information that may be of value. The manager is also a disseminator of information, transmitting relevant information back to others in the workplace. These two roles combined illustrate the manager’s role as a vital link in the organization’s chain of communication. The spokesperson formally relays information to people outside the unit or outside the organization.

3. Decisional Roles The manager’s informational roles typically lead to the decisional roles. First, the manager has the role of entrepreneur, the voluntary initiator of change. The manager is acting as a disturbance handler when handling such problems as strikes, copyright infringements, or problems in public relations or corporate image. As resource allocator, the manager decides how resources are distributed and with whom he or she will work most closely. Finally, as negotiator, the manager enters into negotiations with other groups or organizations as a representative of the company.

B. Basic Management Skills Managers need a number of specific skills if they are to succeed.

1. Technical Skills Technical skills are the skills needed to perform specialized tasks. These skills are developed through a combination of education and experience. Technical skills are especially important for first-line managers who spend most of their time helping employees solve work-related problems, training them in more efficient procedures, and

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monitoring performance.

2. Human Relations Skills Absolutely necessary for managerial success, human relations skills are skills in understanding and getting along with people. These skills are important at all management levels, though most important for middle managers who often act as bridges between other managers. Good communications skills are key to understanding others and maintaining good relations.

3. Conceptual Skills Especially prevalent among top managers, conceptual skills involve the ability to think in the abstract, to diagnose and analyze different situations and to see beyond the present situation. Top managers depend most on conceptual skills, first-line managers least.

4. Decision-Making Skills Decision-making skills include the ability to define problems and to select the best course of action. These skills involve gathering facts, identifying solutions, evaluating alternatives, and implementing the chosen alternative.

5. Time Management Skills Time management skills involve the productive use of managers’ time. Leading causes of wasted time are paperwork, telephone calls, meetings, and e-mail.

6. Global Management Skills. Businesses now demand managers who can understand foreign markets, cultural differences, and the motives and practices of foreign competitors.

Managers must also understand how to collaborate with others around the world on a realtime basis, as well as understand international operations.

7. Management and Technology Skills. While new forms of technology have added to a manager’s ability to process information, these new forms have also made it even more important to organize and interpret an ever-increasing wealth of input, by developing effective technology skills.

KEY TEACHING TIPS • Students should associate technical skills with first-line managers, conceptual skills with top managers, and human relations skills with middle managers.

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Make sure students understand that decision-making skills include the ability to define problems and select the best course of action.

HOMEWORK Research a Manager Now is a good time to assign Application Exercise 5-9 from the end-of-chapter materials as

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homework. The assignment asks students to research the background and skill sets of a highlevel manager to understand what makes that manager successful.

At-Home Completion Time: 45 minutes

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Learning Objective 5-4: Explain the importance of strategic management and effective goal setting in organizational success.

Strategic Management: Setting Goals and Formulating Strategy Strategic management is the process of helping an organization maintain an effective alignment strategy with its environment.Goals are objectives that a business hopes and plans to achieve. A is a broad set of organizational plans for implementing the decisions made for achieving organizational goals.

A. Setting Business Goals Goals are performance targets—the means by which organizations and their managers measure success or failure at every level.

1. Purposes of Goal Setting. An organization functions systematically because it sets goals and plans accordingly. The four main purposes of organizational goal setting include: (a) providing direction and guidance for managers at all levels; (b) helping firms allocate resources; (c) helping to define corporate culture; and (d) helping managers assess performance.

2. Kinds of Goals. Every firm has a purpose and a mission. A mission statement is a statement of how the firm will achieve its purpose in the environment in which it operates.

In addition, every firm needs long-term goals, which look five years or more into the future; intermediate goals, which focus on a period of one to five years; and short-term goals, which are set for one year.

B. Types of Strategy A company usually considers three types of strategy: 1. Corporate Strategy. The purpose of corporate strategy is to determine the firm’s overall attitude toward growth and the way it will manage its businesses or product lines.

2. Business (or Competitive) Strategy. Business (or competitive) strategy focuses on improving the company’s competitive position at the business-unit or product-line level.

3. Functional Strategy. With functional strategy, managers in specific areas decide how best to achieve corporate goals by performing their functional activities as productively as possible.

C. Formulating Strategy Strategy tends to be wider in scope than planning; strategy describes what an organization intends to do. Strategy formulation involves three basic steps.

1. Step 1: Setting Strategic Goals. Strategic goals are long-term goals derived from the firm’s mission statement.

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2. Step 2: Analyzing the Organization and Its Environment: SWOT Analysis. After strategic goals have been established, managers usually attempt to assess both their organization and its environment. A common framework for this assessment is called a SWOT analysis. This process involves assessing organizational strengths and weaknesses (the S and W) and environmental opportunities and threats (the O and T). Environmental analysis involves scanning the external environment for threats and opportunities. Threats include changing consumer tastes, hostile takeovers, and new products and new competitors. Opportunities are areas in which the firm can potentially expand, grow, or take advantage of existing strengths. Organizational analysis involves scanning the internal environment for strengths and weaknesses. Strengths include surplus cash, a dedicated workforce, technical expertise, or little competition. Weaknesses include a cash shortage, aging factories, a heavily unionized workforce, or a poor public image.

3. Step 3: Matching the Organization and Its Environment. This step in strategy formulation involves matching a firm’s strengths and weaknesses to its opportunities and threats. This step is at the heart of strategy formulation. A firm should attempt to leverage its strengths so as to capitalize on opportunities and counteract threats. It should attempt to shield its weaknesses. Understanding strengths and weaknesses also impact whether a firm takes risks or behaves more conservatively.

D. A Hierarchy of Plans Plans can be viewed on three levels: strategic, tactical, and operational. Managerial responsibilities are defined at each level. The levels constitute a hierarchy because implementing plans is practical only when there is a logical flow from one level to the next.

Usually set by the board of directors and top management with input from others in the organization, strategic plans focus on steps needed to meet strategic goals. Usually tactical plans with implementing involving upper and middle managers, are concerned certain aspects of the strategic plans; tactical plans are shorter-term plans. Middle and lowerplansshort-term goals. level managers developoperational , geared toward KEY TEACHING TIPS •

Remind students that strategic management is the process of helping an organization maintain an effective alignment with its environment; it is most closely associated with top managers.

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Reinforce that goal setting is critical for managers at all levels, not just the top.

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Students often confuse the types of strategy. Highlight the difference between

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corporate strategy, business strategy, and functional strategy.

Point out that although top managers traditionally carried out strategy formulation, it now often involves people throughout the organization. .

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Remind students that top managers commonly perform strategic planning . Top and middle managers carry out tactical planning. Middle and first-line managers carry out operational planning.

QUICK QUESTIONS •

What are the purposes of goal setting?

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What is included in your college’s mission statement?

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What is the difference between environmental analysis and organizational analysis?

Use In-Class Activity 2: Class Discussion: How Do Your Goals Stack Up? Time Limit: 30 minutes Use In-Class Activity 3: Small-Group Discussion: SWOT Analysis Time Limit: 30 minutes HOMEWORK Evaluating Mission Statements Now is a good time to assign Application Exercise 5-10 from the end-of-chapter materials as homework. The assignment gives students an opportunity to compare and contrast mission statements from various companies, and to evaluate their effectiveness. At-Home Completion Time: 30 minutes

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Learning Objective 5-5: Discuss contingency planning and crisis management in today’s business world.

Contingency Planning and Crisis Management

Because business environments are often difficult to predict and because the unexpected can create major problems, most managers recognize that even the best-laid plans sometimes simply do not work out. Two common methods of dealing with the unknown and unforeseen are contingency planning and crisis management. A. Contingency Planning Contingency planning is planning for change; it identifies ways in which a company will respond to change. It involves identifying aspects of a business or its environment that might entail changes in strategy and identifying alternatives.

B. Crisis Management Crisis management involves an organization’s methods for dealing with emergencies.

KEY TEACHING TIPS • •

It’s important to point out that a contingency plan may not always work.

Changes in internal and external variables can force changes to even the most well thought-out plan.

Remind students that the most successful organizations are those that make their

mission statements clear, remain open about internal policies andHappened! external relationships, and Use In-Class 4: Up for Debate: I Can’t Believe This Has are Activity Time Limit: 20 minutes adaptive to change.

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Learning Objective 5-6: Describe the development and explain the importance of corporate culture.

Management and the Corporate Culture is the shared experiences, stories, beliefs, and norms that characterize Corporate culture an organization. It helps to define the work and business climate in an organization. It is the unique identity of the company and helps to direct employees’ efforts toward the company goals.

A. Building and Communicating Culture For managers, this involves having an understanding of the culture, transmitting the culture to others in the organization, and maintaining the culture. Corporate culture influences management philosophy, style, and behavior. Managers, therefore, must carefully consider the kind of culture they want for their organizations and then work to nourish that culture by communicating with everyone who works there. Effective communication is a key task.

B. Changing Culture Organizations must sometimes change their cultures. This involves analyzing the company’s environment, formulating a vision of a new company, and setting up appraisal and compensation systems for employees who enforce the new values. The nature of the change must be communicated to both employees and customers.

QUICK QUESTIONS •

What is the corporate culture at your job? In the U.S. Marine Corps? On a football team?

In a beauty salon?

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What types of corporate cultures are the easiest or most difficult to change? What are some variables that make such change easy or difficult?

Use In-Class Activity 5: Up for Debate: Who Creates Corporate Culture?

Time Limit: 30 minutes

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: The Management Process Activity Overview: This activity helps students better understand the management process.

Time Limit: 30 minutes What to Do : 1. Divide students into three-member groups, informing them that the manager of a local catering business needs their help. The caterer has arranged to cater a dinner party for 300 people in just two days. However, the caterer has just learned that 500 people, instead of the anticipated 300, will be attending the party. The caterer has only two employees.

2. Ask each group to think of ways in which the caterer can use the four basic functions of management—planning, organizing, leading, and controlling—in order to accommodate the party. (15 minutes) 3. Reassemble the class and discuss the ways in which the managerial functions may be used.

(15 minutes) Don’t Forget: The management process includes a focus on an organization’s financial, physical, human, and information resources.

Wrap-Up: Conclude by reminding students that, once plans are in place, a number of situations can occur that require minor or major changes in the management process.

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In-Class Activity 2: Class Discussion: How Do Your Goals Stack Up? Activity Overview: This activity is designed to help students understand the connection between long-term, intermediate, and short-term goals.

Time Limit: 30 minutes What to Do: 1. Ask students to write down one or two of their long-term goals, focusing on the five-yearplus horizon. (10 minutes) 2. Ask students to write down one or two intermediate goals—focusing on a one- to five-year horizon—that may help them to achieve their long-term goals. (10 minutes) 3. Ask students to identify one or two short-term goals—covering a range of less than one year—that may help them to achieve their intermediate goals. (10 minutes) Don’t Forget: Remind students that the achievement of short-term goals can support the achievement of intermediate goals, which can ultimately support long-term goals. Wrap-Up: Wrap up the exercise by reminding students that goal setting in organizations is driven by corporate, business, and functional strategies; however, the process is dynamic.

Organizational environments and situations can change. As a result, goals may need to be reshaped.

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In-Class Activity 3: Small-Group Discussion: SWOT Analysis Activity Overview: This activity asks students to brainstorm in small groups in order to complete a SWOT analysis.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups, asking each group to identify internal strengths (S), weaknesses (W), external opportunities (O), and threats (T) surrounding their college or university. (20 minutes) 2. Reassemble the class and discuss each group’s input. (10 minutes) Don’t Forget: This exercise could be completed as an individual activity prior to asking for student input.

Wrap-Up: Wrap up the discussion by reminding students that strengths, weaknesses, opportunities, and threats surrounding an organization can sometimes be obvious. However, different individuals can sometimes perceive these factors quite differently. For example, what one person perceives as a threat may be perceived as an opportunity by another.

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In-Class Activity 4: Up for Debate: I Can’t Believe This Has Happened!

Activity Overview: This activity is designed to get students talking about crisis management.

Time Limit: 20 minutes What to Do: 1. Divide the class into small groups and ask each group to assume you have been suddenly called away for the next three weeks, but that class must go on. Appropriate course material, 2.

Eachobjectives, group must decide on the best waymust to continue.

How material setting—but and objectives be course and all syllabus content be covered in can a classroom there adequately covered?

Who shouldinstructor. carry out the instruction?

(20 minutes) is no time to bring in a replacement Instead, the students themselves are responsible.

Don’t Forget: For smaller class sizes, you might complete this as an individual activity.

Wrap-Up: Be prepared to explain what would and would not feasibly work from an instructor’s perspective as groups present their plans.

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In-Class Activity 5: Up for Debate: Who Creates Corporate Culture?

Activity Overview: This activity asks students to share their thoughts on corporate culture.

Time Limit: 30 minutes What to Do: 1. Divide the class into three-member groups and ask them to discuss among themselves who go along creates managers corporate to culture.

Askwith the it? groups to consider these conversation starters: (15 minutes) How often does corporate culture change? a. Ifc.top managers create corporate culture, how do they get everyone else to follow?

When corporate changes, whatcorporate typically causes change? b. Ifd.first-line managersculture or employees create culture,the how do they get top 2. Reassemble the class and discuss each group’s answers. (15 minutes) Don’t Forget: Corporate culture is not always a direct result of top managers’ actions. Sometimes corporate culture is created by first-line managers, employees, or even everyone in the organization.

Wrap-Up: Remind students that the input they provide is likely a result of their own work experience. Some corporate cultures change often and quickly, whereas others tend to be more static.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 5-1. Describe the roles and responsibilities of top, middle, and first-line managers.

Top managers are strategic planners responsible for corporate performance and formulating the mission, goals, and overall corporate strategy. Middle managers are tactical planners responsible for implementing top management’s strategies. First-line managers spend most of their time working with and supervising employees. (Learning Objective 5-2 – AACSB – application of knowledge) 5-2. What are the four main purposes of setting goals in an organization?

The four main purposes are (a) to provide direction and guidance for managers at all levels; (b) to help firms allocate resources; (c) to help define corporate culture; and (d) to help managers assess performance. (Learning Objective 5-4 – AACSB – application of knowledge) 5-3. Identify and explain the three basic steps in strategy formulation.

The three basic steps in strategy formulation are (a) setting strategic goals that stem from the organization’s mission statement; (b) analyzing the organization and its environment for strengths, weaknesses, opportunities, and threats; and (c) matching environmental threats and opportunities against the organization’s strengths and weaknesses. (Learning Objective 5-4 – AACSB – application of knowledge) 5-4. What is corporate culture? How is it formed? How is it sustained? How does it relate to the corporate mission and vision?

Corporate culture is the shared stories, experiences, beliefs, and norms that characterize an organization. Factors that form culture can range from the personality of the founder, to the firm’s overall philosophy, to daily operating methods. Culture is sustained by communicating the culture to all employees and by rewarding and promoting those who understand and maintain the culture. A strong culture can further the mission of the company or it can derail it. (Learning Objective 5-6 – AACSB – application of knowledge)

QUESTIONS FOR ANALYSIS 5-5. Relate the five basic management skills (technical, human relations, conceptual, decisionmaking, and time management) to the four activities in the management process (planning, organizing, leading, and controlling). For example, which skills are most important in leading?

The planning practices identified will vary from strategic to tactical to operational in nature.

Further, every organizational structure varies, depending on the number of people working in

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the organization. Leading or motivating, depends on the number of subordinates or group members present and, perhaps, the types of diversity. Controlling is the one function that ties back to the planning process; if the plan is not going according to expectations, changes are made to guide the organization in the right direction.

(Learning Objective 5-3 – AACSB – analytical thinking) 5-6. Describe the difference between leadership and management.

Answers will vary in detail, although the theme should be that managers have people working for them, while leaders have people following them. Another possible way of looking at the difference is that managers are directly responsible for the results of their departments, while leaders are responsible for establishing vision, values, culture, and mission. (Learning Objective 5-1 – AACSB – analytical thinking) 5-7. What contingencies would a major retailer of home improvement supplies need to consider in planning? How do you think the organization would address those risks? Encourage students to be creative when answering this question. Contingency plans can include preparations for natural disasters such as hurricanes, that would include communication plans (using Twitter feeds, perhaps), a plan to get extra supplies such as water, and a plan to obtain extra stocks of hardware such as generators, plywood and batteries for the community, as well as preparations for technological, legal, social, and other kinds of internal and external threats. (Learning Objective 5-5 – AACSB – analytical thinking)

5-8. Some business people claim that “culture trumps mission.” What do you think that statement means and how would that affect the corporate strategy? Culture is often unstated and invisible but is also the glue that holds the organization together. Once again, let students be creative with their answers. Things like trust and even integrity can be overtly stated in the mission, vision, and values of an organization and yet not manifest in the actual culture. Encourage students to look for examples in the news, such as firms that sell products or services because they are highly profitable, rather than because they are good for the customer (i.e. Wells Fargo). (Learning Objective 5-6 – AACSB – analytical thinking) APPLICATION EXERCISES 5-9. Research a high-level manager of a well-known company by reading interviews or biographies. What are the strategies and skill sets that make that manager successful? How are that manager’s background, education, and experience relevant to the job?

Answers will vary, but students should cover various elements of the 10 management activities and 5 skills. (Learning Objective 5-3 – AACSB – analytical thinking)

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5-10. Critique three mission statements from various companies. Describe how the mission relates to vision, values, strategies, and culture. How effective do you think the mission statements are? How useful? How clearly do they reflect the identity of the company? Answers will vary, but students should focus on what the message of the mission statement is, compared to the reputation of the company. For instance, Enron’s mission was to be the greatest company in the world. This is both too vague and completely at odds with what (Learning Objective 5-4 – AACSB – analytical Enron was eventually revealed to be. thinking) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 5-11 TO 5-16 (Learning Objectives 5-1, 5-2, 5-3, 5-4, 5-5, and 5-6 AACSB – interpersonal relations and – teamwork, analytical thinking, application of knowledge) In this exercise students are focusing on the expertise necessary to successfully run their business. They should incorporate information from their SWOT analysis to determine their goals and strategies. The students should also incorporate lessons learned from this chapter to develop detailed contingency plans.

TEAM EXERCISE – DREAMS CAN COME TRUE 5-17 TO 5-20 (Learning Objective 5-4 – AACSB – interpersonal relations and teamwork, written and oral communication, application of knowledge) This exercise helps students focus on developing a mission statement and how to derive appropriate goals based on the company’s mission.

5-17. Working with your group, develop a mission statement for Dream Vacations. Why is developing a mission statement important?

Example mission statements will vary. A mission statement defines how an organization will achieve its purpose in the environment in which it conducts its business, its reason for being.

It’s difficult to develop other goals if this one is unclear or undefined.

5-18. Considering the mission statement of Dream Vacations and the information provided in the case, what are the company’s long-term goals? How should Arturo measure these goals?

Long-term goals involve looking into the future more than five years. Answers may vary but should address the types of trips, types of customers, and destinations on which Dream Vacations expects to focus. What goals the students identify will determine the methods of measurement.

5-19. What intermediate goals will help Dream Vacations meet its long-term goals and realize its mission? What types of corrective action should Arturo take if the company fails to meet these goals?

The scenario identifies two intermediate-term goals of growing at least 10 percent per year over the first five years through advertising and referrals and expanding into multiple offices

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within two years. Are these goals that help Dream Vacations meet the long-term goals?

If not, additional intermediate-term goals must be developed. Corrective action must be designed that is specific to the goals. It may be necessary to identify what is influencing the growth to examine if advertising and referrals are effective.

5-20. Identify the short-term goals of Dream Vacations. Are short-term goals more or less important than long-term goals? Short-term goals are focused on developing relationships with resorts in various areas. Both long- and short-term goals are important. Long-term goals focus on the bigger picture of where an organization wants to head while short-term goals involve taking steps that lead to achieving the long-term goals. Therefore, both are important and must be interrelated.

EXERCISING YOUR ETHICS: PEOPLE PROBLEMS (Learning Objective 5-1, 5-2, 5-3, 5-4, 5-5, and 5-6 – AACSB – ethical understanding and reasoning, reflective thinking, application of knowledge) 5-21. Which areas of management functions are involved in this scenario? What skills? What strategies?

Students should address both the leadership and controlling functions.

Skills addressed should include human relations and decision-making. Strategic issues will include how decisions are made and how the organization is operating. Students may also discuss the roles of managers and subordinates, including interpersonal, informational, and decisional.

5-22. What are the ethical issues in this situation?

Answers will vary, but students should address the balancing act between performance of existing employees and how that affects hiring and firing decisions. They may also address confidential information and its impact on personnel issues. They may also address whether addiction is a disability, and whether it is appropriate or even legal to discharge someone for that reason.

5-23. What is the logical, business-based approach for a manager to take in this situation?

Explain your position. At one end of the spectrum, protecting and keeping a long-term, high-performing and valued At the other end of the spectrum, evaluating a new hire should be objective and not biased by personal opinions or manipulation. Logical approaches maytake varyprecedence but shouldover be based on objective evidence. Students should be able employee could new hires. to justify their approach logically.

5-24. What would you do, and why?

Answers will vary, but students should acknowledge that it is often difficult to make

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personnel decisions. They should explain their recommendations, not simply make the “easier” decision.

5-25. How would you describe the culture of this company, based on the limited information in the scenario?

Answers will vary, but should focus on the unspoken values and the observable actions of the company leadership.

CASES: ALPHABET SOUP (Learning Objectives 5-1 and 5-3 AACSB – application of knowledge, reflective thinking) – 5-26. Describe examples of each of the management functions illustrated in this case.

This case cites the example of the two company founders engaging in planning and analysis when diversifying through key acquisitions and alliances. This case also describes the function of leading to ensure Alphabet continues to foster a highly productive company culture of innovation and transitioning to new management and leadership.

5-27. Which management skills seem to be most exemplified in Sergey Brin and Larry Page?

Sergey Brin and Larry Page display technical, interpersonal, conceptual, communication, and decision-making skills. The case discusses their technical skills in creating the algorithms and their conceptual and diagnostic skills in applying it to the business functions at Google. The case also alludes to their decision-making skills in making acquisitions.

5-28. What role have goals and strategy played in the success of Alphabet?

Sergey Brin and Larry Page clearly had goals and a strategy in mind for their company but take a much more informal approach to strategic planning and goal setting versus many more traditional companies. Google operates more on short- and intermediate-term goals than well-publicized long-term goals.

5-29. How would you describe the corporate culture at Alphabet?

The students will likely describe corporate culture at Alphabet as very casual with an emphasis on creativity and innovation.

TEAM RED WHITE AND BLUE (Learning Objectives 5-1, 5-2, 5-3, 5-4, 5-5, and 5-6 – AACSB – analytical thinking, application of knowledge)

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5-30. As Executive Director (ED), how deeply do you think Erwin is involved in each of the four management functions? Briefly describe the types of decisions that he might make as they relate to each of the four functions.

Though students’ focus will vary, answers should include mention of the four management functions: planning, organizing, leading, and controlling.

They may emphasize leading and discussing when exploring Erwin’s role in the formation of the organization, but may emphasize other roles when discussing his day-to-day management.

5-31. The text describes a variety of skills that are essential to management. Which two skills do you think will be most important for Erwin in the coming years?

Students should consider Erwin’s desire to turn the reins over to another leader as well as the continued need for strategic planning. It’s likely that student answers will focus on planning and leading, given the continuing success of the organization.

5-32. How do you think leading and managing a not-for-profit organization (NPO) is different than leading and managing a for-profit organization?

Student answers should focus on the difference between stakeholders of for-profit and nonprofit organizations, most likely pointing to the drive for profits vs. the drive to accomplish mission as well as the general stakeholder groups that each kind of organization must answer to (shareholders of for-profit companies v. the public for a not-for-profit).

5-33. What do you think were the critical elements that have led Team RWB to such success?

Answers should discuss the goal-setting and strategic planning elements of Team RWB. They may also mention the corporate culture and the management functions performed

by Erwin. Answers will vary with opinion, of course, but should demonstrate an understanding of how Erwin performed certain management functions, and may mention his role in establishing corporate culture. the 5-34. RWB What role do you think board of directors of Team (https://www.teamrwb.org/about-us/leadership/) play in leading and managing the organization? How is an NPO board of directors different than that of a for-profit company? What do you think is the ideal nexus between the NPO board and the ED? Students should examine the difference between the management functions of an Executive Director and the leadership functions of a board of directors. Answers may focus on strategic planning, goal-setting, and the functions of management. They may also discuss the importance of Erwin’s role in setting corporate culture.

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Chapter 6: Organizing the Business Chapter Overview Like a thumbprint, every organization has a unique structure. Some new business start-ups begin with a simple structure and over time evolve into an elaborate structure. All organizational structures change, but some change more quickly than others. This chapter presents the building blocks of organizational structure—specialization and departmentalization. It also describes centralization and decentralization, delegation, and authority as the key ingredients in establishing the decision-making hierarchy. Along the way, the chapter looks at the differences among functional, divisional, matrix, and international organizational structures and examines the most popular new forms of organizational design.

Finally, the chapter explores the informal organization and intrapreneuring.

Learning Objectives 6-1. Discuss the factors that influence a firm’s organizational structure.

6-2. Explain specialization and departmentalization as two of the building blocks of organizational structure.

6-3. Describe centralization and decentralization, delegation, and authority as the key ingredients in establishing the decision-making hierarchy.

6-4. Explain the differences among functional, divisional, matrix, and international organizational structures and describe the most popular new forms of organizational design.

6-5. Describe the informal organization and discuss intrapreneuring.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: Organizational Structure

Description Students consider their college’s organizational chart and chain of command and discuss the relationships of the layers of management and why the specifically organizational chart is structured the way that it is.

2. Small-Group Students consider the advantages of Discussion: Centralization versus centralization and decentralization.

Decentralization Students are divided into teams to discuss 3. Up for Debate: of the advantages and disadvantages Making the Grade intrapreneurship at FedEx. 4. Up for Debate: Who Students are divided into teams to discuss “who” within the organization most likely Runs the Grapevine? creates the grapevine.

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Time Limit

30 min.

30 min.

30 min.

30 min.

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CHAPTER OUTLINE Learning Objective 6-1: Discuss the factors that influence a firm’s organizational structure.

What Is Organizational Structure?

Organizational structure is the specification of the jobs to be done within an organization and the ways in which those jobs relate to one another.

A. Organization Charts Organizational charts are prepared to clarify structure and to show employees where they fit into a firm’s operations. The chain of command refers to reporting relationships within the company.

B. Determinants of Organizational Structure Many factors play a part in determining an organization’s optimal structure. Managers not only consider the organization’s mission, and strategy, but also the organization’s size and environment.

KEY TEACHING TIP •

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Remind students that organizational structure refers to the specification of jobs within a firm and how those jobs relate to one another. It can be viewed as the way in which employees’ positions and departments are connected in an organization’s framework.

Many factors play a part in determining an organization’s optimal structure, including

the organization’s QUICK QUESTION mission, strategy, size, and environment. Most organizations change their structures on a continuing basis.

What does anorganization charttell us?

Use In-Class Activity 1: Icebreaker: Organizational Structure Time Limit: 30 minutes

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Learning Objective 6-2: Explain specialization and departmentalization as two of the building blocks of organizational structure.

The Building Blocks of Organizational Structure The first step in developing the structure of any business involves three activities: specialization, departmentalization, and establishment of a decision-making hierarchy.

A. Job Specialization Job specialization, a natural part of an organization’s growth, is the process of identifying the specific jobs that need to be done and designating the people who will perform them. Job specialization may even involve breaking jobs into small components prior to assigning them to individuals. In a very small organization, the owner may perform every job. As the firm grows, however, so does the need to specialize jobs so that others can perform them. Specialized jobs are learned more easily and can be performed more efficiently than non-specialized jobs. It is possible to overspecialize, however, leading to boredom, carelessness, and lack of satisfaction.

B. Departmentalization Departmentalization is the grouping of similar or related jobs into logical units.

Departmentalization allows the firm to treat each department as a profit center—a separate company unit responsible for its own costs and profits. Several types of departmentalization exist: 1. Functional Departmentalization. Organizations are divided according to a group’s functions or activities. Examples include a firm’s production, marketing and sales, human resources, accounting, and finance departments.

2. Product Departmentalization. Organizations are divided according to the specific products or services being produced.

3. Process Departmentalization. Organizations are divided according to production processes used to create a good or service.

4. Customer Departmentalization. This grouping of jobs simplifies shopping by providing departments that offer products and meet the needs of identifiable customer groups.

5. Geographic Departmentalization. Organizations are divided according to the areas of the country or world that they serve.

6. Multiple Forms of Departmentalization. Larger companies are virtually certain to use all of these different types of departmentalization for various levels and in various areas.

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KEY TEACHING TIPS •

Students should recognize that the first step in developing the structure of any business involves specialization, departmentalization, and the establishment of a decision-making hierarchy.

•

An interesting point to make is that larger companies tend to adopt different

types of departmentalization for various levels of the company.

QUICK QUESTIONS •

How does the need to specialize increase as a firm grows?

•

What type of company might opt to use process departmentalization?

•

What type of company might opt to use functional departmentalization?

•

What type of company might opt to use customer departmentalization?

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Learning Objective 6-3: the key in Describe centralization and decentralization, delegation, and authority as ingredients establishing the decision-making hierarchy.

Establishing the Decision-Making Hierarchy The decision-making hierarchy is created by formalizing reporting relationships. When the focus is on the reporting relationships among individual managers and the people who report to them, it is referred to as delegation. When it is on the overall organization, it becomes a question of decentralization versus centralization. A. Distributing Authority: Centralization and Decentralization Some managers make the conscious decision to retain as much decision-making authority as possible at the higher levels of the organizational structure; others decide to push authority as far down the hierarchy as possible.

1. Centralized Organizations. In a centralized organization, most authority is held by upper-level managers. Centralization is common in companies in relatively stable and predictable environments and is also typical of small businesses.

2. Decentralized Organizations. In a decentralized organization, much authority is delegated to lower levels of management. Decentralization is typical in firms that have complex and dynamic environmental conditions. It is also common in businesses that specialize in customer services, allowing the company to be more responsive by allowing managers increased discretion to make quick decisions in their areas of responsibility. 3.

Tall and Flat Organizations. Tall organizations are characterized by many layers of management and are more centralized; flat organizations have few layers of management and are more decentralized.

4. Span of Control. A manager’s span of control is the number of people managed by one manager; many factors can lead to a wide or narrow span of control. In flat organizations, control tends to be wide; in tall organizations, it is narrower.

B. The Delegation Process Delegation begins when responsibility is granted to a subordinate from a manager.

Responsibility is the duty to perform an assigned task; authority is the power to make the decisions necessary to complete the task. Accountability is the obligation employees have for the successful completion of the assigned task.

C. Three Forms of Authority Forms of authority develop when individuals are delegated authority and responsibility in a firm.

1. Line Authority. This authority flows vertically up and down the chain of command.

Line departments are linked directly to the production and sales of specific products.

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2. Staff Authority. This authority is based on special expertise and usually involves advising line managers in areas such as law, accounting, and human resources. These staff members help line departments in making decisions, but do not have the authority to make final decisions. While staff members generally provide services to management, line managers are directly involved in producing the firm’s products.

3. Committee and Team Authority. This is the authority that is granted to committees and teams that play central roles in the firm’s daily operations. Employee committees or work teams are typically empowered to plan, organize, and perform their work with minimal oversight and often with special authority.

KEY TEACHING TIPS • Remind students that in a centralized organization, most decision-making authority is held by upper-level managers; in a decentralized organization, decision-making authority is delegated to levels of management at various points below the top.

• Make sure students understand that a flat organizational structure tends to have fewer layers of management, whereas a tall organizational structure has many layers of management.

• Students often forget exactly what delegation involves: (1) the assignment of responsibility, (2) the granting of authority, and (3) the creation of accountability.

• Students can remember line authority because it is the type of authority that flows up and down the chain of command.

• Students often forget that staff members help line departments in making decisions but do not usually have the authority to make final decisions.

• Students often perceive that span of control should involve controlling as many employees as possible. Ability to effectively control any number of employees depends on the complexity of the project and the skills required, so increased complexity or skill levels required decreases the number of employees that can be effectively managed.

QUICK QUESTIONS • • •

How many employees do you think you can effectively control? What are some factors that inhibit or enhance a manager’s span of control?

Why do managers sometimes have trouble delegating authority?

What are some examples of managers who use line authority, staff authority, and committee and team authority? Might one type of authority be easier to use than another?

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Use In-Class Activity 2: Small-Group Discussion: Centralization versus Decentralization Time Limit: 30 minutes HOMEWORK Interview a Manager Now is a good time to assign Application Exercise 6-9 from the end-of-chapter materials as homework. This assignment asks students to interview a manager to gain first-hand knowledge of how the delegation process is actually carried out at a local service business.

At-Home Completion Time: 1 to 2 hours

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Learning Objective 6-4: Explain the differences among functional, divisional, matrix, and international organizational structures and describe the most popular new forms of organizational design.

Basic Forms of Organizational Structure Four basic forms of organizational structure reflect the general trends followed by most firms: functional, divisional, matrix, and international. A. Functional Structure

Often used by most small- and medium-sized firms, functional organizations divide job responsibilities by functional areas, such as marketing or finance or operations. As firms grow, accountability becomes more difficult, so firms tend to move away from this structure.

B. Divisional Structure Corporate divisions usually operate under this structure as relatively autonomous businesses under the larger corporate umbrella. Divisions are departments that resemble separate businesses in that they produce and market their own products. The structure relies on product departmentalization.

C. Matrix Structure Sometimes a “combination” structure—one that combines two separate structures— works better than either simpler structure alone. A so-called matrix structure is organized along two dimensions, instead of just one, by combining, for example, a functional and a divisional structure, superimposing one framework on the other. It can add flexibility and adaptability to a firm. It may be permanent, or temporary for a specific project.

D. International Structure International have been developed organizational in response structures to the need to manufacture, purchase, and sell in global markets. These structures frequently change as a company becomes more globalized.

E. New Forms of Organizational Structure Among the most popular new forms of organization are team organization, virtual organization, and learning organization.

1. Team Organization. Team organization relies almost exclusively on project-type teams; people rotate from one project to another as dictated by their skills and the demands of the projects. Team authority is the underlying foundation of organizations that adopt this organizational structure.

2. Virtual Organization. This organization has little or no formal structure; this organization exists only in response to its own needs. Employees, facilities, and subcontracted services will change based on project needs.

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3. Learning Organization. The learning organization works to integrate continuous improvement with continuous employee learning and development. The most consistent and logical strategy for achieving continuous improvement as a firm is to constantly upgrade employee talent, skill, and knowledge.

KEY TEACHING TIPS •

•

Students often have a hard time grasping matrix structure, so make sure they understand that it utilizes two types of structures within the same organization; one structure is the “permanent” structure, and the “second” structure is superimposed on top of it.

Remind students that there are several forms of international structure, depending on

the degree with which an organization depends on foreign companies to manufacture, purchase, and sell its products.

QUICK QUESTIONS • Functional structure can be thought of as authority that is determined by the relationships between group functions and activities. What are the benefits of a functional structure?

• •

With divisional structure, a firm organizes itself around product-based divisions. How can an organization benefit from a divisional structure?

With matrix structure, a firm chooses to combine two separate structures. How can this be an advantage to the organization?

HOMEWORK Determine Type of Organization Now is a good time to assign Application Exercise 6-10 from the end-of-chapter materials as homework. This assignment asks students to research a company at which they would like to work someday and determine how the company is organized. This assignment lets them investigate a company in which they have interest and learn about how it is organized and whether the organization type fits the mission.

At-Home Completion Time: 1 hour

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Learning Objective 6-5: Describe the informal organization and discuss intrapreneuring.

Informal Organization —everyday interactions among employees that Frequently, social the informal organization transcend formal jobs and job interrelationships—effectively alters a company’s formal structure.

A. Informal Groups Informal groups are groups of people who decide to interact among themselves. Informal organization can be a powerful force that managers cannot ignore.

B. Organizational Grapevine The grapevineis an informal communication network in which people communicate through ways that may not coincide with the formal communication processes. By identifying the key people in the grapevine, the manager can get valuable information and use it to improve decision making.

C. Intrapreneuring Intrapreneuring is encouraged among businesses as a way of enhancing creativity and maintaining the innovation and flexibility of a small-business environment in large, bureaucratic structures. It involves identifying and supporting inventors, the product champions, and the sponsors of new ideas, products, services, or processes.

KEY TEACHING TIPS •

Students should recall that in a team organization, people float from project to project as dictated by their skills and the demands of those projects.

•

Remind students that the virtual organization has little or no formal structure.

•

Reinforce that a learning organization integrates continuous employee learning and development.

QUICK QUESTIONS •

What is the informal organization at your job?

•

If your CEO is seen in a nightclub with someone other than his or her spouse, how long will it take the grapevine to disseminate that information?

Use In-Class Activity 3: Up for Debate: Making the Grade Time Limit: 30 minutes Use In-Class Activity 4: Up for Debate: Who Runs the Grapevine?

Time Limit: 30 minutes

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Organizational Structure Activity Overview: This activity asks students to consider the organizational chart and chain of command at their college or university and invites them to discuss the relationships of the layers of management and why the organizational chart is specifically structured the way that it is.

Time Limit: 30 minutes What to Do: 1. Divide the class into four-member groups, asking each group to discuss the organizational chart and chain of command at their college or university. Who reports to whom? (10 minutes) 2. Ask each group to discuss the relationship of the layers of management at the college or university, as well as why the organizational chart is structured the way that it is. (10 minutes) 3. Reassemble the class and discuss each group’s findings. Are the groups consistent with one another in their discussions? (10 minutes) Don’t Forget: Students will likely identify many types of reporting relationships within the college or university. In addition, students will identify many reasons for the way the organizational chart at their school is structured, including factors that may not be included in the textbook discussion.

Wrap-Up: Bring the activity to a close by discussing the various reporting relationships evident in the college or university, as well as the different factors that might play a role in the design of the organizational structure, such as chain of command, span of control, delegation of authority, employee skill or certification level, and so on.

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In-Class Activity Decentralization

2:

Small-Group

Discussion: Centralization

versus

Activity Overview: This activity encourages students to consider the advantages and disadvantages of centralization and decentralization within organizations.

Time Limit: 30 minutes What to Do: 1. Divide the class into four-member groups and ask them to come up with five advantages of centralization and five advantages of decentralization in organizations. (15 minutes) 2. Reassemble the class and discuss each group’s input. Which do they think is best? (15 minutes) Don’t Forget: Not everyone has worked in both a centralized and a decentralized organization; however, the advantages for each may become more evident as students think about their definitions.

Wrap-Up: Bring the activity to a close by reminding students that top managers make all (or most) of the decisions in a centralized organization, which may indicate that employees overall “learn” more in a decentralized organization. In a decentralized organization, employees may feel that their input is being heard and addressed in making specific decisions.

On the other hand, it may be that cohesiveness may appear to be higher in some centralized organizations.

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In-Class Activity 3: Up for Debate: Making the Grade Activity Overview: This activity asks students to think about the advantages of intrapreneuring.

Time Limit: 30 minutes What to Do: 1. Ask students to read the Entrepreneurship and New Ventures feature in the textbook. Divide the class into groups of two or three students, and ask students to discuss how FedEx focuses on intrapreneurship. How has the company benefited from intrapreneuring? Has it faced any disadvantages from intrapreneuring? (10 minutes) 2. Ask the groups to discuss how FedEx’s success can be attributed to its commitment to decentralization. (10 minutes) 3. Reassemble the class as a whole and discuss each group’s input. (10 minutes) Don’t Forget: Before you begin, remind students that intrapreneurship is the process of creating and maintaining the innovation and flexibility of a small-business environment within the confines of a large, bureaucratic structure. Decentralization refers to the delegation of decision-making authority to levels of management at various points below the top.

Wrap-Up: FedEx perfected its hub-and-spoke system for increased speed and efficiency and developed a reputation for high-quality, reliable, and fast service. FedEx pioneered the use of bar codes and handheld PDAs for drivers and online, real-time package tracking. These are a few areas in which FedEx has proven to be intrapreneurial. Bring the activity to a close by highlighting FedEx’s ability to practice standardization in its daily activities, even as managers are encouraged to question, challenge, and develop new ideas.

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In-Class Activity 4: Up for Debate: Who Runs the Grapevine?

Activity Overview : This activity invites students to think more about the grapevine, focusing on whom within the organization may be most likely to create it.

Time Limit: 30 minutes What to Do: 1. Divide the class into two- or three-member teams and ask them to discuss within their groups where the grapevine begins within an organization. Is it top managers? Is it mostly males or females? Is the grapevine generated from specific departments? Is it generated from those people with the most seniority? (15 minutes)

2. Reassemble the class as a whole and debate the small groups’ thoughts. (15 minutes) Don’t Forget: The grapevine is not likely to be generated in the same way within every organization.

In addition, information changes as it “moves” from person to person. Remind students that they will be merely considering generalizations in this activity.

Wrap-Up: Wrap up the discussion by reminding students that the grapevine can benefit managers within the organization; they can learn a lot about their workers by listening to what is filtering through the rumor mill. Therefore, some managers may be responsible for starting the grapevine. On the other hand, employees can also be responsible for beginning the grapevine as a result of overhearing information or making assumptions about other workers, departments, the company’s strategic plans, and so on.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 6-1. Describe the five basic forms of departmentalization. Give examples of each.

Examples will vary by student. Departmentalization follows one (or any combination) of five forms: a. functional departmentalization based on functions or activities b. product departmentalization based on products or services offered c. process departmentalization based on production processes used to create goods and services d. customer departmentalization based on customer types or customer groups e. geographic departmentalization based on geographic area (Learning Objective 6-2 – AACSB – application of knowledge) 6-2. What are the advantages and disadvantages of a decentralized organizational structure?

In a decentralized organization, most decision-making authority is delegated to lower levels of management. Decentralized firms tend to have relatively fewer layers of management, resulting in a flat organizational structure. Advantages of decentralization include quicker decision-making, freeing up upper-management time, empowering lower-level management and employees, develops junior management, and develops a more diverse organization.

Disadvantages include loss of control, lack of coordination, and the possibility of a loss of unity across the organization. Students may come up with more advantages and disadvantages as well. (Learning Objective 6-3 – AACSB – analytical thinking, application of knowledge) 6-3. What is the difference between responsibility and authority?

Responsibility is the duty to perform an assigned task; authority is the power to make the decisions necessary to complete that task. Responsibility and authority should be closely linked for any given assignment. (Learning Objective 6-3 – AACSB – application of knowledge) 6-4. Why do some managers have difficulties in delegating authority? Of these reasons, which do you think would be the most significant issue for you?

Some of the reasons managers have difficulty delegating authority include that (a) they fear that employees can’t do anything as well as they can; (b) they fear that something will go wrong if someone else does it; (c) they fear that the employee will “show up” the manager; (d) they are too bogged down in day-to-day activities to delegate; (e) they don’t know how to delegate; and (f) they want to keep control. (Learning Objective 6-3 – AACSB – analytical thinking, reflective thinking) 6-5. Why is a company’s informal organization important?

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The company’s informal organization is the everyday social connections among employees that can transcend formal job-related relationships, creating a very powerful dynamic, which can either support or disrupt a firm’s effectiveness. (Learning Objective 6-5 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 6-6. Draw a high-level organization chart for your college or university.

College organization structures do differ, but most colleges will use a functional structure with a president as its head and cabinet members overseeing various departments such as academic affairs, finance, student development, advancement, and admission. If the student includes the academic divisions in the organization chart, they will likely include Deans of Schools (or Divisions or Faculties) and individual departments that comprise each school.

(Learning Objectives 6-4 AACSB – application of knowledge) 6-7. Describe a hypothetical organizational structure for a start-up Internet marketing firm.

Describe changes that might be necessary as the business grows. Answers will vary, but the firm will probably begin with a centralized structure in which the owner will either perform or oversee every job. Various types of departmentalization will probably emerge as the firm grows, and it may become more decentralized as management delegates authority downward. With additional growth, the firm may advance from a functional to a divisional, matrix, or even virtual organization. (Learning Objective 6-4 – AACSB – application of knowledge)

6-8. Do you think that you would want to work in a matrix organization, such as Martha Stewart Living Omnimedia, where you were assigned simultaneously to multiple units or groups?

Why or why not?

A divisional structure consists of corporate divisions that operate as relatively autonomous units under the larger corporate umbrella. In a matrix structure, however, group members report to two or more managers, usually one line and one staff manager. The matrix structure is often used to address specific issues on a project-by-project basis. Answers to the second part of the question—how students would feel about working in a matrix organization— will vary, but students should address the pros and cons of reporting to more than one manager.

They should address the structural elements identified in the first part of the question.

(Learning Objective 6-4 – AACSB – analytical thinking, reflective thinking)

APPLICATION EXERCISES 6-9. Interview or observe the manager of a local service business, such as a fast-food restaurant. What types of tasks does this manager typically delegate? Is the appropriate authority also delegated in each case?

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Answers will vary, but managers in fast-food restaurants typically delegate tasks like cleaning, cooking, serving, and so on. Depending on the size of the business, ordering, scheduling, and payroll functions may be delegated as well. (Learning Objective 6-3 – AACSB – application of knowledge) 6-10. Select a company where you would like to work one day. Using online research, determine if the company has a functional, divisional, matrix, international, team, virtual, or learning organization. Explain how you arrived at this conclusion. Do you believe that this organizational structure is consistent with the organization’s mission? Do you think that organizational structure is well suited to your working style and preferences?

Answers will vary but after researching the company, the student should determine the type of structure from viewing the company’s organizational chart. An organizational chart represents the firm’s structure and shows where employees fit into the hierarchy.

Organizational charts depict the extent of line and staff authority, departmentalization, and span of control at various levels. How students feel the structure fits them will depend on the company chosen. (Learning Objective 6-4 – AACSB – application of knowledge, reflective thinking)

BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 6-11 TO 6-14 (Learning Objectives 6-3 and 6-4 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) This exercise will give the students the opportunity to analyze and reflect on the impact that organizational structure has on a company. Additionally, students should recognize that the structure, number of employees, and decision-making should evolve and change depending on various internal and external environmental factors. In this exercise students should discuss the nuances of putting together an effective employee team and organization.

TEAM EXERCISE: GETTING WITH THE PROGRAM 6-15 TO 6-17 (Learning Objective 6-3 – AACSB – analytical thinking, application of knowledge, reflective thinking) 6-15. With the average computer programmer earning nearly $80,000 a year, and with all competitive firms paying top dollar, why might organizational issues be critical in determining employee loyalty?

Dissatisfied employees can obtain other jobs easily, so firms will try to limit turnover by creating the most satisfactory work environment possible.

6-16. If you were a programmer, what organizational factors would make a difference to you?

Why? Answers will vary, but possibilities include variety of job tasks, degree of decision-making authority, international involvement, and job-related benefits.

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6-17. As the company founder, how willing would you be to make major organizational changes in light of the shortage of qualified programmers?

Answers will vary, but students should demonstrate awareness that without making the changes needed to retain qualified programmers, the business is unlikely to thrive long-term.

EXERCISING YOUR ETHICS: AVOIDING CONFRONTATION – (Learning Objective 6-5 AACSB – ethical understanding and reasoning, reflective thinking) 6-18. What are the ethical issues in this situation?

The ethical issues revolve around the employer’s responsibility to the employees. By presenting an option that is actually not under consideration, management is undermining the employees’ trust. Once word gets out that layoffs, not pay cuts, were considered, employees can feel betrayed, scared about their future, and uncertain what to believe from management.

6-19. What do you think most people would do in this situation?

Some employees may choose to stick it out (for various reasons), but others will choose to look for a job elsewhere or to retire. A 15 percent pay cut is significant and many employees will not be able to manage on a reduced paycheck. Employees’ loyalty to the company, satisfaction with their jobs and coworkers, will play a part in people’s decisions.

6-20. What would you do in this situation?

Answers will vary. The more uncertain the budget, the lifestyle, the family situation, the more likely an employee will look for something that appears to be more stable and, therefore, beneficial.

CASES: THE SKINNY (Learning Objectives 6-2, 6-3, 6-4 – AACSB – analytical thinking, application of knowledge) 6-21. Describe the organizational structure of your college or university. Is it more functional or divisional, or is it unique in some way?

In a functional structure, relationships between group functions and activities determine authority. Functional structures are usually structured around basic business functions: a marketing department, an operations department, a finance department. The benefits include specialization within functional areas and smoother coordination among them. It fosters centralization.

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A divisional structure relies on product departmentalization in which divisions operate as autonomous businesses under a larger corporate umbrella. Each division will have its own marketing director, operations director, and finance director. In a college, each department may have its own dean or vice president, but it probably won’t have full control over its budget, or do its own marketing to the public.

6-22. In what ways does this structure align with the mission of the college? In what ways might this structure hinder the college’s mission?

Students should review the advantages of each structure to determine which is the best structure to accomplish the mission of the college.

6-23. If you were hired by the college to help reorganize for better efficiency and better provision of service, what tangible advice could you offer?

Characteristics such as maximizing cooperation and minimizing competition should be identified. Focusing on the customer (is it the students or those employing them after graduation or both?) should help the college recognize areas available for improvement.

Increasing accountability of departments and their staffs should be addressed. Training within areas can be enhanced with a service focus. .

HEARD IT THROUGH THE GRAPEVINE – (Learning Objective 6-5 – AACSB analytical thinking, application of knowledge) 6-24. In your office or college, what types of information are conveyed through the grapevine?

How often is the information accurate?

Answers will vary depending on the size and type of company where the students are employed. Students should consider, though, whether the information types include what they perceive as important information or how much of the information fits the description of informal gossip. The students’ perception of the accuracy of the information will be interesting to hear.

6-25. Does a flat organization encourage or discourage office gossip? What leads you to this conclusion?

Students’ perspective will frame their answer to this question. Some students may think since there are fewer layers of managers and more subordinates that there will be more gossip. A flat organization should discourage office gossip because of decision-making authority.

Therefore, information is pushed lower in the hierarchy, enhancing the overall quality of communication and openness about providing information.

6-26. Do you think that the grapevine would be more or less active in a matrix organization?

Why?

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Because a matrix organization encourages more communication across departments, functions, and processes, the grapevine should need to be less active.

6-27. Many companies encourage their employees to form social relationships outside work to build a sense of camaraderie. How would these informal groups feed or limit the grapevine? Level of employee satisfaction will be a determining factor in whether informal groups will feed or limit the grapevine. Dissatisfied employees can spread their negativity, but happy employees are more likely to focus on the employee relationships rather than issues with the organization.

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Chapter 7: Operations Management and Quality Chapter Overview All goods and services production systems have their own unique production processes. These processes provide utility by adding customer value. Companies with different business strategies are best served by having different operations capabilities. Even very similar and competing businesses can produce output and manage quality with completely different production systems.

This chapter is dedicated to the study of operations and quality within both the manufacturing and service sectors. It explains the meaning of the term operations (or production) and describes the three kinds of utility that operations processes provide. It explains how companies with different business strategies are best served by having different operations capabilities and identifies the major factors considered in operations planning.

The chapter also discusses the information contained in four kinds of operations schedules—the master operations schedule, detailed schedule, staff schedule, and project schedule—and identifies the activities involved in operations control. Finally, it looks at the activities and underlying objectives involved in total quality management and explains how a supply chain strategy differs from traditional strategies for coordinating operations among firms.

Learning Objectives 7-1. Explain the meaning of operations and discuss the growth in the services and goods sectors of the U.S. economy.

7-2. Identify the three kinds of utility created by operations and the characteristics that distinguish service operations from goods production.

7-3. Explain how companies with different business strategies are best served by having different operations capabilities.

7-4. Identify the major factors that are considered in operations planning.

7-5. Discuss the information contained in four kinds of operations schedules—the master operations schedule, detailed schedule, staff schedule, and project schedule.

7-6. Discuss the two key activities required for operations control.

7-7. Identify the activities and underlying objectives involved in total quality management.

7-8. Explain how a supply chain strategy differs from traditional strategies for coordinating operations among firms.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: Are You Getting What You Paid For? 2. Up for Debate: Do You Really Have to Be on Time for That Meeting in Cairo?

.

Description Students discuss perceptions of service quality.

Students are divided into teams to discuss the advantages of punctuality and the types of job fields that require punctuality.

Time Limit 25 min.

20 min.

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CHAPTER OUTLINE Learning Objective 7-1: Explain the meaning of operations and discuss the growth in the services and goods sectors of the U.S. economy.

What Does Operations Mean Today?

Service operations (or service production ) provide tangible and intangible services; firms that only make tangible products are engaged in activities for goods operations (or goods production). The term operations (or production) refers to all the activities involved in making products—goods and services—for customers. Growth in the Services and Goods Sectors A. Historically, agriculture was the dominant economic sector in the early years of the United States. Eventually, manufacturing grew, becoming the economic backbone from the nineteenth century into the mid-twentieth century. Services then began a rapid climb in economic importance in terms of both number of employees and percentage of gross domestic product (GDP)—the value of all goods and services produced by the economy, excluding foreign income. The service sector’s greater percentage of GDP has hovered above 65 percent while the smaller 11 percent of the workforce in goods-producing jobs produced 32 percent of the national income. KEY TEACHING TIP Remind students that operations refers to all the activities involved in making products—goods and services—for customers.

QUICK QUESTION What is the difference between service operations and goods operations?

Use In-Class Activity 1: Icebreaker: Are You Getting What You Paid For? Time Limit: 25 minutes

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Learning Objective 7-2: Identify the three kinds of utility created by operations and the characteristics that distinguish service operations from goods production.

Creating Value Through Operations Both services and goods with utility, which is the ability of a provide productconsumers to satisfy a human want or need, thus adding customer value—in terms of form, time, and place.

Form utility is created merely through transforming raw materials and human skills into finished goods. Time utility is created when marketers make products available when different consumers want them. Place utility is created when products are made available where they are convenient for consumers.

Operations (production) management is the systematic direction and control of the activities that transform resources into finished services and goods that create value for and provide benefits to customers. Operations (production) managers are responsible for ensuring that operations activities create value and provide benefits to customers.

A. Differences Between Service and Goods Manufacturing Operations

Both service and manufacturing operations transform raw materials into finished products. In service operations, finished products are not things, but are people with needs met and possessions serviced. Four aspects of service operations can make such operations more complicated than simple goods production: 1. Interacting with Customers. Manufacturing operations focus on physical goods, whereas service operations are a combination of goods and services.

2. Services Can Be Intangible and Unstorable. Intangibility refers to the untouchable value consumers receive in the form of pleasure, gratification, or a feeling of safety; unstorability refers to the idea that if a service isn’t used when available, it’s usually wasted.

3. Customers’ Presence in the Operations Process. Service operations often acknowledge the customer as part of the service transaction itself, since service operations transform customers or their possessions.

4. Intangibles Count for Service Quality. Customers use different measures to judge services and goods because services include intangibles, not just physical objects. Quality of work and quality of service are not necessarily the same thing.

B. Operations Processes An operations process is a set of methods and technologies used in the production of goods and services.

1. Goods Production Processes: Make-to-Order versus Make-to-Stock Processes. A make-to-order operation makes one-of-a-kind products, according to customer specifications. A make-to-stock operation produces standardized products in large

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quantities.

2. Service Production Processes: Extent of Customer Contact. In high-contact systems, such as a city metro system, the customer must be a part of the service. Managers must therefore be concerned with issues of cleanliness, punctuality, and usability of ticket kiosks. In low-contact systems, such as a mail sorting office, customers do not have to be present while the service transaction is being performed.

KEY TEACHING TIPS • Make sure that students understand that utility refers to the ability of a product to satisfy a want or need in terms of form, time, and place. Production adds customer value by providing utility.

•

Reinforce that goods are produced; services are performed.

Remind students that operations processes are methods and technologies used to produce a good or service.

Remind students that in a low-contact system, the service buyer doesn’t have to be • present during the transaction; in a high-contact system, customers are part of the system.

•

QUICK QUESTIONS • What are examples of form, time, and place utility?

• Think of the last restaurant you patronized. Would you be more likely to complain about the quality of the food or the quality of the service?

• What is the intangible and unstorable nature of services?

• What are some examples of products produced in a make-to-order system? In a make-tostock system?

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Learning Objective 7-3: Explain how companies with different business strategies are best served by having different operations capabilities.

Business Strategy as the Driver of Operations Companies go about selecting the kind of production that is best for their business based on the firm’s larger business strategy.a They aimthat to adopt of production thatorders; achieves that Every company identifies strategy it can the usekind for winning customer such strategy in the most efficient way possible. strategies often include quality, lower prices, flexibility, and dependability.

A. The Many Faces of Production 1. Business Strategy DeterminesOperations Operations Capabilities. Operations capability refers to the activity or process that production must do especially well to outperform the competition.

2. Expanding into Additional Capabilities. Over time, excellent firms learn how to achieve more than just one competence.

KEY TEACHING TIP Remind students that operations capabilities are activities that production must do especially well to outperform the competition; top-priority operations capabilities include quality, low price, flexibility, and dependability. Firms choose to focus on one capability, and can learn to excel at more than one, over time.

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Learning Objective 7-4: Identify the major factors that are considered in operations planning. Operations Planning Managers from many departments contribute to the firm’s decisions about operations management; this is a process of logical steps upon which the success of the firm depends. The overall business plan provides guidance for long-term operations plans.

A. Capacity Planning The amount of a product that a company can produce under normal working conditions is its capacity. A firm’s capacity depends on how many people it employs and the number and size of its facilities. Operations wants to match capacity to demand.

B. Location Planning Facility location affects production costs and flexibility. Depending on the site of its facility, a company may either be capable of producing a low-cost product or may find itself at a relative cost disadvantage. Goods production can be located where the economics work most favorably; services, though, must be located near customers.

C. Layout Planning Layout, the physical location or floor plan, determines whether firms can respond quickly and efficiently to customer requests for additional or different products or find themselves unable to match competitors’ speed and convenience.

1. Process Layouts. In a process layout, equipment and people are grouped according to function; this type of layout works especially well in make-to-order shops due to their flexibility advantage.

2. Product Layouts. In a product layout, one type of product is produced in a fixed sequence and is arranged according to its production requirements. It is efficient for large-volume, make-to-stock operations that mass-produce products quickly, often using an assembly line. While advantageous for large-volume production, a disadvantage is inflexibility when changes are required.

3. Fixed-Position Layouts. A fixed-position layout is necessary when, because of size, shape, or any other reason, managers cannot move the service to another production facility.

D. Quality Planning Any complete operations plan must ensure that products are produced to meet the firm’s and customers’ standards of quality—the combination of characteristics of a product or service that bear on its ability to satisfy stated or implied needs. Performance refers to how well the product does what it is supposed to do; consistency refers to the sameness of product quality from unit to unit.

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E.Methods Planning In operations systems, methods improvement refers to methods implemented to reduce waste and inefficiency.

1. Improving Process Flows. A process flowchart is helpful in identifying the sequence of production activities, movements of materials, and work performed at each stage of the process.

2. Improving Customer Service. Customer service can be improved at various stages along the process flowchart.

KEY TEACHING TIPS •

Reinforce that operations planning includes capacity planning, location planning, layout planning, quality planning, and methods planning.

•

Make sure students understand that capacity refers to the amount of a product a company can produce under normal conditions.

Students may forget that the best location for a manufacturer depends on

•

proximity to suppliers and customers, wage rates, labor availability, and the area’s infrastructure; the best location for a service provider depends largely on nearness to customers.

QUICK QUESTIONS • In process layouts, equipment and people are grouped according to function. What is an example of a goods production system that uses a process layout?

•

Product layouts make one product in a fixed sequence and are arranged according to their production requirements. What is an example of a goods production system that uses a product layout?

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Methods improvement focuses on procedures that can reduce waste and inefficiency within an organization. What are some ways in which waste could be reduced and inefficiency enhanced where you work?

HOMEWORK Methods Planning Now is a good time to assign Application Exercise 7-9 from the end-of-chapter materials as homework. This assignment asks students to work with method planning and process flowcharts.

At-Home Completion Time: 1 hour

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Learning Objective 7-5: Discuss the information contained in four kinds of operations schedules—the master operations schedule, detailed schedule, staff schedule, and project schedule.

Operations Scheduling Operations schedulinginvolves developing timetables for implementing operations plans.

A. The Master Operations Schedule A top-level master operations schedule shows which products will be produced and when, in upcoming time periods.

B. Detailed Schedules A detailed schedule indicates daily work assignments with start and stop times for assigned jobs at each workstation.

C. Staff Schedules and Computer-Based Scheduling Staff schedulesspecify assigned working times in upcoming days for each employee on each work shift, and considers employees’ needs and the company’s efficiency and costs, including the ebbs and flows of demand for production. Computer-based scheduling can handle multi-shift activities for many employees—both part-time and full-time— accommodating vacation times, holiday adjustments, and daily adjustments in staffing for unplanned absences and changes in production schedules.

D. Project Scheduling 1The Ganttafter Graphical Method: . Named its developer, Henry Gantt, a Gantt chart breaks down large projects into steps to be performed and specifies the time required to perform each one.

2. Project Scheduling with PERT charts break down large projects into steps to be performed and specify the time required to perform each one; PERT also shows the necessary sequence among activities, from start to finish, and identifies the critical path, the most time-consuming set of activities, for completing the project.

KEY TEACHING TIPS •

Reinforce that the master operations schedule shows which products will be produced and when, as well as how much labor, material, and equipment resources are needed.

•

Make sure students understand the difference between detailed schedules and staff schedules.

QUICK QUESTION • How does an organization benefit from PERT scheduling?

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Use In-Class Activity 2: Up for Debate: Do You Really Have to Be on Time for That Meeting in Cairo?

Time Limit: 20 minutes

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Learning Objective 7-6: Discuss the two key activities required for operations control.

Operations Control Operations control requires managers to monitor performance by comparing results with detailed plans and schedules. If employees do not meet schedules or quality standards, managers can take corrective action.Follow-up , checking to ensure that production decisions are being implemented, is a key and ongoing facet of operations. Operations control includes materials management and quality control. Both activities ensure that schedules are met and products delivered, both in quantity and in quality.

A. Materials Management Materials management is the process by which managers plan, organize, and control the flow of materials from sources of supply through distribution of finished goods.

1. Materials Management Activities for Physical Goods: Once a product has been designed, successful materials flows depend on five activities: Supplier selection means finding and choosing suppliers of services and materials. Purchasing (procurement) is the acquisition of all the raw materials and services that a company needs to produce its products. Transportation is the means of transporting resources to the producer and finished goods to customers. Warehousing is the storage of both incoming materials for production and finished goods for distribution to customers. Inventory control includes the receiving, storing, handling, and counting of all raw materials, partly finished goods, and finished goods.

2. Lean Production Systems Lean production systems are designed for smooth production flows that avoid inefficiencies, eliminate unnecessary inventories, and continuously improve production processes. Just-in-time (JIT) production, a type of lean system, brings together all needed materials at the precise moment they are required for each production stage, not before, thus, creating fast and efficient responses to customer orders.

3. Inventory Management is Crucial for Producing Services For many service firms, too, the materials stakes are high. The most important “inventory” used for many high-contact services is not physical goods but exists in the form of information about service product offerings, clients, their interests, needs, activities, and even their plans for interactions with other clients.

B. Quality Control Quality control means taking action to ensure that operations produce products that meet specific quality standards.

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KEY TEACHING TIPS • Reinforce that lean production systems are designed to avoid inefficiencies, eliminate unnecessary inventories, and improve production processes.

•

Point out that operations control requires managers to monitor performance by

•

Make sure students understand that materials management is the process by which managers plan, organize, and control the flow of materials from sources of supply through distribution of finished goods.

comparing results with detailed plans and schedules and then making any necessary changes.

QUICK QUESTIONS • What are some ways in which managers carry out the following materials management activities: supplier selection, purchasing, transportation, warehousing, and inventory control?

•

How might quality control be carried out at a bank? How might quality control be carried out at a fast-food restaurant?

• What is the difference between controlling quality and building quality into a product or service?

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Learning Objective 7-7: Identify the activities and underlying objectives involved in total quality management.

Quality Improvement and Total Quality Management It is not enough to controlquality by inspecting products and monitoring service operations as they occur. Businesses must also consider building quality into products and services. A. The Quality-Productivity Connection It’s no secret that quality and productivity are watchwords in today’s competitive environment. Productivity is a measure of economic performance: It compares how much we produce with the resources we use to produce it.

The more we can produce while using fewer resources, the more productivity grows and the more everyone benefits. Productivity refers both to the quantity and quality of what is produced. B. Managing for Quality Total Quality Management (TQM) includes all of the activities necessary for getting quality goods and services into the marketplace; this process involves all parts of the business, including customers, suppliers, and employees. To bring all the interests of the stakeholders together, TQM involves evaluating costs of poor quality, identifying the sources causing unsatisfactory quality, assigning responsibility for corrections, and ensuring that those responsible take steps for improving quality.

1. The Cost of Poor Quality Producers of goods and services suffer financial distress from poor-quality service or products.

2. Quality Ownership: Taking Responsibility for Quality. With TQM, employees and suppliers ultimately accept quality ownership—the idea that quality belongs to each person who creates it while performing a job.

C. Tools for Total Quality Management Hundreds of tools have proven useful for quality improvement, ranging from statistical analysis of production data, to satisfaction surveys of customers, to competitive product analysis—a process by which a company analyzes a competitor’s products to identify desirable improvements. Five of the most commonly used tools for TQM are: 1. Value-Added Analysis. Value-added analysis refers to the evaluation of all work activities, material flows, and paperwork to determine the value that they add for customers.

2. Quality Improvement Teams. Quality improvement teams are groups of employees from various work areas who meet regularly to define, analyze, and solve common production problems with the goal to improve both their own work methods and the products they make.

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3. Getting Closer to the Customer. Customers are the driving force for all business activity; the most successful firms keep close to their customers and know what they want in the products they consume. Improvement projects are undertaken for both external and internal customers. Internal customers exist wherever one employee or activity relies on others in the firm.

4. The ISO Series. ISO 9000 is a certification program attesting that a firm or laboratory has met the quality-management requirements set by the International Organization for Standardization. The ISO 14000 program certifies improvements in environmental performance. It requires a firm to develop an environmental management system: a plan documenting how the company has acted to improve its performance in using resources and in managing pollution. The plan must not only identify hazardous wastes the firm expects to create, but also stipulate the plans for treatment and disposal of those wastes.

5. Business Process Reengineering. Business process reengineering focuses on productivity and quality and entails rethinking each step in a process by starting over from scratch. Reengineering involves the redesign of business processes to achieve improvements in cost, quality, service, and speed.

KEY TEACHING TIPS •

Remind students that competitive product analysis is a process by which a company analyzes a competitor’s products to identify desirable improvements.

•

Students often forget that quality improvement teams are comprised of groups of employees from various parts of the organization.

Remind students that ISO 14000 guarantees that a company has an environmental management system, a plan documenting improved use of resources and pollution management.

•

•

Remind students that business process reengineering involves focusing on improving a business process by rethinking each of its steps by starting from scratch.

QUICK QUESTIONS • What do companies try to achieve with value-added analysis?

• What are some examples of “internal” customers? What does “getting closer to the customer” mean?

• What does it mean when a company is ISO 9000 certified?

• Who is responsible for ensuring TQM within an organization?

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HOMEWORK Total Quality Management Now is a good time to assign Application Exercise 7-10 from the end-of-chapter materials as homework. This assignment asks students to explain a quality management system and sell a business on its benefits.

At-Home Completion Time: 1 hour

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Learning Objective 7-8: Explain how a supply chain strategy differs from traditional strategies for coordinating operations among firms. )Adding A for anyValue product (or is the flow of information, materials, and supply chain value chain Through Supply Chains services that starts with raw-materials suppliers and continues through other stages in the network of firms until the product reaches the end customer.

A. The Supply Chain Strategy Supply chain strategy is based on the idea that members of the chain, working as a coordinated unit, will gain competitive advantage.

1. Supply Chain Management. Supply chain management (SCM) looks at the supply chain as a whole in order to improve the overall flow through a system composed of companies working together. Each of the chain’s members gains competitive advantage in this situation.

2. Reengineering Supply Chains for Better Results. The results often include lower costs, faster service, and the coordination of flows of information and materials.

B. Outsourcing and Global Supply Chains Outsourcing is the strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials or services. Global outsourcing creates new operations jobs for supply chain management and, sometimes, the need for more or different types of employee training.

QUICK QUESTIONS • Who are the supply chain members for a manufacturer of baked goods?

• How can the reengineering of supply chains add value?

HOMEWORK Business Plan Now is a good time to assign Part 2 of the Business Plan. In this second section, students are asked to devise goals for their company, analyze the internal and external factors affecting their business, and discuss the organizational structure of their business. AtHome Completion Time: 2 to 3 hours For the complete instructions for this part of the assignment, refer to the instructions at the end of this chapter. The entire businessplanning project (including a sample business plan) can be seen in the Business Plan Project section of the Instructor’s Manual files.

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Are You Getting What You Paid For? Activity Overview: This activity is designed to get students to think about how to perceive service quality.

Time Limit: 25 minutes What to Do: 1. Divide the class into groups of two to four members and ask each group to think of three services, such as cell phone service, restaurants, a barber or hair salon, insurance agent, or various repair services. (5 minutes) 2. Ask groups to think of ways in which buyers of those services measure the level of service quality they are receiving. (10 minutes) 3. Reassemble the class and ask each group to reveal what they discussed. (10 minutes) Don’t Forget: Measuring the quality of manufactured goods—often through durability, functionality, sturdiness, and so on—is often easier and provides more consistency than measuring service quality. Not everyone measures service quality in the same way.

Wrap-Up: Remind students that service quality is often measured by the tangible evidence of the service— such as a manicured lawn, a tailored suit, and so on. However, service quality can also be measured by examining the characteristics of the service performer; these might include reliability, assurance, responsiveness, etc.

In-Class Activity 2: Up for Debate: Do You Really Have to be on Time for That Meeting In Cairo?

Activity Overview: This activity asks students to express their feelings about punctuality.

Time Limit: 20 minutes What to Do: 1. Divide the class into four-member teams. Ask each team to discuss some real-life situations

that require them to be on time. Who benefits from punctuality? (5 minutes) 2. Ask the groups to discuss certain job fields that are time-clock driven. Why are they timeclock driven? Are there any situations discussed in Step 1 that require punctuality but in

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which punctuality is not entirely necessary? Relate punctuality to the concept of productivity as discussed in the chapter. (5 minutes) 3. Reassemble the class as a whole and ask students to discuss each group’s input. (10 minutes) Don’t Forget: Punctuality can be culture-driven; demand for punctuality is situation-specific.

Wrap-Up: Wrap up the activity by discussing the advantages of being on time.

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BUSINESS PLAN PROJECT PART 2: THE BUSINESS OF MANAGING Assignment Overview: The second part of the business plan project asks students to think about goals of their business, some internal and external factors affecting the business, as well as the organizational structure of the business. As part of this assignment, students are asked to complete a simple SWOT analysis, an organizational chart, and a floor plan. These analyses and charts will vary greatly depending on the scope of the business. Encourage as much detail as possible so students can get a clear picture of the true costs of owning a business. Make sure your expectations are clear as to what format (for example, handwritten or electronic) you would like to see the organizational charts and floor plans submitted. Files to Provide Students: For this part of the project, students will be asked to complete Part 2: The Business of Managing. If students have already started working on the business plan project, they should continue using the student template they began working on in Part 1. Part 2 Estimated At-Home Completion Time: If done well, this section will require a minimum of 2 to 3 hours. Instructor feedback will improve the quality of student responses so you may wish to spend class time working on the plan. Homework Deliverable from Students: The length of this section should be somewhat consistent, although some variance can be expected in the organizational chart and floor plan, based on the size of the business. You should expect at least three to five pages in this section.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 7-1. Describe, in your own words, the meaning and significance of business operations. What do we mean when we talk about operations? What does it encompass? What does it exclude?

Answers should vary but should include examples or descriptions of activities involved in making a product or providing a service. More importantly, students should be able to identify activities like financial management, marketing, and leadership activities that are not activities normally thought of as operations. (Learning Objective 7-1 – AACSB –

application of knowledge) 7-2. What are the major differences between goods-production operations and service operations?

Service operations focus on performance, process and outcome, service characteristics, customer-service links, and service quality considerations. Services are largely intangible and more unstorable than most physical goods. Goods production operations focus on tangible product features and functions as well as on the production processes themselves, including production efficiency. (Learning Objective 7-2 – AACSB – application of knowledge) 7-3. What are the major differences between high-contact and low-contact service systems?

Give an example of each, comparing and contrasting them.

In a low-contact system, customers are not in contact with the service provider; in a highcontact system, the service buyer must be present during the transaction. Examples will vary, but should clearly demonstrate the student’s understanding of the differences. For instance, McDonalds would be an example of a high-contact service system, as would the college.

Low contact systems may be harder to identify, but could include ISPs, cellular providers, the local pharmacy, etc. The student should be able to justify why the stated choice is low or high contact using the parameters from the chapter. (Learning Objective 7-2 – AACSB – application of knowledge) 7-4. What are the three forms of utility (give examples of each)?

The production process adds customer value through form, time, and place utility. Form utility is created by converting raw materials and human skills into finished goods. Time utility is created by making products and services available when customers want and need them. Place utility provides the product to the customer at a convenient location. (Learning Objective 7-1 – AACSB – application of knowledge)

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QUESTIONS FOR ANALYSIS 7-5. How would you describe the five major operations planning activities to an administrator of your college or to a local business owner? Use specific examples as they apply to your chosen organization.

Capacity planning might include both the minimum and maximum number of students or customers that the college or business is able to serve based on space, employees, equipment, etc. Location planning should focus on the site of the college or business, how accessible it is, and how that location either lends or detracts from the overall mission. Layout planning can include the arrangement of the buildings, the classrooms, and other structural issues, and should include some mention of process, product, and fixed layouts. Quality planning should include indicators of quality, performance, and value. Methods planning should cover efficiency and effectiveness, and the school or company’s plans for improvement.

(Learning Objective 7-4 – AACSB – application of knowledge)

7-6. What type of business strategy does Disney use to attract customers to its theme parks?

What does the company do to implement its strategy? What are the key operational characteristics?

Disney theme park strategy focuses on quality and dependability. Most students will state that methods planning and operations control is very important since Disney focuses on customer services and consistency in theme park visitors’ experiences. Additional activities of importance will include layout planning and capacity planning so the theme park activities operate smoothly. Also, detailed scheduling for both staff and visitors will be a priority.

(Learning Objective 7-3, 7-5 – AACSB – application of knowledge)

7-7. Choose three different businesses that you frequent and rate the quality of their service or product on a scale of 1–5, with 1 being poor quality and 5 being high quality. Explain the standard that you applied for each business to determine quality. Was it the same standard, or did you apply a different standard to each one? If so, why?

Quality is subjective. Therefore, for each business, the student may apply a broad standard, such as the ability of the business to satisfy stated or implied needs, or a specific standard, such as cleanliness, customer service, or speed and efficiency. In any case, the answer should explain the reasoning for the rating. (Learning Objective 7-4 – AACSB – analytical thinking)

7-8. If you were a member of a quality improvement team at your college or a local business of your choice, what would be five specific high-impact recommendations that you would support? Of those five, which two would be the most important, and briefly explain what strategies you might employ as a manager to implement those two recommendations.

Examples will vary, but should be specific, such as decreasing response time for financial For the two most important recommendations, students should identify tangible, implementable strategies, such as, for the above example, the college may try flow-charting aid.

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the current process, identifying roadblocks and barriers, and then establishing a more streamlined process along with a staff training program. (Learning Objective 7-7 – AACSB –analytical thinking, application of knowledge) APPLICATION EXERCISES 7-9. Map out the process for enrolling in classes at your school by drawing a process flowchart that shows the stages in the activity, and then tell how you would use that flowchart as part of a methods improvement approach to operations planning.

Answers will vary, but process charts should include a logical starting point, show all the steps, and show the predecessor relationships—which tasks must be complete before a task can start. (Learning Objective 7-7 – AACSB – analytical thinking)

7-10. Create a short memo to a business explaining the benefits of a quality management system and why management should implement such a system.

Answers will vary, but many managers will reveal that the top concern is delivering what the customer wants and the costs involved in creating and delivering the service.

(Learning Objective 7-7 – AACSB – application of knowledge, reflective thinking)

BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 7-11 TO 7-15 (Learning Objectives 7-2, 7-3, 7-4, 7-7 and 7-8 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Answers will vary but students should note regardless of the type of business, every business will have a service component. Remind students that service quality is often measured by the tangible evidence of the service and there will be different perceptions on service quality.

When analyzing the key operations characteristics, students should focus on operations planning and the activities or processes that the business needs to consistently perform well to survive and flourish. In analyzing the planned production activities students should consider lean manufacturing concepts to improve its business, how the layout of a facility affects its operations, how products offer different forms of utility to customers, and how companies’ activities impact the triple bottom line. When looking at supply chain management the students should focus on the supply chain as a whole in order to improve the overall flow of their business.

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TEAM EXERCISE: CALCULATING THE COST OF COMPETITION 7-16 TO 7-19 (Learning Objective 7-2, 7-6, and 7-7 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge, ethical understanding and reasoning) In this exercise the students will be faced with the real-world dilemma of cost versus benefits.

The students will need to consider not only competition issues but also, the company’s reputation, costs, and profits. They will also need to consider the CEO’s decision-making process and how she considers input from stakeholders.

7-16. If you were a customer, what would you hope the company would do? Would your answer be different if you were an investor or stockholder? What would you want the company to do if you were an employee?

Answers will vary, but students should address the conflict between a lower product cost and the value of the company’s “Made in America” reputation. A lower product cost could increase profits or decrease cost to consumer, or possibly both. Students should also address the ethical implications of both layoffs and offshoring and the impacts of those decisions on the company.

7-17. What are the pros and cons of moving both manufacturing and the call center to other countries? Pros include potential savings to customers and increased profits for stockholders. Cons include loss of reputation and reduced control of supply chain and quality as well as negative impact on the morale of remaining employees.

7-18. What other options are available?

Students may suggest including employees in the decision-making process, implementing a TQM program, encouraging and rewarding innovation, exploring other supply chain options, process improvements or other creative suggestions.

7-19. What course of action does your team advise, and why? What are both the short- and longterm ramifications of your recommendation? Student answers will vary, but students should be able to justify their suggestions and recognize the implications of their decisions in relation to all stakeholder groups, both short- and long-term.

EXERCISING YOUR ETHICS: PROMISES, PROMISES (Learning Objective 7-4 AACSB – ethical understanding and reasoning, analytical – thinking) 7-20. What are the underlying ethical issues in this situation?

The salesperson should have communicated the potential contract with his or her boss, knowing that the contract would require a 20-percent increase in production capacity.

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However, with a large layoff of employees previously—and knowing that the company needs the business—the salesperson may have assumed that production would not be a problem.

7-21. From an ethical standpoint, what is an appropriate response to the customer’s question?

What steps should you take in responding to it? Explain.

Answers will vary, but students should mention that you should be honest with the manager of King Kong Mufflers, letting him know that the company can react to the large order, that the company does have the production capacity, but that the workforce will need to be expanded, which may take a little time up front.

7-22. What would you say on the phone at this time to this customer?

Answers will vary, but students should keep in mind that proper delivery to the customer is a priority. Without the production capacity, that cannot be done.

CASES: MADE FROM SCRATCH (Learning Objectives 7-4 and 7-6 – AACSB

– analytical thinking, application of knowledge)

7-23. How would you define quality and how is quality measured in the restaurant industry? Are some measurements more useful than others? Explain.

Quality, while subjective, is the combination of characteristics of a product or service that impact its ability to satisfy stated or implied needs. Quality in the restaurant industry is often measured on ambiance of the restaurant, speed of service, attentiveness of service, customer’s satisfaction with the taste and appearance of the food, price, and more.

Consistency of service and goods is vital in the restaurant industry. The type of restaurant will influence which characteristics are valued more.

7-24. Would you categorize The Cheesecake Factory as a service provider or a provider of goods, or both? How would your classification affect your quality control decisions? How would it affect the way you approach operations?

As a restaurant does provide both service and goods, students must support their choice. The classification will affect quality control decisions by prioritizing on certain aspects of the business, whether service or food. It can impact staffing and training, or supplier choice.

7-25. Describe how process flowcharts may be helpful for methods improvement in restaurant operations. What kinds of information would you hope to gain from the flowcharts?

Process flowcharts could help with handling customer flow, busy times, and food preferences. Before creating the charts, you would need information on the type and length of activities, performance measures, historical trends, etc.

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7-26. Identify a major U.S. restaurant chain that has recently received poor-quality ratings. Who are its customers, and what are the basic causes that led to declining quality? Students may identify a restaurant that straddles the fast-food and luxury dining market, like Chili’s or Chipotle Mexican Grill. They may identify its customers as people looking for a fresh quick meal. They may perceive it as healthier than fast food establishments such as McDonald’s. These firms may have experienced issues with food safety. In particular, claims of organic ingredients and use of local suppliers do not ensure food safety if appropriate quality control processes are not in place.

7-27. U.S. restaurants must comply with local health regulations. The results of periodic inspections have to be posted or published, or both. What actions would you recommend be considered by restaurants to overcome negative perceptions from a less-than-satisfactory rating?

Restaurants with satisfactory ratings should prominently post them where customers can see them. They can use their social media presence to publicize the ratings. Make a story and explain changes they have instituted to improve their ratings.

TELECOMMUTING BOOSTS QUALITY AND PRODUCTIVITY…OR DOES IT? (Learning Objective 7-5 – AACSB – analytical thinking, reflective thinking, application of knowledge) 7-28.If you were advising a company on how to motivate and monitor remote workers, what strategies would you suggest?

Students may identify such measures as time-tracking software, incentives for meeting benchmarks, online team meetings, or other creative solutions.

7-29. Mayer looked at the log of Yahoo!’s VPN to see how frequently employees checked in.

What do you think of this as a measure of productivity and quality? What other measure(s) would you suggest instead of the one she used?

Some students will agree and others will indicate that “checking in” might not be the best measure of productivity. Other measures cited by students will probably include: new product development, revenues, costs, and customer satisfaction.

7-30. Consider businesses such as health care, auto repair, teaching, or others that provide services to consumers. Identify two kinds of work suitable for telecommuting and two kinds for office-only jobs. Explain your reasoning.

Students will likely break the jobs into two categories: those requiring “face” time, i.e., receptionist, maintenance staff and “lone wolf” types of positions such as computer programmers. They may make a distinction between service and product provision and which functions may be more suitable for remote work. In light of the COVID-19 pandemic, students may note that there are some professions that have adapted well to contactless

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delivery (like grocery stores and banks) and some that are simply unable to do so (like massage therapy and construction work).

7-31. Consider businesses such as grocery stores, auto dealers, hardware stores, or others that provide products to consumers. Could you identify ways in which these companies could provide goods and services with remote workers?

Answers will vary depending on the businesses the students choose.

7-32. How do you feel about telecommuting? Would you rather have a job, like those at Yahoo, in which you have set office hours, or would you rather work from home? Do you think that working from home would cause you to be more productive or less productive? Why? Answers will vary depending on what is important to each student. They should consider the many advantages and disadvantages mentioned in the case. Some may be considered advantages by some people and disadvantages by others. Consider these: avoiding distractions at home, increased satisfaction and decreased employee turnover, ease of face-toface discussions at work, increased control over their own work schedule, ability to work with others, or alone. Due to the Covid-19 pandemic, many companies have made changes in their work requirements. Students should recognize this and address it in their answers.

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PART 2 INTEGRATIVE LEARNING PORTFOLIO THE BUSINESS OF MANAGING CRAFTING A BUSINESS PLAN

MISSION STATEMENT P2-1. Provide a brief mission statement for your business. Hint: Refer to the discussion of mission statements in Chapter 5. Be sure to include the name of your business, how you will stand out from your competition, and why a customer will buy from you.

BUSINESS GOALS P2-2. Consider the goals for your business. What are three of your business goals for the first year? What are two intermediate to long-term goals? Hint: Refer to the discussion of goal setting in Chapter 5. Be as specific and realistic as possible with the goals you set. For example, if you plan on selling a service, how many customers do you want by the end of the first year, and how much do you want each customer to spend? If you plan

to sell a good, how many do you hope to sell?

SWOT ANALYSIS P2-3. Perform a basic SWOT analysis for your business, listing its main strengths, weaknesses, opportunities, and threats. Hint: We explained previously what factors you should consider in your basic SWOT analysis. Look around at your world, talk to classmates, or talk to your instructor for other ideas in performing your SWOT analysis.

MANAGEMENT P2-4. Who will manage the business? Hint: Refer to the discussion of managers in Chapter 5. Think about how many management as well as what kinds of managers your business needs. levels of ORGANIZATION CHART P2-5. Show how the “team” fits together by creating a simple organizational chart for your business. Make sure your organizational chart indicates who will work for each manager as well as each person’s job title. Hint: Most businesses start off quite small. However, as you create your organizational chart, consider what your business will look like in the future. What different tasks are involved in the business? Who will each person report to in the organizational structure? Refer to the discussion of organizational structure in Chapter 6 for information to get you started. FLOOR PLAN P2-6. Create a floor plan of the business. What does it look like when you walk through the door?

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Hint: When sketching your floor plan, consider where equipment, supplies, and furniture will be located. Ask your instructor how he or she would like you to submit the floor plan for your business.

RAW MATERIALS AND SUPPLIES P2-7. Explain what types of raw materials and supplies you will need to run your business.

How will you produce your good or service? What equipment do you need? What hours will you operate?

Hint: Refer to the discussion of operations earlier in this chapter for information to get you started. QUALITY ASSURANCE P2-8. What steps will you take to ensure that the quality of the product or service stays at a high level? Who will be responsible for maintaining the quality of the product or service (or both)?

Hint: Refer to the discussion of quality improvement and Total Quality Management in this chapter for information to get you started.

CASE PART 2: FORD MOTOR COMPANY, 1909–1928 QUESTIONS FOR DISCUSSION P2-9.How closely do you think today’s assembly lines resemble Ford’s original concept? What kinds of innovations have occurred in the last 100 years? Students will likely point out the move toward robots and computer-aided designs, as well as the more flexible nature of assembly that has made retooling easier. However, the basic idea of moving the product from station to station has largely remained the same. Students may find in their research some innovative ways of building products that are not assembly-line based. (Learning Objective 7-4 – AACSB – analytical thinking)

P2-10. Compare and contrast operational issues today with those of Ford’s time. What lessons from Ford are still relevant? What issues are no longer relevant? Creating value by being able to mass-pßroduce products will likely be identified as still relevant, as will layout issues, scheduling, and materials control and managing the supply chain. Issues such as unionizing and difficulties in outsources may be different today, as shown by supply issues during the pandemic. (Learning Objective 7-4 – AACSB – analytical thinking)

P2-11. How do you think Ford’s insistence on efficiency affected the corporate culture?

Answers will vary but may focus on the harsh working conditions that Ford created by asking workers to work long hours at repetitive tasks. (Learning Objective 5-6 – AACSB – analytical thinking)

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P2-12. How do you think Ford Motor Company was structured in the early years? How do you think the structure has changed since then, if at all, and why? Students should with some research be able to describe the early, centralized, highly hierarchical nature of Ford.

There may be differing opinions about the current structure and whether or not the company is more decentralized, but students should be able to weave the concepts from Chapter 6 into the discussion. (Learning Objectives 6-1, 6-2, 6-3, and 6-4 – AACSB – analytical thinking)

P2-13. What are the pros and cons of globalization, and how do they compare to those of Ford’s time? Students should revisit Chapter 1 of the text regarding the global business environment. This topic should generate a broad discussion that may include “Made in the USA” initiatives and what that actually means (e.g. are all the component parts made in the USA?) and the advantages of being able to buy products that are made overseas as well as sell products to other nations. (Learning Objective 1-1 – AACSB – analytical thinking)

P2-14. What kinds of supply-chain issues did Ford face, how did he solve them, and how do they compare to today’s supply-chain management issues? Students may mention that early on, Ford had to rely on specialty shops to make the parts he needed, and that any slowdown in the supply chain could stop automobile production, and that one solution was to bring parts manufacturing in-house. In later years, parts were being outsourced first to United States companies and later to overseas operations, and supply chain management became more focused on find the right parts at the lowest price and making sure they arrived quickly, so there was less stock in hand. However, the same old problems persisted, as became evident during the coronavirus pandemic, when parts became hard to get as foreign factories shut down production either temporarily or permanently. (Learning Objective 7-8 – AACSB – analytical thinking)

FINDING YOUR PATH Careers in Business Demand for employees with business degrees continues to grow, whether people want careers in general management or more specialized areas of management. Making Yourself Employable As discussed in Chapter 5, the seven core management skills are technical, human relations, conceptual, decision-making, time management, global management, and management and technology skills. Begin (or continue) tracking your activities that help you develop these skills or provide evidence that you possess them.

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Chapter 8: Employee Behavior and Motivation Chapter Overview What motivates you to do well at your job? Is it money? Respect? Recognition? Every employee in an organization has his or her own set of motivating factors. This chapter discusses the basic forms of behaviors that employees exhibit in organizations, as well as the nature and importance of individual differences among employees. It also explains the meaning and importance of psychological contracts and the person-job fit in the workplace.

Finally, the chapter presents some time-tested models and concepts of employee motivation, and some strategies and techniques used by organizations to improve employee motivation.

Learning Objectives 8-1. Identify and discuss the basic forms of behaviors that employees exhibit in organizations.

8-2. Describe the nature and importance of individual differences among employees.

8-3. Explain the meaning and importance of psychological contracts and the person-job fit in the

workplace.

8-4. Identify and summarize the most important models and concepts of employee motivation.

8-5. Describe some of the strategies and techniques used by organizations to improve employee motivation.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: Balancing Inducements and Contributions

Description Time Limit Students contract discuss between the psychological themselves 20 min. and their jobs. Students are divided into teams to express their opinions about important job criteria.

2. Up for Debate: What Are You 40 min.

Looking for in a Job? 3. Small-Group Discussion: Students examine the challenges 25 min. stemming from trying to motivate Motivation in Global Firms employees in a global company.

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CHAPTER OUTLINE Learning Objective 8-1: Identify and discuss the basic forms of behaviors that employees exhibit in organizations.

Forms of Employee Behavior Employee behavior is the pattern of actions by the members of an organization that directly or indirectly influences the organization’s effectiveness.

A. Performance Behaviors Performance behaviors are the total set of work-related behaviors that the organization expects employees to display. They directly target performance of a job.

B. Organizational Citizenship Organizational citizenship includes the positive employee behaviors that do not directly contribute to the bottom line. They provide positive benefits to the organization above and beyond strict job performance.

C. Counterproductive Behaviors Counterproductive behaviors detract from, rather than contribute to, organizational performance. Such behaviors include absenteeism, which occurs when an employee does not show up for work, and turnover, which occurs when people quit their jobs. These behaviors actually cost the organization.

KEY TEACHING TIPS •

Students should be able to identify employee behavior as the pattern of actions by members of an organization that directly or indirectly influences the organization’s effectiveness.

•

Reinforce that counterproductive behaviors include absenteeism, turnover, theft and sabotage, workplace aggression and violence, and sexual and racial harassment. You might ask students what counterproductive behaviors they have observed at their jobs.

QUICK QUESTIONS •

What are some typical performance behaviors expected of you in the workplace?

•

What are some examples of employee behaviors that exemplify organizational citizenship?

Use In-Class Activity 1: Icebreaker: Balancing Inducements and Contributions Time Limit: 20 minutes

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Learning Objective 8-2: Describe the nature and importance of individual differences among employees.

Individual Differences between Employees Individual differences are personal attributes that vary from one person to another; they may be physical, psychological, and emotional. Two basic categories include personality and attitudes.

A. Personality at Work Personality is the relatively stable set of psychological attributes that distinguish one person from another.

1. The “Big Five” Personality Traits. The “big five” personality traits include agreeableness, conscientiousness, emotionality, extraversion, and openness. Agreeableness is a person’s ability to get along with others. Highly conscientious people tend to focus on only a few things at one time in contrast to less conscientious people who often pursue a wider array of tasks, but are also often disorganized with less selfdiscipline. People with positive emotionality are relatively more poised, calm, and secure. People with negative emotionality are more excitable, insecure, and reactive.

Extraversion refers to a person’s comfort level with relationships and openness reflects how open or rigid a person’s beliefs are. The value of this framework is that it encompasses an integrated set of traits that appear to be valid predictors of certain behaviors in certain situations.

2. The Myers-Briggs Framework. Another interesting approach to understanding personalities in organizations is the Myers-Briggs framework. This framework, based on the classical work of Carl Jung, differentiates people in terms of four general dimensions.

These are: Extraversion (E) Versus Introversion (I), Sensing (S) Versus Intuition (N), Thinking (T) Versus Feeling (F), and Judging (J) Versus Perceiving (P). The MyersBriggs Type Indicator (MBTI) is a popular questionnaire that some organizations use to assess personality types. It is among the most popular selection instruments used today, with as many as 1.5 million people taking it each year. Research suggests that the MBTI is a useful method for determining communication styles and interaction preferences.

3. Emotional Intelligence. Emotional intelligence or emotional quotient (EQ) refers to the extent to which people are self-aware, can manage their emotions, can motivate themselves, express empathy for others, and possess social skills.

4. Other Personality Traits at Work. Locus of control is the extent to which people believe that their behavior has a real effect on what happens to them. A person’s self- efficacy is that person’s belief about his or her capabilities to perform a task.

Authoritarianism is the extent to which a person believes that power and status differences are appropriate within hierarchical social systems such as organizations. Self- esteem is the extent to which a person believes that he or she is a worthwhile and deserving individual. Risk propensity is the degree to which a person is willing to take chances and make risky decisions.

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B. Attitudes at Work Attitudes reflect our beliefs and feelings about specific ideas, situations, or other people.

They are important because they are the mechanism through which we express our feelings.

1. How Attitudes Are Formed. Attitudes are formed by a variety of forces, including our personal values, our experiences, and our personalities. Any of the “Big Five” or individual personality traits may influence our attitudes.

2. Attitude Structure. Attitudes are usually viewed as stable dispositions to behave toward objects in a certain way. Attitudes contain three components: cognition, affect, and intention. Cognition is the knowledge a person presumes to have about something and is based on perceptions of truth and reality. Affect is a person’s feelings toward something, is similar to emotion, and is something over which we have little or no conscious control.

Intention guides a person’s behavior. Some attitudes, and their corresponding intentions, are much more central and significant to an individual than others.

3. Cognitive Dissonance. When two sets of cognitions or perceptions are contradictory or incongruent, a person experiences a level of conflict and anxiety called cognitive dissonance. It also occurs when people behave in a way that is inconsistent with their attitudes.

4. Key Work-Related Attitudes. People in an organization form attitudes about many different things. Employees are likely to have attitudes about their salary, their promotion possibilities, their boss, employee benefits, and so on. Especially important attitudes are job satisfaction, which reflects the extent to which people have positive attitudes toward their jobs, and organizational commitment, which reflects an individual’s identification with the organization and its mission. Managers can take actions to promote satisfaction and commitment. Treating employees fairly, and providing reasonable rewards and job security leads to employees that are more likely to be satisfied and committed. Allowing employees to have a say in how things are done can also promote these attitudes, as can designing jobs so that they are stimulating.

KEY TEACHING TIPS •

Remind students that individual differences may be physical, psychological, or emotional.

•

Make sure students understand that people with high EQs may perform better than others,

especially in jobs that require high interpersonal interaction and involve influencing the QUICK QUESTION work of others.

What can you say about each of the “big five” personality traits?

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Learning Objective 8-3: Explain the meaning and importance of psychological contracts and the person-job fit in the workplace.

Matching People and Jobs Managers like to have a good match between people and the jobs they are performing.

A. Psychological Contracts A psychological contract is the overall set of expectations held by employees and the organization regarding what employees will contribute to the organization (contributions) and what the organization will provide in return (inducements). Recent trends in downsizing have led to changes in the psychological contract. Whereas firms used to offer some degree of job security as part of the psychological contract, now other forms of inducements like training and flexible work schedules are often needed to attract and retain people.

B. The Person-Job Fit The person-job fit refers to the extent to which a person’s contributions and the organization’s inducements match one another. Good person-job fit can result in higher performance and more positive attitudes. A poor person-job fit can have the opposite effect.

KEY TEACHING TIPS •

Students often have trouble understanding the concept of the psychological contract.

Make sure they understand that it is the set of employee expectations about the contributions that they will make to the organization, and the inducements the organization will provide in return.

• Reinforce that a good person-job fit is one in which the employee’s contributions match the inducements the organization offers.

QUICK QUESTION How might a company benefit from high degrees of job satisfaction and organizational commitment among its employees?

Use In-Class Activity 2:Up for Debate: What Are You Looking for in a Job? Time Limit: 40 minutes HOMEWORK Interview a Manager Now is a good time to assign Application Exercise 8-10 from the end-of-chapter materials as homework. This assignment asks students to interview a manager and identify sources of job satisfaction at that company.

At-Home Completion Time: 1-2 hours

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Learning Objective 8-4: Identify and summarize the most important models and concepts of employee motivation.

Basic Motivation Concepts and Theories Motivation is the set of forces that cause people to behave in certain ways. There are a number of major studies and theories of employee motivation.

A. Classical Theory According to the classical theory of motivation, employees are motivated solely by money. Frederick Taylor, the father of scientific management, proposed that paying workers more money would prompt them to produce more.

B. Early Behavioral Theory The Hawthorne effect is the tendency for productivity to increase when workers believe they are receiving special attention from management.

1. Human Resources Model: Theories X and Y. McGregor’s Theory X is the managerial assumption that workers are lazy and need direction; Theory Y is the managerial assumption that workers are energetic, cooperative, and self-motivated. The value of these two theories lies in their ability to highlight and classify the behavior of managers in light of their attitudes toward employees.

2. Maslow’s Hierarchy of Needs Model. Maslow proposed that workers each have a set of needs that they seek to fulfill in their work, and these needs are arranged in a hierarchy of importance. These needs are physiological, security, social, self-esteem, and selfactualization. Maslow further proposed that lower-level needs must be met before higherlevel needs; once one set of needs is met, it ceases to motivate behavior.

3. Two-Factor Theory. Herzberg proposed that job satisfaction depends on motivation factors, such as recognition in the workplace, as well as the presence of hygiene factors, such as work conditions. Hygiene factors do not enhance satisfaction, but they do prevent dissatisfaction. Research suggests that the theory works only in some situations. The practice also suggests that managers must first ensure that hygiene factors such as working conditions are acceptable, resulting in an absence of dissatisfaction. Then the managers must offer motivation factors as a way to improve satisfaction and motivation.

4. Other Important Needs. McClelland’s acquired needs theory hypothesized three other needs, the needs for achievement, affiliation, and power. The need for achievement comes from an individual’s desire to accomplish a goal or task as effectively as possible. Need for affiliation is the need for human companionship, and the need for power is the desire to control one’s environment.

C. Contemporary Motivation Theory Recently, more complex models of employee behavior and motivation have been developed.

1. Expectancy Theory. This theory suggests that employees are especially motivated to

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work toward rewards when they believe they have a reasonable chance of obtaining them. This theory explains why people may not work as hard when their salaries are based solely on seniority, for example.

2. Equity Theory. This theory focuses on social comparisons, people evaluating their treatment by the organization relative to the treatment of others.

KEY TEACHING TIPS • To begin a discussion on motivation, you might want to ask students what motivates them on the job.

•

Remind students that according to the classical theory of motivation, workers are motivated by money; paying them more money should prompt them to produce more goods.

•

Make sure students understand the distinction between Theory X (workers are lazy) and Theory Y (workers want to do a good job).

Make sure students understand that hygiene factors affect motivation and satisfaction only if they are absent or fail to meet expectations.

Students often forget that equity theory focuses on social comparisons—people evaluating their treatment by the organization relative to the treatment of others.

• •

QUICK QUESTIONS •

What is the theory behind scientific management?

•

Does the Hawthorne effect still apply to people in the workplace?

•

Why are Theory Y managers more likely to have satisfied and motivated employees?

•

Based on Maslow’s hierarchy of needs, what is an example of how physiological needs take precedence over security and social needs?

How does expectancy theory apply when a student feels that the harder she or he studies for an exam the greater the likelihood of a good grade?

How is the comparison of employee inputs relative to outputs similar to the

• •

“psychological contract?”

Use In-Class Activity 3: Small-Group Discussion: Motivation in Global Firms Time Limit: 25 minutes

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HOMEWORK Satisfaction and Motivation Now might be a good time to assign Application Exercise 8-9 from the end-of-chapter materials as homework. This exercise asks students to think about what makes employees satisfied and motivated. At-Home Completion Time: 30-45 minutes

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Learning Objective 8-5: Describe some of the strategies and techniques used by organizations to improve employee motivation.

Strategies and Techniques for Enhancing Motivation Understanding what motivates workers is only one part of the manager’s job. The other part is applying that knowledge.

A. Reinforcement/Behavior Modification Positive reinforcement is used when a company or manager provides a reward when employees exhibit desired behaviors;punishment is used to change behavior by presenting people with unpleasant consequences if they exhibit undesired behaviors. Social learning occurs when people observe the behaviors of others, recognize their consequences, and alter their own behavior as a result.

B. Using Goals to Motivate Behavior Management by objectives (MBO) is a system of collaborative goal setting, extending through all levels of an organization. MBO is primarily concerned with the implementation of plans in organizations. Because employees contribute to setting the goals, they should accept and be committed to achieving them.

C. Participative Management and Empowerment In participative management and empowerment, employees are given a voice in the management of their jobs and the company. Employees may feel more committed to the firm’s goals if they have helped to shape them. A key to success in this case is to invite participation only to the extent that employees want to have input and only if participation will have real value for an organization.

D. Work Teams and Team Structures Some companies benefit from using team management. Although teams are often less effective in traditional and rigidly structured bureaucratic organizations, they can help smaller, more flexible organizations make decisions quickly and effectively, enhance communication, and encourage organizational members to feel more like a part of an organization.

E. Job Enrichment and Job Redesign Both of these programs typically increase worker satisfaction in jobs that lack motivating factors.

1. Job Enrichment Programs. These programs attempt to add motivating factors to job activities. They can involve job rotation programs, or increasing responsibility or recognition.

2. Job Redesign Programs. These programs attempt to create a better fit between employees and their jobs by restructuring work. Job redesign can usually be carried out

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through combining tasks, forming natural work groups, or establishing client relationships. a. Combining Tasks. Enlarging jobs and increasing their variety can make employees feel that their work is more meaningful. b. Forming Natural Work Groups. People who perform different jobs on the same projects are candidates for natural work groups that help employees see the place and importance of their jobs in the total structure of the firm. c. Establishing Client Relationships. Allowing employees to interact with customers can increase job variety and give workers both a greater sense of control and more feedback about performance.

F. Modified Work Schedules and Alternative Workplaces Work-Share Programs.

1. These programs allow employees to share a single, full-time job. Employees appreciate the schedule flexibility to accommodate their personal needs, and firms can reduce turnover and save on the cost of benefits.

2. Flextime Programs. Flextime programs allow workers to choose their working hours by adjusting a standard work schedule.

3. Alternative Workplaces. A rapidly growing number of U.S. workers do a significant portion of their work via telecommuting. Telecommuting allows employees to perform some or all of their jobs away from standard office settings.

4. Advantages and Disadvantages of Modified Schedules and Alternative Workplaces.

Some advantages include: (a) more freedom in employees’ personal lives; (b) ability of employees to coordinate work around family members’ schedules; (c) an increased sense of freedom and control for employees; and (d) higher commitment and satisfaction for employees. Some disadvantages include: (a) the difficulty of accurately tracking working hours; (b) the lack of self-discipline to work without supervision as well as the lack of social interaction available in the workplace; and (c) employer perceptions that unobserved workers are not actually working.

KEY TEACHING TIP Students often confuse the following topics. Job enrichmentis designed to add one or more motivating factors to job activities; job redesign acknowledges that different people want different things from their jobs.

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QUICK QUESTIONS •

What are examples of positive reinforcement and punishment in the workplace?

•

With management by objectives, managers and subordinates set goals and evaluate progress over time. What are some advantages and disadvantages of MBO?

•

Participative programs are not for everyone. What are some drawbacks of such programs?

What are some advantages and disadvantages of using teams in organizations?

• •

In what types of situations might employees benefit from work-share programs and flextime programs?

What are some drawbacks of relying on telecommuting?

•

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Balancing Inducements and Contributions Activity Overview: This activity asks students to think about the psychological contract between themselves and their jobs.

Time Limit: 20 minutes What to Do: 1. Divide students into three-member groups. Remind students what it means to have a psychological contract, and what person-job fit refers to. (5 minutes) 2. Tell each student to interview his or her partners, asking the partners to assess the balance of contributions and inducements at their jobs. Is the psychological contract even for both sides? Do the contributions outweigh the inducements? If the contributions and inducements do not balance, what has to happen so they will be in balance? (15 minutes) 3. Reassemble the class and ask students to share the information they’ve obtained in their interviews. (10 minutes) Don’t Forget: Some students may not feel comfortable revealing the name of their employer in this scenario; if so, they can refer to the employer as “Company X.” Wrap-Up: Close with a recap of the psychological contract and highlight how a good personjob fit occurs when employee contributions and company inducements line up. Ultimately, this results in higher performance and more positive attitudes.

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In-Class Activity 2: Up for Debate: What Are You Looking for in a Job? Activity Overview: This activity asks students to express their opinions about important job criteria and compare these with other students.

Time Limit: 40 minutes What to Do: 1. Ask students to think about what is important to them in a job, ranking the following items, with 1 being the most important and 10 being the least important. (10 minutes) • Working Conditions • Quality of Coworkers/Mentors • Salary • Benefits • Location of Job • Level of Challenge/Responsibility • Training Programs Offered • Advancement Opportunities • Job Security • Job Title 2. Divide the class into four-member teams.

3. Ask each team to compare their rankings. What conclusions can they draw? While they are doing this, students could potentially go to the board or an overhead slide and mark their rankings on a table you create; this would give you an overview of the class. (10 minutes) 4. Reassemble the class as a whole and have each group share their findings with the class. (10 minutes) 5. Look at the list of items that people ranked highest in general. Talk about how companies can actually accomplish these. For example, how would a company provide ideal working conditions for its employees? (10 minutes) Don’t Forget: There are no right or wrong answers to this exercise.

Wrap-Up: Wrap up the discussion by reminding students that this is the challenge in any organization— people are motivated by different things. Business owners and managers must find ways to motivate every employee so they have high job satisfaction.

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In-Class Activity 3: Small-Group Discussion: Motivation in Global Firms Activity Overview: This activity asks students to think about the increased challenges that stem from trying to motivate employees in a global company.

Time Limit: 25 minutes What to Do: 1. Divide the class into small groups and ask them to discuss what types of additional difficulties may arise when attempting to motivate employees in a global company as compared with a domestic company. (10 minutes) 2. Reassemble the class and discuss group comments. (15 minutes) Don’t Forget: Cultural differences can be difficult to assess; students may want to think of differences in perceptions of time, personal space, punctuality, reasons for working, and communication when completing this assignment.

Wrap-Up: Remind students that a good rule of thumb when motivating workers in a global company is to always treat employees with respect, to be sensitive to local cultures, and to follow laws of the host country; the rest might come a little easier.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 8-1. Describe the “Big Five” personality traits and how they contribute to employee performance. The “Big Five” personality traits include agreeableness, conscientiousness, emotionality, extraversion, and openness. Answers should define the traits and elaborate on how they contribute to employee performance. (Learning Objective 8-2 – AACSB – application of knowledge)

8-2. What are the three structural components of an attitude? Be sure to describe each.

Attitudes reflect our beliefs and feelings about specific ideas, situations, or other people. Attitudes are important because they are the mechanism through which we express our feelings. Attitudes are formed by a variety of forces, including our personal values, our experiences, and our personalities. Attitudes are usually viewed as stable dispositions to behave toward objects in a certain way and contain three components: cognition, affect, and intention. Cognition is the knowledge a person presumes to have about something. A person’s affect is his or her feelings toward something, and intention guides a person’s behavior. (Learning Objective 8-2 – AACSB – application of knowledge) 8-3. Describe several strategies and techniques for enhancing employee motivation and give examples of each. Strategies can include cognitive strategies such as positive reinforcement, goal-setting, and empowerment, and structural factors such as teamwork, job redesign, and alternative schedules and workplaces. (Learning Objective 8-5 – AACSB – application of knowledge)

8-4. Make a list of the pros and cons of participative management.

Participative management gives employees a voice in how they do their jobs and in how the company is managed; they become empowered to take greater responsibility for their own performance, which often makes them feel more committed to organizational goals they have helped to shape. Pros can include increased productivity, job satisfaction, and quality. Cons can include slower decision-making process, less security around proprietary information, and possible conflicts of personality and interests. (Learning Objective AACSB – application8-5 of –knowledge)

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QUESTIONS FOR ANALYSIS 8-5.What is a psychological contract? Describe the psychological contract you currently have or have had in the past with an employer, or describe the psychological contract that you have with the instructor in this class.

A psychological contract is the overall set of expectations held by employees and the organization regarding what employees will contribute to the organization and what the organization will provide in return. In answering the second part of this question, students should cite their overall set of expectations versus that of the employer or instructor regarding what they have contributed to the organization (or class) and what the organization (or class) has provided in return. (Learning Objective 8-3 – AACSB – reflective thinking) 8-6. Do you think that most people are relatively satisfied or dissatisfied with their work? What factors do you think most contribute to satisfaction or dissatisfaction? Answers will vary depending on students’ personal and family experiences in their careers. Students should discuss personal factors and job-related factors including hygiene and motivating factors.

(Learning Objective 8-4 – AACSB – reflective thinking)

8-7. Describe your most recent job in terms of your contributions and the organization’s inducements. Answers will vary, but should mention a variety of contributions to the organization, such as effort, ability, loyalty, skills, and time, and tangible rewards such as pay and career and training opportunities, as well as intangible rewards, such as job security and status, and increased flexibility in working schedules. (Learning Objectives 85 – AACSB – reflective thinking)

8-8. What would you tell a worker performing a simple and routine job who wants more challenge and enjoyment from work? Answers will vary, but many people would suggest that the worker improve his job skills— through training and education—that might open doors to more job variety. In addition, many students will suggest that the worker talk with his or her manager about enriching his current job. (Learning Objectives 8-5 – AACSB – analytical thinking) APPLICATION EXERCISES 8-9. Assume you are about to start your own business. What would you do from the beginning to ensure that your employees will be satisfied and motivated? Answers will vary, but many will suggest that the employees be empowered to make certain decisions early on and that you commit a certain amount of resources early on for any

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additional training and education that they might want or need. (Learning Objective 8-4 – AACSB – analytical thinking) 8-10. Ask an employer what they believe motivates their employees. Identify one or more theories of motivation that seem consistent with this manager’s approach. Answers will vary but should include discussions of the strategies reviewed in the chapter. For some manufacturing companies, resources are plentiful, and managers can afford to provide a higher-than-average wage and competitive benefits. Job enrichment and open communication throughout an organization are also satisfaction factors. A college environment will be more service focused and will present different motivations for employees. (Learning Objective 8-4 – AACSB – application of knowledge)

BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 8-11 TO 8-15 (Learning Objectives 8-1, 8-2, 8-4, and 8-5 – AACSB – interpersonal relations and teamwork, analytical thinking, reflective thinking, application of knowledge) Answers will vary but students should note regardless of the type of business, every business will have employees. Setting expectations and managing and motivating those employees will be instrumental in determining the success of the business venture. Remind students that choosing employees that best fit with the mission and the culture of the firm is challenging but results in higher levels of satisfaction from the employees. The many dimensions discussed in the chapter help students understand that each employee has individual motivations that are different in scope and balance from other employees. Finding the right rewards and methods of motivation is key. Students need to consider how flexible they will be able to be in the inducements they offer to employees, especially in the early stages of a new venture. As the business grows, how will they modify their structure, and their management practices?

TEAM EXERCISE: TOO MUCH OF A GOOD THING 8-16 TO 8-20 (Learning Objectives 8-3, 8-4, 8-5 – AACSB – interpersonal relations and teamwork, analytical thinking, application of knowledge) Students must focus on using most of the concepts in the chapter, particularly regarding motivation strategies and individual behaviors, as well as performance behaviors, organizational citizenship, and the psychological contract with each employee. Cultural changes to the company’s operation will be required and may need to be phased in.

Participatory management, or management by objectives, as systems of collaborative goal setting give employees a voice in how the company is managed and how they are rewarded.

Earning employee commitment to the changes will be absolutely necessary for the needed changes to be successful.

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EXERCISING YOUR ETHICS: TOO MUCH OF A GOOD THING (Learning Objectives 8-3, 8-4, 8-5 – AACSB – ethical understanding and reasoning, application of knowledge, analytical thinking) 8-21. What are the ethical issues in this case?

The HR manager is deeply concerned that the behavior modification approach demonstrates a lack of respect for employees.

8-22. What do you think most managers would do in this situation?

Answers will vary, but students should recognize that proceeding with the behavior modification plan is a direct order from the CEO. As employees are dissatisfied with the loss of these programs, the HR manager can suggest to the CEO that rewards be offered in exchange for losing the flexible scheduling. As the company enjoys a loyal workforce, with low turnover, it should not want to lose that valuable asset.

8-23. What would you do?

Answers will vary, but students will probably consider including elements of expectancy theory while implementing the behavior modification approach.

CASES: A LIVING WAGE (Learning Objectives 8-2, 8-3, 8-4 – AACSB – analytical thinking, application of knowledge) Students’ perspective will frame their answer to these questions based on their personalities and past experiences. Every person in an organization is fundamentally different from everyone else. To be successful, managers must recognize that these differences exist and attempt to understand them. They also need to understand why people work. 8-24. Do you think that higher pay is the best way to increase employee engagement and

commitment? What leads you to this conclusion? If Hilton employees are motivated by money, then, yes, higher pay should result in higher productivity and lower turnover. But this also will only be true if the increased pay actually is enough to make a difference in the employees’ ability to meet their financial and personal needs.

8-25. What factors motivate you personally?

Answers will vary but should take into account both tangible and intangible factors.

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8-26. Explain Hilton’s employee support programs in light of the classical theory of motivation.

The classical theory of motivation holds that workers are motivated solely by money.

However, Hilton recognized the importance of intangible motivating factors like uniforms and service-worker employee spaces. Students may acknowledge that the classical theory only goes so far, and that Hilton’s programs focus instead on recognizing the value of employees.

8-27. How could Maslow’s hierarchy of needs help explain the relationship between pay and productivity? Maslow’s hierarchy of needs explains the relationship between pay and productivity because pay falls into the physiological needs level of the Figure 8.3. The needs at the lower points of the figure must be met before the needs above that become relevant to an individual. Being secure in one’s salary will help meet that need and let the employee move up the pyramid and meet other needs. Increased productivity may result from increased pay, in this theory, because the employee will feel more secure and happier, and that often leads to increased productivity.

8-28. Use equity theory, expectancy theory, or two-factor theory to explain Hilton’s employee engagement programs. The expectancy theory fits with Hilton’s programs, as improvements were made for all employees, indicating that everyone had a fair shot at rewards. Equity theory also applies in this case, since Hilton was recognizing even their lowest-paid staff. The two-factor theory fits best here, as Hilton addressed both hygiene and motivation factors.

8-29. Do you believe that companies have greater social responsibility to pay higher wages or to provide a supportive workplace? Support your claim. Answers will vary. While it might be ideal to state that there is a social responsibility to pay higher wages, companies must also provide a supportive workplace and balance the economic impact of higher wages with the skills and talents required to perform various tasks.

SEARCHING FOR A GREAT PLACE TO WORK (Learning Objectives 8- 2, 8-3, 8-4, 8-5 – AACSB – analytical thinking, application of knowledge, reflective thinking) 8-30. What criteria do you have for a great place to work?

Answers will vary, especially depending on the previous employment experience of the students. However, various hygiene and motivation factors should be considered.

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8-31. Describe your ideal job or career and list the performance behaviors that you think would make you successful. Students should include work-related behaviors that the organization is likely to expect them to display. These will be behaviors that directly target performing a job, so they will be measurable in some manner. Students should not discount the value of organizational citizenship to success.

8-32. Using Herzberg’s two-factor theory, determine which factor is more important to you and describe how you would assess a potential employment situation for those factors. It will be an individual decision whether hygiene factors or motivation factors are more important. Students should keep in mind that hygiene factors affect motivation and satisfaction only if they are absent or fail to meet expectations. Reviewing a company’s website for information about the company culture, as well as reading any articles, such as the Fortune rankings of best places to work, will provide insight into the working environment.

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Chapter 9: Leadership and Decision Making Chapter Overview Think of a really effective leader with whom you have worked. What made him or her such a good leader? Was it his or her personality? Was it the way he or she handled a crisis? All good leaders have their own “bag of tricks” to motivate, inspire, and influence their employees to work toward company goals.

This chapter focuses on several approaches to leadership and describes transformational and charismatic perspectives on leadership. It also looks at types of leadership substitutes and neutralizers, as well as several contemporary issues in leadership—seeing leaders as coaches and examining gender and cross-cultural issues in leadership. This chapter also: • Discusses strategic leadership, ethical leadership, and virtual leadership.

• Relates leadership to decision making.

• Discusses both rational and behavioral perspectives on decision making.

Learning Objectives: 9-1. Define leadership and distinguish it from management. 9-2. Summarize early approaches to the study of leadership. 9-3. Discuss the concept of situational approaches to leadership. 9-4. Describe transformational and charismatic perspectives on leadership.

9-5. Identify and discuss leadership substitutes and neutralizers. 9-6. Discuss leaders as coaches and examine gender and cross-cultural issues in leadership. 9-7. Describe strategic leadership, ethical leadership, and virtual leadership. 9-8. Relate leadership to decision making and discuss both rational and behavioral perspectives on decision making.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity Description Time Limit Students assess their own abilities as leaders 1. Icebreaker: Are You a 20 min. and managers.

Leader or a Manager?

2. Small-Group Discussion: Students identify a business or political leader and identify transformational or transactional 20 min.

Transformational vs. characteristics of that leader.

Transactional Students Entrepreneurship are asked andto New read Ventures 3. Up for Debate: Is John the feature in the textbook and discuss the 30 min.

DeJoria a Charismatic charisma of John DeJoria.

Leader?

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CHAPTER OUTLINE Learning Objective 9-1: Define leadership and distinguish it from management.

The Nature of Leadership Leadership includes the processes and behaviors used by someone, such as a manager, to motivate, inspire, and influence the behaviors of others.

A. Leadership and Management Leadership differs from management in a number of ways: A person can be a manager, a leader, both, or neither. Management focuses primarily on the activities of planning, organizing, leading, and controlling. Leadership, in contrast, is much more closely related to activities such as agenda setting, aligning, inspiring, and monitoring. Organizations need both management and leadership if they are to be effective. Management in conjunction with leadership can help achieve planned orderly change, and leadership in conjunction with management can keep the organization properly aligned with its environment.

B. Leadership and Power Power is the ability to affect the behavior of others.

1. Legitimate Power is power granted through the organizational hierarchy, by rank and position. It is authority. By itself, it does not make someone a leader.

2. Reward Power is the power to give or withhold rewards ranging from salary increases to praise to interesting job assignments. If the subordinate values only formal organizational rewards, the manager is not a leader; if the subordinate values informal rewards such as praise and recognition, the manager is showing leadership.

3. Coercive Power is the power to force compliance by means of psychological, emotional, or physical threat. It is accepted that these are not appropriate managerial behaviors, and a manager using this kind of power is likely to provoke resentment and hostility, and is less likely to be seen as a leader.

4. Referent Power is power based on identification, imitation, loyalty, or charisma. This is abstract and based on followers identifying in some way with a leader, who may be like them in personality, background, or attitudes. Charisma is an intangible attribute that attracts loyalty and enthusiasm.

5. Expert Power is power derived from information or expertise. The more important the information and the fewer the people who have access to it, the greater is the degree of expert power possessed by any one individual. Generally, people who are both leaders and managers tend to have large amount of expert power.

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QUICK QUESTION •

What distinguishes leadership from management? In other words, can someone be a manager and not a leader, or a leader and not a manager?

Use In-Class Activity 1: Icebreaker: Are You a Leader or a Manager?

Time Limit: 20 minutes

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Learning Objective 9-2: Summarize early approaches to the study of leadership.

Early Approaches to Leadership A. Trait Approaches to Leadership The trait approach to leadershipfocuses on identifying the essential leadership traits in individuals. Although the trait approach was all but abandoned several decades ago, in recent years, it has resurfaced. A limited list of traits includes emotional intelligence, mental intelligence, drive, motivation, honesty and integrity, self-confidence, knowledge of the business and charisma. It is still undetermined whether these traits relate to leadership.

B. Behavioral Approaches to Leadership The behavioral approach to leadership focused on the behaviors employed by effective leaders; this research led to the identification of two basic forms of leader behavior: taskfocused leader behavior, which occurs when a leader focuses on how tasks should be performed in order to meet certain goals and performance standards; and employee-focused leader behavior, which occurs when a leader focuses on the satisfaction, motivation, and well-being of employees.

KEY TEACHING TIPS Students often confuse the various approaches to leadership. Remind them that the trait approach focuses on identifying traits that indicate leadership ability, including intelligence, dominance, self-confidence, energy, activity, and knowledge. Remind students to keep the behavioral approach to leadership separate from the trait approach. The behavioral approach focuses on behaviors used by effective leaders and can include task- focused behaviors, employee-focused behaviors, or a combination depending on the situation.

QUICK QUESTIONS •

What is the difference between task-focused leader behavior and employee-focused leader behavior?

• The trait approach was all but abandoned several decades ago. Why?

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Learning Objective 9-3: Discuss the concept of situational approaches to leadership.

The Situational Approach to Leadership The situational approach to leadership assumes that the appropriate leader behavior varies from one to another. It attempts to identify various forms of leader behavior that resultsituation in • The manager’s value on system contingent (they depend elements of the situation and characteristics of both the leader • Confidence in subordinates and • Personal inclinations followers) outcomes and consequences.

• Feelings of security Leadership characteristics • Actual behaviors considered include: Then, subordinate characteristics include: • Subordinates’ need for independence • Readiness to assume responsibility • Tolerance for ambiguity • Level of interest in the problem • Understanding of goals • Level of knowledge, experience, and expectations Situational characteristics that affect decision making include: • The type of organization • Group effectiveness • The problem itself • Time pressures Three important situational approaches to leadership are (1) the path–goal theory, (2) the decision tree approach, and (3) the leader–member exchange model. The path-goal theory is an extension of the expectancy theory of motivation and suggests that the primary functions of a leader are to make valued or desired rewards available in the workplace and to clarify for the subordinate the kinds of behavior that will lead to goal accomplishment and valued rewards. The leader should clarify the paths to goal attainment. The decision tree approach concerns itself with only subordinate participation in decision making and assumes that the degree to which subordinates should be encouraged to participate depends on the situation. The leader-member exchange (LMX) model stresses the importance of variable relationships between supervisors and each of their subordinates. It focuses on the different relationships leaders often establish with different subordinates.

QUICK QUESTION •

The situational approach suggests that leaders can vary their use of authority to fit the situation. What are some situational characteristics that affect decision making?

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Learning Objective 9-4: Describe transformational and charismatic perspectives on leadership.

Leadership Through the Eyes of Followers Another recent perspective that has been adopted by some leadership experts focuses on how leaders are seen through the eyes of their followers.

A. Transformational Leadership Transformational leadership focuses on the importance of leading for change; it is the set of abilities that allows a leader to recognize the need for change, to create a vision to guide that change, and to execute the change effectively. Transactional leadership is essentially the same as management in that it involves routine, regimented activities.

Only highly skilled leaders tend to be able to succeed in both transactional and transformational realms.

B. Charismatic Leadership Charismatic leadership is a type of influence based on a leader’s personal charisma; charismatic leaders are likely to have a lot of self-confidence, confidence in their beliefs and ideals, and a strong need to influence people. Charismatic leaders: 1. Envision likely future trends, set high expectations for themselves and others, and behave in ways that meet or exceed those expectations 2. Energize others by demonstrating personal excitement and confidence and consistent patterns of success 3. Enable others by supporting them, empathizing with them, and expressing confidence in them KEY TEACHING TIPS •

Remind students that a few leaders are able to adopt either transformational or trans- actional perspectives, depending on their circumstances; others are able to do one or the other, but not both.

•

Point out to students that someone with charisma is more likely to influence others

•

than someone without charisma.

It is worth noting that taking over a leadership role from someone who is highly

charismatic is a challenge and early positive results are important for them to gain credibility.

QUICK QUESTION What attributes make a leader charismatic?

Use In-Class Activity 2: Small-Group Discussion: Transformational vs. Transactional Time Limit: 20 minutes

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Use In-Class Activity 3: Up for Debate: Is John DeJoria a Charismatic Leader?

Time Limit: 30 minutes HOMEWORK Leadership Style

Now is a good time to assign Application Exercise 9-10 from the end-of-chapter materials as homework. This assignment gives students a chance to further research Richard Branson’s leadership style and to understand and evaluate his style and effectiveness of leadership. At-Home Completion Time: 45 minutes

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Learning Objective 9-5: Identify and discuss leadership substitutes and neutralizers.

Special Issues in Leadership A. Leadership Substitutes Leadership substitutes are individual, task, and organizational characteristics that tend to outweigh the need for a leader to initiate or direct employee performance. In other words, when certain individual abilities, experiences, training, knowledge, motivation, and/or professionalism are present, people can perform well without a designated leader. An ER specialist knows what to do whether a leader is present or not.

B. Leadership Neutralizers Leadership neutralizers are factors that may render certain leadership behaviors ineffective. Examples of leadership neutralizers include long-standing norms, group cohesiveness, elements of the job, and organizational factors. An example would be an inexperienced leader assigned to a very experienced group with long-standing performance norms and high group cohesiveness. Another example might be a worker on an assembly line—he or she can only work as fast as the belt moves and motivational attempts on behalf of leaders cannot necessarily change production rates, although such leadership might be able to reduce errors and absenteeism.

KEY TEACHING TIP Students often confuse leadership substitutes and leadership neutralizers. Leadership neutralizers are factors that can render various leadership behaviors ineffective. Leadership substitutes are characteristics that tend to outweigh the need for a leader to initiate or direct employee performance, meaning that sometimes, employees will perform their jobs capably without the direction of a leader.

QUICK QUESTIONS •

What are some examples of possible leadership neutralizers?

•

Leadership substitutes are characteristics that outweigh the need for a leader to initiate or direct employee performance. What are some examples of leadership substitutes?

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Learning Objective 9-6: Discuss leaders as coaches and examine gender and cross-cultural issues in leadership.

The Changing Nature of Leadership A. Leaders as Coaches Many organizations are becoming less hierarchical, changing the role of the leader from “overseer” to “coach.” The leader would help select and train team members and other new employees, provide some general direction, and help the team get the information and other resources it needs. Mentors help less-experienced employees learn the ropes and better prepare them to advance within the organization. The leader keeps a low profile and lets the group get its work done with little or no direct oversight, just as a coach would do during a game.

B. Gender and Leadership Contrary to stereotypes, female leaders are not necessarily more nurturing or supportive than male leaders; and male leaders are not systematically harsher, controlling, or taskfocused than female leaders. Females do tend to be more democratic in making decisions; males tend to be more autocratic.

C. Cross-Cultural Leadership Culture encompasses both international differences and diversity-based differences within one culture. Cross-cultural factors play a growing role in organizations as their workforces become more diverse. Collectivism places the group before the individual while individualism places the individual before the group.

KEY TEACHING TIP Students often remember that culture refers to international differences among people, but they often forget that culture also includes diversity-based differences within one culture.

QUICK QUESTIONS •

Is the United States a collectivist culture or an individualist culture?

•

“A new role for a leader is to become a coach, rather than overs an eer”. Explain this statement. What has brought about this change in leadership focus?

• Do men and women tend to lead differently? If so, how?

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HOMEWORK Evaluate a Leader Now might be a good time to assign Application Exercise 9-9 from the end-of-chapter materials as homework. The assignment asks students to consider the challenges facing members of minority groups in succeeding as leaders. At-Home Completion Time: 1 hour

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Learning Objective 9-7: Describe strategic leadership, ethical leadership, and virtual leadership.

Emerging Issues in Leadership A. Strategic Leadership Strategic is a leader’s leadership ability to understand the complexities of both the organization and its environment and to lead change in the organization so as to enhance its competitiveness.

B. Ethical Leadership is a leader’s ability to maintain high ethical standards for his or her own conduct, to Ethical leadership unfailingly exhibit ethical behavior, and to hold others in the organization to the same standards.

C. Virtual Leadership Virtual leadership refers to leadership that is exhibited when leaders and their employees work in locations that are far from one another.

QUICK QUESTIONS •

Virtual leadership involves managing employees who work in different locations than the manager. What are some advantages and disadvantages of virtual leadership from the manager’s perspective? How can a manager show leadership in this kind of environment?

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Learning Objective 9-8: Relate leadership to decision making and discuss both rational and behavioral perspectives on decision making.

Leadership, Management, and Decision Making Decision making—choosing one alternative from among several options—is a critical management skill.

A. The Nature of Decision Making Decision making is the act of choosing one alternative from among a set of alternatives. The decision-making process includes recognizing and defining the nature of a decision situation, identifying alternatives, choosing the “best” alternative, and putting it into practice.

1. Types of Decisions. Managers must make many different types of decisions. In general, however, most decisions fall into one of two categories: programmed and nonprogrammed. A programmed decision is one that is relatively structured or recurs with some frequency (or both). Nonprogrammed decisions, on the other hand, are relatively unstructured and occur much less often.

2. Decision-Making Conditions. Just as there are different kinds of decisions, there are also different conditions in which decisions must be made. State of Certainty is when the decision maker knows with reasonable certainty what the alternatives are and what conditions are associated with each alternative. State of Risk is when the availability of each alternative and its potential payoffs and costs are all associated with probability estimates. State of Uncertainty is when the decision maker does not know all the alternatives, the risks associated with each, or the likely consequences of each alternative.

B. Rational Decision Making There are a number of steps in the rational decision-making process.

1. Recognizing and Defining the Decision Situation. Step one is to recognize that a decision is necessary. A stimulus or spark must initiate the process; managers must define the problem.

2. Identifying Alternatives. Alternative courses of effective action must be developed; the more important the decision, the more attention is directed to developing alternatives.

Developing both obvious, standard alternatives and creative, innovative alternatives is useful.

3. Evaluating Alternatives. Managers must weigh the pros and cons and the feasibility of all alternatives to the problem. Managers must thoroughly evaluate all the alternatives to increase the chances that the alternative chosen will be successful.

4. Selecting the Best Alternative. While many situations do not lend themselves to objective, mathematical analysis, managers and leaders can develop subjective estimates

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and weights for choosing an alternative. Finding multiple acceptable alternatives may be possible; selecting just one alternative and rejecting all the others might not be necessary.

5. Implementing the Chosen Alternative. Implementation is sometimes fairly easy, but frequently is more difficult than anticipated. There is potential resistance at various stages of an implementation process, for reasons including insecurity, inconvenience, and fear of the unknown. Unanticipated consequences are possible; unexpected factors may develop.

6. Following Up and Evaluating the Results. Managers should make sure that the chosen alternative has served its original purpose. Several responses are available, if it is not working as expected, and range from redefining the problem to implementing previously disregarded alternatives.

C. Behavioral Aspects of Decision Making While approaching decision situations logically is ideal, frequently decisions made with little regard for logic can turn out to be correct. Several ingredients in how these forces work are behavioral aspects of decision making.

1. Political Forces in Decision Making. Political forces contribute to the behavioral nature of decision making. A coalition is an informal alliance of individuals or groups formed to achieve a common goal.

2. Intuition. Intuition is an innate belief about something, often without conscious consideration. Intuition is often thought of as a “hunch.” While not as arbitrary as that sounds, it is actually based on experience and practice in making decisions in similar situations.

3. Escalation of Commitment. Escalation of commitment occurs when managers become so committed to the course of action they have chosen that they stay with it, even when it appears to have been wrong.

4. Risk Propensity and Decision Making. Risk propensity is the extent to which a decision maker is willing to gamble when making a decision. Conservative managers are cautious and more likely to avoid mistakes or big losses. More aggressive managers may achieve big successes, but are also more likely to incur greater losses.

KEY TEACHING TIPS •

Remind students that they often engage in rational decision making, which occurs when a manager makes a decision by selecting and implementing a “best” alternative.

•

A coalition is an informal alliance of individuals or groups formed to achieve a common goal; point out that this goal is often a preferred decision alternative.

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•

Remind students that when they have a “hunch,” it is intuition, which is an innate belief about something, often without conscious consideration.

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Point out that every individual has a varying level of risk propensity, which is the extent to which a person is willing to gamble when making a decision.

QUICK QUESTIONS •

What are some typical constraints that can limit the identification of alternatives? If an

•

alternative appears not to be working, what are the manager’s options? For what types

•

of decisions would the rational decision-making model apply? Why? Escalation of

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commitment involves selecting a course of action and then becoming so committed to it that managers stay with it, even when it appears to be wrong. Why do some managers stay with a course of action even when they know it to be wrong?

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Are You a Leader or a Manager?

Activity Overview: This activity provides students with a chance to interview a classmate, then discuss their own leadership potential with that classmate.

Time Limit: 20 minutes What to Do: 1. After reviewing the differences between “managers” and “leaders,” ask students to think about their own leadership and management potential. Assign each student to a partner, asking each one to briefly interview the other to find out how each would assess his or her own management and leadership potential. (10 minutes)

2. Reassemble the class and ask for volunteers who are willing to share any information about their own personal assessments and/or introduce their interviewee to discuss some of the topics discussed in the interview. (10 minutes) Don’t Forget: Some draw. students will already have some managerial/leadership experience upon which to For those who don’t, ask them to consider a situation where they have been able to display management or leadership qualities (in a school club, sports team, or a circle of friends, for example); or, ask them to identify characteristics and behaviors in their own bosses that they admire, and then assess whether they could emulate those behaviors and characteristics.

This may help them to better distinguish their leadership potential from their management potential.

Wrap-Up: Wrap up the discussion by reminding students that some managers are both leaders and managers.

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In-Class Activity 2: Small-Group Discussion: Transformational vs.

Transactional Activity Overview: This activity asks students to assess the leadership characteristics of selected leaders, identifying transformational and transactional characteristics among them.

Time Limit: 20 minutes What to Do: 1. Divide the class into small groups and ask each group to come up with a business or political leader with whom all are familiar. Based on the leader selected, each group should identify their selected leader as being either transformational or transactional. (10 minutes) 2. Reassemble the class as a whole to discuss each group’s input. (10 minutes) Don’t Forget: People can perceive leadership differently. Groups should make their assessments based on the descriptions of transactional and transformational leadership given in the textbook.

Wrap-Up: Bring the activity to a close by providing a quick overview of both types of leadership, identifying some cited leadership characteristics from the groups’ discussions for further definition.

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In-Class Activity 3: Up for Debate: Is John DeJoria a Charismatic Leader?

Activity Overview: This activity asks students to assess the leadership characteristics of one of the most successful entrepreneurs in the world.

Time Limit: 30 minutes What to Do: 1. Ask students to read about John DeJoria in the Entrepreneurship and New Ventures feature, considering his traits and behaviors as a leader and making notes about whether he was a charismatic leader. (10 minutes) 2. Ask the class as a whole to discuss those traits and behaviors that might indicate that John DeJoria had a high or low level of charisma. (20 minutes) Don’t Forget: This assignment can be completed using any number of successful (or unsuccessful) entrepreneurs.

Wrap-Up: Bring the activity to a close by discussing how what one person views as charismatic may not be viewed as charismatic by another individual.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 9-1. What are the basic differences between management and leadership?

Leadership includes the processes and behaviors used by someone to motivate, inspire, and influence the behaviors of others. Management, however, tends to focus on planning, organizing, leading, and controlling. Leaders focus on affecting the behaviors of others and motivating them to be more productive. A manager may or may not be a leader; management can often be carried out via some formal authority within the organization, while leadership may potentially be carried out by anyone in the organization. (Learning Objective 9-1 – AACSB – application of knowledge) 9-2. Summarize the basic premises underlying the trait approach to leadership.

The trait approach to leadership focuses on identifying specific leadership traits that may indicate one’s leadership potential. The premise was that leaders had certain traits in common and that evaluating someone based on their possession and strength of those traits would be a good indicator of someone’s leadership potential. (Learning Objective 9-2 – AACSB – application of knowledge) 9-3. What are leadership substitutes and neutralizers?

Leadership substitutes are individual, task, and organizational characteristics that tend to outweigh the need for a leader to initiate or direct employee performance. Leadership neutralizers tend to render certain leadership behaviors ineffective, based on the presence of the neutralizers; norms and cohesiveness in a group, for example, can be so strong that there is very little an individual manager can do to influence the group. (Learning Objective 9-5 – AACSB – application of knowledge) 9-4. List and briefly explain the steps in rational decision making.

The rational decision-making model begins with (1) recognizing and defining the decision situation. Recognize that a decision is necessary and define the problem.

Decision makers then (2) identify alternatives, remembering that various constraints often limit the alternatives. Consider standard alternatives and creative innovative ones; (3) evaluate the alternatives on various criteria, including legal, financial, human, material and information resources or costs; (4) select the best alternative using a combination of objective and subjective analysis; (5) implement the chosen alternative, anticipating areas of potential resistance or problems; and (6) follow up and evaluate the results, and be prepared to respond if the alternative is not performing as expected.

(Learning Objective 9-8 – AACSB – application of knowledge)

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QUESTIONS FOR ANALYSIS 9-5. Describe the five types of power. Which type or types does your current supervisor exercise?

Legitimate Power is granted through the organizational hierarchy. Reward Power is the power to give or withhold rewards. Coercive Power is the power to force compliance by means of psychological, emotional, or physical threat. Referent Power is the power based on identification, imitation, loyalty, or charisma. Expert Power is the power derived from information or expertise. (Learning Objective 9-1 – AACSB – application of knowledge, analytical thinking) 9-6. When is task-focused leader behavior most important? When is it more important for a leader to exhibit employee-focused behavior?

Students should discuss various scenarios where the leader needs to initiate or direct employee performance and focus on the task. They should also discuss various leadership neutralizers, which render task leadership behaviors ineffective, such as dealing with professionals and other highly skilled employees. (Learning Objective 9-5 – AACSB – application of knowledge) 9-7. Give a current example of a virtual leader. As a potential “follower” in a virtual leadership situation, what issues would be of most concern to you? What would the issues be from the perspective of the “leader” role in such a situation?

There are a number of concerns that followers typically have in virtual organizations. One concern is making sure instructions are clearly understood. In the absence of nonverbal communication, it is sometimes difficult to assess the relative importance of different tasks.

The second problem is loneliness and isolation. Research is showing that people who work from home sometimes feel isolated from the daily interactions that typically take place in organizations. One problem for the leaders of virtual organizations is that they must work harder to develop a positive work culture. Team leaders may not know their team members personally and this may make appropriate task assignments more difficult.

(Learning Objective 9-7 – AACSB – application of knowledge) 9-8. Identify a leader who you believe exhibits charismatic leadership and explain the behaviors that support this conclusion.

Answers will vary but will focus on the behavioral characteristics of the leaders such as selfconfidence, outgoing personality, and the need to influence people. (Learning Objective 9-4 – AACSB – application of knowledge)

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APPLICATION EXERCISES 9-9. Overwhelmingly, the CEOs of the largest companies in the United States are white males, but women and minorities are making inroads. Identify a leader who is not a white, middle- aged male, and describe the challenges this leader faces as well as strategies or traits that make her or him successful. Answers will vary but will focus on the behavioral aspects of political forces and coalitions, intuition, escalation of commitment, and risk propensity that especially impacts minority leaders. (Learning Objective 9-6 – AACSB – application of knowledge)

9-10. Sir Richard Branson is the sixth wealthiest citizen of the United Kingdom. In 2019, he had an estimated net worth of $4.6 billion and owned 400 companies under the name of Virgin. Based on a bit of research, how would you classify Branson’s leadership style? What are the pros and cons of his leadership style? Would you want to work for Branson as part of his management team? Why or why not? There will be a range of answers with some students describing Branson’s leadership style in terms of his behaviors; other answers will focus on his decision-making style, and still others will focus on his gender and its impact on his decisions. Students’ thoughts on his effectiveness will depend on their perspectives on the ethics of his decisions and whether they agree with them.(Learning Objective 9-4 – AACSB – reflective thinking, analytical thinking) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 9-11 TO 9-15 (Learning Objectives 9-2, 9-3, 9-4, 9-5 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Answers will be determined by the type of business (brick and mortar, e-commerce, etc.), the team’s perspective on the role the leader needs to play, each team member’s preferred leadership style, the number and type of employees, the skills and experience levels of the employees, etc. When answering these questions, the students should be reminded of the type of traits/skills and decisions the leader might need to possess: 1: Communication; 2: Financial; 3: Strategic/tactical decisions; 4: Ethical; 5: Interpersonal; 6: Vision; etc.

TEAM EXERCISE: MANAGING CHANGES IN STRATEGIC DIRECTION- 916 TO 919 (Learning Objectives 9-3, 9-4, 9-5, and 9-8 AACSB – – ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking) This exercise should encourage thoughtful discussion on the nature of leadership, responsibilities of a leader, the decision-making process, and the impact a leader’s personality has on an organization’s motivational strategy.

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EXERCISING YOUR ETHICS: PAINTED INTO A CORNER (Learning Objective 9-8 – AACSB – ethical understanding and reasoning, reflective thinking) 9-20. What are the ethical issues in this case?

Answers will vary but students will need to consider conflicts of interest in awarding bonuses and pleasing the board and stockholders and accurately reporting expenses and revenues and disclosing risks. There is also a conflict of interest inherent in the close friendship between the CFO and the CEO. Students may also note that the mission statement is conflicted.

9-21. How would you address this situation?

Answers likely will vary, but the spectrum will range from keeping this information internal to informing the board to going fully public and informing all stakeholders, including the public. Students should also address both the short- and long-term ramifications of their decision.

9-22. How would you reconcile your strategy with the mission statement?

Answers will vary, but students will need to address the inherent conflicts between profits and integrity in the mission statement.

CASES: AUTHENTIC LEADERSHIP (Learning Objectives 9-3 and 9-4, 9-6, and 9-7 – AACSB of knowledge) – analytical thinking, application 9-23. What personal traits does Brad Smith possess that aid him as a leader?

Traits Brad Smith seems to possess include emotional and mental intelligence, selfconfidence, energy, activity, and knowledge, and likely, charisma.

9-24. How would you describe Brad Smith’s leadership style?

Students should review the three theories of situational approaches to leadership. Most students are likely to identify Brad Smith’s leadership style as being based on the path-goal theory. Given the statements he makes in the case about what leadership is, and what success looks like, this seems to be the best match.

9-25. Do you believe that Smith’s gender played a part in his success? Why or why not?

To an extent, anyone’s gender will affect their leadership style, in the same way that their experience, education, and background will also be factors. Students should recognize this. His gender is an unchangeable part of him. Students should consider how gender affects their own perceptions of leadership and leadership characteristics in explaining their answers.

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9-26. What are three important lessons from Smith’s career path?

Answers will vary depending on the students’ perspectives and experiences. Lessons to take away, though, include appreciating his willingness to take risks and to adapt, his understanding the importance of fostering innovation and enthusiasm (through the unstructured time initiative as well as team building), and his general understanding of what leadership actually means and how to show it (learning this in part through teaching martial arts).

THE MAN BEHIND THE GENIUS (Learning Objectives 9-1, 9-4, 9-7, 9-8 – AACSB – analytical thinking, application of knowledge) 9-27. Do you think Steve Jobs was a charismatic leader? What leads you to this conclusion?

Most students will think that Steve Jobs was a charismatic leader, citing various behavioral characteristics such as confidence, desire for excellence, intelligence, etc.

9-28. Jobs enjoyed almost cult-like loyalty among his employees. Why do you think people clamored to work for Apple under Jobs’s leadership?

Answers will vary but many students will cite the challenge and excitement of working with a ground-breaking leader such as Jobs.

9-29. What challenges face employees working for a leader such as Jobs?

Answers will vary but most students will probably focus on Steve Jobs’ high standards, drive, perfectionism, and lack of compassion.

9-30. Describe Jobs with respect to intuition, escalation of commitment, and risk propensity.

Again, answers will vary with most students seeing Jobs as an extremely confident, intuitive risk taker, and someone who was absolutely certain when he made up his mind about something.

9-31. Do you think that you would have enjoyed working for Apple during Jobs’s leadership?

Why or why not? Answers will vary depending on students’ own comfort with the traits they observe that Steve Jobs possessed as a leader and what he demanded of Apple employees relative to their confidence in their ability to meet his standards.

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9-32. How does a leader differ from a manager? Describe the situational approach to leadership and three major theories within this category. How would the path-goal theory help you identify the most appropriate leadership style in a situation?

Managers focus primarily on planning, organization, leading, and controlling, while leaders concentrate on agenda setting, aligning, inspiring, and monitoring. While there can be overlap, each is a discrete set of activities.

The situational approach to leadership assumes that appropriate leader behavior varies from one situation to another. It attempts to identify forms of leader behavior that result in contingent outcomes and consequences. The path-goal theory suggests that the primary functions of a leader are to make valued or desired rewards available in the workplace and to clarify for the subordinate the kinds of behavior that will lead to goal accomplishment and valued rewards. The decision-tree approach concerns itself solely with the level of subordinate participation appropriate to a situation. The leader-member exchange model stresses the importance of different relationships between supervisors and each of their subordinates.

Path-goal theory identifies four kinds of behaviors that leaders can use, depending on the situation. Directive leader behavior lets subordinates know what is expected of them, gives guidance and direction, and schedules work. Supportive leader behavior is being friendly and approachable, showing concern for subordinates’ welfare, and treating members as equals.

Participative leader behavior includes consulting with subordinates, soliciting suggestions, and allowing participation in decision making. Achievement-oriented leader behavior sets challenging goals, expects subordinates to perform at high levels, encourages subordinates, and shows confidence in subordinates’ abilities.

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Chapter 10: Human Resource Management and Labor Relations Chapter Overview Human resource management involves a steady stream of activities. An HR manager’s job revolves around a set of functions including HR planning, staffing, developing employees, appraisal, and compensation and benefits. This chapter covers each of these functions, including how managers plan for their organization’s HR needs and ways in which organizations select, develop, and appraise employee performance. The chapter also describes the main components of a compensation system and some of the legal issues involved in hiring, compensating, and managing workers. Finally, the chapter discusses workforce diversity, the management of knowledge workers, the use of a contingent workforce, and why workers organize into labor unions. A career in HR management can be rewarding, but given the dynamic nature of the external environment, keeping abreast of changes and incorporating those necessary changes into these HR management functions is also challenging.

Learning Objectives 10-1. Define human resource management, discuss its strategic significance, and explain how managers plan for their organization’s human resource needs.

10-2. Discuss the legal context of human resource management and identify contemporary legal issues.

10-3. Identify the steps in staffing a company and discuss ways in which organizations recruit and select new employees.

10-4. Describe the main components of a compensation and benefits system.

10-5. Describe how managers develop the workforce in their organization through training and performance appraisal.

10-6. Discuss workforce diversity, the management of knowledge workers, and the use of a contingent workforce as important changes in the contemporary workplace.

10-7. Explain why workers organize into labor unions and describe the collective bargaining process.

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

Description Students write a job description for both the instructor’s job and the 1. Icebreaker: Writing a Job student’s job. Students are divided into Description teams to in 2. Up for Debate: Performing discuss the steps involved Appraisals, Laying It On the Line determining whether to fire someone.

3. Small-Group Discussion: What Students consider what incentives might motivate workers.

Motivates Employees?

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Time Limit

45 min.

30 min.

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CHAPTER OUTLINE Learning Objective 10-1: Define human resource management, discuss its strategic significance, and explain how managers plan for their organization’s human resource needs.

The Foundations of Human Resource Management Human resource management (HRM) is the set of organizational activities directed at attracting, developing, and maintaining an effective workforce.

A. The Strategic Importance of HRM Human resources are the people comprising an organization’s workforce. They are critical for effective organizational functioning. The importance of HRM has grown dramatically in the last several years due in part to the recognition that human resources are a valuable means for improving productivity, and today’s awareness of the costs associated with poor human resource management. Effectiveness of HR performance directly impacts the bottom-line performance of the firm. Human capital reflects the organization’s investment in attracting, retaining, and motivating an effective workforce while talent management recognizes that people represent a portfolio of talents that can be managed and used in ways best targeted to organizational success.

B. HR Planning Human resource planning is the starting point for attracting qualified new employees.

1. Job analysis. Job analysis is a systematic analysis of jobs within an organization.

The job analysis results in: (a) the job description, which lists the duties and responsibilities of a job; its working conditions; and the tools, materials, equipment, and information used to perform it; and (b) the job specification, which lists the skills, abilities, and other credentials and qualifications needed to perform the job effectively. Job analysis is needed to develop appropriate selection methods, create relevant performance appraisal systems, and set equitable compensation rates.

2. Forecasting HR Demand and Supply. Forecasting the supply of labor involves forecasting the internal supply—the number and type of employees who will be in the firm at some future date—and the external supply—the number and type of people who will be available for hiring from the labor market at large. a. Replacement Charts. Replacement charts list each important managerial position, who occupies it, how long that person will probably stay in it before moving on, and who is now qualified or soon will be qualified to move into it. b. Skills Inventories. Employee information systems (skills inventories) contain information on each employee’s education, skills, work experience, and career

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aspirations to aid in identifying qualified employees when a position becomes available. c. Forecasting the external supply of labor requires information from outside sources, such as state employment commissions, government reports, and figures supplied by colleges on the number of students in major fields.

3. Matching HR Supply and Demand. After comparing future demand and internal supply, managers can make plans to manage predicted shortfalls or overstaffing.

Hiring new employees, retraining present employees, and investing in productivityenhancing systems, can help meet shortfalls. Overstaffing can be handled by transferring employees, not replacing employees who quit, encouraging early retirement, and laying off workers. During the Great Recession, many firms found it necessary to reduce the size of their workforce through layoffs. Others did not reduce their workforce but reduced the number of hours each employee spent at work. The same issues arose during the COVID-19 pandemic in 2020.

KEY TEACHING TIPS •

Remind students that HRM is the set of organizational activities directed at attracting, developing, and maintaining an effective workforce.

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Students often confuse these terms: A job description lists what you do in the

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job, including the duties and responsibilities; a job specification lists the skills and abilities you bring with you to the job.

Remind students that forecasting the supply of labor includes both an internal

and QUICK QUESTIONS external forecast.

• Why has the role of human resource management increased in importance in the last several years?

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How can an HR manager benefit from the use of a replacement chart?

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How can an HR manager benefit from the use of an employee information system?

Use In-Class Activity 1: Icebreaker: Writing a Job Description Time Limit: 45 minutes

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Learning Objective 10-2: Discuss the legal context of human resource management and identify contemporary legal issues. The Legal Context of HRM A number of laws regulate various aspects of employee-employer relations, especially in the areas of equal employment opportunity, compensation and benefits, labor relations, and occupational safety and health. A. Equal Employment Opportunity

Title VII of the Civil Rights Act of 1964 forbids discrimination in all areas of the employment relationship. The intent of Title VII is to ensure that employment decisions are made on the basis of an individual’s qualifications rather than on the basis of personal biases. The Equal Employment Opportunity Commission (EEOC) has responsibility for enforcing Title VII, the Age Discrimination in Employment Act, and the Americans with Disabilities Act. A business with government contracts must have on file a written affirmative action plan—a written statement of how the organization intends to actively recruit, hire, and develop members of underused groups.

B. Compensation and Benefits The Fair Labor Standards Act sets a minimum wage and requires the payment of overtime rates for work in excess of 40 hours per week. The Equal Pay Act of 1963 requires that men and women be paid the same amount for doing the same job. The Employee Retirement Income Security Act (ERISA) of 1974 ensures the financial security of pension funds by regulating how they can be invested.

The Family and Medical Leave Act (FMLA) of 1993 requires employers to provide up to 12 weeks of unpaid leave for family and medical emergencies.

C. Labor Relations Union activities and management’s behavior toward unions constitute another heavily regulated area. TheNational Labor Relations Act (also known as the Wagner Act), passed in 1935, sets up procedures for employees to vote on whether to have a union.

The National Labor Relations Board (NLRB)was established by the Wagner Act to enforce its provisions. Following a series of severe strikes in 1946, the LaborManagement Relations Act (also known as theTaft-Hartley Act) was passed in 1947 to limit union power.

D. Health and Safety holdsOccupational The that every employer provide place of employment that is free from Safety andmust Health Act ofa1970 hazards that may cause death or serious physical harm.

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E. Other Legal Issues in the cannot Workplace 1. .AIDS Employers legally require an AIDS test or any other medical examination as a condition for making an offer of employment. Organizations must treat AIDS like any other disease covered by law; employers cannot discriminate against a person with AIDS, and they should try to educate coworkers about AIDS. 2. Sexual Harassment. Sexual harassment is defined by the EEOC as unwelcome sexual advances in the work environment. The employer is responsible for changing the environment by warning, reprimanding, or firing the harasser. With quid pro quo harassment, the harasser offers to exchange something of value, such as a raise or promotion, for sexual favors. Lewd jokes, unwelcome comments, a work area decorated with inappropriate photographs, and so on constitute a hostile work environment. Harassment has been expanded to include unwelcome or inappropriate behaviors regarding ethnicity, religion, and age.

3. Employment at Will. The concept of employment at will holds that both employer and employee have the mutual right to terminate an employment relationship at any time for any reason, with or without advance notice to the other. However, employees can bring suit based on grounds of wrongful discharge.

4. The Patriot Act. In response to the terrorist attacks of September 11, 2001, the U.S. government passed legislation to increase its powers to investigate and prosecute suspected terrorists. The HRM implications are that certain individuals (including exconvicts and aliens from other countries deemed by the U.S. State Department to have repeatedly provided support for acts of international terrorism) are ineligible to work with potentially dangerous biological agents. Other sections grant government investigators access to previously confidential personal and financial records.

KEY TEACHING TIPS • Reiterate that protected groups consist of individuals who share characteristics— such as race, color, religion, gender, age, disability status, and national origin—as indicated by a given law.

• Reinforce that sexual harassment includes (a) quid pro quo, in which the harasser offers something of value for sexual favors, and (b) hostile work environment, in which lewd behavior displayed by another employee is offensive. Also, remind students that harassment definitions have been broadened to include age, religious, and ethnic harassment.

QUICK QUESTIONS • •

What is the purpose of an affirmative action plan?

What does OSHA guarantee?

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Learning Objective 10-3: Identify the steps in staffing a company and discuss ways in which organizations recruit and select new employees.

Staffing the Organization When managers have determined that new employees are needed and understand the legal context in which they operate, they can then turn their attention to recruiting and hiring the right mix of people. This involves two processes: (1) acquiring new employees from outside the company and (2) promoting current employees from within. Both external and internal staffing, however, start with effective recruiting. A. Recruiting Employees Recruiting is the process of attracting qualified persons to apply for the jobs that are open.

1. Internal Recruiting. Internal recruiting means considering present employees as candidates for openings.

2. External Recruiting. External recruiting involves attracting people outside of the organization to apply for jobs. Recruiting decisions go both ways. While the organization is recruiting an employee, the prospective employee is also selecting a job.

Since hiring the wrong employee can be a costly error, companies look to strive for a good person-job fit. One tool used is the realistic job preview that provides the applicant with a real picture of what performing the available job would be like.

B. Selecting Employees The intent of the selection process is to gather from applicants the information that will predict their job success and then to hire the candidates likely to be most successful.

1. Application Forms. An application form is a method of gathering information about the applicant’s work history, educational background, and other job-related data.

2. Tests. Tests of ability, skill, aptitude, or knowledge relevant to a particular job are usually the best predictors of job success, although tests of general intelligence or personality are occasionally useful as well.

3. Interviews. In a structured interview, questions are written in advance, and all interviewers follow the same question list with each candidate; in an unstructured interview, questions vary with the candidates’ backgrounds.

4. Other Techniques. Organizations often require applicants to take physical exams and drug tests. Some organizations also run background checks on prospective employees.

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KEY TEACHING TIPS •

Remind students that new employees are found both internally and externally in the recruitment process.

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Remind students that all applicant information gathered in the selection process can be used to predict job success.

QUICK QUESTIONS •

What are the benefits and drawbacks of internal recruiting? External recruiting?

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When do you think tests are useful in the selection process?

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Why are interviews sometimes a poor predictor of job success? In what way(s) might an interview be an accurate predictor of job success?

HOMEWORK Interview a Manager Now might be a good time to assign Application Exercise 10-10 from the end-ofchapter materials as homework. This assignment asks students to interview someone familiar with a company’s current hiring processes about the recruitment and selection process at the company. At-Home Completion Time: 1 hour

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Learning Objective 10-4: Describe the main components of a compensation and benefits system.

A. Compensation and Benefits A major factor in retaining skilled workers is a company’scompensation system—the total package of rewards that it offers employees in return for their contributions to the organization’s mission.

1. Wages and Salaries Wages are paid for time worked. A salary is an amount paid per month or year for performing a job. Companies may set wages and salaries by looking at competitors’ rates. In addition, firms must decide how their wage and salary levels will compare for different jobs.

2. Incentive Programs Incentive programs are special pay programs designed to motivate high performance. a. Individual Incentives. A bonus may be awarded to employees upon their reaching a sales quota or performance goal. Merit salary systems link raises to performance levels in non-sales jobs. Pay-for-performance (or variable pay) goes to middle managers for especially productive output with earnings that significantly exceed the cost of bonuses.

b. Company-Wide Incentives. These programs apply to all employees in a firm. In profit-sharing plans, a firm’s profits earned above a certain level are distributed to employees. Gainsharing plans distribute bonuses to employees when a firm’s costs are reduced through greater work efficiency. Pay-for-knowledge plans distribute pay to workers who learn new skills and become proficient at different jobs.

3. Benefits Programs Benefits are compensation other than wages and salaries, including health, disability, and life insurance, and paid vacations and holidays. Most companies are required by law to provide Social Security retirement benefits and workers’ compensation insurance (insurance for compensating workers injured on the job). Many public companies allow employees to use payroll deductions to buy stock at discounted prices. Counseling services, on-site child-care centers, and reduced fees at gyms are other types of benefits increasingly being offered. a. Retirement Plans. Retirement plans are set up to pay pensions to workers when they retire. Contributions are made either totally by the company or by both the company and the employee. In recent years more companies have run into problems because they have not set aside enough money to cover the retirement funds for their workers. Some major companies have stopped contributing

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toward retirement accounts while others have transitioned employees to riskier 401(k) plans. b.

Containing the Costs of Benefits.

To contain the costs of benefits, employees can select from a variety of benefit alternatives in what is known as a cafeteria benefits plan.A certain dollar amount of benefits per employee is set aside so that each employee can choose from a variety of alternatives.

KEY TEACHING TIPS •

Point out that a compensation system includes more than just wages and salaries; it includes incentives and employee benefit programs.

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Students often confuse the types of incentive plans: Profit-sharing plans distribute profits earned above a certain level to employees; gainsharing plans distribute bonuses to employees who achieve greater work efficiency; and pay-for-

knowledge QUICK QUESTIONS plans encourage workers to learn new skills.

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In what way(s) is variable pay a better motivator than a merit raise?

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How can an organization benefit from offering incentive programs to its employees?

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How does a cafeteria benefit plan allow a company to cut costs?

Use In-Class Activity 3:Small-Group Discussion: What Motivates Employees?

Time Limit: 30 minutes

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Learning Objective 10-5: Describe how managers develop the workforce in their organization through training and performance appraisal.

Developing the Workforce A. Training and Development Training usually refers to teaching operational or technical employees how to do the job for which they were hired. Development refers to teaching managers and professionals the skills needed for present and future jobs and includes improved decision making, strategic leadership, and more.

1. Assessing Training Needs. The first step in developing a training plan is to determine what needs exist. Not all performance issues are due to lack of training; motivation, poor equipment or poor supervision may be at fault. As training programs are being developed, the manager should set specific and measurable goals specifying what participants are to learn. Managers should also plan to evaluate the training program after employees complete it.

2. Common Training Methods. After a company hires new employees, it must acquaint them with the firm and their new jobs. Lectures, readings, role-playing, practice using tools and materials, and web-based activities are among the methods of training. The purpose of the training and the content being provided will determine the preferred training method(s). When employees must learn a physical skill, methods allowing practice or the actual use of tools and materials are needed, as in on-the-job training. Vestibule training focuses on safety, learning, and feedback, rather than on productivity.

3. Evaluation of Training. Typical evaluation approaches include measuring one or more relevant criteria (such as attitudes or performance) before and after the training, and determining whether the criteria changed as a result of the training and development. Trainees may say that they enjoyed the training and learned a lot, but the true test is whether their job performance improves after their training.

B. Performance Appraisal are designed appraisals to show workers precisely how well they are Performance doing their jobs. Employees’ performances should be evaluated regularly for many reasons. One reason is that a performance appraisal may be necessary for validating selection devices or assessing the impact of training programs. A second, administrative reason is to aid in making decisions about pay raises, promotions, and training. Still another reason is to provide feedback to employees to help them improve their current performance and plan their future careers.

Because performance evaluations often help determine wages and promotions, they must be fair and nondiscriminatory. In the case of appraisals, managers use content validation to show that the appraisal system accurately measures performance on

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important job elements and does not measure traits or behavior that are irrelevant to job performance.

1. Common Appraisal Methods.

Two basic categories of appraisal methods commonly used in organizations are objective methods and judgmental methods.

Objective measures of performance include actual output (number of units produced), scrap rate, dollar volume of sales, and number of claims processed.

Judgmental methods, including ranking and rating techniques, are the most common way to measure performance, though they have flaws.

2. Errors in Performance Appraisal. Errors or biases can occur in any kind of rating or ranking system. One common problem is recency error, the tendency to base judgments on the subordinate’s most recent performance because it is most easily recalled. But an appraisal is meant to evaluate performance over an entire time period. Halo error is allowing the assessment of an employee on one dimension to “spread” to ratings of that employee on other unrelated dimensions.

One interesting innovation in performance appraisal used in some organizations today is called 360-degree feedback, in which managers are evaluated by everyone around them—their boss, their peers, and their subordinates.

3. Performance Feedback. The last step in most performance appraisal systems is giving feedback to subordinates about their performance. This is usually done in a private meeting between the person being evaluated and his or her boss. It should be focused on the facts: the assessed level of performance, how and why that assessment was made, and how it can be improved in the future.

QUICK QUESTIONS 1. What types of training are offered at your place of work?

2. What do you think would be the biggest challenges of giving an employee performance appraisal?

Use In-Class Activity 2:Up for Debate: Performing Appraisals, Laying It On the Line Time Limit: 30 minutes

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Learning Objective 10-6: Discuss workforce diversity, the management of knowledge workers, and the use of a contingent workforce as important changes in the contemporary workplace.

New Challenges in the Changing Workplace New challenges arise as the economic and social environments of business change.

A. Managing Workforce Diversity Workforce diversity is the range of workers’ attitudes, values, beliefs, and behaviors that differ by gender, race, age, ethnicity, physical ability, and other relevant characteristics; many U.S. organizations are now creating more diverse workforces than ever before. Organizations are recognizing that diversity can be a competitive advantage.

B. Managing Knowledge Workers Traditionally, employees added value to organizations because of what they did or because of their experience; today, however, many employees add value because of what they know. Knowledge workers, which include computer scientists, engineers, physical scientists, and game developers require extensive specialized training.

Retraining and training updates are critical to prevent their skills from becoming obsolete.

Companies must provide this training or risk losing employees to firms that will support this need; additionally, firms must ensure they are compensating these employees at market rates.

C. Contingent and Temporary Workers 1. Trends in Contingent and Temporary Employment. A contingent worker is a person who works for an organization on something other than a permanent or full- time basis. Independent contractors, on-call workers, temporary employees (usually hired through outside agencies), and contract or leased employees are categories of contingent workers. A separate category is part-time workers. In 2017, 20 percent of employed U.S. workers fit into one of these categories. In 2019, the percentage has risen to around 40 percent.

2. Managing Contingent and Temporary Workers. The keys to understanding how to use such workers involve careful planning and understanding their advantages and disadvantages within the organization. In addition, managers must assess the real cost of using contingent workers. Managers must make decisions about how to integrate contingent workers into the organization.

KEY TEACHING TIP Remind students that workforce diversity is the range of workers’ attitudes, values, beliefs, and behaviors that differ by gender, race, age, ethnicity, physical ability, and so on.

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Remind students that training is a vital responsibility of the firm, to create and maintain competitive advantage, enhance productivity, and increase job satisfaction among employees. Students should understand that performance appraisals, while often uncomfortable, are a necessary part of the evaluation process and work to ensure good communication and performance by employees by providing feedback to them. Remind students that temporary and contingent workers are valuable assets to the organization.

QUICK QUESTIONS

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How can an organization benefit from welcoming a diverse workforce?

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How do knowledge workers add value to an organization?

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What are some advantages and disadvantages of hiring contingent workers?

HOMEWORK Search for three companies that are considered great places to work.

Now might be a good time to assign Application Exercise 10-9 from the end-of-chapter materials as homework as it asks students to review compensation, benefits, and perks at various companies.

At-Home Completion Time: 1 hour

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Learning Objective 10-7: Explain why workers organize into labor unions and describe the collective bargaining process.

Dealing with Organized Labor A labor union is a group of individuals working together to achieve shared job-related goals, such as higher pay, shorter working hours, more job security, better benefits, or refers to the process of dealing with improved working conditions. Labor relations employees who are represented by a union.

A. Unionism Today U.S. labor unions have experienced increasing difficulties in attracting new members.

In 2019, only 10.31 percent of the U.S. labor force is represented by a labor union.

The Future of Unions. The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), as well as independent major unions such as the Teamsters and the National Education Association (NEA), still play a major role in U.S. business. Unions in the traditional strongholds of goods-producing industries continue to wield considerable power as well. But, even large and influential unions such as the United Auto Workers (UAW) were forced to make significant concessions during the large- scale restructuring of the U.S. auto industry in 20082009. Also, auto plant closures will reduce the number of auto jobs in the future.

Another issue affecting the future of unionism is the geographic shift in the U.S. economy. For the most part, unionism in the United States started in the North and Midwest regions and in cities such as Detroit, Pittsburgh, Cleveland, St. Louis, and Chicago. But over the past several decades, there has been a pronounced shift as businesses have moved their operations to the South and Southwest, areas that do not have a strong union heritage.

B.Collective Bargaining Collective bargaining is the process by which labor and management negotiate conditions of employment for union-represented workers and draft a labor contract.

1. Reaching Agreement on Contract Terms. By law, union leaders and management representatives must negotiate “in good faith.” Each party will have its starting point on an issue, but also its zone in which it can compromise while meeting that side’s needs. If an agreement cannot be reached, the willingness of each side to use tactics such as strikes, or mediation or arbitration come into play.

2. Contract Issues. The contract can address any number of issues, including control over hiring policies and work assignments, working hours, overtime policies, rest period arrangements, differential pay plays for shift employees, and grievance procedures. Some of the issues that are typically most important to union negotiators are: a. Compensation. A cost-of-living adjustment (COLA) is one of the most

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common tools for securing wage increases. Wage reopener clauses provide for renegotiating wage rates at preset times during the duration of the contract. b. Benefits. Typical employee benefit issues include the cost of insurance, retirement, paid holidays, and working conditions. c. Job Security. In many cases, demands for job security include the promise that a company will not move to another location and that, if the workforce is reduced, seniority will be used to determine which workers lose their jobs.

3. When Bargaining Fails. An impasse occurs when, after a series of bargaining sessions, management and labor have failed to agree on a new contract or a contract to replace an agreement that is about to expire. Each side has tactics at its disposal once an impasse is reached. a. Union Tactics. When their demands are not met, unions may bring a variety of tactics to the bargaining table. Historically, one of the most common tactics has been a strike. A strike occurs when employees walk off the job and refuse to work. Beginning in the 1990s, the number of strikes per year has declined dramatically. From an average of 281 strikes per year from 1960 to 1980, the average dropped to 15 per year between 2010 and 2019.

Other union tactics include picketing, in which workers march at the entrance to the firm with signs explaining their reasons for striking; boycotts, in which union members agree not to buy products of a targeted employer; and a work slowdown, in which workers perform their jobs at a much slower pace than normal.

b. Management Tactics. Lockouts occur when employers deny employees access to the workplace. A firm can also hire temporary or permanent replacements called strikebreakers. In some cases, an employer can obtain legal injunctions that either prohibit workers from striking or prohibit a union from interfering with its efforts to use replacement workers.

4. Mediation and Arbitration. In mediation, a neutral third-party offers advice and suggestions in settling a labor-management dispute but cannot impose a settlement; in arbitration, the neutral third party dictates a settlement between the two sides, which have agreed to submit to outside judgment. Compulsory arbitration is used to settle disputes between the government and public employees.

KEY TEACHING TIPS •

Remind students that the official term describing the process of dealing with employees represented by a labor union is labor relations.

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• Remind students that collective bargaining is much like the negotiation process.

When involved with collective bargaining, both labor and management present demands and then focus on identifying the bargaining zone.

•

Be sure students understand that a contract involves many more topics than simply

•

Students often confuse mediation and arbitration. Mediation involves a third party who makes recommendations to solve a dispute; arbitration involves a third party who makes a legally binding decision to solve a dispute.

pay scales. Benefits and job security frequently are very important topics in a negotiation.

QUICK QUESTIONS • In most sectors, unions are in a weakened position compared with many decades ago. How has this affected the way in which labor works with management?

• •

What issues are typically most important to union negotiators when collective bargaining with management?

When bargaining fails between labor and management, what are some union tactics that can be brought to the bargaining table? Management tactics?

HOMEWORK Business Plan Now is a good time to assign Part 3 of the business plan project. In this section, students think about their employees, the jobs they will be performing, and the ways in which they can lead and motivate them, as well as train them.

At-Home Completion Time: 3 to 5 hours

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Writing a Job Description Activity Overview: This activity asks students to write a job description for an instructor and for a student.

Time Limit: 45 minutes What to Do: 1. Review what is included in a job description, then ask students to think about what variables should be included in their instructor’s job description and what should be included in a student’s job description, if one were to exist, making individual notes along the way. (10 minutes) 2. Split the class into small groups, asking members of each group to share what they came up with in Step 1. (10 minutes) 3. Ask each group to further discuss what should be included in their instructor’s job description and in a student’s job description, considering any other factors that might come to mind that have not already been discussed. Write a final job description for both instructor and student. (10 minutes) 4. Reassemble the class and discuss each group’s suggestions. (15 minutes) Don’t Forget: There are many roles that instructors play in a college or university other than what students see in the classroom.

Wrap-Up: Review the purpose of a job description, highlighting some of the major elements included in most college or university instructors’ job descriptions.

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In-Class Activity 2: Up for Debate: Performing Appraisals, Laying It On the Line Activity Overview: This activity asks students to consider the steps involved in determining whether to fire someone.

Time Limit: 30 minutes What to Do: 1. Divide the class into three-member groups and ask them to read the Entrepreneurship and New Ventures feature in the textbook. (10 minutes) 2. Ask groups to consider the points Dan Yoo describes in the case. Do you think these points make sense? Do they make sense for employees? Do they make sense for employers? (10 minutes) 3. Regroup the class as a whole and discuss each group’s input, then ask the class to come up with a final decision. (10 minutes) Don’t Forget: When a person has to be let go from a position, it is not personal. It is based on performance data.

Wrap-Up: Wrap up the activity by briefly discussing what students think the future of performance appraisals will look like. Things are changing in this area and the students will be in the middle of these changes.

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In-Class Activity 3: Small-Group Discussion: What Motivates Employees?

Activity Overview: This activity asks students to consider what companywide incentives might motivate workers who work in specific jobs.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and assign each group to one of the jobs below: (5 minutes) • Cook at a fast food restaurant • Waitress at a local diner • Groundskeeper • Computer technician at a small firm • Janitor • College professor 2.

Ask each group to brainstorm what incentives would be especially motivating for a worker performing the assigned job; remind students to consider both tangible and intangible incentives. (10 minutes) Reassemble the class and ask each group to share their results, allowing all students to share input. (15 minutes)

3.

Don’t Forget: This activity can be completed using any type of job as the basis for discussion. Remind students to consider “reasonable” costs to the company as they brainstorm for ideas.

Wrap-Up: Bring the activity to a close by recapping each group’s conclusion, reminding students that tangible incentives, such as various benefits packages, can be motivating but that intangible incentives, such as employee recognition programs, can also be motivating.

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BUSINESS PLAN PROJECT PART 3 PEOPLE IN ORGANIZATIONS Assignment Overview: This part of the business plan asks students to think about their employees, the jobs they will be performing, and the ways in which they can lead and motivate them. Students take the different job titles they created in the organizational chart in Part 2 and give thought to the skills that employees will need to bring to the job before they begin. They also consider the training they’ll need to provide employees after they are hired, as well as how they’ll compensate their employees. Part 3 of the business plan also asks students to consider how they’ll lead employees and keep them happy and motivated.

Files to Provide Students: For this part of the project, students will be asked to complete Part 3: People in Organizations. If students have already started working on the business plan project, they should continue using the student template they worked on in Parts 1 and 2.

Part 3 Estimated At-Home Completion Time: If done well, this section will require a minimum of 3 to 5 hours. As noted previously, because some companies will have more job descriptions and job specifications than others, you may want to limit the number you ask students to complete.

Homework Deliverable from Students: The length of this section should be somewhat consistent, although some variance can be expected depending on the size and complexity of the business. You should expect at least 3 to 5 pages in this section.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 10-1.What are some of the strategic considerations in human resource management?

Answers will vary but should include discussion of human capital, talent management, job analysis, forecasting and matching supply and demand, employee information systems, and matching employee skills with company needs. (Learning Objective 10-1 – AACSB – application of knowledge) 10-2. Why is the formal training of workers so important to most employers? Why don’t employers simply let people learn about their jobs as they perform them?

Employers need to ensure that workers are performing their jobs correctly and efficiently in order to prevent costly errors. Also, in order to be socially responsible to employees, suppliers, shareholders, and customers, firms must train their workers in the latest technology, the most efficient production processes, and the nature of the industry.

Letting people learn solely on the job increases risks and decreases efficiencies for a longer period of time than if training is provided. (Learning Objective 10-5 – AACSB – application of knowledge) 10-3. What benefits do firms typically use to attract and keep productive workers? What are some of the less traditional benefits that firms are using?

Individual incentives may include bonuses, merit pay, or pay-for-performance.

Companywide incentives include profit-sharing plans, gain-sharing plans, and pay-forknowledge plans. Mandatory benefits include social security and workers’ compensation insurance, while optional benefits include health and life insurance, stock purchase plans, retirement programs, and family-friendly benefits, such as flextime, subsidized cafeterias, subsidized or free childcare, sick days, vacations, employee recognition awards, etc. (Learning Objective 10-4 – AACSB – application of knowledge) 10-4. What is a knowledge worker? What strategies do companies use to retain knowledge workers?

Knowledge workers are employees who add value to organizations because of what they know. To retain these workers, companies need to compensate them sufficiently. This may include financial compensation at market rates as well as training opportunities to help them maintain and update their knowledge and skills. (Learning Objective 10-6 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 10-5. What are some significant legal issues with regard to recruiting, hiring, and managing

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employees? Answers will vary but should include discussion of equal employment opportunity, civil rights, discrimination, privacy, family medical leave, unionization, safety, harassment, and compensation. (Learning Objective 10-2 – AACSB – application of knowledge)

10-6. What are your views and feelings about collective bargaining? What reasons can you give for your opinions? Student answers will depend on personal opinion but should be supported by discussion about wage and benefit protection, accountability, conflict mediation, dispute resolution, and workforce representation. Students may also identify the burden of union dues, the potential conflict between union interests and personal interests, political influence and conflicts, relations between management and employees, seniority issues. (Learning Objective 10-7 – AACSB – reflective thinking)

10-7. What are the advantages and challenges of recruiting a diverse workforce?

Answers will vary, but many students will recognize that a diverse workforce provides more creativity, a variety of opinions and decision-making styles, and opportunities for creating a competitive advantage. The challenges are those diverse opinions may create communication problems possibly creating conflict in the organization. (Learning Objective 10-6 – AACSB – analytical thinking) 10-8. How much will benefit considerations affect your choice of an employer after graduation? What types of benefits would be most and least appealing to you and why? Student answers will vary, as age, experience, and life-stage (single, married, with or without children, living arrangements, etc.) will influence their decisions.

Students should be able to express that wages and salaries are only a portion of the benefits they should consider. Students should include discussion of benefits including health, life, and disability insurance; vacation time or paid time off; sick leave; payroll deductions to buy company stock; employee counseling services, childcare.

Retirement plans, and whether the company contributes to them, should be factored in as well. (Learning Objective 10-4 – AACSB – reflective thinking) APPLICATION EXERCISES 10-9. Go online and search for at least three companies that are considered great places to work. Describe the compensation, benefits, and perks at each of these companies. Of the three, which is most appealing to you and why? Which is least appealing and why?

Answers will vary but students will probably focus on companies that pay better, provide better benefits, and flexible working conditions. (Learning Objective 10-4 – AACSB – application of knowledge)

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10-10. Interview someone familiar with a company’s current hiring processes. Briefly outline how the company recruits employees to apply for jobs, the steps in the selection process, and the orientation program for new employees. Relate your notes back to the topics and learning objectives in this chapter.

Answers will vary based on the company and the position. Most HR professionals will reveal how certain recruitment tools work better than others, how certain jobs require pre-employment testing, and how the value placed on the interview process may vary depending on the job or other factors. Students may also include mention of a realistic job preview. (Learning Objective 10-3 – AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 10-11 TO 10-15 (Learning Objectives 10-2, 10-3, and 10-4 – AACSB – interpersonal relations and teamwork, application of knowledge, analytical thinking) Answers will be determined by the type of business (brick and mortar, e-commerce, etc.), the numbers and types of employees needed, the competition, prevailing wages, projected company finances, normal industry practices, etc.

TEAM EXERCISE: THE DOWNSIDE OF DOWNSIZING 10-16 TO 10-20 (Learning Objectives 10-2 and 10-6 – AACSB – ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking) This should be an interesting discussion because students will bring their own perspectives on race, gender, and job performance to this exercise. Students should focus on job performance and contributions to the company when making their decisions but the discussion will be wide ranging covering the legal issues, diversity, perception, etc.

10-16. Students must keep in mind all the non-discrimination laws, including Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act, and others.

10-17. Answers will vary, but students must address the legal and ethical issues they identified in answering the previous question.

10-18. This is the time for students to compare notes, and again ensure that both legal and ethical issues are addressed.

10-19. The students must come to an agreement on which single employee will be laid off.

The decision must be based on job performance and contributions to the company.

10-20. The Entrepreneurship and New Ventures feature provides some insight into how to communicate the decision to the employee who is to be laid off. The group must also determine how to communicate the decision to the remaining employees, as the firm does not want to lose them, or for them to lose faith in the company and its management.

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EXERCISING YOUR ETHICS: OPERATING TACTICALLY (Learning Objective 10-7 – AACSB – ethical understanding and reasoning, reflective thinking) 10-21. What are the ethical issues in this situation?

The key ethical issue is dishonesty—your manager is encouraging you to deliberately mislead employees and to actively interfere with organizing activities. Furthermore, terminating a key organizer is blatant intimidation.

10-22. What are the basic arguments for and against extreme measures to fight unionization efforts?

Basic arguments for extreme measures to fight unionization include the need to limit spending on human resources. Basic arguments against extreme measures include the questionable ethics of this approach and the negative impact on morale, which could negatively affect efficiency and effectiveness.

10-23. What do you think most managers would do in this situation? What would you do?

Answers will vary, but older, more experienced managers may be more likely to stand up to their bosses, refusing to mislead their employees.

CASES: A UNIQUE PARTNERSHIP DRIVES WEGMANS (Learning Objective 10-3, 10-4, 10-5 – AACSB – reflective thinking, analytical thinking)

When discussing this case, students should focus on the pros and cons of internal and external recruiting, recognizing that internal recruitment builds loyalty and often leads to lower employee turnover but recognizing that not every position can be filled from within. Plus, external recruits can bring a different and valuable perspective. When discussing the training program, students need to focus on the skills that the managers will ultimately need. The employee appraisal question should generate much discussion with many students basing their answers on how effective they think their company’s annual appraisal is.

10-24. If you were an HR executive at Wegmans, would you focus more on internal recruiting or on external recruiting? Would your strategy for higher-level positions differ from your strategy for lower-level positions? How would current economic conditions influence your strategy?

Both kinds of recruiting are important for Wegmans. Internal recruiting should be used to fill openings by promoting from within. External recruiting should be used to fill

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entry-level openings and openings for which no one is qualified and available internally. Economic conditions will influence the strategy because they determine the number of candidates available and the ease of finding those candidates. In a strong and growing economy, employees will be more difficult to find; in a struggling economy, they will be easier to find.

10-25. As an HR executive at Wegmans, you need to hire a group of new employees as part of your management-trainee program—people who will be put on a track leading, ultimately, to positions as store managers. Briefly outline your program for developing these employees.

Students will need to create a training and development plan, focused on moving people through various areas of the company and developing their management skills. Indicate what kinds of training are necessary and what methods will be appropriate: role-playing, lectures, on-the-job and vestibule training, and more.

10-26. If you were an employee at Wegmans, how would you expect your annual performance appraisal to be conducted? Given the company’s customer-relations strategy, which appraisal methods do you think would be most appropriate?

Common appraisal methods include objective measures of performance, such as sales volume, and judgmental methods, including ranking and rating techniques. Each has flaws in a retail environment such as Wegmans. Employees should expect feedback about their performance. Methods evaluating someone’s skill in developing positive customer relationships will be important. 360-degree feedback may be helpful, as it can provide useful feedback from a variety of sources.

FINDING THE WORK/LIFE BALANCE (Learning Objectives 10-3, 10-4, 10-6 – AACSB – analytical thinking, reflective thinking) Students’ perspective will frame their answer to this question based on their current experience in the workforce, their experiences with wages and salaries, and other benefits described. Students at different life stages will find that different benefits appeal to them. One possible trade-off is the location of the company, though Cary is near the Research Triangle area in North Carolina.

Another trade-off is that the company is privately held, meaning that publicly traded stock options are unavailable as an incentive. Policies and benefits that support the work/life balance include many of the benefits offered by SAS Institute: a relatively short work week, childcare and bring-your-child- to-work occasionally, onsite pharmacies, farmer’s market, and health clinic. All of these add convenience and make life easier for the employees. Easier usually also means less stress, which is always a positive. Challenges a manager faces in this environment still must revolve around job performance of the employees and contributions each employee makes to the company.

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The lack of turnover actually makes it even more important to evaluate employees as accurately as practical on these criteria.

10-27. After reading about SAS Institute, what would appeal to you most about working there?

Students are likely to focus on the flexibility offered by the variety of benefits offered by SAS Institute. Answers will vary about which benefits most appeal to them, as stage of life will influence their choices.

10-28. What trade-offs is SAS making to offer the benefits and culture described?

There are costs associated with providing such a breadth of benefits. The company may need to determine if enough people to justify the costs utilize each benefit. But the costs of training new employees must be factored in, as well. The company should also evaluate the productivity of its employees and which benefits favorably impact it.

10-29. What types of policies and benefits do you believe are most supportive of work/life balance?

Answers will vary, but students are likely to approve of the approach SAS Institute has taken. Pay is good, a variety of benefits are available, and the challenges, atmosphere, and bosses are great.

10-30. What challenges might you face as a manager working in this environment? How could you overcome these challenges?

Answers will vary depending on students’ employment experience. However, they should note that the flexible hours and great atmosphere do not encourage a strict disciplinary approach to management.

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PART 3 INTEGRATIVE LEARNING PORTFOLIO PEOPLE IN ORGANIZATIONS CRAFTING A BUSINESS PLAN CORPORATE CULTURE P3-1. What do you see as the “corporate culture” of your business? What types of employee behaviors, such as organizational citizenship, will you expect? Hint: Will your business demand a casual environment or a more professional environment? Refer to the discussion on employee behavior in Chapter 8 for information on organizational citizenship and other employee behaviors.

LEADERSHIP PHILOSOPHY P3-2. What is your philosophy on leadership? How will you manage your employees day-to-day?

Hint: Refer to the discussion on leadership in Chapter 9 to help you formulate your thoughts.

JOB DESCRIPTIONS P3-3. Looking back at your organizational chart in Part 2, briefly create a job description for each team member. Hint: As you learned in this chapter, a job description lists the duties and responsibilities of a job, its working conditions, and the tools, materials, equipment, and information used to perform it. Imagine your business on a typical day. Who is working and what are each person’s responsibilities?

JOB SPECIFICATIONS P3-4. Next, create a job specification for each job, listing the skills, other credentials, and qualifications needed to perform the job effectively. Hint: As you write your job specifications, consider what you would write if you were composing an ad for the position. What would the new employee need to bring to the job in order to qualify for the position?

Insert Job Title #1: Insert Needed Skills/Credentials/Qualification for Job: Insert Job Title #2: Insert Needed Skills/Credentials/Qualification for Job:

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Insert Job Title #3: Insert Needed Skills/Credentials/Qualification for Job: TRAINING EMPLOYEES P3-5. What sort of training, if any, will your employees need once they are hired? How will you provide this training?

Hint: Refer to the discussion of training in this chapter. Will you offer your employees onthe-job training? Off-the-job training? Vestibule training?

COMPENSATION P3-6. A major factor in retaining skilled workers is a company’s compensation system—the total package of rewards that it offers employees in return for their labor. Part of this compensation system includes wages or salaries. What wages or salaries will you offer for each job? Why did you decide on that pay rate? Hint: Refer to the discussion in this chapter for more information on forms of compensation. You may also want to check out sites like www.salary.com, which includes a salary wizard you can use to determine how much people with different job titles are making in your area and across the United States.

INCENTIVES P3-7. As you learned in this chapter, incentive programs are special programs designed to motivate high performance. What incentives will you use to motivate your workforce? Hint: Be creative and look beyond a simple answer, such as giving pay increases. Ask yourself: Who are my employees and what is important to them? Refer to the discussion in this chapter for more information on the types of incentives you may want to consider.

CASE PART 3: FORD MOTOR COMPANY 1929-1947 P3-8. Do you think that Ford’s “speed up” policy was unique? Do you think that kind of policy still exists today? Do you think it is effective? If so, why? If not, what is a better alternative?

Students should include a discussion of employee motivating factors, including both monetary compensation and intangible benefits. They should mention components of different theories and philosophies, like Frederick Taylor’s Classical Theory, Herzberg’s Two-Factor Theory, the X and Y Theory, Hawthorne effect, and other modern motivational theories. Their opinions should be backed up with factual evidence from the text.

(Learning Objective 8-4 – AACSB – analytical thinking)

P3-9. What are the differences between unions today and the unions of the 1920s and 1930s? How are they the same? What is your personal opinion on unionization?

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Answers should include mention of the violence and coercion of the unions of the 1920s and 1930s and should note the unions’ political and social power. Unionism steadily declined until the recession of 2008, when membership began to rise again. However, even the powerful auto unions had to make concessions to avoid plant closures and do As the economy shifts from not wield the same power they did decades ago. manufacturing to service/knowledge base along with the rise of the gig economy, unions Similarities in unions of the past and today include are becoming less relevant. collective bargaining (arguably the most important current function of a union) and protection of workers’ rights. (Learning Objective 10-7 – AACSB – analytical thinking) P3-10. Do you think Henry Ford’s leadership style was the driving force behind his success?

If so, what traits contributed to his success? If not, what do you think was the driving force behind his success?

Students will need to identify Ford’s authoritarian leadership style and note the characteristics that both served and hampered Ford’s success. They may discuss the differences in appropriate and successful leadership styles between Ford’s time and now.

Students should demonstrate an understanding of the components of various leadership styles. (Learning Objectives 9-1 and 9-2 – AACSB – analytical thinking)

P3-11. How do you think compensation and benefits have changed over the past 100 years?

The main difference that students should point to is peripheral benefits beyond monetary compensation. They should be able to discuss the idea of a living wage and the value of additional benefits. Students may note that unions were instrumental in bringing about changes to compensation and benefits, like retirement plans and health benefits. They should also be able to identify some political forces like wage freezes that made compensation packages more robust and even commonplace today.

Students will need to identify the most current benefits like work-from-home agreements, on-site perks, and flex time. (Learning Objective 10-4 – AACSB – application of knowledge) P3-12. How do you think employee motivation has changed over the past 100 years, and why? Contemporary motivational theory includes expectancy and equity theories.

The major change that students should be able to articulate is a shift away from classical theory to other motivating theories and the continuing growth of nontraditional benefits and They may discuss job enrichment, participative management, how performance reviews have evolved, and other changes. (Learning Objective 8–4 AACSB – analytical thinking) recognition of the social-emotional needs of employees.

P3-13. How would you describe Henry Ford’s leadership style, and would that same style work today? Do you know of a manager or leader who shares some of those same traits, How about and if so, how effective is that leader or manager, in your opinion? objectively - how is that manager’s or leader’s organization or department performing?

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Though answers may vary, students will need to point to Ford’s authoritarian style and his top-down approach to leadership. They should be able to link their opinions to specific traits outlined in the text. Students should also be able to articulate objective measures of a manger or leaders’ performance. (Learning Objective 9-4 – AACSB – analytical thinking) P3-14. Do you think workers today are happier than they were 100 years ago? Why or why not? Opinions in this answer should draw on the importance of individual employee differences, the rise of the recognition of emotional intelligence, personality traits, and psychological contracts. Their answers should focus on job satisfaction and (Learning Objective 8-2 and 8-3 – AACSB – analytical measurements thereof. thinking) FINDING YOUR PATH Careers in Business Part 3 of the book focused on two general areas, motivation and leadership and the specific field of human resource management. When asked what one wants in a job, a person should be honest and make sure the answer has substance and conveys something meaningful about herself and her interests. Making Yourself Employable Throughout your career, you will be working with people so should develop your own human relations skills (interpersonal skills). A. Developing Your Human Relations Skills

To start developing human relations skills, first honestly assess your current skill level. Do you get along with others? Do you listen to others? Are you willing to take criticism? Identify someone you trust and ask the same questions about yourself.

B. Human Resource Management HRM is a growing field. If you choose to enter it, keep in mind that you will be a manager who helps your organization attract, develop, and retain talent. It may be challenging in difficult times. Understand the details of what is involved in HRM, the legal context of employment, current and emerging trends involving new approaches to compensation, alternative work arrangement, performance management, and labor relations.

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Chapter 11: Marketing Processes and Consumer Behavior Chapter Overview Many students think that marketing is merely sales or advertising. Actually, sales and advertising are just a small part of the overall marketing process. Think of a product that you buy often. You might not realize that everything about that product—from the time it is created, produced, packaged, and shipped to you—involves various facets of marketing. This chapter explains the concept of marketing and discusses the five forces that constitute the external marketing environment. It also explains the purpose of a marketing plan, identifies the four components of the marketing mix, and discusses the necessity of identifying market segments. As the chapter unfolds, many variables surrounding both the consumer and organizational markets are discussed. A focus is provided on distinguishing features between products and services and the importance of branding and packaging. The chapter also discusses the consumer buying process, organizational markets, and key considerations in the new product development process. Finally, it looks at the challenges that arise in adopting an international marketing mix and the ways in which small businesses can benefit from an understanding of the marketing mix.

Learning Objectives 11-1. Explain the concept of marketing and identify the five forces that constitute the external marketing environment.

11-2. Explain the purpose of a marketing plan and identify its main components.

11-3. Explain market segmentation and how it is used in target marketing.

11-4. Discuss the purpose of marketing research and compare the four marketing research methods.

11-5. Describe the consumer buying process and the key factors that influence that process.

11-6. Discuss the four categories of organizational markets and the characteristics of business-to-business (B2B) buying behavior.

11-7. Discuss the marketing mix as it applies to small business.

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

Description Students consider various elements 1. Icebreaker: Assessing the Marketing from the marketing environment that Environment affect specific industries.

Students consider all the valuable information they give to others about themselves.

Students are divided into teams to and 3. Up for Debate: Social Networking debate the advantages social of using disadvantages and Job Seeking networking to find jobs. Students consider what a foreign visitor 4. Small-Group Discussion: Never Give might notice about the American a German a Yellow Rose marketplace.

2. Small-Group Discussion: Data Mining

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Time Limit 30 min.

20 min.

30 min.

30 min.

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CHAPTER OUTLINE Learning Objective 11-1: Explain the concept of marketing and identify the five forces that constitute the external marketing environment.

What Is Marketing? as “activities, set of institutions, and defines marketing The AmericanaMarketing Association processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.”

A. Delivering Value Consumers buy products that offer the best value when it comes to meeting their needs and wants.

1. Value and Benefits. Value compares a product’s benefits with its costs; benefits include the product’s functions and emotional satisfaction associated with owning, experiencing, or possessing it. But, costs, including the sales price, the buyer’s time, and even the emotional costs of making a purchase decision factor into determining value. A satisfied customer perceives the benefits derived from the purchase to be greater than its costs.

Value = Benefits/Costs.

2. Value and Utility. Products provide utility, which is the product’s ability to satisfy a person’s want or need. Marketing strives to provide four kinds of utility—form utility (designing products with features customers want), time utility (providing products when customers want them), place utility (providing products where customers want them), and possession utility (providing terms of sale that result in transferring product ownership to customers).

B. Goods, Services, and Ideas Consumer goods are tangible products that consumers purchase for personal use; firms that sell these goods are engaged in consumer marketing. Industrial goods are products that are purchased by companies to be used in further production of other products; firms that sell products to other businesses are engaged in industrial marketing. Services are products with intangible (nonphysical) features, such as professional advice, timely information for decisions, or vacation packaging. Service marketing is the application of marketing for services.

C. Relationship Marketing and Customer Relationship Management Relationship marketingfocuses on building lasting relationships between customers and suppliers. Customer relationship management (CRM) is an organized method that a firm uses to build better information connections with clients, to strengthen relationships.

Data warehousing is the compiling and storage of customers’ data; data mining allows for the sifting, sorting, and searching for previously undiscovered clues about what customers

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look at and react to and how they might be influenced. This leads to clearer pictures of customer preferences, and allows a business to build closer relationships.

D. The Marketing Environment Marketing decisions are affected by various influences in the external environment, everything outside an organization’s boundaries that might affect it.

1. Political and Legal Environment. The political-legal environment is the relationship between business and government, usually in the form of government regulation of business. Political activities may result in favorable laws and regulations that may open new business opportunities.

2. Sociocultural Environment. Elements from this segment of the environment include the customs, mores, values, and demographic characteristics of the society in which an organization functions.

3. Technological Environment. New products make existing products obsolete, and many products change our values and lifestyles. Lifestyle changes often stimulate new products not directly related to the new technologies themselves.

4. Economic Environment. Economic conditions affect many facets of marketing, including consumer spending patterns and marketers’ plans for product offerings, pricing, and promotional strategies. Interest rates and inflation concern marketers, as does the general business cycle.

5. Competitive Environment. Marketers must convince buyers that they should purchase one company’s products rather than another’s. Marketers must understand the types of competition they face. Substitute products may not look alike or they may seem very different from one another, but they can fulfill the same need; brand competition occurs between similar products and is based on buyers’ perceptions of the benefits of products offered by particular companies; international competition matches domestic products against foreign products.

KEY TEACHING TIPS • Students often forget that marketing is more than just advertising and sales. It is a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships.

• Make sure that students grasp the concept of utility—the ability of a product to satisfy a person’s want or need—as it is a difficult concept for some students.

• Consumer marketing involves the sale of consumer goods and services to consumers; industrial marketing involves the sale of industrial goods and services to other companies.

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• Relationship marketing emphasizes building lasting relationships with customers and suppliers. What do organizations hope to gain from relationship marketing?

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Make sure students understand the distinction between data warehousing and data mining.

Reinforce that every marketer is faced with forces from the external environment, including the political-legal, sociocultural, technological, economic, and competitive environments.

QUICK QUESTIONS •

How does a marketer create form utility, time utility, place utility, and possession utility?

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What are some examples of consumer goods? What about industrial goods?

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Relationship marketing emphasizes building lasting relationships with customers and suppliers. What do organizations hope to gain from relationship marketing?

Make sure students understand the distinction between data warehousing and data mining.

What are some common political-legal factors that affect marketing?

• • • • • • •

What are some common sociocultural factors that affect marketing?

What are some common technological factors that affect marketing?

What are some common economic factors that affect marketing?

What are some examples of competing products?

Why do marketers attempt to differentiate their products?

Use In-Class Activity 1: Icebreaker: Assessing the Marketing Environment Time Limit: 30 minutes Use In-Class Activity 2: Small-Group Discussion: Data Mining Time Limit: 20 minutes

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Learning Objective 11-2: Explain the purpose of a marketing plan and identify its main components.

The plan for focusing marketing efforts on consumers’ needs is a marketing detailed strategy and wants. The plan identifies the marketing objectives, stating what marketing will accomplish in the future. It contains a strategy that identifies the specific activities and resources that will be used to meet the needs and desires of customers in the firm’s chosen target markets, so as to accomplish the marketing objectives.

Every well-developed plan should begin with objectives or goals, setting the stage for everything that follows. Marketing objectives, the goals the marketing plan intends to accomplish, are the foundation that guides all of the detailed activities in the plan. The marketing objectives themselves exist solely to support the company’s overall business mission.

A. Marketing Strategy: Planning the Marketing Mix

Marketing strategy identifies the planned marketing programs, all the marketing activities that a business will use to achieve its marketing goals, and when those activities will occur. A company’s marketing managers are responsible for planning and implementing all the marketing activities that result in the transfer of goods or services to its customers. Marketing strategy focuses on the needs and wants of customers in the chosen target markets. It also includes four basic components, known as the marketing mix. This mix consists of the “Four Ps” of marketing: product, pricing, place, and promotion.

1. Product. The product is a good, service, or idea designed to fill a customer’s need or want. Producers often promote particular features of products to distinguish them in the marketplace. a. Product Differentiation. Product differentiation is the creation of a feature or image that makes a product differ enough from existing competitive products to attract customers.

2. Pricing. Pricing, selecting the best price at which to sell a product, is often a balancing act. Pricing must be set to support direct and indirect costs, yet prices cannot be so high that consumers turn to lower-priced competing products. Low prices, for example, generally lead to larger sales volumes but lower profits on each unit. High prices usually limit the number of units being sold but increase profits per unit. High prices may also attract customers by implying that a product is of high quality.

3. Place (Distribution). Place refers to the where and how customers get access to the products they buy. Distribution activities are concerned with getting the product from the producer to the consumer. The place can be a retail store, direct delivery to the customer, or on a digital device. Marketers use channels to distribute products. Manufacturers can sell to other companies that then sell to retailers that sell to the final consumers. Others sell directly to retailers, and others sell directly to the final consumers.

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4. Promotion. Promotion refers to techniques for communicating information about products. Promotion includes a combination of advertising, personal selling, sales promotion, and publicity/public relations and direct or interactive marketing. a. Advertising is any form of paid nonpersonal communication used by an identified sponsor to persuade or inform potential buyers about a product. b. Personal selling is person-to-person sales, frequently used in marketing industrial goods and services. c. Sales promotion involves one-time direct inducements to buyers. These inducements may include premiums (free gifts), coupons, or package inserts, meant to tempt consumers to buy the products. These are “deals” of limited duration. d. Public relations includes all communication efforts directed at building goodwill.

5. Blending It All Together: Integrated marketing strategy ensures that the Four Ps blend together so that they are compatible with one another and with the company’s nonmarketing activities as well.

KEY TEACHING TIPS • Reinforce that although price may be the easiest of the Four Ps to change, a price that is too high fails to attract buyers, and a price that is too low yields little profit.

• • •

•

Make sure students understand that place is concerned with all of the activities involved in getting products from producers to consumers.

Reinforce that promotion refers to techniques—advertising, personal selling, sales promotions, publicity, and PR—for communicating information about products.

Remind students that the marketing mix consists of product, price, promotion, and place.

It is affected by variables such as consumer characteristics, consumer needs, emerging marketing, and competition.

Stress that the elements of the marketing mix—the Four Ps—are treated similarly by small businesses and large businesses; only the implementation may change.

QUICK QUESTIONS •

What are the Four Ps?

•

What is an integrated marketing strategy and why is it important?

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HOMEWORK CRM and the Marketing Mix Now is a good time to assign Application Exercise 11-9 from the end-of-chapter materials as homework. This assignment is designed to get students thinking about how to use the different elements of the marketing mix to create an ongoing relationship with customers.

At-Home Completion Time: 30 minutes

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Learning Objective 11-3: Explain market segmentation and how it is used in target marketing.

Marketing Strategy: Target Marketing and Market Segmentation Target markets are groups of people or organizations on which a firm’s marketing efforts are divides a market into categories of customer types or “segments,” with similar wants and needs that focused.

Market segmentation can be expected to show interest in the same products. The process of fixing, adapting, and communicating the nature of the product itself is product positioning. Identifying Market Segments

Members of a market segment must share common traits that will affect their purchasing decisions. The most important variables are: A. Geographic Segmentation Consumers in certain geographic regions exhibit characteristics and buying patterns that are typical of those regions. Geographic variables are the geographical units, from countries to neighborhoods that may be considered in a segmentation strategy.

B. Demographic Segmentation Demographic variables describe populations, including such traits as age, income, gender, ethnic background, marital status, race, religion, and social class. A segment can focus on a single trait, or on a combination of traits.

C. Geo-Demographic Segmentation Geo-demographic segmentation is a combination strategy. Geo-demographic variables are a combination of geographic and demographic traits. Looking at people through this combination of traits is becoming the most common segmentation tool. Segmentation is more effective because the greater number of variables defines the market more precisely.

D. Psychographic Segmentation Psychographic variables include lifestyles, personalities, interests, and attitudes as these impact people’s decision processes.

E. Behavioral Segmentation Behavioral segmentation uses behavioral variables to market items, including such categories as usage rate (light, moderate, heavy user), situation (holiday, seasonal) or specific purpose (very specific features of the product).

KEY TEACHING TIP The variables that can be used to divide a market into segments include geographic segmentation, demographic segmentation, geo-demographic segmentation, psychographic segmentation, and behavioral segmentation. Frequently, target markets are identified based on some combination of variables.

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QUICK QUESTIONS •

What demographic variables would affect your purchase of a cell phone?

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Would other variables affect your purchase of a cell phone, such as behavioral or psychographic variables?

How can psychographic variables—unlike geographic and demographic variables—be changed by marketing efforts?

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Learning Objective 11-4: Discuss the purpose of marketing research and compare the four marketing research methods.

Marketing Research the study of what customers need and want and how best to meet those Marketing research, needs and wants, is a powerful tool for gaining decision-making information. Its role is to increase competitiveness by clarifying the interactions among a firm’s stakeholders, marketing variables, environmental factors, and marketing decisions.

A. The Research Process Market research can occur at almost any point in a product’s life cycle. Typically, however, it is used in developing new products or altering existing products.

1. Study the current situation. What is the need and what is being done to meet it?

2. Select a research method. In choosing from a wide range of methods, marketers must consider the effectiveness and costs of different options.

3. Collect data. Secondary data are already available from previous research. When secondary sources are unavailable or inadequate, researchers must obtain primary data, new data from newly performed research. Primary data is gathered for the specific purpose, while secondary data will have been gathered for other reasons, but can be applied to other studies.

4. Analyze the data. Data are of no use until organized into information.

5. Prepare a report. This report should sum up the study’s methodology and findings. It should also identify solutions and, where appropriate, make recommendations on a course of action.

B.Research Methods The success of a research study often depends on the method a research team uses. There are four basic methods of market research.

1. Observation. Observation involves watching and recording consumer behavior.

Information technology systems, including live camera feeds, electronic scanners and data files, and data storage of television viewing and website activity, allow marketers to observe consumer preferences rapidly and accurately.

2. Surveys. One way to get useful information is by performing surveys, a method of collecting data in which the researcher interacts with people to gather facts, attitudes, or opinions, either by mailing out or e-mailing questionnaires, by telephone calls, or by conducting face-to-face interviews. Most surveys now are conducted online.

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3. Focus Group. In a focus group, participants are gathered in one place, presented with an issue, and asked to discuss it. The researcher takes notes but provides only a minimal amount of structure. This technique allows researchers to explore issues too complex for questionnaires and can produce creative solutions. Experimentation.

Experimentation compares the responses of the same or similar people under different 4. circumstances or regarding different products, or product features.

HOMEWORK Market Research Now is a good time to assign Application Exercise 11-10 from the end-of-chapter materials as homework. This assignment is designed to get students thinking about applying market research techniques, as well as the Four Ps to marketing a product.

At-Home Completion Time: 45 minutes

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Learning Objective 11-5: Describe the consumer buying process and the key factors that influence that process.

Understanding Consumer Behavior Consumer behavior is the study of the decision process by which people buy and consume products.

A. Influences on Consumer Behavior Influences on consumer behavior can include psychological (motivations, perceptions, ability to learn, attitudes), personal (lifestyle, personality, economic status), social (family, opinion leaders, and reference groups such as friends, coworkers, and professional associates), and/or cultural (culture, subculture, social class—background, occupation, income) elements. When consumers exhibit brand loyalty, they regularly purchase products because they are satisfied with the product’s performance or benefits. The influence elements have minimal impact when brand loyalty is strong.

B. The Consumer Buying Process Various models have been constructed to help show how consumers decide to purchase products; marketers use this information to develop marketing plans. The consumer buying process includes five steps: 1. Problem/Need Recognition. The consumer recognizes a problem or a need.

2. Information Seeking. Consumers seek information from personal sources, marketing sources, public sources, and experiences. Depending on the complexity of the purchase, the search for information may not be extensive.

3. Evaluation of Alternatives. Consumers compare products before deciding which one(s) best meet their needs.

4. Purchase Decision. Ultimately, consumers make purchase decisions. Rational motives involve the logical evaluation of product attributes, such as cost, quality, and usefulness.

Emotional motives involve nonobjective factors and include sociability, imitation of others, and aesthetics.

5. Postpurchase Evaluation. Only satisfied customers will likely make repeat purchases.

KEY TEACHING TIP •

The consumer buying process consists of a series of steps taken by consumers when making purchases: (a) Problem/Need Recognition, (b) Information Seeking, (c) Evaluation of Alternatives, (d) Purchase Decision, and (e) Postpurchase Evaluation.

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QUICK QUESTIONS •

What are some examples of psychological influences and personal influences on consumers? What about social influences and cultural influences?

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What is the difference between rational motives and emotional motives when consumers make a purchase decision? Are emotional motives related to psychographics?

What factors might consumers consider when evaluating alternatives in the consumer buying process?

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Learning Objective 11-6: Discuss the four categories of organizational markets and the characteristics of business-tobusiness (B2B) buying behavior.

Marketing to organizations that buy goods Organizational Marketing and Buying Behaviors. and services used in creating and delivering consumer products or public services involves various kinds of markets and buying behaviors different from those in consumer markets.

A. Business Marketing Organizational markets fall into four categories: service companies, industrial, reseller, and government and institutional markets.

1. Services Market. The services companies market encompasses the many firms that provide services to the purchasing public.

2. Industrial Market. The industrial market includes businesses that buy goods that are either converted into other products or goods that are used up during production.

3. Reseller Market. The reseller market consists of marketing intermediaries, such as wholesalers and retailers that buy finished products and resell them.

4. Government and Institutional Market. In addition to federal and state governments, the institutional market consists of nongovernment organizations, such as hospitals, churches, charities, and museums, that also use supplies and equipment as well as legal, accounting, and transportation services.

B. B2B Buying Behavior Organizational buying behavior bears little resemblance to consumer buying practices.

Differences include the buyers’ purchasing skills and an emphasis on buyer-seller relationships.

1. Differences in Buyers. Industrial buyers purchase in large quantities, and are trained, professional, specialized, and expert, which is important given the amount of money at stake in industrial purchases.

2. Differences in the Buyer-Seller Relationship. Industrial buying situations often involve frequent, long-term buyer-seller relationships, emphasizing personal selling by trained representatives who understand the needs of each customer.

C. Social Media and Marketing Social networking as used by marketers today refers to communications that flow among people and organizations interacting through an online platform that facilitates building social relations among its users.

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1. Viral Marketing and Social Networking. Viral marketing is a form of marketing that relies on social networking and the Internet to spread information like a “virus” from person to person.

2. Web-Driven Revenue with Social Networking. Although many major consumer companies have their own Facebook pages, small businesses, too, use social media channels to increase revenues by networking with customers in target markets.

Viral marketing and social networking can lead to consumer awareness faster and with wider reach than traditional media messages, and at a lower cost.

D. The International Marketing Mix Foreign consumers differ from domestic buyers in language, customs, business practices, and consumer behavior. Marketing products internationally means mounting a strategy to support global business operations. 1. International Products Some products can be marketed internationally without modifications, whereas other products need to be modified to fit the needs of a local market.

2. International Pricing Many factors that affect domestic pricing also affect international pricing; additional factors affecting global pricing are the costs of transportation and selling abroad.

3. International Distribution Distribution networks in other countries may be costly. Many domestic marketers avoid time delays by buying existing businesses with already-established distribution and marketing networks.

4. International Promotion Many American promotional tactics do not succeed in other countries. Marketers must consider differences in customs and cultural values when promoting products abroad.

KEY TEACHING TIP •

In the consumer market, buying and selling transactions are visible to the public. Equally important, though far less visible, are organizational (or commercial) markets.

•

The industrial market involves different complexities from the consumer market, in particular due to the difference in buyers and the buyer-seller relationship.

International marketing requires examining each of the 4Ps to determine what adaptations, if any, need to be made for selling in specific countries.

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Reinforce that marketers face an extreme advantage when distributing products abroad if they can deliver through already-established networks.

QUICK QUESTIONS •

How are farmers and manufacturers, for example, included in the industrial market?

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What are the roles of wholesalers and retailers in the reseller market? How are

•

consumer-seller relationships different from buyer-seller relationships? Why is social

•

media especially important to small businesses? Remind students that one consideration when determining the difference between domestic pricing and international pricing is the higher cost of transporting and selling products abroad.

Use In-Class Activity 4: Small-Group Discussion: Never Give a German a Yellow Rose Time Limit: 30 minutes

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Learning Objective 11-7: Discuss the marketing mix as it applies to small business.

Small Business and the Marketing Mix Many of today’s largest firms were once small businesses. The successful small businesses have learned skillful application of the marketing concept and careful consideration of each element in the marketing mix. A. Small-Business Products

Understanding the target market and the targeted group’s wants is critical.

B. Small-Business Pricing Profits are often determined by accurately assessing costs from the start. Haphazard pricing can sink a firm with a good product.

C. Small-Business Distribution The most critical aspect of distribution for small businesses is facility location, particularly relative to customer location. Small businesses can often react to changes in needs more quickly than larger firms.

D. Small-Business Promotion Understanding promotional costs, as well as benefits of chosen promotional tools, may be the most critical steps involved. Costs can be reduced by using less expensive promotional methods.

KEY TEACHING TIP Students need to understand that establishing the Marketing Mix is especially critical for small businesses.

Use In-Class Activity 3: Small-Group Discussion: Social Networking and Job Seeking Time Limit: 30 minutes

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Assessing the Marketing Environment Activity Overview: This activity asks students to consider various elements from the marketing environment that affect specific industries.

Time Limit: 30 minutes What to Do: 1. Divide the class into five-member groups and assign an industry to each group. For example, you may use the automotive industry, fast-food industry, apparel industry, airline industry, and the banking industry. (5 minutes)

2. Ask each group to discuss how variables from each of the five environments highlighted in the textbook—the political-legal, sociocultural, technological, economic, and competitive environments—affect their assigned industry. (10 minutes) 3. Reassemble the class and discuss each group’s input. (15 minutes) Don’t Forget: With groups of five students, you can assign each student to analyze one of the environments. After this activity is completed, you can ask students to further research their assigned industry to find additional environmental variables that are currently affecting it.

Wrap-Up: Review the five marketing environments presented in the textbook and some of the common variables that come from each. Remind students that, in many cases, the same variables from each respective environment affect a number of different industries.

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In-Class Activity 2: Small-Group Discussion: Data Mining Activity Overview: This activity asks students to think about all the valuable information about themselves that they give to others.

Time Limit: 20 minutes What to Do: 1. Divide students into small groups and ask them to discuss and make a list of all the locations where they freely give valuable personal information. (10 minutes) 2. Reassemble the class and compile the groups’ lists. Are the lists similar? For what purposes is this information used by others? (10 minutes) Don’t Forget: You can also use this activity as an in-class debate with students considering the pros and cons of data mining.

Wrap-Up: Bring the activity to a close by briefly discussing the purpose of data mining and its advantages and disadvantages from a consumer’s perspective.

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In-Class Activity 3: Up for Debate: Social Networking and Job Seeking Activity Overview: This activity asks students to debate the advantages of starting your own small company, in a highly competitive industry.

Time Limit: 30 minutes What to Do: 1. Divide the class into three-member groups and ask them to read the Entrepreneurship and New Ventures feature. (5 minutes) 2. Ask each group to discuss the following questions: (15 minutes) a. What are the advantages and disadvantages of being a small farmer, trying to sell your crops? b. What kind of resources would be useful to you, as the small farmer, and would help you learn what you need to know to be successful? Information about what different environments will have the most impact on your ability to succeed?

3. Bring the class together and debate the groups’ answers. (10 minutes) Don’t Forget: To remind the students that there is a lot more to being a successful business person than simply providing a product. What are the most important factors besides the product?

Wrap-Up: Bring the activity to a close by encouraging students to consider how many different tasks a business owner must perform to succeed, and the different environments that impact their decisions.

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In-Class Activity 4: Small-Group Discussion: Never Give a German a Yellow Rose Activity Overview: This activity asks students to consider what a foreign visitor might notice about the American marketplace.

Time Limit: 30 minutes What to Do: 1. Divide students into small groups and ask them to assume that they will be receiving a foreign visitor. At this point, individual groups can select the home country of their visitor if it will help with the assignment.

2. Tell each group to assume that the visitor wants to know what he or she might be able to observe about the American marketplace. In general, the visitor is curious about the various elements of the marketing mix. For example, in considering products, you might mention product assortment and the use of brands; for promotion, you might mention the most popular media options used for specific products and what consumers are attracted to in an advertisement. Ask each group to come up with some suggestions. (15 minutes) 3. Regroup the class and have each group share some of their suggestions. (15 minutes) Don’t Forget: Parts of the marketing mix can often be quite similar from one culture to the next; however, elements of the marketing mix can also vary, depending on the product and the culture into which the product is being sold.

Wrap-Up: Close the activity with a short discussion of the elements of the marketing mix and how these elements can change from one culture to the next, depending on the product and the culture into which the product is being sold.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 11-1. What are the five forces in the external marketing environment?

Five outside factors comprise a company’s external environment and influence its marketing programs: (1) the political and legal environment (2) the sociocultural environment (3) the technological environment (4) the economic environment and (5) the competitive environment. (Learning Objective 11-1 – AACSB – application of knowledge) 11-2. What is the difference between value and utility?

The value of a product refers to its comparative benefits and costs. Benefits include not only the functions of the product but also the emotional satisfaction associated with owning, experiencing, or possessing it. Costs include the sales price, the buyer’s time finding the product, and even the emotional costs of making a purchase decision. A satisfied customer perceives the benefits derived from the purchase to be greater than its costs. Utility is the ability of the product to satisfy the customer’s wants and needs. In a sense, utility is both a separate issue and a subset of benefits. (Learning Objective 11-1 – AACSB – application of knowledge) 11-3. What is market segmentation and how is it used in target marketing?

Market segmentation is a method of breaking consumers into mutually exclusive groups based on similar characteristics that are likely to affect consumption. By identifying and targeting segments that are most likely to purchase its products, an organization can tailor its marketing efforts in terms of product features and benefits, pricing, packaging, promotion, and distribution. (Learning Objective 11-3 – AACSB – application of knowledge) 11-4. What are four ways that companies conduct market research Students should note observation, survey, focus group, and experimentation. (Learning Objective 11-4 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 11-5. Select three everyday products (personal fitness training, CDs, dog food, cell phones, coffee, or shoes, for example). Show how these different versions products might be aimed toward different market segments. Explain how the marketing mix differs for each segment.

Answers will vary but should include how students will tailor their marketing efforts in terms of product features and benefits, pricing, packaging, promotion, and distribution. (Learning Objective 11-3 – AACSB – analytical thinking)

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11-6 Imagine being the marketing manager for a local chain of family dining restaurants. How would you adapt the marketing mix to an economic downturn? How would you adapt it to an economic boom?

Students should mention the four components of the marketing mix: product, pricing, place, and promotion. (Learning Objective 11-3 – AACSB – analytical thinking) 11-7 Select a well-known company. After doing a bit of research on the company website and in the news, how would you summarize the company’s marketing plan?

Students should discuss marketing mix and marketing objectives. Students likely cannot see the actual marketing plan of their chosen company, but the strategy should be clear from the marketing mix, and students should note alignment with the company mission. (Learning Objective 11-2 – AACSB – analytical thinking) 11-8. Assume two companies make a similar product such as wooden picture frames. One company is a small business producing the frames mostly by hand, and the other is a very large business that mass-produces frames using an automated assembly line. What are the advantages and disadvantages for each?

Students should be able to identify major advantages of the large corporation such as economies of scale, and the disadvantages such as lack of uniqueness, as well as the advantages of the small business that can produce unique items but will likely have higher unit costs and a more difficult time distributing the product, although with e-intermediaries like Amazon and Etsy, that may not be as big of a disadvantage as it once was. (Learning Objective 11-2, 11-3, 11-4, 11-5, and 11-7 − AACSB − analytical thinking) APPLICATION EXERCISES 11-9 Describe how the consumer buying process applied to a recent purchase. Address the factors that influenced your purchase, as well as the steps in your purchase, and how the company’s marketing mix affected your decision.

The students should focus on the four major influences on consumer behavior: psychological, personal, social, and cultural. They should be able to identify when they recognized the need for the product, how they sought information, how they evaluated alternatives, motives (both rational and emotional) for their decision, and their post-purchase evaluation (how they felt about the purchase, or if they left a positive or negative review on a website). (Learning Objective 11-5 – AACSB – analytical thinking) 11-10. Choose an existing product that is not widely known. Once you have identified the product, describe how you would use what you have learned about marketing to increase demand for the product.

Students will select a wide variety of goods and services so the marketing plans will vary.

However, the answers should contain utility and value information and focus on the .

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marketing mix as well as demonstrate some market research, target marketing, and the consumer buying process. (Learning Objective 11-2, 11-3, 11-4, and 11-5 − AACSB − analytical thinking) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 11-11 to 11-15 (Learning Objectives 11-2, 11-3, 11-4, and 11-5 – AACSB – interpersonal relations and teamwork, analytical thinking, application of knowledge) This assignment gives students an opportunity to design a complete marketing plan for their business. They should use the framework referenced in “Developing the Marketing Plan” and formulate an appropriate marketing strategy focused on the needs and wants of potential customers. TEAM EXERCISE: FINDING THE SILVER LINING 11-16 TO 11-21 (Learning Objectives 11-1, 11-2, 11-3, 11-4, and 11-5 – AACSB – interpersonal relations and teamwork, reflective thinking) The students’ responses to the questions may vary dramatically due to the different perspectives. Students should be encouraged to explore all the issues including: the target market, the environmental factors, politicallegal, economic, competitive, etc. Students should also review the consumer buying behavior model and the market segmentation variables that will impact the purchase.

Finally, the students should create a marketing mix plan based on their target market

and market research.

EXERCISING YOUR ETHICS: THE 480 MILLION DOLLAR QUESTION – (Learning Objective 11-2 AACSB analytical thinking, reflective thinking, ethical – understanding and reasoning) 11-22. What are the ethical issues in this situation?

The key ethical issue is integrity (should the company keep the money or return it?).

Students may also highlight communication or other secondary ethical issues.

11-23. From an ethical standpoint, what are your obligations as the marketing manager in this situation? Students should acknowledge the need to strike a balance between external market forces (the current political environment, social media, etc.) and the need to drive profits. They may also address balancing their own personal ethics and the eventual decision of the company. In the end, they may note that their obligation as marketing manager is to the company.

11-24. As the marketing manager, what recommendation would you argue for in this situation and how would you attempt to persuade your peers?

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Answers will vary but most students will probably recommend returning the money.

Students will want to consider the negative impact to the company’s reputation of keeping the money. Students should be able to formulate arguments that balance emotion (personal ethics) and logic (business decisions). Students should be encouraged to explore what might happen if the company decision was at odds with their own personal ethics.

CASES: BUILDING A BRAND WITH SOCIAL MEDIA (Learning Objectives 11-1, 11-2, 11-3, and 11-5 – AACSB − analytical thinking) 11-25. What forces in the external environment have created opportunities or challenges for IKEA? Explain. Challenges facing IKEA include the political and legal environment (e.g. tariffs may impact their pricing competitiveness), sociocultural environment (social media and pop culture), technological environment (moving the catalogue online), economic environment (shifting spending on home goods), and the competitive environment (retailers like Amazon and WalMart). Opportunities may include some of the same elements, but students should focus on the increasing influence of social media on purchasing behavior.

11-26. How would you describe IKEA’s marketing philosophy in terms of its value package, marketing mix, and overall approach? Though IKEA’s marketing mix and value package focus on product and price elements, the Students should note that the company’s overall approach changes constantly to reflect its customer’s buying process but never strays from the company’s mission. company also pays attention to place and promotion.

11-27. Describe the consumer buying process for someone purchasing furniture. How would the buying process for an IKEA customer be similar to and different from the buying process for someone purchasing furniture from a more traditional local store?

The consumer buying process consists of a series of steps taken by consumers when making purchases: (a) Problem/Need Recognition, (b) Information Seeking, (c) Evaluation of Alternatives, (d) Purchase Decision, and (e) Postpurchase Evaluation. Students should run through all these steps in their answers, relating each step to the process of purchasing cosmetic products. Social media can fit into multiple steps, including Information Seeking, Evaluation of Alternatives, and Postpurchase Evaluation. Students should note the and the way that IKEA shapes the buying process both in-person and online (using both social media and other, more traditional forms of promotion).

11-28. Search IKEA on social media. On the basis of what you find, how would you describe its target audience?

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Answers may vary. However, students should take psychographic, demographic, and behavioral variables into account to answer this question. Age, gender, education, income, lifestyle, attitudes, and interests are some relevant variables to consider.

SHAVING OFF THE PROFITS (Learning Objectives 11-1, 11-2, 11-3, 11-5 – AACSB − analytical and reflective thinking, application of knowledge) 11-29. How would you best describe P&G’s marketing strategy for Gillette?

P&G’s marketing strategy focused on lowering prices and increasing the diversity of its target market. Students may also note a shift in the company’s focus on buying process (online vs. in-person shopping).

11-30. What elements of P&G’s external marketing environment, if any, are influencing the company’s marketing strategy? Explain your reasoning.

Most students will cite the economic, competitive environment, and the sociocultural forces as having the main impact on P&G’s new strategic plan.

11-31. Why do you suppose lowering the prices of Gillette products didn’t increase sales?

Most students will probably conclude that lowering prices alone would not help Gillette overcome the increased market competition and concurrent decreased demand. They may note the enduring reputation of Gillette in comparison with newer, “fresher” brands.

11-32. Explain the roles of target marketing and market segmentation as they apply in this case.

Students should note in general how P&G and its competitors are using demographic, psychographic, and behavioral variables to determine their target market and better meet the customers’ needs and wants. They should be able to cite specific examples to support their answers.

11-33. In what ways are the components of P&G’s marketing mix being affected by the situation described in this case? Give examples to illustrate. Most students will state that all of the components of the marketing mix: product, price, place, and promotion have been affected by the changes in the customer base for P&G. The products will have different features meant to appeal to either the lower end market segments, or the higher end market segments. Price will be reflected appropriately. Products targeting the high-end segment will be priced higher while products targeting the low-end segment will be priced appropriately lower than before. P&G will be selling each set of products at appropriately chosen retail outlets that will appeal to the market segments. Promotions will also be modified to appeal to the low-end segments for “their” products and the high-end segments for “their” products.

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Chapter 12: Developing and Pricing Products Chapter Overview By now, students have grasped that the marketing mix—or the Four Ps—is built around the characteristics and needs of the target market. This chapter brings the Four Ps another step forward by discussing product and pricing.

As the chapter unfolds, many variables surrounding both the consumer and organizational markets are discussed, as well as a focus on distinguishing features between products and services and the importance of branding and packaging.

Specifically, the chapter identifies the various pricing objectives that govern pricing decisions and and the price-setting tools used in making these decisions. It discusses pricing strategies identifies the pricing tactics that can be used for setting prices.

Learning Objectives 12-1. Explain the definition of a product as a value package and how to classify goods and services.

12-2. Describe the new product development process.

12-3. Describe the stages of the product life cycle (PLC) and methods for extending a product’s life.

12-4. Identify the various pricing objectives that govern pricing decisions, and describe the price-setting tools used in making these decisions.

12-5. Discuss pricing strategies that can be used for different competitive situations and identify the pricing tactics that can be used for setting prices.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity Description Time Limit Students consider pricing strategies behind 1. Icebreaker: Why Do 30 min.

They Charge More? 2. some well-known competing brands.

Up for Debate: Getting Students are divided into teams to discuss a Stimulus Boost with 30 min. the pros and cons of varying the pricing Pricing strategies for a product.

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CHAPTER OUTLINE Learning Objective 12-1: Explain the definition of a product as a value package and how to classify goods and services.

What Is a Product?

In order to develop the marketing mix and plan their strategies effectively, marketers must consider what consumers buy when they purchase products; marketers must begin by understanding that every product is a value package that provides benefits to satisfy the needs and wants of customers. A. The Value Package

Product features are the tangible and intangible qualities that are built into products; product benefits include what products can do emotionally or physically for consumers.

Today’s consumer regards a product as a bundle of attributes, benefits and features, that taken together, are the value package.

B. Classifying Goods and Services Goods and services may be classified according to their expected buyers; buyers may be classified as buyers of consumer products or buyers of organizational products. The consumer and industrial buying processes differ significantly.

1. Classifying Consumer Products. Convenience goods (such as milk and bottled water) and convenience services are consumed rapidly and regularly. They are inexpensive and are purchased often and with little output of time and effort. Shopping goods (such as appliances and mobile devices) and shopping services (such as hotel or airline reservations) are more expensive and are purchased less often than convenience products.

Consumers often compare brands, sometimes in different stores. They may also evaluate alternatives in terms of style, performance, color, price, and other criteria. Specialty goods (such as wedding gowns and tuxedoes) and specialty services (such as catering for wedding receptions or health care insurance) are extremely important and expensive purchases. Consumers usually decide on precisely what they want and will accept no substitutes. They often go from source to source, sometimes spending a great deal of money and time to get a specific product.

2. Classifying Organizational Products. Production items are goods or services that are used directly in the production process. Expense items are goods and services consumed within one year by organizations producing other goods or supplying other services.

Capital items are longer-lasting (expensive and sometimes permanent) goods and services that have expected lives of more than one year and typically several years.

C. The Product Mix The product mix is the group of all goods and/or services that a marketer makes available for sale, whether consumer goods, industrial goods, or both.

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1. Product Lines. A group of products that are closely related because they function in a similar manner (flavored coffees) or are sold to the same customer group (stop-in coffee drinkers) who will use them in similar ways is a product line. Product lines help a company to grow by broadening the customer base.

KEY TEACHING TIPS • Remind students that a value package is a combination of all the product features and benefits—all bundled together—that are found to be attractive to the consumer.

•

Make sure students understand the distinction between a product mix (the total assortment of all goods and services available from a marketer) and a product line (a group of products that function in a similar manner or are sold to the same customer group who will use them in similar ways).

HOMEWORK Product Features and Benefits Now might be a good time to assign Application Exercise 12-9 from the end-of-chapter materials as homework. This assignment encourages students to consider the product benefits and how they are used to attract the chosen target market.

At-Home Completion Time: 30 minutes

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Learning Objective 12-2: Describe the new product development process.

Developing New Products To expand or diversify to survive, marketers must develop and introduce streams of new products. Competition and shifting consumer preferences cause marketers to continually monitor and frequently change their offerings.

A. The New Product Development Process Product development is a long, complex process. New products usually involve carefully planned and sometimes risky commitments of time and resources.

B. Product Mortality Rates. Estimates indicate that it takes 50 new product ideas to generate one product that reaches that marketplace; only a few of the survivors become successful.

Speed to Market. The quicker a product enters the marketplace, the more likely it is to survive. Introducing new products ahead of competitors allows companies to become market leaders.

C. The Seven-Step Development Process To increase their chances of developing a successful new product, many firms adopt some version of a seven-step process for developing physical goods.

1. Product ideas. Product development begins with a search for ideas for new products.

Ideas typically come from consumers, the sales force, R&D departments, suppliers, or engineering personnel.

2. Screening. This stage is designed to eliminate ideas that do not mesh with the firm’s abilities or objectives. Representatives from marketing, engineering, operations, and finance participate.

3. Concept testing. Once ideas have been screened, companies use market research to get consumers’ input about benefits and prices.

4. Business analysis. After gathering consumer opinions, marketers compare production costs and benefits to see whether the product meets minimum profitability goals.

5. Prototype development. Once the firm has determined the potential profitability of a product, engineering, R&D, or design groups produce a prototype. Expenses increase at this stage.

6. Product testing and test marketing. Applying lessons from the prototype, the company goes into limited production.

7. Commercialization. If test marketing proves positive, the company begins full-scale production and marketing.

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D.Variations in the Process for Services The development of services involves many of the same stages. Basically, steps 2, 3, 4, 6, and 7 are the same. There are, however, important differences in steps 1 and 5: Service ideas. The search for service ideas includes defining the service value package, identifying the tangible and intangible features that characterize the service, and stating service specifications. Service process design. Instead of prototype development, services require a three-part service process design that includes process selection (identifying each step of the service, including sequence and timing), worker requirements (stating employee behaviors, skills, capabilities, and interactions with customers during the service performance), and facility requirements that designate all equipment that supports delivery of the service.

KEY TEACHING TIP • New product development is time intensive, expensive, and risky. Being the first to market with a product is only valuable if sound research indicates demand for a product or service with the value package being offered.

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Most new products fail, and far more never even get the chance. Stress that high mortality rates indicate that out of many new ideas, only a few products reach the market.

QUICK QUESTIONS • Can you think of any recent examples of a product that benefited from its speed to market?

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Can you think of any recent examples of new products that did not meet expectations, or actually failed? What about successes?

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Learning Objective 12-3: Describe the stages of the product life cycle (PLC) and methods for extending a product’s life.

A. The Product Life Cycle Every product passes through a series of stages during its commercial life.

1. Stages in the PLC. The product life cycle is a natural process in which products are born, grow, mature, decline, and die. The stages include: introduction, which begins when the product enters the marketplace; growth, when sales and profits climb; maturity, the longest stage when sales growth begins to slow; and decline, when sales and profits continue to fall.

B. Extending Product Life: An Alternative to New Products 1. Product Extension. In product extension , an existing product is marketed globally instead of just domestically.

2.

Product Adaptation. With product adaptation , the product is modified for greater 3. appeal in different countries.

Reintroduction. Reintroduction means reviving, for new markets, products that are becoming obsolete in older ones.

C. Identifying Products Branding and packaging are two tools that allow consumers to recognize products in the marketplace.

1. Branding Products Brand names are symbols for characterizing products and distinguishing them from one another; branding is the process of using symbols, names, logos, and colors to communicate the features and qualities of products. a. Brand awareness is the brand name that first comes to your mind when you consider a particular product category. b. Gaining Brand Awareness. Firms compete to be “top-of-mind” for consumers; it is an expensive struggle that pays tremendous dividends when successful. Marketers are finding more effective, less expensive ways to gain brand awareness. c. Product Placements. A product placement is a promotional tactic for brand exposure in which characters in television, film, music, magazines, or video games use a real product that is visible to viewers. Its marketing purpose is to be visible to viewers and potential consumers. It legitimizes the brand in the mind of the customer.

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2. Types of Brand Names a. National Brands. These are brand-name products produced by, widely distributed by, and carrying the name of the manufacturer. b. Licensed Brands. These are brand-name products that carry the name of an organization or individual. Marketers exploit brands because of their public appeal, image and status that customers hope to gain by associating with them.

Private Brands. These are brand-name products that a wholesaler or retailer has c.commissioned from a manufacturer. These products can only be found in the stores of that wholesaler or retailer.

D. Packaging Products A product’s package serves several purposes; the packaging can serve as an in-store advertisement, a display for the brand name, an identifier of product features and benefits, and can reduce the risk of damage and increase the difficulty of stealing.

KEY TEACHING TIPS •

Reinforce that the product life cycle is a series of stages through which a product passes during its commercial life; the duration of a product’s life cycle varies.

•

Remind students that both product placements and viral marketing help marketers

•

gain brand awareness.

Make sure students understand that branding is the process of using symbols,

names, QUICK QUESTIONS logos, and colors to communicate the qualities of a particular product made by a producer.

• particular What happens in the decline stage of the product life cycle?

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How does successful branding lead to brand awareness?

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Why is viral marketing sometimes more successful than traditional media options?

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What is the difference between national, licensed, and private brands?

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What are some purposes of packaging?

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Learning Objective 12-4: Identify the various pricing objectives that govern pricing decisions and describe the pricesetting tools used in making these decisions.

Determining Prices In pricing, managers decide what the customer pays and the seller receives in exchange for a product.

A. Pricing to Meet Business Objectives Pricing are the objectives goals that sellers hope to achieve in pricing products for sale.

Marketers’ pricing strategies are influenced by a variety of factors. Some companies have profit-maximizing pricing objectives, while others have market share pricing objectives. Still others are concerned with pricing for e-business objectives. Competition, social and ethical concerns, and corporate image all can factor into the decision.

1. Profit-Maximizing Objectives. Some companies that set prices to maximize profits, therefore, have profit-maximizing pricing objectives. Marketers attempt to set prices to sell the number of units that will generate the highest possible profits. The seller’s pricing decision is critical for determining the firm’s revenue, which is the selling price times the number of units sold.

REVENUE = SELLING PRICE X UNITS (QUANTITY) SOLD

2. Market Share (Market Penetration) Objectives. Some firms want to dominate the market or secure high market share and, therefore, have market share pricing objectives.

Market share is determined by estimating the total percent of the market that the marketer is currently supplying; a business may be willing to accept minimal profits or even losses to establish market share. Market domination means continuous sales of more units and higher profits, even at lower unit prices.

3. Pricing for E-Business Objectives. Because the Web provides a more direct link between producer and customer, buyers often avoid the added costs of wholesalers and retailers.

Marketing costs as well as selling prices for e-businesses can be somewhat lower because of the unique marketing capabilities of the Internet. The ease of online comparison shopping can lead to cost efficiencies.

B. Price-Setting Tools Marketers must estimate the potential impact before deciding on final prices. Tools used for this purpose are cost-oriented pricing and breakeven analysis.

1. Cost-Oriented Pricing. Cost-oriented pricing considers the need to cover production costs and make a profit. Selling price = Seller’s costs + Profit. Markup is the amount added to an item’s total cost to earn a profit; markup is usually stated as a percentage of the product’s selling price.

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Markup Markup percentage=Sales price 100% 2. Breakeven Analysis: Cost-Volume-Profit Relationships. Using cost-oriented pricing, a firm will cover variable costs—costs, such as materials bought to make the product, that change with the number of units of a product produced and sold. It will also make some money to pay fixed costs—costs, such as annual rent, that must be paid regardless of the number of units produced and sold.

Breakeven analysis assesses costs versus revenues for various sales volumes. It shows, at any particular selling price, the financial result—the amount of loss or profit—for each possible volume of sales. Thebreakeven point is how many of a product must be sold so that total revenues exactly cover both fixed and variable costs.

Breakeven Point (in units)

=

Total Fixed Cost Price – Variable Cost

KEY TEACHING TIPS • Reinforce that pricing enables managers to decide what the firm will get in exchange for its products; pricing objectives are the goals they hope to achieve in pricing products.

• •

Make sure students understand that cost-oriented pricing considers profit and a firm’s need to cover production costs and the costs of the merchandise.

Breakeven analysis can be a tough concept for students so you may want to reinforce the concept and the formula: Breakeven Point (in units) = Total Fixed Cost/Price – Variable Cost.

Review the shirt example in the textbook.

QUICK QUESTION How do marketers achieve profit-maximizing objectives and market-share objectives?

Use In-Class Activity 1: Icebreaker: Why Do They Charge More?

Time Limit: 30 minutes HOMEWORK Pricing Now might be a good time to assign Application Exercise 12-10 from the end-of-chapter materials as homework. This assignment encourages students to consider the pricing objectives behind familiar products. At-Home Completion Time: 30 minutes

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Learning Objective 12-5: Discuss pricing strategies that can be used for different competitive situations and identify the pricing tactics that can be used for setting prices.

Pricing Strategies and Tactics Pricing strategies are planning activities that affect the marketing mix. Pricing tactics are ways that managers implement a firm’s pricing strategies. It is much easier to change pricing than to change products or distribution channels. A. Pricing Strategies

1. Pricing Existing Products. A firm can price existing products above, below, or at or near market price. Marketers that price products above market rely on the assumption that higher prices are accompanied by higher quality. Pricing below the market can succeed if the firm can offer a product of comparable quality while keeping costs below those of the competitors.

2. Pricing New Products. If a marketer can differentiate a product from all others, the marketers may implement price skimming, in which price is initially set high to earn large profits. Such a strategy will attract competitors to enter the marketplace with lower prices.

With penetration pricing, price is initially set low to create consumer interest and to stimulate trial purchases. Profit is low; therefore, the marketer relies on raising prices as consumer acceptance grows.

3. Fixed versus Dynamic Pricing for Online Business. Dynamic pricing works because information flow on the Web notifies buyers of changes in product availability. Examples of dynamic pricing include eBay’s traditional auction bidding while eBay’s Buy It Now is an example of fixed pricing.

4. Bundling. A bundling strategy groups several products together to be sold as a single unit, rather than individually. Cable or satellite TV/phone/internet packages are one example of a bundle. A discount on insurance by purchasing multiple policies (for home and car) is another way a bundle serves to benefit both the company and the consumer.

B. Pricing Tactics Price lining involves offering all items in certain categories at a limited number of prices.

A store predetermines three or four price points at which a particular type of product will be sold. Price lining involves setting each price level with a specific type of customer in mind and then packaging and promoting products accordingly. Psychological pricing takes advantage of the fact that customers are not completely rational when making buying decisions. One type of psychological pricing, odd-even pricing, is based on the theory that customers prefer prices that are not stated in even dollar amounts. Discounts are price reductions designed to stimulate sales.

C. International Pricing. Sometimes products must be priced for what customers in other countries can afford. This may involve developing products to fit that pricing. Another

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strategy calls for pricing products below cost to increase foreign market share; this practice is called dumping and is illegal in the United States.

KEY TEACHING TIPS •

Students often confuse these terms: With price skimming, price is initially set high to cover costs and generate a profit; with penetration pricing, price is initially set low to establish a new product in the market.

•

Reinforce that price lining offers all items in certain categories at a limited number of prices at price points, whereas odd-even pricing is based on the theory that customers

prefer prices that are not stated in even dollar amounts, such as $.99 and $1.99.

QUICK QUESTIONS •

How has dynamic pricing benefited Web users over traditional fixed pricing strategies?

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When might sellers resort to using discounts?

Use In-Class Activity 2: Getting a Stimulus Boost with Pricing Time Limit: 30 minutes

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Why Do They Charge More?

Activity Overview: This activity asks students to consider pricing strategies behind some well-known competing products.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask each group to come up with four sets of competing products or services; in most cases, students will select products that are similar, but carry a different brand name, such as Blue Bonnet Margarine versus Prairie Farms Margarine. (10 minutes) 2. Ask students to discuss the “average” price of each product and be able to explain the reasoning for one brand’s price being higher than the competing brand. (10 minutes) 3. Reassemble the class as a whole and ask for each group’s input. (10 minutes) Don’t Forget: Students will come up with a variety of reasons for differing products’ prices. Some will be more difficult to explain than others. For example, almost everyone knows that a one-night stay at the Holiday Inn Express is less costly than a stay at the Ritz-Carlton because the Ritz-Carlton offers more amenities. Price differences between Del Monte spinach and Jolly Green Giant spinach might be more difficult to explain.

Wrap-Up: Bring the activity to a close by reminding students of the role pricing plays in the marketing mix and the common types of pricing strategies and tactics seen in the marketplace.

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In-Class Activity 2: Up for Debate: Getting a Stimulus Boost with Pricing Activity Overview: This activity asks students to discuss how firms are changing their pricing messages during economic downtimes.

Time Limit: 30 minutes What to Do: 1. Ask students to read the Managing in Turbulent Times feature of the textbook, making a list of as many pros and cons of relying on the different kinds of service providers as possible.

(10 minutes) 2. Divide the class into small groups to discuss their pros and cons of price discounts and surge pricing. Do the pros outweigh the cons? For whom? (10 minutes) 3. Reassemble the class to debate the pros and cons as a group. Do the pros outweigh the cons?

(10 minutes) Don’t Forget: Retailers are constantly looking for ways to get an edge in the marketplace. Remind students that retailers will use all of the 4 Ps (price, promotion, product, and place) to add value and try to get an edge in competitive markets.

Wrap-Up: Ask students to discuss whether they have used, or would use, a ride service such as Uber or Lyft, if it were available in their area. Have them consider why they would use it, and what their expectations about the service would be.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 12-1. What is a value package?

A value package is defined as a bundle of attributes that provide the right features and benefits that satisfy customers’ wants and needs. (Learning Objective 12-1 – AACSB – application of knowledge) 12-2. How would you explain the product development process?

Students should include most aspects of the seven-step product development process from idea to commercialization. (Learning Objective 12-2 – AACSB – application of knowledge) 12-3. What are the various classifications of consumer and industrial products? Give an example of a good and a service for each category other than those discussed in the text.

The various classifications of consumer and organizational products include: • Consumer products—any product made for the end user to purchase and use • Convenience goods and services—candy, ATM services, take-out ice cream • Shopping goods and services—clothing, car repair, furniture • Specialty goods and services—houses, interior design, funeral services • Production goods—gym member demand for classes used to create new class schedule, plant products used to create pharmaceuticals, trees trimmed and turned into lumber • Expense items—inventory, repair bills, office supplies • Capital items—computer servers, long-term maintenance contracts (Learning Objective 12-1 – AACSB – application of knowledge)

12-4. What pricing strategies can companies use for different competitive situations?

Students should be able to describe various pricing strategies, including penetration pricing, skimming, pricing high or low, fixed or dynamic pricing. Students should be able to apply strategies to different competitive market types: monopolistic, oligopoly, monopoly, and pure competition as well as startups, new products, mature products, and other factors. (Learning Objective 12-5 – AACSB – application of knowledge)

QUESTIONS FOR ANALYSIS 12-5. Describe the four stages of the product life cycle and the marketing mix that is used in each. Provide at least one example of a product in each stage other than those provided in the text.

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1. Introduction Stage, prices are high, there are few models, little competition, sales and profits are at their lowest, and companies focus on consumer awareness.

2. Growth Stage, prices drop, competition, sales and profit increase.

3. Maturity Stage is typically the longest stage with sales and profits peaking then declining, increased competition leads to lower prices and increased promotional expenses.

4. The final stage is the Decline Stage. Profits, sales, and promotion decline. Eventually, the product dies.

Examples will vary.

(Learning Objective 11-3 – AACSB – application of knowledge) 12-6. Some companies have very narrow product mixes, producing just one or two products, while others have many different products. What are the advantages of each approach? A narrow product mix permits a company to focus its efforts on a core product and one or two target markets. A wide product mix gives a company more flexibility if one product does not do as well. Additionally, they can appeal to multiple target markets. (Learning Objective 12-1 – AACSB – analytical thinking)

12-7. Suppose that a small publisher selling to book distributors has fixed operating costs of $600,000 each year and variable costs of $3.00 per book. How many books must the firm sell to break even if the selling price is $6.00?

Breakeven units = Fixed costs/(selling price – variable costs) Breakeven units = $600,000/($6 – $3) = 200,000 books (Learning Objective 12-4 – AACSB – application of knowledge)

12-8. Describe price skimming and penetration pricing. What types of new products would be best suited to price skimming? What types of products will be most successful with penetration pricing?

Price skimming is entering the market at a high price and gradually lowering it. This approach works well for durable products that will be purchased infrequently. A penetration approach is entering the market with a low price and gradually increasing it. This approach works well for consumables since customers will be purchasing the product frequently.

(Learning Objective 12-5 – AACSB – application of knowledge)

APPLICATION EXERCISES 12-9. For this exercise, select a car or truck or other vehicle, something you wouldn’t ordinarily buy, and identify the target market. Once you’ve identified the target market, describe the features of the vehicle that appeal specifically to the target market.

Students answers will vary but many will pick popular brands and describe the features in terms of price, comfort, gas mileage, service, reputation, etc. (Learning Objective 12-1 – AACSB – analytical thinking)

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12-10. Select a product and analyze pricing objectives for it. What information would you want to gather if you were to adopt a profit-maximizing objective? What information would you want to gather if you were to adopt a market share objective? Answers will vary but should include a great deal of competitive information, including number of competitors, competitor prices. Market share objectives should consider (Learning Objective 12-4 – breakeven point, number of competitors, and their shares.

AACSB – analytical thinking) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 12-11 TO 12-15 (Learning Objectives 12-2, 12-4, 12-5 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Depending on the type of business venture, teams’ product mix and pricing strategies will vary widely. Teams should be able to justify that their strategies are consistent with the needs and wants of the target market. They should know where in the Product Life Cycle their product(s) will be, and how many steps of the new product development process they might need to go through.

TEAM EXERCISE: THE PRICE IS RIGHT 12-16 TO 12-20 (Learning Objectives 12-4 and 12-5 – AACSB – interpersonal relations and teamwork, analytical thinking, application of knowledge) After completing the Action Steps, students will better understand the impact of pricing strategies, what pricing strategies are available to marketers, and the objectives companies try to achieve through pricing. 12-18. Using the information provided in the case, identify the fixed and variable costs.

Fixed costs include rent, employee salaries, and business manager’s salary. Variable cost is the cost from the vendor for each case.

12-19. Using the amounts calculated in Step 2, calculate the breakeven point at a sales price of $15, $20, $25, and $30. On the basis of these answers as well as your assessment of likely monthly sales, decide on the best price for the phone cases.

Formula is Breakeven Point in units = Total Fixed Cost/Price - Variable Cost 13000/15 – 5 = Breakeven @ $15 = 1300 units/month 13000/20 – 5 = Breakeven @ $20 = 867 units/month 13000/25 – 5 = Breakeven @ $25 = 650 units/month 13000/30 – 5 = Breakeven @ $30 = 520 units/month

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Students will notice that at the lowest price, the demand is the highest, so they are likely to choose $15 as the best price for the phone cases.

EXERCISING YOUR ETHICS: DRIVING A LEGITIMATE BARGAIN (Learning Objective 12-1 – AACSB – ethical understanding and reasoning, reflective thinking) 12-21. How would you characterize the particular ethical issues in this situation?

The key ethical issues are integrity and communication. Matt has invested enormous effort in information collecting and evaluating alternatives, expecting that once he had made the purchase decision, the dealer would come through on its end of the bargain. One possibility is that the sales representative and the sales manager simply had not communicated, but this becomes an ethical issue when the sales representative has the responsibility to establish contracts without the authority to deliver results.

12-22. From an ethical standpoint, what are the obligations of the sales representative and the sales manager regarding the pricing of the product in this situation?

Since the contract has been signed, the minimal obligation of the car company is to offer the new model at the price of the previous year’s model.

12-23. If you were Angela, the sales manager, how would you defend your actions?

Answers may vary. Students should focus on the ethical issues. Manufacturing schedules are something Matt could know about or account for, when signing the contract. Gary, too, should have known and communicated about manufacturing schedules to Matt.

12-24. If you were responsible for maintaining good customer relations at the dealership, how would you handle this matter, considering the interests of both the consumer and the business?

Answers will vary. Students will want to consider the negative impact on the local marketplace if the customer leaves completely dissatisfied. Especially, with social media, this situation could go viral. As noted in 12-22, the minimum offer should be a new model at the previous year’s price. Other options are available.

CASES: THE THIRTY-THOUSAND DOLLAR HANDBAG(Learning Objectives 12-1, 12-4, and 12-5 – AACSB – analytical and reflective thinking, application of knowledge) 12-25. How would you describe the value package of the Louis Vuitton purse?

Students should note social capital (both of the company and the purchaser), scarcity, and function. They may note other creative components of the value package.

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12-26. What is Louis Vuitton’s target market? Do you think it is evolving or is it static?

Answers will vary. Students should note the high price of the product, which places it out of reach of much of the general population. They should mention the specific desire for social capital (people who buy these bags will want to display them), and the bags’ value as status symbols. Students may argue that the market is either evolving or static depending on their opinion, but should be able to back up their opinion with market research.

12-27. If you were starting a small boutique store that carried handbags, what kinds of bags would you stock and why?

Student answers will vary but should be backed up with supporting evidence.

12-28. Pick a small business in your community. In a paragraph or two, describe the products or services provided by the company and the target market(s). Taking those two things into consideration, how do you think the company sets its prices?

Answers will vary. Students should investigate both products and market and should describe the various elements that contribute to pricing, including market research, target market research, supply and demand, and market share and other pricing objectives.

12-29. Do you think the economic downturn of 2008 affected the price of Louis Vuitton handbags? Do you think the economic crisis of 2020 affected the price of Louis Vuitton and other luxury handbags? Why or why not?

Answers will vary based on student opinion, but students should support their opinions with market research and historical sales and pricing data.

A PENNEY FOR YOUR THOUGHTS (Learning Objectives 12-4 and 12-5 – AACSB – analytical and reflective thinking, application of knowledge) 12-30. Describe your impression of the target market for JCPenney. How do you think the target market influences the pricing strategy? Traditional JCPenney target customers were more likely middle aged and older females motivated by the “thrill” of the “hunt,” the excitement of a sale where everyone is trying to purchase the same product at a discount.

For the JCPenney customer, it was the whole Pricing strategy would involve satisfying those needs with discounts and coupons. Companies have to consider the target market when creating a pricing each segment shopping experience, notstrategy just thesince purchased product.is going to respond differently in terms of price and perceived value.

12-31. Do you think marking up prices and then offering deep discounts is still a good pricing strategy in today’s market?

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Answers will vary but should note the differences in online and in-person price discounts (getting a coupon code may or may not have the same purchasing influence as a paper coupon) and be able to back up their opinion with research. Because of the ease with which consumers are able to compare straight pricing, coupons and discounts may not hold the same allure.

12-32. How do you think JCPenney’s marketing mix, including place, affects the price its customers are willing to pay?

Students should note that JC Penney’s marketing mix will need to change based on the general buying habits of consumers and the near-ubiquitous online availability of similar products.

12-33. If you were the new CEO of JCPenney, what pricing strategy would you propose to your management team as part of your plan to save the company?

Students should be able to back up answers with logical arguments based on the text. They should note that the current pricing strategy is not working and suggest changes considering various elements of the marketing mix.

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Chapter 13: Distributing and Promoting Products Chapter Overview By now, students have grasped that the marketing mix—or the Four Ps—is built around the characteristics and needs of the target market. This chapter brings the Four Ps another step forward by discussing distribution and promotion. Specifically, the chapter examines the meaning of distribution mix and identifies the different channels of distribution. Along the way, the chapter examines the role of wholesalers, different types of retailing, the role of e-intermediaries, and the major activities in the physical distribution process. Finally, the chapter looks at the objectives of promotion, the considerations in selecting a promotional mix, the tasks involved in personal selling, sales promotions, and publicity and public relations.

Learning Objectives

13-1. Explain the meaning of distribution mix and identify the different channels of distribution.

13-2. Describe the role of wholesalers and the functions performed by e-intermediaries.

13-3. Describe the different types of retailing and explain how online retailers add value for consumers on the Internet.

13-4. Define physical distribution and describe the major activities in the physical distribution process.

13-5. Identify the objectives of promotion and the considerations in selecting a promotional mix, and discuss the various kinds of advertising promotions.

13-6. Outline the tasks involved in personal selling and describe the various types of sales promotions.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity Description 1. Icebreaker: Why Do Students consider distribution and They Sell Where They promotion strategies.

Do? 2. Up for Debate: Getting Students are divided into teams to discuss a Stimulus Boost with the pros and cons of relying on direct marketing and promotions to help push Promotion products through distribution channels.

Students 3. Up for discuss Debate:different What’s ways that a product can be promoted the Best Way to Reach to one specific target Them?market.

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Time Limit 30 min.

30 min.

30 min.

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Learning Objective 13-1: Explain the meaning of distribution mixand identify the different channels of distribution.

The Distribution Mix The distribution mix is the combination of distribution channels that a firm selects to get a product to end users.

A. Intermediaries and Distribution Channels Intermediaries help to distribute a producer’s goods, either by moving them or by providing information that stimulates their movement from sellers to customers.

Wholesalers are intermediaries who sell products to other businesses for resale to final consumers. Retailers sell products directly to consumers. The nature of the product and the target market greatly affect whether intermediaries are used. 1. Distribution of Goods and Services. A distribution channel is the path that a product follows from producer to end user. a. Channel 1: Direct Distribution. In a direct channel, the product travels from the producer to the consumer or to the industrial buyer, without intermediaries. b. Channel 2: Retail Distribution. In Channel 2, producers distribute consumer products through retailers, whether their own retail outlets or other retailers. c. Channel 3: Wholesale Distribution. Wholesalers enter the distribution network primarily for the purpose of storage and restocking of merchandise. d. Channel 4: Distribution by Agents or Brokers. Channel 4 uses sales agents or brokers who represent producers and sell to consumers or industrial users. They receive commissions based on the prices of the goods they sell. Sales agents generally deal in the related product lines of a few producers, and form long-term relationships to represent those producers and meet the needs of many customers. Brokers match numerous sellers and buyers as needed, often without knowing in advance who they will be.

2. The Pros and Cons of Nondirect Distribution. Nondirect distribution becomes higher priced for end users because each distribution link charges a markup or commission.

However, intermediaries can save consumers time by reducing the number of contacts made, and save consumers money by providing speed of delivery, storability, and less cost by buying cheaply in bulk from manufacturers and then passing savings on to final consumers. Intermediaries exist because they provide necessary services that get products efficiently from producers to users.

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B. Distribution Strategies 1. Intensive Distribution.

Intensive distribution means distributing through as many channels and channel members as possible (both wholesalers and retailers). This method is usually used for low-cost consumer goods such as candy and magazines.

2. Exclusive With exclusive Distribution. distribution, a manufacturer grants the exclusive right to distribute or sell a product to a limited number of wholesalers or retailers, usually in a given geographic area. High-cost prestige products such as Rolex watches are sold in this manner.

3. Selective Distribution.

Using selective distribution, a producer selects only wholesalers and retailers that will give a product special attention in sales effort, display and promotion advantage, and so forth. Furniture and appliances are examples of consumer products that use selective distribution.

C. Channel Conflict and Channel Leadership 1. Channel occurs when Conflict.Channel members ofconflict the channel disagree over roles or rewards. Conflict may arise if one channel member has more power or is perceived as getting preferential treatment. Conflicts can defeat the purpose of the system by disrupting the flow of goods.

Usually Leadership. one channel member—the channel captain —can determine 2. Channel the roles and rewards of the others. The channel captain often is a manufacturer or an originator of a service. But in some industries, an influential wholesaler or a large retailer such as Walmart may be a channel captain because of large sales volume.

KEY TEACHING TIPS •

The distribution channel strategy depends on the nature of the product and the target market.

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Each of the intermediaries plays a very specific role in distributing the product.

QUICK QUESTIONS •

What are some activities involved between manufacturing and retail? How is value added in these activities? Remind students of the various benefits that intermediaries provide in the distribution process.

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No intermediaries are involved in a direct channel. What are some products that

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flow through Channel 2?

Channel 3 emerged as a way of reducing the need for floor space among retailers.

What products might pass through Channel 3? .

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Use In-Class Activity 1: Icebreaker: Why Do They Sell Where They Do? Time Limit: 30 minutes HOMEWORK Now might be a good time to assign Application Exercise 13-9 from the end-of-chapter materials as homework. This assignment encourages students to consider the supply chain and how being a member affects its marketing decisions.

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Learning Objective 13-2: Describe the role of wholesalers and the functions performed by e-intermediaries.

Wholesaling Wholesalers provide a variety of services, which may include storing, providing an assortment of products, and offering delivery, credit, and product information.

A. Merchant Wholesalers Most wholesalers are independent operations that sell various consumer or business goods produced by a variety of manufacturers. The largest group, merchant wholesalers, buys products from manufacturers and sells them to other businesses.

They own the goods that they resell and usually provide storage and delivery. Fullservice merchant wholesalers (about 80 percent of all merchant wholesalers) provide value-adding services, including credit, marketing advice, and merchandising services.

Limited-function merchant wholesalers provide fewer services, sometimes merely storage. Drop shippers don’t even carry inventory or handle products; they take orders from customers, negotiate with producers to supply goods, take title to them, and arrange for shipment.

B. Agents and Brokers Agents and brokers, including online e-agents, serve as independent sales representatives for many companies’ products. Unlike wholesalers, agents and brokers do not own their merchandise. However, they serve as sales and merchandising arms for producers or sellers who do not have their own sales forces.

C. The E-Intermediary E-intermediaries are online channel members (wholesalers) who perform one or both of two functions: (1) collect information about sellers and present it to consumers; or (2) help deliver online products to buyers.

1. Syndicated Sellers. Syndicated selling occurs when one website offers another commission for referring customers.

2. Shopping Agents. Shopping agents (e-agents) gather, sort, and present accurate information to help online consumers compare websites, stores, prices, and product features. Many consumers use e-agents when purchasing airline tickets or hotel rooms.

3. Business-to-Business Brokers. E-commerce intermediaries provide online value-adding services for business customers. The pricing process between B2B buyers and sellers of commodities and services can be outsourced, for example. As a broker, the intermediary brings together timely information and links businesses to one another.

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Learning Objective 13-3: Describe the different types of retailing and explain how online retailers add value for consumers on the Internet.

Retailing Varying greatly in size, retailers represent the end of the distribution channel, making the sale of goods or services to final consumers. More than one-half of the U.S. retailers account for less than 10 percent of all retail sales.

A. Types of Brick-and-Mortar Retail Outlets U.S. retail operations vary by type, size, pricing strategies, location, range of services, or range of product lines.

1. Product-Line Retailers. Retailers that feature broad product lines include department stores, which are arranged into specialized departments and handle a wide range of goods, and a variety of other services such as credit plans; supermarkets, which offer a wide selection at low prices, with self-service and wide selection; and specialty stores, which are small stores that carry a full line of related products in narrow product fields and feature knowledgeable salespeople.

2. Bargain Retailers. Bargain retailers carry wide ranges of products at low prices and come in many forms: discount houses, which feature a large number of items at low prices; catalog showrooms, which allow customers to view displays, place orders, and wait briefly while clerks retrieve orders from warehouses; factory outlets, which are manufacturerowned stores that avoid wholesalers and retailers by selling merchandise directly from factory to consumer; wholesale clubs, which offer large discounts on a wide range of brand-name merchandise to customers who pay annual membership fees.

3. Convenience Stores. Convenience stores offer ease of purchase of a narrow assortment of products with higher prices.

B. Nonstore Retailing Some retailers sell some or all of their products without stores. Vending machines are ideal for products such as snack foods, bottled water and soft drinks, cigarettes, and even videos (Redbox). Major types of nonstore selling include direct-response retailing, in which firms make contact with customers both to inform them about products and to receive sales orders.

Mail order (or catalog marketing ) is a popular form of direct-response retailing. Less popular in recent years istelemarketing—the use of the telephone to sell directly. In direct selling, companies sell door-to-door or through home-selling parties.

C.Online Retailing Over 85 percent of the world’s online population—over 1 billion customers— have made purchases on the Internet on such sites as iTunes and Amazon.com. Online retailing allows sellers to inform, sell to, and distribute to consumers using online technology.

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1. Electronic Catalogs. Electronic catalogs use the Internet to display products for both retail and business customers. Advantages include little cost in maintaining and accessing the catalog, as well as reducing mail distribution and printing costs.

2. Electronic Storefronts and Cybermalls. Electronic storefronts allow consumers to collect information about products and buying opportunities, whereas cybermalls are collections of virtual storefronts representing diverse products. Convenience and accessibility of information are prime benefits.

3. Interactive and Video Retailing. Interactive marketing allows both retail and B2C customers to interact with multimedia sites using voice, graphics, animation, film clips, and access to live human advice. Video retailing lets viewers shop at home from channels on their TVs or other digital devices, and place orders by phoning in or emailing.

KEY TEACHING TIPS •

Students easily confuse the work of agents and brokers. Agents form long-term relationships to represent just a few producers, while brokers match numerous sellers and buyers.

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Students often confuse the various types of bargain retailers. It may help to review

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the functions of each type: discount houses, catalog showrooms, factory outlets, and wholesale clubs.

Review the functions of nonstore retailing, including direct-response retailing, mail order, telemarketing, and direct selling.

Emphasize the variety of e-intermediaries and the impact on marketing.

QUICK QUESTIONS •

How do online retailers benefit from the use of syndicated sellers?

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How do online consumers benefit from shopping agents (e-agents)?

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How do online retailers and consumers benefit from electronic retailing?

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How can consumers benefit from interactive and video marketing?

Learning Objective 13-4:

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Define physical distributionand describe the major activities in the physical distribution process.

Physical Distribution refers to the activities needed to move products efficiently from manufacturer to consumer.

Two primary activities include warehousing and transportation. Its purpose is to make goods available when and where customers want them, keep costs low, and provide services to satisfy customers.

A. Warehousing Operations Storing or warehousing, is a major part of distribution management. Private warehouses are owned by a single manufacturer, wholesaler, or retailer that needs storage space on a regular basis; public warehouses are independently owned and rent space to firms that need it. A growth area for storage is in storing digital data by using off-site digital storage services.

B. Transportation Operations Factors involved in choosing a transportation method include the nature of the product, the distance it must travel, the speed with which it must be received, and the customers’ wants and needs.

Transportation Modes. The most common modes are trucks, railroads, planes, digital transmission, water carriers, and pipelines. Differences in cost most often are related to delivery speed. Trucks. The advantages of trucks include flexibility for any-distance distribution, fast service, and dependability. Planes. Air is the fastest mode of transportation for physical goods. However, it is also the most expensive form of transportation. High Speed Digital Transmission. Online transmission is a newer, faster, and less expensive means of distribution than all other modes. It is restricted to products such as music, images, movies, and software. Water Carriers.

Water is the least expensive mode, but also the slowest. Water carriers can reach many areas throughout the world. Railroads. Railroads can economically transport high-volume, heavy, bulky items, such as cars, steel, and coal. However, their delivery routes are limited by fixed, immovable rail tracks. Pipelines. Pipelines are slow and lack flexibility and adaptability. But for specialized products they provide economical and reliable delivery of products such as liquids and gases.

C. Distribution through Supply Chains as a Marketing Strategy

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Instead of just offering advantages in product features, quality, price, and promotion, many firms have turned to supply chains that depend on distribution as a cornerstone of business strategy. This approach means assessing, improving, and integrating the entire stream of activities—upstream suppliers, wholesaling, warehousing, transportation, delivery, and follow-up services—involved in getting products to customers.

QUICK QUESTIONS •

How can intermediaries provide added value to customers?

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What is the difference between a private warehouse and a public warehouse?

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What are the advantages and disadvantages of relying on the following modes of transportation: trucks, planes, water carriers, railroads, and pipelines?

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Learning Objective 13-5: Identify the objectives of promotion and the considerations in selecting a promotional mix, and discuss the various kinds of advertising promotions.

The Importance of Promotion Promotion is any technique designed to sell a product; it is a message that a marketer sends to consumers about its product(s).

A. Promotional Objectives Marketers may use promotion to accomplish a number of tasks, such as communicating information, positioning products, adding value, or controlling sales volume. The ultimate objective is to increase sales. Positioning is the process of establishing an easily identifiable product image in the minds of consumers by fixing, adapting, and communicating the nature of the product itself.

B. Promotional Strategies 1. Pull Strategy. A pull strategy appeals directly to consumers who will demand the product from retailers.

2. Push Strategy. Using a push strategy, a firm markets its product to wholesalers and retailers who then persuade customers to buy it.

Manufacturers frequently use a combination of pull and push strategies, appealing to customers to create demand for the product and to wholesalers and retailers to stock the item.

C. The Promotional Mix Marketers use five types of promotional tools: advertising, personal selling, sales promotions, direct or interactive marketing, and publicity and public relations. The best combination of these tools—the best promotional mix—depends on many factors. A marketer’s product, its target audience, and its budget are all important considerations in building the promotional mix.

Buyers must recognize the need to make a purchase prior to searching for product or service information.

Buyers then compare competing products and services before purchasing one.

Buyers then evaluate the purchase. There are five stages to this process, and the marketer publicity to make sure buyers are aware of their products. matches promotional tools with these steps: 2. buyers search information about available products,marketers advertising personaland 1. As When buyers firstfor recognize the need to make a purchase, useand advertising selling are important methods to educate consumers.

3. Personal selling can become vital as buyers compare competing products. Sales representatives can demonstrate product quality, features, and performance in comparison with competitors’ products.

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4. When buyers are ready to purchase products, sales promotion can give consumers an incentive to buy. Personal selling can help by bringing products to convenient purchase locations.

5. After making purchases, buyers evaluate products and make a note of their strengths and deficiencies. Advertising and personal selling can remind consumers that they made wise purchase choices.

D. Advertising Advertising is paid, nonpersonal communication used by an identified sponsor to inform an audience about a product.

1. Advertising Media. Advertising media are specific communication devices for carrying a seller’s message to potential customers; advertising media include newspapers, television, direct mail, radio, magazines, and outdoor advertising. The combination of media through which a company advertises is called its media mix. a. Television. Although TV is the most widely used medium, it is also the most expensive. b. Internet. Although Internet advertising has great target marketing potential, consumers don’t want to wade through web pages cluttered with distracting graphics and pop-ups. c. Direct Mail. Direct-mail advertisements allow a seller to select its audience and personalize its message. However, many people discard it as junk mail. d. Newspapers. Newspapers provide excellent local coverage. However, they are generally thrown out and don’t allow advertisers to target audiences well. e. Radio. Radio ads are inexpensive and audiences are largely segmented. However, radio ads go by quickly and people tend to use the radio as background while doing other things. f. Magazines. Magazines provide for a high level of market segmentation, allow attractive artwork, and have long lives. However, they must be submitted well in advance, and ads may not appear in the best spots. g. Outdoor. Outdoor advertising—billboards and so on—are inexpensive, face little competition for consumers’ attention, and provide high repeat exposure. However, they can present only limited information, and advertisers have little control over audiences. h. Other. A combination of other media, including catalogs, sidewalk handouts, skywriting, phone calls, and door-to-door communication, are also available.

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Advertisers want better information about who looks at their ads and for how 2. Real-Time Adalways Tracking. long. Accurate ad-watching behavior of shoppers in malls, theaters, and grocery stores is on the increase through the introduction of high-tech real-time surveillance.

Companies like Google have become experts at feeding back ad data to their advertisers.

KEY TEACHING TIPS • Remind students of the elements of the promotional mix and reinforce that many factors determine how a marketer designs its promotional mix, with target audience being the most important.

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Reinforce that promotion refers to techniques for communicating information about products; it is a part of the communication mix—the total message a company sends to consumers about its products.

Point out that when designing the promotional mix, marketers match the best promotional tools with where buyers currently are in the decision-making process.

Ensure that students realize that to most effectively promote a product, marketers must • find out who their customers are, to which media they pay attention, what messages appeal to them, and how to get their attention.

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QUICK QUESTIONS •

What elements make up the media mix?

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What are some advantages and disadvantages of using newspapers, magazines, radio, Internet, and outdoor advertising?

Use In-Class Activity 3: Up for Debate: What’s the Best Way to Reach Them?

Time Limit: 30 minutes HOMEWORK Advertising Media Now is a good time to assign Application Exercise 13-10 from the end-of-chapter materials as homework. The assignment encourages students to analyze a marketing video in terms of appeal to the target market.

At-Home Completion Time: 1 hour

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Learning Objective 13-6: Outline the tasks involved in personal selling and describe the various types of sales promotions.

Personal Selling In personal selling,a salesperson communicates one-to-one with potential customers to identify their needs and to line them up with the seller’s products. Personal selling requires a certain level of trust between buyer and seller, which must be established over time. A. Personal Selling Situations Salespeople must consider the ways in which personal sales activities are affected by the differences between consumer and industrial products. Retail selling is selling a consumer product for the buyer’s personal or household use. Industrial selling is selling products to other businesses, either for the purpose of manufacturing or for resale. In retail selling, the buyer usually comes to the seller, whereas the industrial salesperson typically calls on the prospective buyer. An industrial decision usually takes longer than a retail decision because it involves more money, decision makers, and weighing of alternatives.

B. Personal Selling Tasks In order processing, a salesperson receives an order and sees to its handling and delivery. Creative selling involves providing information and demonstrating product benefits to persuade buyers to complete a purchase. A company may use missionary selling when its purpose is to promote itself and its products rather than simply to close a sale.

C. The Personal Selling Process Perhaps the most complex and challenging of these three sales tasks is creative selling. The creative salesperson is responsible for starting and following through on most of the steps in the personal selling process: 1. Prospecting and qualifying. Prospecting is the process of identifying potential customers. In qualifying, prospects must be assessed to determine whether they have the authority to buy and the ability to pay.

2. Approaching. The approach refers to the first few minutes of a salesperson’s contact with a qualified prospect, the first impression.

3. Presenting and demonstrating. Next, the salesperson makes a presentation, a full explanation of the product, its features, and its uses. The presentation must link product benefits to the prospect’s needs. A presentation may or may not include a demonstration.

4. Handling objections. No matter what product is for sale, prospects will have some objections. Objections indicate interest on the part of the buyer, but also pinpoint the parts of the presentation that concerned the buyer.

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5. Closing. The most critical part of the selling process is the closing, in which the salesperson asks the prospect to buy the product. Successful salespeople recognize the signs that a customer is ready to buy.

6. Following up. Follow-up is a key activity, especially in relationship marketing. For lasting relationships with buyers, good salespeople don’t end the sales process with the closing; they want sales to be so successful that customers will buy from them again.

D. Sales Promotions Sales promotions are short-term promotional activities designed to stimulate consumer buying, industrial sales, or cooperation from distributors. Sales promotions are important because they increase the likelihood that buyers will try products.

The best-known forms of sales promotion are samples and discount coupons, premiums, which are free or reduced-priced items, point-of-sale (POS) displays, loyalty programs, and trade shows. Successful sales promotions provide potential customers with convenience and accessibility when the decision to buy occurs.

E. Direct (or Interactive) Marketing is one-on-one nonpersonal selling that tries to get consumers to make purchases away Direct (or interactive) marketing from retail stores and, instead, to purchase from home, at work, or by using a mobile device. When used by B2B businesses, direct marketing is primarily lead generation so a salesperson can close the sale where interest has been shown. In B2C businesses, it has primarily a selling goal. The advantage of direct marketing is that you can target the message to the individual and you can measure the results.

F. Publicity and Public Relations Publicity is information about a company, a product, or an event transmitted by the general mass media to attract public attention. Public relations is company-influenced publicity that seeks to build good relations with the public and to deal with the effects of unfavorable events.

KEY TEACHING TIPS •

Personal selling is used to communicate one-on-one with potential customers to identify their needs and align them with the seller’s products.

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Review the tasks involved in personal selling: order processing, creative selling, and

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missionary selling.

Reinforce that sales promotions include a number of short-term promotional activities designed to encourage consumer buying, industrial sales, or cooperation from distributors.

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• Remind students of the flexibility and adaptability of direct (or interactive) marketing in targeting very specific customers.

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Make sure that students understand the difference between publicity and public relations, as these two concepts are often confused.

QUICK QUESTIONS •

What are some types of sales promotions?

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What are some differences between personal selling for consumer products or industrial products?

Use In-Class Activity 2: Up for Debate: Getting a Stimulus Boost with Promotion Time Limit: 30 minutes HOMEWORK

Business Plan Now is a good time to assign Part 4 of the business plan project. In this section, students consider their target market, the features and benefits of their product or service, and the use of the Four Ps in attracting customers to their product or service.

At-Home Completion Time: 3 to 5 hours

IN-CLASS ACTIVITIES

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In-Class Activity 1: Icebreaker: Why Do They Sell Where They Do? Activity Overview: This activity asks students to consider distribution strategies behind some well-known competing products.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask each group to come up with four sets of competing products or services; in most cases, students will select products that are similar, but carry a different brand name, such as Blue Bonnet Margarine versus Prairie Farms Margarine. These should be products that are similar to each other but that are found in different types of places. (10 minutes) 2. Ask students to discuss the place each product is sold and be able to explain the reasoning for one brand being sold in one kind of place rather than a different place (convenience store and Whole Foods, for example). (10 minutes) 3. Reassemble the class as a whole and ask for each group’s input. (10 minutes) Don’t Forget: Students will come up with a variety of reasons for differing products being sold where they are sold. Some will be more difficult to explain than others. For example, almost everyone knows that a product purchased at Walmart often is less costly than a product from Kroger.

But students may not understand why that is the case when the product appears to be the same, from their perspective.

Wrap-Up: Bring the activity to a close by reminding students of the role distribution plays in the marketing mix and the common types of distribution strategies seen in the marketplace.

In-Class Activity 2: Up for Debate: Getting a Stimulus Boost with Promotion

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Activity Overview: This activity asks students to discuss how firms are changing their distribution messages during economic downtimes.

Time Limit: 30 minutes What to Do: 1. Ask students to read the Managing in Turbulent Times feature in the textbook, making a list

of as many pros and cons of relying on direct marketing as possible. (10 minutes) 2. Divide the class into small groups to discuss their pros and cons of premiums, direct (or interactive) marketing, and integrated promotion and distribution. Do the pros outweigh the cons? (10 minutes) 3. Reassemble the class to debate the pros and cons as a group. Do the pros outweigh the cons?

(10 minutes) Don’t Forget: Retailers are constantly looking for ways to get an edge in the marketplace.

Remind students that retailers will use all of the 4 Ps (price, promotion, product, and place) to add value and try to get an edge in competitive markets.

Wrap-Up: Ask students to clip advertisements from newspapers or magazines, or print online advertisements that show how retailers are seeking to use promotion to gain attention and boost demand. Get the students to bring them to the next class and vote on the one that is most innovative.

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In-Class Activity 3: Up for Debate: What’s the Best Way to Reach Them?

Activity Overview: This activity asks students to think about different ways that a product can be promoted to one specific target market.

Time Limit: 30 minutes What to Do: 1. Divide the class into four-member groups and ask each group to consider marketing a solarpowered vacuum cleaner to working women with fast-paced, on-the-go lifestyles. In their discussions, groups should consider the following: (15 minutes) a. Which elements of the promotional mix should be utilized? b. What are the best ways/places to promote this product to this specific target market?

2. Reassemble the class and discuss each group’s promotion suggestions. (15 minutes) Don’t Forget: Specific promotional mix elements do a better job than others in reaching or attracting specific target markets.

Wrap-Up: Bring the activity to a close by reviewing the elements of the promotional mix and how each element may or may not be suited in this scenario.

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BUSINESS PLAN PROJECT PART 4 PRINCIPLES OF MARKETING Assignment Overview: This part of the business plan asks students to think about marketing’s “Four Ps”—product, price, place (distribution), and promotion—and how they apply to their business. Students will list features and benefits, as well as the points of difference for their product or service.

After describing the product, the student must connect those described features and benefits to a targeted buyer. Once the targeted buyer has been named, students will describe advertising and promotional efforts to get the buyer’s attention.

Files to Provide Students: For this part of the project, students will be asked to complete Part 4: Principles of Marketing. If students have already started working on the business plan project, they should continue using the student template they began working on in Parts 1 to 3. A copy of the marketing template is available on the following page. Estimated At-Home Completion Time: If done well, this section will require a minimum of 3 to 5 hours. Instructor feedback will improve the quality of student responses, so you may wish to spend class time working on the plan. Homework Deliverable from Students: The length of student responses in this part of the plan will vary greatly, as critical or creative thinkers will often begin to distinguish themselves. At a minimum, you should expect 3 to 5 pages in this part, with exceptional students writing as many as 8 pages to fully explain all aspects of their marketing program.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 13-1. What are the types of distribution channels that sellers use to get products to end users?

Give an example of each. The channels of distribution are as follows: Channel 1 involves direct sales to consumers without intermediaries; Channel 2 involves a retailer; Channel 3 involves both a retailer and a wholesaler; Channel 4 includes an agent or broker before the wholesalers and retailers. Students should give specific examples of each channel with a statement explaining why that example fits that channel concept. (Learning Objective 13-1 – AACSB – application of knowledge)

13-2. What are the three distribution strategies for market coverage? When is each most appropriate? Intensive distribution means distributing through as many channels and channel members as possible (both wholesalers and retailers) for low-cost consumer goods such as snacks and magazines. With exclusive distribution, a manufacturer grants the exclusive right to distribute or sell a product to a limited number of wholesalers or retailers, usually in a given geographic area. The product is usually a high-cost prestige product, such as a luxury car. Using selective distribution, a producer selects only wholesalers and retailers that will give a product special attention in sales effort, display and promotion advantage, and so forth. Furniture and appliances are often marketed using selective distribution. (Learning Objective 13-1 – AACSB – application of knowledge)

13-3. How do retailers add value to consumers? Why don’t more manufacturers sell direct to consumers? Students should address the product and place components of the marketing mix; retailers bring product to place, making it easier for consumers to access the product.

They should also address the impact of online shopping on the place component of the marketing mix. The retailer is often the end of the supply chain before the product reaches consumers. Students may also address specialization (manufacturer and retailer) and the variety of complementary products that a retailer can offer. (Learning Objective 13-3 – AACSB – analytical thinking)

13-4. What are the major activities in the process of physically distributing goods?

The major activities in physical distribution of goods are warehousing and transportation.

(Learning Objective 13-4 – AACSB – application of knowledge) 13-5. What are the steps in the personal selling process?

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The first step is prospecting and qualifying: the process of identifying potential customers and then prospects must be assessed to determine whether they have the authority to buy and the ability to pay. The second step is approaching. The approach refers to the first few minutes of a salesperson’s contact with a qualified prospect. Next, the salesperson makes a presentation, a full explanation of the product, its features, and its uses. The fourth step is handling objections. No matter what product is for sale, prospects objections.will Thehave nextsome step is . The closing most critical part of the selling process is the closing, in which the salesperson asks the prospect to buy the product. The final step is , a key activity, especially in relationship marketing. (Learning Objective 13-6 – follow-up AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 13-6. Describe the four forms of non-store retailing. Give examples of products that would be most appropriate for each and discuss the reasons why that product would do well with that particular form.

In addition to the obvious answer of online retailing, nonstore retailing includes directresponse retailing, in which firms contact customers directly to inform them about products and to receive sales orders; mail order (or catalog marketing), in which customers place orders for catalog merchandise received through the mail; telemarketing, which uses phone calls to sell directly to consumers; and direct selling, which uses door-to-door or homeselling parties, many of which are conducted through social media. Students should provide specific examples for each form (such as kitchenware for direct selling.) (Learning Objective 13-3 – AACSB – analytical thinking)

13-7. What are the major types of product line and bargain retailers? Identify at least one example of each type. Retailers that feature broad product lines include department stores, which are arranged into specialized departments and handle a wide range of goods; supermarkets, which offer a wide selection at low prices; and, specialty stores, which are small stores that carry a line of related products. Bargain retailers carry wide ranges of products and come in many forms: discount houses, which feature a large number of items at low prices; catalog showrooms, which allow customers to view displays, place orders, and wait briefly while clerks retrieve orders from warehouses; factory outlets, which are manufacturer-owned stores that avoid wholesalers and retailers by selling merchandise directly from factory to consumer; wholesale clubs, which offer large discounts on a wide range of brand-name merchandise to customers who pay annual membership fees.

(Learning Objective 13-3 – AACSB – application of knowledge)

13-8. Identify the major tools of sales promotion. At which stage of the consumer buying process is each most important? Why? The major tools of sales promotion are samples and coupons, premiums, loyalty programs, and point-of-sale displays. Samples are important at the need recognition stage, and

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especially at the information seeking stage. They can encourage trial of a product, without any commitment. This eliminates risk and provides information. Coupons provide a discounted price to the consumer. This encourages trial of new products, trial of competitors’ products, or repurchase. Depending on the situation, the information seeking stage or the evaluation of alternatives stage would be where coupons are important. Premiums are “rewards” for purchasing a specific product. Therefore, the purchasing decision stage is when this promotion is most relevant. It may push a consumer in a certain direction on the purchase. Loyalty programs reward repeat purchasers. Therefore, the purchase decision stage and the post-purchase evaluation stage matter the most. If a consumer does not make the repeat purchase, or return to that store, then the evaluation was not positive, by the consumer. Point-of-purchase displays matter at the need recognition and information seeking stages. In places like grocery stores, these capitalize on need recognition by providing the product, but not its competitors. In doctors’ offices and bank lobbies, their purpose it to provide information (but, again, not information on alternatives). (Learning Objective 13-5 – AACSB – application of knowledge) APPLICATION EXERCISES 13-9. In addition to being a major online retailer, Amazon.com acts as an e-intermediary for many small to medium-sized businesses. Imagine that you are interested in selling refurbished cell phones. Using the information on Amazon’s website, how would you become a seller on Amazon? What costs are associated with selling your products through Amazon? If you decided to sell your products through your own website instead, what would be the pros and cons?

As a member of a supply chain, the company’s marketing mix has to be consistent with its partners’ strategy. A company cannot make unilateral decisions without considering the other members of the supply chain. For example, if a member increases its prices what is the impact on the other members. Students should also discuss how the supply chain process needs to be an integrated process. (Learning Objectives 13-2 – AACSB – application of knowledge, analytical thinking) 13-10. Search for some of the best viral marketing videos of all time and chose one to analyze.

What is the product being marketed, and who is the target market? How does the advertisement appeal to the target market? Why do you think this particular video was effective?

Student answers will vary based on both the product and the video. For instance, Dollar Shave Club rocketed to success based on a viral video promoting cheap, delivered-to-yourdoor razor blades. Students should identify the demographics of the target market and elements of the video as well that made it go viral, such as humor, drama, etc. (Learning Objective 13-5 – AACSB – analytical thinking)

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BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 13-11 TO 13-15 (Learning Objectives 13-1, 13-4, 13-5, 13-6 – AACSB – interpersonal relations and teamwork, analytical thinking) In this exercise students continue to develop their marketing plan by adding an appropriate distribution and promotional plan to their marketing mix. Determining promotion objectives and strategies leads to choosing the specific appropriate tools to successfully achieve the objectives. Choosing the appropriate distribution mix relies on having earlier correctly identified your target market and the characteristics of the buyers. Knowing the costs of the tools you choose will help you stay within your budget.

TEAM EXERCISE: MAKING A DIFFERENCE 13-16 TO 13-19 (Learning Objectives 13-5, 13-6 analytical thinking) As studentsrelations examineand the teamwork, guidelines, they – AACSB – interpersonal must determine whether the objectives are the same for attracting students from Huge University as for attracting students from other North American colleges and universities.

Why would the objective be the same? Will the elements of the promotional mix need to be different or can they be the same? Why? Once the program is a few years old, students should keep in mind that the message should be able to change and use the experiences of the students who completed the program to enhance the content of the promotions.

EXERCISING YOUR ETHICS: THE CHAIN OF RESPONSIBILITY (Learning Objective 13-4 AACSB – ethical understanding and reasoning, analytical – thinking) 13-20. What are the responsibilities of each party—the customer, the store, and the delivery firm—in this situation?

The responsibilities of each party in this situation are as follows: • Customer: To provide correct delivery information to the store.

• Store: To clearly communicate its delivery policies to consumers.

• Delivery firm: To make timely deliveries to the designated address and to clearly communicate its policies to the store.

13-21. From an ethical standpoint, in what ways is the store manager’s action right? In what ways is it wrong?

From an ethical standpoint, the store manager’s action is right and wrong as follows: • Right: Since the store fulfilled its obligation to the customer, fiscal responsibility would suggest that the store manager should not refund the customer’s money.

• Wrong: Since the package was not delivered to the bride, good customer service would suggest that the store manager should refund the money.

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13-22. If you were appointed to settle this matter, what actions would you take?

Answers will vary, but students should recognize that customers typically broadcast a bad experience to many of their friends and colleagues, magnifying the impact of a dissatisfying experience.

CASES: CHAOS THEORY AT WORK (Learning Objectives 13-1, 13-2, 13-3, 13-4, and 13-5 – AACSB – application of knowledge, analytical thinking) 13-23. Why are online retailers taking so much market share from the traditional brick-andmortar stores? Online retailers have become experts at collecting and collating individual and marketplace buying patterns and tracking individual shopping preferences. Online retailing allows sellers to inform, sell to, and distribute to consumers using online technology. The breadth of products available and convenience of shopping online have proven to be very attractive to consumers.

13-24. Do you think that legacy stores such as Macy’s and even Walmart will be able to compete with online stores in the future? How would they have to change in order to be more competitive?

Legacy stores can compete by providing services that directly compete with online retailers.

These services include the ability to inform and sell to consumers conveniently. Promotional strategies such as advertising, personal selling, and sales promotion can be useful tools. Easy access to products and face-to-face selling can influence buyers in the information search and evaluation of alternatives, as well as the purchase decision.

13-25. How have changes in physical distribution changed the marketplace? How has the marketplace changed the distribution networks? Global distribution systems allow products to be produced around the world and shipped efficiently to customers.

Transportation options have changed. Digital transmission and digital storage have created new service requirements.

13-26. If everything were available to purchase online, would there still be products and services you would want to buy in person? How can online retailers become more competitive against traditional stores for items that people still prefer to buy in person?

Answers will vary depending on students’ comfort with buying various products online.

They will want to “touch” some products, where other products are easier to learn about online and purchase without the in-person experience. Online retailers can compete by coming as close as possible to offering the in-person experience. Videos, testimonials, and reviews can increase people’s willingness to complete a purchase, for example. Some vendors send samples in advance of a purchase, to help someone reach a decision.

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THE LONG TAIL, REVISITED (Learning Objectives 13-3 -- AACSB – analytical thinking) 13-27. What kinds of products do you think you would find in Anderson’s “long tail”? Give examples.

Older products no longer available in brick-and-mortar stores along with new products that have not yet developed a following are two primary categories of long tail products. These are products at the beginning of the PLC and the end of the PLC. 13-28. Do you think the long-tail theory is still applicable? Why, or why not?

Yes. Simply examine the tremendous variety of products available on Amazon. Compare it to the number of products available in a WalMart store. Investigate products where Amazon is the seller and where it is the intermediary.

13-29. Would you start a niche marketing business? If so, why and how would you market your products or services? If not, why not?

Answers will vary depending on students’ risk tolerance. Students should address the value of the products to customers, the ease of reaching the customers, and which promotional tools will be most effective for marketing the chosen products. The best tools will differ with the product being marketed.

13-30. Do you think it is ethical for companies like Amazon to collect third party data? How would you feel, and what would you do, if your product suddenly became mainstream and Amazon started carrying it, selling it, and fulfilling those sales? What are the issues? What are the pros and cons?

Answers will vary about the ethics of companies collecting third party data. Students may be aware, and accept, that much of their online activity is already tracked. Students should be excited about their product going mainstream and being handled by Amazon. The growth curve for the product will increase significantly, so the opportunity for profit will likewise increase. Issues include the ability to meet the increased demand while maintaining the quality of the product.

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PART 4 INTEGRATIVE LEARNING PORTFOLIO PRINCIPLES OF MARKETING CRAFTING A BUSINESS PLAN TARGET MARKET P4-1. Describe your target market in terms of age, education level, income, and other demographic variables.

Hint: Refer to Chapter 11 for more information on the aspects of target marketing and market segmentation that you may want to consider. Be as detailed as possible about who you think your customers will be.

PRODUCT FEATURES AND BENEFITS P4-2. Describe the features and benefits of your product or service. Hint: As you learned in Chapter 11, a product is a bundle of attributes— features and benefits. What features does your product have—what does it look like, and what does it do? How will your product benefit the buyer?

PRODUCT DIFFERENTIATION P4-3. How will you make your product stand out in the crowd? Hint: There are many ways to stand out in the crowd, such as a unique product, outstanding service, or a great location. What makes your “great idea” special? Does it fill an unmet need in the marketplace? How will you differentiate your product to make sure that it succeeds?

PRICING P4-4. What pricing strategy will you choose for your product, and what are the reasons for this strategy? Hint: Refer to Chapter 12 for more information on pricing strategies and tactics. Since your business is new, so is the product. Therefore, you probably want to choose between price skimming and penetration pricing. Which will you choose, and why?

PLACE (DISTRIBUTION) ISSUES P4-5. Where will customers find your product or service? (That is, what issues of the distribution mix should you consider?) Hint: If your business will sell its product directly to consumers, what types of retail stores will sell your product? If your product will be sold to another business, which channel of distribution will you use? Refer to Chapter 12 for more information on aspects of distribution you may want to consider.

ADVERTISING P4-6. How will you advertise to your target market? Why have you chosen these forms of advertisement?

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Hint: Marketers use several different advertising media—specific communication devices for carrying a seller’s message to potential customers—each having its advantages and drawbacks. Refer to this chapter for a discussion of the types of advertising media you may wish to consider here.

PROMOTIONS P4-7.What other methods of promotion will you use, and why?

Hint: There’s more to promotion than simple advertising. Other methods include personal selling, sales promotions, and publicity and public relations. Refer to the discussion of promotion in this chapter for ideas on how to promote your product that go beyond just advertising.

CASE PART 4: FORD MOTOR COMPANY, 1948-1965 P4-8. Why do you think the Edsel was a failure? What market research strategies would you have recommended to that team? What product development strategies would you have recommended?

Students should point to Edsel’s failure to utilize even basic marketing techniques like focus groups and outside experts. They should be able to articulate market research strategies like these and others like surveys and experimentation. Students should be able to identify the seven-step product development process. They should also be able to understand that even in the 1950s, it took a long time to bring a product to market, unlike today’s rapid turnaround environments where products can be developed and prototyped quickly. (Learning Objectives 11-4 and 12-2– AACSB – analytical thinking)

P4-9. Why do you think management at Ford and other auto companies spend so much money on developing new products rather than simply improving existing product lines? Students should be able to link their answers to the seven-step product development process and should discuss marketing strategies as well. They should be able to recognize the costs of re-tooling an automobile factory to produce new cars. They should be able to articulate the product life cycle and both planned and unplanned obsolescence. For instance, they may discuss rapidly changing technology and customer taste and preferences. (Learning Objective 12-3 – AACSB – analytical thinking)

P4-10. What was the physical distribution process for automobiles in the 1950s? How is that similar to today’s process? How is it different?

In the 1950s, Ford had established an extensive network of dealers, pioneering the car Students will need to note the increasing self-service and online purchasing, like CarMax and eBay Motors, dealership model and solving the models problemofofcar “place”.

(Learning Objective 13-4 – AACSB – even as car dealerships are still successful. analytical thinking)

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P4-11. How do you think Ford established prices for the 1949 Ford? For the Edsel? The Mustang? What internal and external factors did they consider?

When Ford unveiled the 1949 Ford, the company’s process was opaque, so students will not be able to cite pricing strategies specific to Ford, but they will note some general external strategies that Ford may have been using, like price skimming and penetration. In addition, the company would have been looking internally at a profit-based pricing model. (Learning Objectives 12-4 and 12-5 – AACSB – analytical thinking) P4-12. What factors of the external marketing environment, both at home and abroad, worked in Ford’s favor as it tried to reestablish its dominance? Which factors worked against it?

Explain your reasoning.

The marketing environment in the 1950s was very different than it is today, and students will need to be able to articulate factors like infrastructure (roads and traffic control), and he created a need for families to have a second car. Students may also note women’s increasing participation in the workplace, further necessitating two cars in a household. Ford also pioneered the eight-hour day, allowing the public to enjoy more leisure time. Globally, Ford’s increasing factories around the world drove up demand for his cars. Increased competition, especially from GM and Chevrolet and the failure of the Edsel are among the factors working against Ford. (Learning Objective 12-4 and 12-5 – AACSB – analytical thinking) FINDING YOUR PATH Careers in Business Marketing is a popular major in most business programs. Marketing managers are often generalists responsible for all marketing-related activities for a particular product.

However, there are also specialized marketing jobs including personal selling, marketing research, packaging, advertising, industrial marketing, social media, and distribution.

Making Yourself Employable Learn how to market yourself. Marketing Skills Since a lot of marketing work involves interpersonal relationships, human relations skills are important. Additionally, the ability to assess marketing trends, understand product development and pricing, and interpret marketing research data are skills in demand.

Communications skills and data analytics skills count heavily as well. Marketing Yourself Approach a job search process from the perspective of: you are a product and potential employers are customers looking for the product with the features and benefits that best meet their needs. So, do the following:

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Identify skills or abilities you possess (product features)

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• • • •

List how those skills benefit a prospective employer (product benefits) Identify an industry or organization you are interested in (target market) and list characteristics of this target market.

Evaluate how your features and benefits lists match your target market’s needs and what evidence you have to support your assessment.

How can you fill any gaps to improve the match between you and your prospective customer/employer?

Your Image and Résumé As your résumé likely will be your first chance to make an impression on your potential employer, be professional. Use resources on your campus, such as career centers, for help on creating the document.

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Chapter 14: Information Technology (IT) for Business Chapter Overview Information technology (IT) has had a tremendous impact on the business world in the last few years. Think of how much the Internet alone affects your life. Some people feel completely “out of touch” going just one day without it. We are connected to the remotest corners of the world.

Businesses have a variety of IT resources at their disposal, and information systems and how these systems are used play an integral role in businesses.

This chapter provides the latest details on business IT. It discusses the impacts IT has had on the business world and identifies the IT resources businesses have at their disposal. It also describes the role of information systems, the different types of information systems, and how businesses use such systems. Finally, it looks at the various threats and risks IT poses for businesses, as well as the ways in which businesses protect themselves from these threats and risks. Even if you are apprehensive about IT and its uses, this chapter will help you become more familiar with and comfortable with IT.

Learning Objectives 14-1. Discuss the impacts information technology is having on the business world.

14-2. Identify the IT resources businesses have at their disposal and how these resources are used.

14-3. Describe the role of information systems, the different types of information systems, and how businesses use such systems.

14-4. Identify the threats and risks information technology poses to businesses.

14-5. Describe the ways in which businesses protect themselves from the threats and risks information technology poses.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: IT Devices

Description Time Limit Students discuss various ways in which technological devices allow the class as a 20 min. whole to create, store, exchange, and use information.

Students 2. Small-Group Discussion: examine how information technology progress leads to the creation of CereProc and New Products, 30 min. new products.

Especially for Small Markets Students are divided into teams to discuss the ethical issues surfacing when an employer has 30 min.

3. Up for Debate: Is That Ethical? the ability to access and track employees’ computer usage.

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CHAPTER OUTLINE Learning Objective 14-1: Discuss the impacts information technology is having on the business world.

Information Technology Impacts: A Driver of Changes for Business Information technology (IT)includes the various appliances and devices for creating, storing, exchanging, and using information in diverse modes, including visual images, voice, multimedia, and business data.E-commerce is the use of online networks and other electronic means for retailing and business-to-business transactions. Businesses are using IT to bolster productivity, improve operations and processes, create new opportunities, and communicate and work in ways not possible before.

A. Creating Portable Offices: Providing Remote Access to Instant Information Technology built into various devices offers businesses powerful tools that save time and travel expenses by enabling employees, customers, and suppliers to communicate from any location.

B. Enabling Better Service by Coordinating Remote Deliveries Company activities may be geographically scattered, but remain coordinated through a networked system that also provides better service for customers. Shipping from various locations is more cost-effective and efficient than gathering all the items in one place to then ship to the buyer.

C. Creating Leaner, More Efficient Organizations Networks and technology allow organizations to operate with fewer employees and simpler structures. IT communications provide better use of employee skills and greater efficiencies from physical resources.

D. Enabling Increased Collaboration Collaboration software and other IT communication devices enable greater collaboration among internal units and with outside firms.

E. Enabling Global Exchange The global reach of IT enables business collaboration on a huge scale and minimizes delays, holds down costs, and maintains quality.

F. Providing Flexibility for Customization IT networks and other IT advances create new manufacturing and service capabilities that enable businesses to offer customers greater variety and faster delivery cycles. Mass customization allows manufacturers to produce in large volumes, with each item featuring the unique options the customer prefers. The standardized assembly line has become very adaptable. Customization and greater flexibility is also possible for service industries, including pet care and travel.

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G. Providing New Business Opportunities IT is creating entirely new businesses where none existed before.

H. Improving the World and Our Lives Numerous businesses across various industries use IT to create improvements that enhance the standard of living worldwide.

KEY TEACHING TIPS •

Remind students that information technology (IT) includes the various devices for creating, storing, exchanging, and using information in diverse modes, including visual images, voice, multimedia, and business data.

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Students need to keep the meaning of standardization separate from masscustomization, which and allows companies to produce in large volumes and provide unique features

options for customers.

QUICK QUESTIONS •

How are portable offices bolstering productivity?

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How has IT allowed marketers to provide better service?

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How does IT allow firms to create leaner, more efficient organizations?

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How has IT changed the nature of the management process within organizations?

Use In-Class Activity 1: Icebreaker: IT Devices Time Limit: 20 minutes HOMEWORK The Impact of IT Now might be a good time to assign Application Exercise 14-9 from the end-of-chapter materials as homework. This assignment asks students to think about how IT systems affect their daily lives, and whether their encounters with IT leave them at risk for identity theft.

At-Home Completion Time: 30 minutes

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Learning Objective 14-2: Identify the IT resources businesses have at their disposal and how these resources are used.

IT Building Blocks: Business Resources Businesses have numerous IT resources at their disposal.

A. The Internet and Other Communication Resources The Internet is a gigantic global system of interconnected computer networks belonging to millions of collaborating organizations and agencies—government, business, academic, and public—linked together by voice, electronic, and wireless technologies.

The World Wide Web and its protocols (Hypertext transfer protocol (HTTP) and hypertext transfer protocol secure (HTTPS)) provide the common language that allows information sharing on the Internet. 1. Intranets. Intranets are private networks of internal websites linked throughout an organization that are accessible only to employees.

2. Extranets. Extranets allow outsiders limited access to a firm’s internal information network.

3. Electronic Conferencing. Electronic conferencing allows groups of people to communicate simultaneously from various locations via e-mail, phone, or video, eliminating travel time and providing immediate contact.

4. VSAT Satellite Communications. VSAT satellite communications have a transmitterreceiver that sits outdoors with a direct line-of-sight to a satellite; the hub sends signals to and receives signals from the satellite, exchanging voice, video, and data transmission. It provides privacy because the organization’s system has total control over communications among its facilities, without dependence on other companies.

B. Networks: System Architecture A computer network is a group of two or more computers linked together by some form of cabling or by wireless technology to share data or resources, such as a printer; a client-server networkis a common type of network used in businesses in which the clients are usually the laptop or desktop computers being used, and the servers are any number of computers that provide services shared by users. Cloud computing adds an externally located component, a remote storage service, which enhances user flexibility.

1. Wide Area Networks (WANs). Wide area networks (WANs) are computers linked over long distances (statewide or even nationwide) through telephone lines, microwave signals, or satellite communications.

2. Local Area Networks (LANs). In local area networks (LANs), computers are linked in a smaller area, such as all of a firm’s computers within a single building. The arrangement requires only one computer system with one database and one software system.

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3. Wireless Networks. Wireless networks use airborne electronic signals to link network computers and devices. For example, smartphone systems allow users to send and receive transmissions on wireless wide area networks (WWANS) of hundreds of service providers in over 90 countries around the world.

4. Wi-Fi. A hotspot, or Wi-Fi access point, for the Internet is actually its own small network, called a wireless local area network (Wireless LAN or WLAN). “Super WiFi” networks are to be developed in the future by the federal government.

KEY TEACHING TIP Make sure students understand the distinction between intranets (private networks accessible only to employees) and extranets (networks that allow outsiders limited access to a firm’s internal information).

QUICK QUESTIONS •

For what purposes might data conferencing be used? What about videoconferencing?

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What are the clients and what are the servers in a client-server network?

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What is the difference between a wide area network (WAN) and a local area network (LAN)?

What are some benefits of Wi-Fi?

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Use In-Class Activity 2: Small-Group Discussion: CereProc and New Products, especially for Small Markets Time Limit: 30 minutes

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Learning Objective 14-3: Describe the role of information systems, the different types of information systems, and how businesses use such systems.

Information Systems: Harnessing the Competitive Power of IT An information system is a system that uses IT resources and enables managers to take data— raw facts and figures—and transform data into information —the meaningful, useful interpretation of data.Information systems managers operate the systems used for gathering, organizing, and distributing information.

A. Leveraging Information Resources: Data Warehousing and Data Mining Data warehousing involves the collection, storage, and retrieval of data in electronic files.

1. Data Mining. Data mining is the application of statistics and electronic technologies for searching, sifting, and reorganizing pools of data to uncover useful information.

2. Information Linkages with Suppliers. Coordinated planning avoids excessive inventories, speeds up deliveries, and holds down costs throughout the supply chain while keeping shelves stocked for retail customers.

B. Types of Information Systems Each user group and department in an organization may need a special information system.

1. Information Systems for Knowledge Workers. Knowledge information systems support knowledge workers by providing resources to create, store, use, and transmit new knowledge for useful applications. Computer-aided design (CAD) helps knowledge workers design products by simulating them and displaying them in three-dimensional graphics. Computer-aided manufacturing (CAM) uses computers to design and control the equipment needed in a manufacturing process.

2. Information Systems for Managers. Each manager’s information activities and information system needs vary according to his or her functional area. a. Enterprise Resource Planning (ERP). Enterprise resource planning (ERP) is an information system for organizing and managing a firm’s activities across product lines, department, and geographic locations.

b. Management Information Systems (MIS). Management information systems (MIS) support managers by providing reports, schedules, plans, and budgets that can then be used for making decisions. c. Decision Support Systems (DSS). Decision support systems (DSS) are interactive systems that create virtual business models and test them with different data to see how they respond.

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KEY TEACHING TIPS •

Students often confuse this point: Data warehousing is the collection, storage, and retrieval of data in electronic files; data mining is the application of electronic technologies for searching, sifting, and reorganizing data to uncover useful • information. Reinforce that an information system enables managers to collect, process, and transmit • that information for use in decision making.

Make sure students understand that a management information system provides reports, schedules, plans, and budgets that managers use to make decisions.

QUICK QUESTIONS •

When does data become information?

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How do knowledge workers benefit from knowledge information systems?

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What is the role of a decision support system (DSS)?

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What are some advantages that radio frequency identification can provide to individual stores and to the supply chain as a whole?

HOMEWORK System Architecture Now might be a good time to assign Application Exercise 14-10 from the end-of-chapter materials as homework. This assignment asks students to assess the impact of changes in IT on higher education. At-Home Completion Time: 1 hour

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Learning Objective 14-4: Identify the threats and risks information technology poses to businesses.

IT Risks and Threats IT has attracted abusers that are set on doing mischief, with severity ranging from mild nuisance to outright destruction.

A. Hackers Hackers are cybercriminals who gain unauthorized access to a computer or network, either to steal information, money, or property or to tamper with data. Hackers cost companies and organizations billions in money and jobs annually.

B. Identity Theft Identity theft is the unauthorized stealing of personal information to get loans, credit cards, or other monetary benefits by impersonating the victim. It is among the fastestgrowing crimes in the U.S., with as many as 16.6 million victims each year.

C. Intellectual Property Theft Intellectual includes products property of the mind—something produced by the intellect, that has commercial value. Nearly every company faces the dilemma of protecting product plans, new inventions, industrial processes, and other intellectual property. Its ownership and right to its use may be protected by patent, copyright, trademark, and other means.

D. Computer Viruses, Worms, and Trojan Horses computer exists A in a filevirus that attaches itself to a program and migrates from computer to computer as a shared program or as an e-mail attachment. Worms are a particular kind of virus that travels from computer to computer within networked computer systems, without needing you to open any software to spread the contaminated file. Unlike viruses, a Trojan horse does not replicate itself. It most often comes into the computer by masquerading as a harmless, legitimate software product or data file. is unintentionally downloaded on a computer and crawls around to monitor the E.Spyware host’s computer activities. For example, Internet users open files that promise “free giveaways,” not suspecting that they are downloading spyware onto their systems.

F. is Spam junk e-mail sent to a mailing list or a newsgroup. It wastes time and bandwidth, decreasing productivity. Its damage in lost time and productivity is between $28 and $66 billion in the U.S. and could be $620 billion worldwide.

QUICK QUESTIONS • • •

Can hackers ever do good?

How can identity theft be avoided?

What types of damage might a worm and a Trojan horse do?

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Learning Objective 14-5: Describe the ways in which businesses protect themselves from the threats and risks information technology poses.

IT Protection Measures Businesses guard themselves against intrusion, identity theft, and viruses by using firewalls, special software, and encryption.

A. Preventing Unauthorized Access: Firewalls Firewalls are security systems with special software and/or hardware devices designed to keep computers safe from hackers. A firewall contains two components for filtering each incoming message: (1) the company’s security policy, which contains access rules; and (b) a router, which involves a “traffic switch” that determines on which network routes or paths to send each message after it is tested against the security policy.

B. Preventing Identity Theft The Fair and Accurate Credit Transactions Act (FACTA) strengthens identity-theft protections by specifying how organizations must destroy information, rather than simply dropping it in a dumpster. Documents must be shredded, pulverized, or burned, and electronic records must be permanently removed.

C. Preventing Infectious Intrusions: Antivirus Software Anti-virus software protects systems by searching incoming e-mail and data files for “signatures” of known viruses and virus-like characteristics and quarantining such messages.

D. Protecting Electronic Communications: Encryption Software An encryption system works by encoding e-mails so that only intended recipients can open them. The system works by scrambling an e-mail message so that it looks like garbled nonsense to anyone who doesn’t possess the “key,” another part of the software that decodes encrypted e-mails.

E. Avoiding Spam and Spyware Anti-spyware and spam filtering software on business systems helps employees avoid privacy invasion and improves worker productivity.

F. Ethical Concerns in IT It is obvious that IT developments and usage are progressing faster than society’s appreciation for the potential consequences, including new ethical concerns. Ease of access to computers, mobile devices, and the Internet, together with messaging capabilities and social networking, promote widespread public exposure about people’s private lives, including personal information about how they think and feel. Just how this information should be used, by whom, under what conditions, and with what restrictions, if any, are issues teeming with ethical considerations.

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KEY TEACHING TIP •

Reinforce that an encryption system works by scrambling an e-mail message so that it looks like garbled nonsense to anyone who doesn’t possess the “key,” another part of the software that decodes encrypted e-mails.

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Remind students of the ethical issues associated with current information technology.

Ease of access to computers, mobile devices, and the Internet, together with messaging capabilities and social networking, promote widespread public exposure about

people’s private lives, including personal information about how they think and feel. Just how this QUICK QUESTION information should be used, by whom, under what conditions, and with what restrictions, What are a firewall’s two components for filtering incoming messages? if any, are issues teeming with ethical considerations. This should seem especially relevant to students, the ubiquitous of social media.

Use In-Class Activity 3: Up with for Debate: Is That use Ethical?

Time Limit: 30 minutes

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: IT Devices Activity Overview: This activity asks students to come up with a list of technological devices that reflect the many ways in which the class as a whole creates, stores, exchanges, and uses information.

Time Limit: 20 minutes What to Do: 1. Ask the class as a whole to brainstorm, coming up with a list of technological devices that they use in their personal lives, at work, or at school to create, store, exchange, and use information.

2. Ask the class to comment on these questions: a. Do students in the class as a whole use more or fewer devices than what you expected prior to brainstorming? b. In what way(s) do you see your individual use of these devices changing in the coming years? c. In what way(s) have these devices impacted your personal lives, such as at school, at the bank, while shopping, and so on?

Don’t Forget: Some people are more technologically savvy than others. Many students will say they take advantage of every gadget available, while others do not have Internet access at home.

Wrap-Up: Bring the activity to a close by reminding students that new technologies are always looming on the horizon and that no one can accurately predict how much IT will change and affect our lives in the future.

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In-Class Activity 2: Small-Group Discussion: CereProc and New Products, Especially for Small Markets Activity Overview: This activity encourages students to think about how information technology can be used to develop new products and services even in difficult economic times.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask them to read the Entrepreneurship and New Ventures feature in the textbook. (10 minutes) 2. Ask students to discuss the following questions within their small groups (10 minutes): a. What do you think about the idea of CereVoice and Voice Creation? If you were given the opportunity, would you invest in CereProc’s products? b. Think of another product or service that information technology might make viable. What would you call the product or service? What would be its unique selling points?

3. Regroup the class as a whole and discuss each group’s conclusions. (10 minutes) Don’t Forget: Information technology is rapidly changing. As new technologies become available so do new possibilities. Encourage your students to keep their eyes on technology blogs to keep abreast of new developments.

Wrap-Up: Bring the activity to a close by reminding students of the speed with which technology changes can take place. Also remind them that a product does not have to have a target market of millions or billions of users to be successful.

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In-Class Activity 3: Up for Debate: Is That Ethical?

Activity Overview: This activity asks students to discuss the ethical issues that may arise from an employer having the ability to access and track employees’ computer usage.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask them to consider this tidbit that a coworker overheard at the water cooler: “I guess it was as simple as that! Once Jeremy looked into everything Jason had been doing on the Internet, he asked Jason to hit the road. He was playing card games, placing personal stock market transactions, and sending e-mails to his friends and wife. I guess we all need to be more careful.” Ask each group to discuss whether firing an employee based on their Internet activities is ethical; groups should take notes on the pros and cons of such a company policy. (15 minutes)

2. Reassemble the class as a whole and discuss each group’s conclusion. (15 minutes) Don’t Forget: Many companies have such policies stated clearly in the employee handbook; on the other hand, some employers may use such tactics as an excuse to get rid of an employee.

Wrap-Up: Bring the debate to a close by reminding students that company policies stated in the employee handbook must be adhered to. However, one side of the argument is: “If you don’t want me to use the Internet, then don’t give it to me.” The other side of the argument is: “While working on company time, I should do what the employer wants.” Most group comments will fall somewhere between those two extremes.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 14-1. Compare and contrast an intranet with an extranet.

An intranet is an organization’s private network of internally linked websites, accessible only to employees. An extranet is a system that allows outsiders limited access to a firm’s internal information network. (Learning Objective 14-1 – AACSB – application of knowledge) 14-2. How can electronic conferencing increase a company’s productivity and efficiency?

It is easy, quick, and relatively low-cost, eliminating the need for expensive travel for faceto-face meetings. (Learning Objective 14-1 – AACSB – application of knowledge) 14-3. What are the advantages and risks of cloud computing?

The cloud enhances user flexibility, especially for employees working remotely because users can access e-mails and data files from any online location, rather than from one particular location. The cloud computing has become a cost saver for companies by eliminating the need for buying, installing, and maintaining in-house server computers, many of which have excessive unused storage capacity. The risks of cloud computing include hacking and privacy issues. (Learning Objective 14-2 – AACSB – application of knowledge) 14-4. Why should companies be concerned about hackers?

Hackers can cause serious damage: stealing company and customer information, compromising company files and records. This can cause a company serious financial problems. (Learning Objective 14-4 – AACSB – application of knowledge) 14-5. What is intellectual property? Provide at least three examples.

Intellectual property is a product of the mind, something produced by the intellect, with great expenditure of human effort. Examples include new inventions, product plans, and manufacturing processes. (Learning Objective 14-4 – AACSB – application of knowledge)

QUESTIONS FOR ANALYSIS 14-6. Describe how a company might use data warehousing and data mining in its information system to better plan for new products. Data warehousing involves the collection, storage, and retrieval of data in electronic files; data mining is the application of electronic technologies for searching, sifting, and

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reorganizing pools of data to uncover useful information. (Learning Objective 14-3 – AACSB – application of knowledge) 14-7. How could an airline use data mining to make better business decisions?

An airline can use data mining to analyze its flights and flight schedule. Which flights are most full? Least full? Which destinations? Which times of day? It can examine the proportion of business vs. leisure travelers, as that information will impact the price someone is willing to pay for the ticket. These all play into the profitability of the airline. (Learning Objective 14-3 – AACSB – application of knowledge) 14-8. How do your bank, employer, and e-mail provider protect your personal information from unauthorized use?

Step one is the use of strong passwords, by customers and employees. Any of these organizations should be using firewalls, special software, and encryption of data. Use of antivirus software and constant updating of it and of computer operating systems is mandatory.

Cyber insurance is a growing market for businesses, as it is an important element of risk management. (Learning Objective 14-5 – AACSB – application of knowledge)

APPLICATION EXERCISES 14-9. Consider your daily activities—as a consumer, student, parent, friend, homeowner or renter, car driver, employee, and so forth—and think about the ways that you are involved with IT systems. Make a list of your recent IT encounters and then recall instances in those encounters that you revealed personal information that could be used to steal your identity.

Are some encounters on your list riskier than others? Why or why not?

Answers will vary, but most students will mention their access to ATMs and their use of credit cards, often daily, in making consumer purchases. Students use IT regularly in course registration, online access to educational materials, even payment of fees. Identity theft can happen at any time, either during or after the sharing of personal information. (Learning Objective 14-4 – AACSB – analytical thinking)

14-10. After reading the first section of this chapter, consider how IT has changed the business of higher education. Identify at least three functions, services, or activities that would not have been available even 10 years ago. How do you think that colleges and universities will change in the future because of advances in IT? Answers will vary, but many students will mention online classes and testing, applying and registering for college/classes online, and accessing their academic records online.

(Learning Objective 14-1 – AACSB – analytical thinking)

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BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 14-11 TO 14-15 (Learning Objectives 14-2, 14-3, 14-4, and 14-5 – AACSB – interpersonal relations and teamwork, analytical thinking, application of knowledge) Students should develop a comprehensive IT plan that focuses on meeting customers’ needs; improving efficiencies, operations, and processes; and bolstering productivity, while creating new opportunities. They should also address the various threats and risks it poses for their businesses, as well as the ways to protect themselves from threats and risks information technology might pose for their business.

TEAM EXERCISE: NEW AGE HELP DESK 14-16 TO 14-20 (Learning Objectives 14-1, 14-2, 14-3, 14-4, and 14-5 – AACSB – ethical understanding and reasoning, interpersonal relations and teamwork, analytical thinking) Students should initially focus on reviewing the types of tasks that lend themselves to working from home, and the types of tasks that require being in the office. After sorting this information out, the students should determine whether the company or the individual is responsible for providing the technology used in the home office. Answers may vary, but students should explain their reasoning. In this scenario, tech support is already an issue; students will have to take that into account when determining how to support the employees’ in their home offices. Security is another serious issue that cannot be ignored. The students must address it, as they should, even in their home network.

EXERCISING YOUR ETHICS: TO READ OR NOT TO READ (Learning Objectives 14-4 and 14-5 – AACSB – ethical understanding and reasoning, reflective thinking) 14-21. Given the factors in this situation, what, if any, ethical issues exist?

The ethical issues focus on the trust issues between employees and employer.

14-22. Do you think that the company is wise to monitor employees in this manner? Why, or why not? Answers will vary, but many students will recognize that companies do monitor employees’ activities to try to increase employee productivity but there is also the perspective of the trust issue from the employees’ perspective. Students should keep in mind that there is a trust issue from the employer’s perspective, as well.

14-23. If you discovered that an employee was spending a lot of time on non-work–related searches, how would you address the issue with the employee?

Answers will vary, but many students will suggest that their advice would depend on the situation; the employee needs to understand that work obviously comes first.

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CASES: THINK BEFORE YOU CLICK (Learning Objectives 14-4 and 14-5 – AACSB – analytical thinking) 14-24. Think about recent spam e-mails and text messages that you have received. What kinds of information were the intruders seeking?

The intruders were seeking passwords, personal financial data, credit card numbers, etc.

14-25. Were you able to identify the e-mails and messages as “scams” before opening them, or did you discover their real contents after you opened them? What might have alerted you to the risks?

Most students are technically savvy and immediately identified the “scams.”

14-26. In what ways might the “opened” message from a scammer be harmful to you? To your IT devices and systems?

An open message may carry a virus, spyware, or worm that can capture personal information and permit identity theft.

14-27. What steps can you take (or have you taken) to protect against such intrusions? What costs would be involved for gaining that protection?

Answers will vary but most students will probably mention firewalls and other anti-theft software.

14-28. Consider the various IT systems you use daily. What kinds of protection do they have to protect against invasion by cyberpirates?

Again, answers will vary depending on the IT devices used by students.

SELLING CUSTOMER SEARCH DATA (Learning Objectives 14-4 and 14-5 – AACSB – analytical thinking) 14-29. How and where do you see your browsing data affecting the ads that you see?

Students will have noticed that after they search for a product, they will see numerous ads for that product or a related product, on many sites they visit. These sites may have nothing to do with the product, but the ads “follow” them.

14-30. Do you appreciate the targeted marketing that more and more companies use, or do you feel that it is limiting your options? If so, how?

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Student answers may vary with some appreciating the targeted marketing, and others feeling limited by it. They may notice the frequency with which ads appear after they search for a product. They should also pay attention to the lack of alternatives presented to them.

14-31. As a consumer, how do you feel about your Internet service provider selling your browsing data? How do you feel about that as a business owner, marketing manager, or entrepreneur? What arguments could you make to Congress either for or against enacting tougher restrictions on data like purchasing patterns, search history, and page visits?

Students may not be bothered by their ISPs selling their browsing data. They have grown up sharing personal information on various websites and may consider this simply an extension of that behavior. As a business owner, marketing manager, or entrepreneur, it can easily be seen as a positive, if you are able to use search results to drive customers to your business.

This ability to gather information helps the business owners to target people more likely to have an interest in their product. Arguments will vary, depending on the students’ perspectives on the gathering and selling of browsing data. Privacy concerns are likely to be identified.

14-32. As part of the marketing department of a consumer products company, how would you use browsing history to help market your products? Browsing history can provide information about the type of people who purchase, or are interested in, your product.

Any information that you can gain about your prospective customers lets you target them more effectively. You can learn about why they like your product, their other interests and product needs, benefits that are meaningful to them. This information allows you to craft a marketing message that appeals to them.

14-33. What kinds of measures could you implement in order to protect your privacy? Would you do those things, or do you feel that Internet privacy is an oxymoron? There are many lists of suggested measures to protect one’s online privacy. Students will vary in their level of concern. They are comfortable sharing a great deal of personal information online and may not be concerned. Internet privacy does not need to be an oxymoron but does take awareness and effort to maintain.

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Chapter 15: The Role of Accountants and Accounting Information Chapter Overview Every organization relies on accounting information and financial statements in order to gauge business activity over periods of time. Accounting information can be thought of as a measuring stick of an organization’s performance in specific periods of time. This chapter unfolds with a discussion of the role of accountants and an explanation of the types of accountants in the U.S. business system—public accountants, private accountants, management accountants, and forensic accountants. In addition, the chapter discusses the accounting equation as well as the three basic financial statements, showing how they reflect the activity and financial condition of a business. It also looks at the key standards and principles for reporting financial statements and describes how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business. Finally, the chapter ends with a discussion of the role of ethics in accounting—a subject that has received much press in recent years.

Learning Objectives 15-1. Explain the role of accountants in business and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants. 15-2. Explain the accounting equation and how it is used. 15-3.

Describe the three basic financial statements and show how they reflect the activity and financial condition of a business. 15-4. Explain the key standards and principles for compiling and reporting financial statements. 15-5. Describe how computing financial ratios can help investors and other stakeholders to get more information from financial statements to determine the financial strengths of a business. 15-6. Discuss the role of ethics in accounting. 15-7. Describe the purpose of the International Accounting Standards Board and explain why it exists.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity Description 1. Icebreaker: Do You Use Students think about ways in which they Accounting? use accounting in their personal lives.

2. Class Discussion: Students determine in which financial Interpreting Financial statement specific pieces of information Statements are included. Students review financial 3. Small-Group Discussion: information from annual reports of real Annual Reports companies. Students calculate financial 4. Class Discussion: ratios and Choose an Investment interpret their results.

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Time Limit 20 min.

20 min.

45 min.

30 min.

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CHAPTER OUTLINE Learning Objective 15-1: Explain the role of accountants in business and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.

What is Accounting, and Who Uses Accounting Information?

Accountingis a comprehensive system for collecting, analyzing, and communicating financial information to a firm’s owners and employees, to the public, and to various regulatory agencies. is just one phase of accounting—the recording of transactions. Because businesses Bookkeeping engage in thousands of transactions, ensuring consistent, dependable financial information is —an organized accounting information system (AIS) mandatory. This is the job of the procedure for identifying, measuring, recording, and retaining financial information so that it can be used in accounting statements and management reports. Users of accounting information include business managers, employees and unions, investors and creditors, tax authorities, and government regulatory agencies.

The controller manages a firm’s accounting activities. As chief accounting officer, the controller ensures that the AIS provides the reports and statements needed for planning, decision making, and other management activities.

A. Financial Versus Managerial Accounting

1. Financial Accounting. A firm’s financial accounting system is concerned with external information users—the firm’s external stakeholders: consumer groups, unions, stockholders, suppliers, creditors, and government agencies. It prepares reports such as income statements and balance sheets that focus on the activities of the company as a whole rather than on individual departments or divisions.

2. Managerial Accounting. Managerial (management) accounting serves internal users.

Managers at all levels need information to make departmental decisions, monitor projects, and plan future activities. Other employees also need accounting information. Engineers must know certain costs, for example, before making product or operations improvements, purchasing agents use information on materials costs to negotiate terms with suppliers, and to set performance goals, and salespeople need historic sales data for each geographic region and for each of its products.

B. Certified Public Accountants Certified public accountants (CPAs) offer accounting services to the public, whether a business or individual client. They are independent from the clients they serve. They are licensed by a state after passing an exam prepared by the American Institute of Certified Public Accountants (AICPA).

1. The “Big Four” Public Accounting Firms. The “Big Four” public accounting firms, Deloitte Touche Tohmatsu (United States), Ernst & Young (United Kingdom),

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PricewaterhouseCoopers, PwC (United Kingdom), and KPMG (Netherlands) account for one-half of the total revenue generated by accounting firms active in the United States.

2. CPA Services. Most CPA firms provide auditing services, tax services, and management services. a. Auditing. An audit examines a company’s AIS to determine whether financial reports reliably represent its operations; an audit must ensure that clients’ accounting systems follow generally accepted accounting principles (GAAP), which are the guidelines governing the content and form of financial reports. b. Tax Services. Tax services include assistance not only with tax-return preparation, but also with tax planning. c. Management Advisory Services. Management advisory services range from personal financial planning to planning corporate mergers.

3. Noncertified Public Accountants. This category includes accountants who do not take the CPA exam, who are preparing for it, or who are waiting for state certification.

4. The CPA Vision Project. The CPA Vision Project is a profession-wide program that was established to assess the future of accounting; a prime reason for the project is the decline in the number of people who have entered the profession in recent years. The CPA Vision Project identifies core competencies for accounting that will be necessary for the future CPA. It foresees CPAs who combine specialty skills with a broad-based orientation to communicate more effectively with people in a wide range of business activities.

C. Private Accountants and Management Accountants Private accountants are hired as salaried employees of a firm who perform day-to-day activities. Management accountants provide services to support managers in various activities. Many hold the certified management accountant (CMA) designation.

D. Forensic Accountants Forensic accounting is the use of accounting for legal purposes. Forensic accountants may be called on by law enforcement agencies, insurance companies, or law firms for investigative accounting and litigation support in crimes against companies, crimes by companies, and civil disagreements. 1. Investigative Accounting. Investigative accounting involves the investigation of a trail of financial transactions behind a suspected crime.

2. Litigation Support. Forensic accountants assist in the application of accounting evidence for judicial proceedings by preparing and preserving evidence for these proceedings, testifying as expert witnesses, and in determining economic damages in any case before the court. a. Certified Fraud Examiners. The Certified Fraud Examiner (CFE) designation is administered by the Association of Certified Fraud Examiners; the CFE’s activities

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focus specifically on fraud-related issues, including fraud prevention and deterrence, financial transactions, fraud investigation, and legal elements of fraud.

E. Federal Restrictions on CPA Services and Financial Reporting: Sarbox The Sarbanes-Oxley Act (2002) was enacted to restore public trust in corporate accounting practices; Sarbox restricts the kinds of nonaudit services that CPAs can provide. Sarbox Compliance Requirements. The CFO and CEO must pledge that the company’s finances are correct and must vouch for the methods and internal controls used to get those numbers; Sarbox requires companies to provide a system that is safe for all employees to anonymously report unethical accounting practices and illegal activities without fear of retaliation.

KEY TEACHING TIPS • Remind students that accounting is a comprehensive system for collecting, analyzing, and communicating financial information, whereas bookkeeping is the recording of transactions.

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Point out that the controller manages a firm’s accounting activities.

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Make sure students keep these two points separate: Financial accounting is concerned with external information users; managerial accounting serves internal users and is not limited to managers.

Make sure students understand the role of a CPA, who offers accounting services to the public and who is licensed by a state after passing an exam.

Reinforce that generally accepted accounting principles (GAAP) are accounting • guidelines governing the content and form of financial reports.

In contrast to what students learned about the CPA, they should remember that private • accountants perform day-to-day activities; most are management accountants who support managers in the organization.

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Students often see the work of forensic accountants as being especially interesting. You • may want to spend some time discussing these accountants to pique their interest.

QUICK QUESTIONS •

Who uses accounting information and for what purpose do they use it?

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Outside of the company, who might have an interest in a company’s financial situation?

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What types of services do CPAs perform?

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• What has occurred in the business environment that has prompted the need for forensic accountants and certified fraud examiners?

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The Sarbanes-Oxley Act of 2002 (Sarbox) is a critical piece of federal legislation enacted to restore public trust in corporate accounting practices. What are some of Sarbox’s provisions?

Use In-Class Activity 1: Icebreaker: Do You Use Accounting?

Time Limit: 20 minutes

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Learning Objective 15-2: Explain the accounting equation and how it is used. accounting The Accounting Equation Assets = Liabilities + Owners’ Equity.

Underlying all record-keeping procedures is the most basic tool of accounting—the equation.

An asset is any economic resource that is expected to benefit a firm or an individual who Theowns accounting equation it; a liability is states a debtthat that the firm owes to an outside organization.

A. Assets and Liabilities B. Owners’ Equity Owners’ equity refers to the amount of money that owners would receive if they sold all assets and paid all debts. Assets - Liabilities = Owners’ Equity.

KEY TEACHING TIPS •

Make sure that students understand the accounting equation: Assets = Liabilities + Owners’ Equity

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An asset is any economic resource that is expected to benefit a firm that owns it; a liability is a debt that the firm owes. What are some examples of assets and liabilities found in organizations?

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Make sure students understand that owners’ equity is the money owners would receive if they sold all of a company’s assets and paid all of its liabilities.

QUICK QUESTION •

In what way(s) do businesses benefit from intangible assets?

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How does the term net worth fit into the accounting equation?

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Why is owners’ equity meaningful to investors and lenders?

HOMEWORK What’s Your Net Worth?

Now is a good time to assign Application Exercise 15-10 from the end-of-chapter materials as homework. This assignment asks students to identify their own assets and liabilities, to use the accounting equation to determine their own net worth, and to determine how to increase it. At-Home Completion Time: 1 hour

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Learning Objective 15-3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.

Financial Statements Accountants summarize the results of a firm’s transactions and issue reports to help managers make informed decisions. the mostcondition important areinfinancial statements,which sheets display aAmong firm’s financial at reports one point time. They supply fall Balance assets, liabilities, and owners’ equity. intoinformation three broadabout categories—balance sheets, income statements, and statements of cash flows.

1. Assets.

An asset is any economic resource that a company owns and from which it A. Balance Sheets expects to get some future benefit. a. Current Assets. Current assets include cash and assets that can be converted into cash within a year. The act of converting something into cash is called liquidating. Assets are normally listed in order of liquidity—the ease of converting them into cash.

Typically, assets range from cash to marketable securities to merchandise inventory. b. Fixed Assets. Fixed assets, including land, buildings, and equipment, have long-term use or value. Accountants use depreciation to spread the cost of an asset over the years of its useful life. c. Intangible Assets. Intangible assets have monetary value in the form of expected benefits. These usually include the cost of obtaining rights or privileges, such as patents, trademarks, copyrights, and franchise fees. Goodwill is the amount paid for an existing business beyond the value of its other assets.

2. Liabilities. Current liabilities are debts that must be paid within one year. Accounts payable are unpaid bills to suppliers for materials as well as wages and taxes that must be paid in the coming year. Long-term liabilities are debts that are not due for at least a year.

3. Owners’ Equity. Owners’ equity is broken down into paid-in capital and retained earnings. Paid-in capital is additional money invested in the firm by its owners. Retained earnings are net profits kept by a firm rather than paid out as dividend payments to stockholders.

B. Income Statements The income statement is sometimes called a profit-and-loss statement because its description of revenues and expenses results in a figure showing the firm’s annual profit or loss.

Profit (or Loss) = Revenues - Expenses 1. Revenues. Revenues are funds that flow into a business from the sale of goods or services.

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2. Cost of Revenues (Cost of Goods Sold). The cost of revenues section shows the costs of obtaining the revenues from other companies during the year (used for service providers).

Cost of goods sold are costs of obtaining materials to make products sold during the year (used for goods producers). a. Gross Profit. Gross profit is calculated by subtracting the cost of revenues from revenues obtained by selling the firm’s products. b. Operating Expenses. Operating expenses are resources that must flow out of a company if it is to earn revenues. Expense categories include research development, selling, administrative, and general expenses.

3. Operating and Net Income. Operating income compares the gross profit from operations against operation expenses. Net income (net profit or net earnings) is calculated by subtracting income taxes from operating income.

C.Statements of Cash Flows Required of all firms whose stock is publicly traded, the statement of cash flows shows a company’s yearly cash receipts and cash payments. This statement shows cash flows from operating, investing, and financing activities.

D.The Budget: An Internal Financial Statement A budget is a detailed statement of estimated receipts and expenditures for a future period of time.

KEY TEACHING TIPS • Reinforce that financial statements include the summaries of a firm’s transactions and help managers make informed decisions; financial statements include balance sheets, income statements, and statements of cash flows. Go over each of the financial statements carefully with students.

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Make sure that students understand the distinction between current assets and fixed assets and that they can provide examples of each.

Make sure students understand the difference between current liabilities and long-term • liabilities and that they can provide examples of each.

Explain that owners’ equity can be broken down into paid-in capital and retained • earnings, and explain each of those concepts.

Reinforce that you can find the company’s revenues and expenses in the income statement (or profit-and-loss statement). Revenues – Expenses = Profit (or Loss). Also point out the • main areas of the income statement: revenues, cost of revenues, and operating expenses.

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Reinforce that revenues are the funds that flow into a business from the sale of goods or services; the cost of revenues (or the cost of goods sold) are the costs of obtaining materials to make products sold during the year (for goods) or the costs of obtaining the revenues from other companies (for services).

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Point out that a statement of cash flows describes yearly cash receipts and cash

payments; it includes cash flows from operations, investing, and financing activities.

QUICK QUESTIONS •

What are some examples of operating expenses?

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Who might be interested in the information revealed in a statement of cash flows? Why?

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What might be included in a budget for a typical household in the United States?

HOMEWORK Using a Budget Now is a good time to assign Application Exercise 15-9 from the end-of-chapter materials as homework. This assignment asks students to create a personal budget and examine how to increase their personal net worth by using it. At-Home Completion Time: 1 hour Use In-Class Activity 2:

Class Discussion: Interpreting Financial Statements Time Limit: 20 minutes Use In-Class Activity 3:Small-Group Discussion: Annual Reports Time Limit: 45 minutes

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Learning Objective 15-4: Explain the key standards and principles for compiling and reporting financial statements.

Reporting Standards and Practices Spelled out in GAAP, these practices and principles cover a range of issues. The purpose is to Revenue recognition is the formal recording and reporting of revenues in financial statements, givewhich external users confidence the accuracy meaningThis of financial information. takes place after the in earnings cycle isand completed. occurs when 1) the sale is completeRecognition and the product has been delivered; and 2) the sale price has been collected or is A. Revenue and Activity Timing collectible (accounts receivable).

B. Full Disclosure This indicates that financial statements should not include just numbers; they should include management’s interpretations and explanations of those numbers.

KEY TEACHING TIP •

Remind students that full disclosure requires that financial statements include both the “numbers” and management’s interpretations/explanations of those numbers.

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Reinforce that two conditions must be met for an earnings cycle to be complete: the sale is complete and the product delivered; and the sale price has been collected or is collectible.

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Learning Objective 15-5: Describe how computing financial ratios can help investors and other stakeholders get more information from financial statements to determine the financial strengths of a business.

Analyzing Financial Statements Financial statements provide data, which can reveal trends and be applied to create various ratios.

These trendsratios and ratios canmeasures be used of to the evaluate firm’stofinancial its progress, and provide firm’s aability meet its health, debt obligations.

They can its Solvency be used to estimate short-term and long-term risk. prospects.

1. The Current and Short-Term Short-term solvency ratios measure a A. Solvency Ratios:Ratio Borrower’s Ability to Solvency.

Repay Debt company’s liquidity and its ability to pay immediate debts. The most commonly used of these is the current ratio, which measures a company’s ability to meet current obligations out of current assets. It is calculated by dividing current assets by current liabilities. The higher the ratio, the lower the risk to investors. A 2:1 ratio is accepted as satisfactory.

2. Long-Term Solvency. Long-term solvency is calculated by dividing debt—total liabilities—by owners’ equity; this ratio illustrates the extent to which a firm is financed through borrowed money. The lower the debt, the lower the risk to investors and creditors.

3. Leverage. Leverage refers to the ability to make otherwise unaffordable investments by borrowing funds.

B. Profitability Ratios: Earnings Power for Owners Profitability ratios are used for measuring potential earnings.

Earnings per Share. This ratio is calculated by dividing net income by the number of shares outstanding; this determines the size of the dividend that a firm can pay shareholders. As the ratio goes up, stock value increases because investors know that the firm can better afford to pay dividends. The price earnings ratio is a comparison of a firm’s current share price to its current earnings per share.

C. Activity Ratios: How Efficiently Is the Firm Using Its Resources?

Activity ratios reveal the efficiency with which firms have used resources; an example is when annual sales revenues can increase without an increase in operating costs.

These ratios are used for evaluating management’s use of assets.

KEY TEACHING TIPS •

Reinforce that the current ratio measures a company’s ability to meet current obligations out of current assets. The formula is Current Assets/Current Liabilities.

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•

Reinforce that long-term solvency indicates a company’s ability to repay debts in future years; the formula is Total Liabilities/Owners’ Equity.

•

Point out earnings per share determines the size of the dividend a firm can pay shareholders; this can be determined using the formula Net Income/Number of Shares of Stock Outstanding.

QUICK QUESTIONS •

What do solvency ratios measure?

•

How can high debt be desirable for a company?

•

Of what value is earnings per share to an investor in analyzing the quality of the investment?

Use In-Class Activity 4: Class Discussion: Choose an Investment Time Limit: 30 minutes

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Learning Objective 15-6: Discuss the role of ethics in accounting.

Bringing Ethics into the Accounting Equation TheA. purpose of accounting ethics is to maintain public confidence in businessconduct institutions, AICPA’s Code of Professional Conduct.

The code of professional for public financial markets, the products services of the accountants in and the United Statesand is maintained andaccounting enforced byprofession. the AICPA; the following areas are included: responsibilities, the public interest, integrity, objectivity and independence, due care, and conduct in scope and nature of services.

B. Violation of Accounting Ethics and GAAP. The majority of recent accounting wrongdoing has related to all of the six ethics-related areas. Such adversity can be prevented if employees follow the code of professional conduct.

KEY TEACHING TIP •

It is critical that students recognize the purpose of ethics in accounting: to maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession.

QUICK QUESTIONS •

What are the six ethics-related areas outlined by the AICPA in Code its of Professional Conduct?

• What is the connection between the Sarbanes-Oxley Act of 2002 and the recent widespread violations of accounting ethics?

HOMEWORK Business Plan Now is a good time to assign Part 5 of the business plan project. In this section, students consider their IT needs and costs and complete a balance sheet and income statement for their business.

At-Home Completion Time: 3 to 5 hours

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Learning Objective 15-7: Describe the purpose of the International Accounting Standards Board and explain why it exists.

Internationalizing Accounting.

By the late twentieth century, it was apparent that the upsurge in multinational organizations and the global economy demanded more uniformity among accounting practices. The development of “universal” procedures would allow governments and investors in, say, China, Brazil, and Italy to read, interpret, and compare financial statements from all those countries, whereas such comparisons even today are difficult, if not sometimes impossible.

A. International Accounting Standards Board Established in 2001 and housed at London, England, the International Accounting Standards Board (IASB) is an independent, nonprofit organization responsible for developing a set of global accounting standards, and for gaining the support and cooperation of the world’s various accounting organizations to implement those standards.

B. Why One Set of Global Practices?

Although more than 138 countries have adopted IASB’s accounting practices, nearly 50 others continue to use their national GAAPs. U.S.-based global companies such as Google, Caterpillar, and Microsoft may prepare different financial reports using local accounting practices for each country in which they conduct business. 1. Example Areas Targeted for Aligning U.S. GAAP and IASB Among the many differences between the practices of U.S. GAAP and IASB—some reports identify more than 400 such discrepancies—the following examples illustrate some discrepancies and proposals for convergence toward universal standards in financial reporting. a. In valuing assets b. In revenue recognition c. In devaluing of financial assets d. In fair value disclosure 2. Timetable for Implementation The U.S. Securities and Exchange Commission originally targeted 2015 as the earliest date that U.S. companies would be required to use IASB procedures for financial reporting. Some procedures were implemented that year, but others were deferred and/or targeted to be phased in over a period of years.

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Do You Use Accounting?

Activity Overview: This activity asks students to think about the ways in which they use accounting in their personal lives.

Time Limit: 20 minutes What to Do: 1.Ask students to make a list of ways in which they use accounting in their personal lives. They might want to consider the following questions when making up their lists: (15 minutes) a. How do you keep track of what money is coming in? b. How do you keep track of what money is going out? c. How do you budget your money? d. How do you plan for unexpected expenditures? e. What types of “tools” do you use to keep track of your financial information? f. At later points in your life, do you think you will account for your money differently? If

so, how?

2. Ask students to share any relevant information that might benefit other students in the class.

(5 minutes) Don’t Forget: Everyone has his or her own unique way of keeping track of their financial situation; some will be more effective than others.

Wrap-Up: Remind students that we are all accountants to a certain degree. Bring the exercise to a close by briefly outlining accounting and previewing the types of accountants discussed in the chapter.

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In-Class Activity 2: Class Discussion: Interpreting Financial Statements Activity Overview : This activity asks students to determine in which financial statement specific pieces of information are included.

Time Limit: 20 minutes What to Do: 1. In advance, make a list of revenues, expenses, assets, debts, etc.

2. Ask students to account for each item on a balance sheet or income statement as you reveal

the item; for each item, ask, “Where would this go?” (20 minutes) Don’t Forget: Another alternative is to ask students to individually write down their answers and then discuss each item revealed and the rationale for including it in either the balance sheet or income statement. Wrap-Up: Wrap up the activity by providing a brief overview of the accounting equation, followed by a brief overview of the roles of the financial statements.

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In-Class Activity 3: Small-Group Discussion: Annual Reports Activity Overview: This activity gives students a chance to review actual financial information from annual reports of real companies.

Time Limit: 45 minutes What to Do: 1. In advance, ask students to bring a copy of a recent annual report to class. Make it clear that many companies post their annual reports online, so they can access the information they need on the Web. You may also want to bring a supply of annual reports in case students can’t get to them.

2. Divide students into groups of two and ask each group to review one of the annual reports.

In particular, ask students to identify financial information that has been discussed in this chapter and discuss whether that information coincides with what has been presented in this chapter. (30 minutes) 3. Reassemble the class as a whole and ask each group to reveal the financial status of their selected company. (15 minutes) Don’t Forget: Remind students to also pay attention to the opinion of each company’s auditing firm as revealed in the annual report.

Wrap-Up: Remind students of the use of the annual report, such as how potential investors in a corporation interpret such data prior to making a stock purchase.

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In-Class Activity 4: Class Discussion: Choose an Investment Activity Overview: This activity asks students to calculate financial ratios and interpret the results.

Time Limit: 30 minutes What to Do: 1. Ahead of time, ask students to bring an annual report of a corporation of their choice to class.

2. Divide the class into groups of two, asking each group to calculate the following ratios/information based on information they find in the annual report: (15 minutes) a. Current ratio b. Long-term solvency c. Earnings per share 3. Ask each group to discuss the following questions: (15 minutes) a. What is the company’s ability to meet currency obligations out of current assets? b. Is the company likely to be able to repay debts in future years? c. What might be the size of the dividend that the firm can pay shareholders?

Don’t Forget: Information needed to calculate the above figures should be present in any financial statement. You may want to bring a supply of annual reports in case students can’t get to them, or make it clear that many companies post their annual reports online so students can access the information they need on the Web. Wrap-Up: Bring the activity to a close by providing a brief overview of short- and long-term solvency, as well as what earnings per share indicate.

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BUSINESS PLAN PROJECT PART 5 MANAGING INFORMATION Assignment Overview: The fifth part of the business plan project asks students to think about their business in terms of their business needs and costs. Specifically, students are asked to determine their IT needs and resources and are asked to complete a balance sheet and an income statement for their business. Many students find this part of the plan especially challenging, and will have trouble estimating their costs. Remind them that the values they calculate in this part of the plan are estimates, and there is no surefire method for accurately measuring how a business may perform. You may want to spend some class time going over each question in this part of the plan and create a list of sources that students can use when calculating their costs.

Files to Provide Students: If you would like students to complete a balance sheet and an income statement for their businesses, a sample spreadsheet file is available for them to consult in the following pages. Full Business Plan templates are also available at www.mybizlab.com.

Part 5 Estimated At-Home Completion Time: If done well, this section will require a minimum of 3 to 5 hours. Instructor feedback is critical in this part of the plan, as most students will need some direction in gathering information that will help answer the questions related to costs.

Homework Deliverable from Students: The length of this section should be somewhat consistent, although some variance can be expected. You should expect about 4 to 5 pages in this section.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 15-1. Who are the users of financial accounting information and for what purposes do they use it?

Business managers use accounting information to develop goals and plans, set budgets, and evaluate future prospects. Employees and unions use it to plan for and receive compensation and such benefits as health care, vacation time, and retirement pay.

Investors and creditors use accounting information to estimate returns to stockholders, determine growth prospects, and decide whether a firm is a good credit risk. Tax authorities use it to plan for tax inflows, determine the tax liabilities of individuals and businesses, and ensure that correct amounts are paid on time. Government regulatory agencies rely on it to fulfill their duties toward the public. (Learning Objective 15-1 – AACSB – application of knowledge) 15-2. Identify the three types of services performed by CPAs. The three types of services performed by CPAs are auditing services, tax services, and management services. (Learning Objective 15-1 – AACSB – application of knowledge) 15-3. Explain the ways in which financial accounting differs from managerial accounting.

Financial accounting is concerned with external information users—the firm’s external stakeholders: consumer groups, unions, stockholders, suppliers, creditors, and government agencies, and focuses on the business as a whole. Managerial accounting serves internal users including managers, engineers, purchasing agents, and salespeople and focuses on the detailed information needed to make decisions within the organization. (Learning Objective 15-1 – AACSB – application of knowledge) 15-4. Discuss the activities and services performed by forensic accountants.

Forensic accountants may be called on—by law enforcement agencies, insurance companies, law firms, and business firms—for both investigative accounting and litigation support in crimes against companies, crimes by companies, and civil disagreements. (Learning Objective 15-1 – AACSB – application of knowledge) 15-5. What are the three basic financial statements, and what major information does each contain? The balance sheet reflects a firm’s financial condition at one point in time by supplying detailed information about the firm’s assets, liabilities, and owners’ equity. The income statement reflects a firm’s profit or loss by comparing the firm’s revenues with its expenses. The statement of cash flows describes a company’s yearly cash receipts and cash payments.

(Learning Objective 15-3 – AACSB – application of knowledge)

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QUESTIONS FOR ANALYSIS 15-6. If you were planning to invest in a company, from what source would you obtain financial information, and what financial information would you focus on?

Student may have various answers and their focus may depend on their knowledge of investing. For instance, some students may focus on financial ratios while others may focus on qualitative measures. Balance sheets and statements of cash flow both provide a piece of the picture. Balance sheets reveal profitability and the relationship of assets to liabilities and owners’ equity for a given date; while statements of cash flows reveal the firm’s operations through analysis of cash flows. (Learning Objectives 15-3 – AACSB – analytical thinking) 15-7.What are the basic financial statements and how are they related to each other? Also, how are they different?

Students should be able to identify balance sheet, income statement, and statement of retained earnings. They should be able to demonstrate understanding that the balance sheet is a picture of the financial position of the company at a specific point in time, and that the other two statements are a more linear representation of the financial results of a company. The income and retained earnings statements explain the difference between the beginning and ending balance sheets. (Learning Objective 15-3 – AACSB – application of knowledge, analytical thinking) 15-8. What are three or more barriers to the United States adopting IFRS? Answers will vary but students will probably note the large numbers of countries that have to agree, the impact, cost of implementation, tax laws, shareholder impact, etc. (Learning Objective 15-7 – AACSB –analytical thinking) APPLICATION EXERCISES 15-9. Create a personal budget that includes a way to monitor actual monthly expenditures against budget and a way to forecast future cash balances. How could you use this budget to increase your personal net worth?

Students should demonstrate an understanding budgeting and its importance as a way to control spending and increase savings. (Learning Objective 15-3 – AACSB – analytical thinking and reflective thinking)

15-10. Identify your accounting assets and liabilities. Use the accounting equation to determine your own net worth (equity). Using this information, how would you go about increasing your net worth in the future?

Students should address the accounting equation and budget forecasting and demonstrate an understanding of equity and how to increase it. (Learning Objective 15-2 – AACSB – analytical thinking and reflective thinking)

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BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 15-11 TO 15-15 – (Learning Objectives 15-1, 15-2, and 15-3 AACSB interpersonal relations and – teamwork, analytical thinking, application of knowledge) In this assignment, the team will have the opportunity to see how they will use the three main financial statements, how choices impact their cash flow statement, understand the role financial data plays in creating a successful business, the role financial documents play in obtaining credit, and who on the team will be responsible for creating and maintaining the necessary data.

TEAM EXERCISE: AN AMERICAN LEGEND 15-16 TO 15-19 (Learning Objectives 15-2, 15-3, and 15-5 – AACSB – interpersonal relations and teamwork, analytical thinking) Answers will vary somewhat depending on what three-year-period is used. Students must use the equations provided to determine ratios, and perform other calculations, and recognize trends.

EXERCISING YOUR ETHICS: GIVE AND TAKE WITH ACCOUNTING CLIENTS (Learning Objective 15-6 AACSB – ethical understanding and reasoning, analytical – thinking) 15-20. What are the ethical issues in this situation?

Katrina completed the work according to accepted accounting standards. The ethical issue is that she has maintained the accounting standards but by doing so, she will possibly lose a major client.

15-21. What are the basic arguments for and against Aaron Ault’s position in this situation? For and against Katrina Belinski’s position? Aaron’s argument is that he is trying to reduce his tax bill and since the work was done towards the end of the year and the payment was possibly received in the current year, he does not see any problems with changing the dates and statements. Katrina’s position is that being a licensed professional prevents her from changing the financial statements. Additionally, revenue recognition ties into activity timing. The two conditions for recognizing revenue were met in this situation: the sale was completed, and the product delivered, and the sale price is collectible.

15-22. What do you think that Ault and Belinski should do in this situation?

Answers will vary, but most students will agree that Katrina completed the work correctly and that Aaron should not ask Katrina to change the returns. If Katrina explains the ethical requirements for CPAs, maybe Aaron will better understand her position.

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CASES: CSI: WALL STREET (Learning Objective 15-1 – AACSB – ethical understanding and reasoning, reflective thinking) 15-23. What factors do you think are most important in choosing among various methods to protect against fraud in a firm?

When choosing various fraud protection methods, costs and effectiveness would obviously be key factors.

15-24. Suppose you are hoping for a career as a CFE. How do recent trends in fraud provide new opportunities for such a career? If the article is correct that fraudulent activities increase during an economic downturn and fraudulent activity has become more sophisticated, then there are new opportunities for a CFE to probe electronic records and cash transfers.

15-25. An external auditor, such as a CPA firm’s accountant, may suspect some irregularities in a client firm’s accounting practices. In what ways might a CFE be of assistance? A CFE would have more expertise in pursuing and finding the fraud. The examiner has training in several areas that would apply in this instance, including fraud detection, evaluating accounting systems for weaknesses and fraud risks, and reviewing internal organizational controls for fraud prevention.

15-26. Consider the anti-fraud training for a company’s employees and create an agenda that includes four (or more) topics that should be incorporated into that training, along with descriptions of each. The training should include asset theft, review of financial statements, checking documentation, inventory review, cash accounts, revenue recognition, and activity timing, etc.

15-27. What ethical issues, if any, are involved in a decision to investigate a suspected case of fraud in a firm’s accounting activities? The broad scope of fraud—its costs, who commits it and how, and how it is detected—might affect the decision to investigate a fraud case. The purpose of ethics in accounting is to maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession. Without ethics, all of accounting’s tools and methods would be meaningless because their usefulness depends, ultimately, on truthfulness in their application. Accordingly, professional accounting associations such as the AICPA and IMA enforce codes of professional conduct that include ethics-related areas, such as the accountant’s responsibilities, the public interest, integrity, and due care.

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THE MODERN ACCOUNTANT (Learning Objectives 15-1, 15-6, and – AACSB – ethical understanding and reasoning, reflective thinking) 15-28. If you were interested in pursuing a career as an accountant, what would you consider as a focus (e.g., forensics, international, financial, managerial, consulting, auditing, tax)? What classes and other experiences would you want to have on your résumé to position you for such a career?

Answers will vary but students should demonstrate an understanding of the differences and similarities between the professions and the benefits of each to career experience.

15-29. What is the role of a CPA in modern accounting and how has it changed in the past 10–20 years? Students should address the change from onsite “books” to cloud accounting and the rising prevalence of do-it-yourself account tools like QuickBooks and TurboTax as well as the shift away from detailed auditing and toward data analytics.

15-30. Briefly describe the Sarbanes-Oxley Act and any subsequent legislation. Do you think it was effective and achieved its goals? Why or why not? Students should identify the major provisions of Sarbanes-Oxley and subsequent legislation like the Audit Integrity and Job Protection Act. Opinions should be backed with a clear understanding of the implications and consequences of different legislative acts.

15-31. Ethics has a long-standing role in the accounting profession. Will the emerging role of the modern accountant bring with it a greater emphasis on ethics (as compared with traditional accounting)? Explain.

Many students will argue that today’s reporting requirements and the broader role of the modern accountant places a greater emphasis on ethics and the possibility of potential conflict.

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PART 5 INTEGRATIVE LEARNING PORTFOLIO MANAGING INFORMATION CRAFTING A BUSINESS PLAN IT RESOURCES P5-1. What kind of IT resources will your business require? Hint: Think about the employees in your business and what they will need in order to do their jobs. What computer hardware and software will they need? Will your business need a network and an Internet connection? What type of network? Refer to Chapter 14 for a discussion on IT

resources you may want to consider.

CUSTOMER SERVICE P5-2. How will you use information technology to keep track of your customers and potential customers? Hint: Many businesses—even small businesses—use databases to keep track of their customers. Will your business require a database? What about other information systems? Refer to Chapter 14 for more information on these topics.

COSTS OF DOING BUSINESS P5-3. What are the costs of doing business? Equipment, supplies, salaries, rent, utilities, and insurance are just some of these expenses. Estimate what it will cost to do business for one year. Hint: The Business Plan Student Template provides a table for you to insert the costs associated with doing business. Insert the costs associated with doing business in the table below. The list below provides some hints as to where you can get this information. Note that these are just estimates—just try your best to include accurate costs for the expenses you think will be a part of doing business.

HINTS FOR EACH EXPENSE IN THE TABLE: Rent: Refer to the floor plan. How many square feet is your place of business? What is the “going rate” per square foot for office space in your community? A real estate agent or a local SBA representative (www.sba.gov) can also be helpful in answering this question.

Salaries: Refer to the organizational chart. How much will each employee earn? How many hours cost, will each employee be needed on a weekly basis? Once you’ve determined the weekly expand it to a monthly and a yearly cost.

Supplies: Refer to the floor plan. How much will all the computers, equipment, and furniture cost? be What kinds of general office supplies will you need? Most prices for this information can found on an office supply Website, such as www.staples.com.

15-26 Advertising and Other Promotions: Refer to your marketing section. You have described .

how

you wish to reach your customer—now you need to decide how much it will cost. If you are using television, contact the sales department at a local station. If you are using a newspaper, contact their advertising department. Salespeople are usually happy to answer your questions.

Utilities: These amounts will vary, depending on your business and what utilities you will pay.

If your business looks like an office, this cost may be similar to what a homeowner pays.

However, if your business involves making a product, then the costs will be significant. An SBA representative can be a good resource. Insurance: This value will be affected by the nature of the business. More equipment will usually mean higher insurance costs. Again, contact an SBA representative for feedback.

EXPECTED REVENUE P5-4. How much will you charge for your product? How many products do you believe you can sell in one year (or how many customers do you think your business can attract)?

Multiply the price you will charge by the number of products you hope to sell or the amount you hope each customer will spend. This will give you an estimate of your revenues for one year.

Hint: You will use the amounts you calculate in the costs and revenues questions in this part of the plan in the accounting statements in the next part, so be as realistic as you can.

INCOME STATEMENT AND BALANCE SHEET P5-5. Create a balance sheet and an income statement (profit-and-loss statement) for your business. Hint: You will have two options for creating these reports. The first option is to use the Microsoft Word versions that are found within the Business Plan Student Template itself. The second option is to use the specific Microsoft Excel templates created for each statement, which are found on the book’s companion website at www.pearsonhighered.com/ebert. These Excel files are handy to use

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because they already have the worksheet calculations preset—all you have to do is “plug in” the numbers and the calculations will be performed automatically for you. If you make adjustments to the different values in the Excel worksheets, you’ll automatically see how changes to expenses, for example, can improve the “bottom line.” This chapter has discussed income statements and balance sheets. This is a good opportunity to show students how to prepare a spreadsheet (see following pages) into which to put the financial information for an income statement and a balance sheet.

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Income Statement (Profit-and-Loss Statement) June

July

Aug.

Sept.

Oct.

Nov.

Dec. ……

YEARLY

Revenue (Sales) Category 1 Category 2 Total Revenue (Sales) Cost of Goods Sold Category 1 Category 2 Total Cost of Goods Sold Gross Profit Expenses Rent Expense Salary/Wage Expenses Supplies Expense Advertising Expense Utilities Expense Telephone/Internet Expense Insurance Expense Interest from Loans (if applicable) Other Expenses (specify) Total Expenses Net Profit

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Balance Sheet Assets Current Assets Cash Cash Value of Inventory Prepaid Expenses (insurance) Total Current Assets Fixed Assets Machinery and Equipment Furniture and Fixtures Real Estate/Buildings Total Fixed Assets Total Assets

Liabilities and Net Worth Current Liabilities Accounts Payable Taxes Payable Notes Payable (due within 12 months) Total Current Liabilities Long-Term Liabilities Bank Loans Payable (greater than 12 months) Less: Short-Term Portion Total Long-Term Liabilities Total Liabilities Owners’ Equity (Net Worth) Total Liabilities and Owners’ Equity .

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CASE PART 5: FORD MOTOR COMPANY, 1965–2008 P5-6. Some economists posit that the only legal duty a corporation owes its shareholders is to make a profit and therefore maximize the share price. Others say that corporations have a social responsibility to the public that goes beyond just making a profit. Which position do you support, and why?

Students should be able to articulate the reasons behind their opinions and cite specific examples from the text, like responsibility toward customers and the environment, federal legislation, public trading laws, and consumer rights. (Learning Objectives 2-2, 3-6 and 15-6 – AACSB – analytical thinking) P5-7. As far back as the sixteenth century, English barrister Sir Edward Coke called corporations immortal, soulless beings. What do you think he meant by that?

In addition to discussing Sir Coke’s meaning, students should be able to point to the 1981 Supreme Court ruling that defines corporations as “an artificial being, invisible, intangible, and existing only in contemplation of the law.” Although corporations can be tried and punished for crimes, they cannot be incarcerated or lose civil rights. Additionally, they have an unlimited life because their existence is separate from their owners or leadership. And because they are a legal person but run by committee, a corporation cannot have ethics or morals. (Learning Objectives 3-6 and 15-6 – AACSB – analytical thinking) P5-8. Why would a company “go public”? What is involved in that process?

Students should note the increase profit-making abilities of a public company, but the initial objective of going public is to raise large amounts of capital very quickly. With some research, they should be able to determine that going public involves audited financial statements, an underwriter, and an initial public offering. (Learning Objectives 3-6 and 15-1 – AACSB – analytical thinking) P5-9. What are the roles of accountants in providing outside users with financial information?

What are the roles of accountants in providing internal users (management) with information?

How are those two different types of accounting similar, and how are they different?

They should be able to distinguish between financial and managerial accounting.

Students should be able to articulate the external rules and rulemaking bodies that govern financial accounting and to differentiate that from managerial accounting, which is an internal function.

(Learning Objective 15-1 – AACSB – analytical thinking) P5-10. What are a few ways that information technology is being used in automobile manufacturing today?

Students may note a wide variety of IT uses in current automobile manufacturing, from robots on the factory floor to CAD/CAM in design to back-up cameras and motion sensors. They

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may note the ability to customize cars online prior to purchase. Students may also point to IT in the supply chain after manufacturing and to online purchasing options. (Learning Objective 14-3 – AACSB – analytical thinking) FINDING YOUR PATH Careers in Business Accounting and information technology (IT) are two of the more popular career tracks in business programs. Future job growth prospects for accounting graduates is around 6 percent overall growth by 2028. IT graduates are experiencing higher demand, with job growth expected to exceed 11 percent by 2028.

Making Yourself Employable Accounting Accounting has a clear competency standard: qualifying to become a CPA. While many people salaries enjoy a successful career without passing the CPA exam, they may earn lower or have less upward mobility. In addition to core accounting skills and competencies, accounting graduates may be more employable if they have a clear understanding of financial reporting processes and standards, forecasting competency, and IT skills.

Information Technology (IT) Information technology tends to be highly technical, as individuals in the field must understand systems analysis and database management, digital forensics, and issues associated relating it with IT governance. To stand out, focus on IT as a business function by to other areas of business.

As both accounting and IT students can be stereotyped as “nerdy” or uninteresting, do things to show that this stereotype does not apply to you.

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Chapter 16: Understanding Money and the Role of Banking Chapter Overview Do you remember your first summer job? Whether it was babysitting, delivering papers, or mowing lawns, think of how long it took to save just a few dollars. And most of us learned just how valuable those few dollars were once they were spent on something. Money is discussed in every introductory business class, and it is the one topic with which we are all familiar.

This chapter presents the different forms that money takes in the nation’s money supply and discusses the different types of financial institutions that compose the U.S. financial system. It also looks at how financial institutions create money and describes the means by which they are regulated. The functions of the Federal Reserve System are discussed, as are the tools that it uses to control the money supply. Finally, the chapter identifies three important ways in which the money and banking system is changing and touches on some of the institutions and activities in international banking and finance.

Learning Objectives 16-1. Define money and identify the different forms that it takes in the nation’s money supply.

16-2. Describe the different kinds of financial institutions that compose the U.S. financial system and explain the services they offer.

16-3. Explain how financial institutions create money and describe the means by which they are regulated.

16-4. Discuss the functions of the Federal Reserve System and describe the tools that it uses to control the money supply.

16-5. Identify three important ways in which the money and banking system is changing.

16-6. Discuss some of the institutions and activities in international banking and finance.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Description Activity Students consider 1.

Icebreaker: Howthe characteristics of money Much Would That Be when making purchases using something other than “money.” Students analyze the pros and in, Say, Chocolate cons of Bars? traditional check writing versus electronic 2. Up for Debate: Your Check Is Not in payments. the Mail

.

Time Limit 30 min.

20 min.

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CHAPTER OUTLINE Learning Objective 16-1: Define money and identify the different forms that it takes in the nation’s money supply.

What Is Money?

A. The Characteristics of Money Money has four main characteristics: 1. Portability—light and easy to handle 2. Divisibility—easily divisible into smaller parts with fixed values 3. Durability—can be replaced if it wears out; hard to counterfeit 4. Stability—while value fluctuates, on the whole is relatively stable and predictable B. The Functions of Money Money serves three functions: 1. It is a medium of exchange. We use money to buy and sell things.

2. It is a store of value. Money can be saved and used for future purchases.

3. It is a measure of worth. All products can be valued in terms of money.

Money adds convenience and simplicity to our lives, for consumers and businesses alike.

C. M-1: The Spendable Money Supply The value of money decreases when its supply is high; when the money supply is low, its value increases. A common measurement of the money supply is M-1, which counts only the most liquid forms of money, includingcurrency (cash), checks, and checking accounts (demand deposits).

D. M-2: M-1 Plus the Convertible Money Supply M-2 includes everything in M-1 plus other forms of money that are not quite as liquid— items that are invested for the short term, but are easily converted to spendable forms. The and major components of M-2 are M-1time , deposits, money market mutual funds, M-2 now is viewed as a more reliable measure of the money supply than savings accounts.

M-1.

E. Credit Cards and Debit Cards: Plastic Money?

Credit cards, however, are not money and, accordingly, are not included in M-1 or M-2 when measuring the nation’s money supply. Debit cards, however, do not create debt as money is transferred immediately from a bank account; they are included in M-1.

KEY TEACHING TIPS •

Point out that just about any object that can serve as money is portable, divisible, durable, and stable.

•

Explain each of the following characteristics of money: portability, divisibility, durability, and stability.

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Students often confuse the characteristics of money with the functions of money. At this point, a quick review of both may be helpful.

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Prior to the discussion of the M-1 and M-2, it may be helpful to point out that the

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value of money depends on its supply—meaning how much is in circulation. For example, the value of money drops when supply is high.

Students should keep M-2 separate from M-1. M-2 includes M-1 plus other forms

of QUICK QUESTIONS money funds, that are not quite as liquid, such as time deposits, money market mutual accounts.

• and Howsavings is it that checking accounts can be counted as part of M-1? Different cultures •

“put different spins” on monetary transactions. For example, money is exchanged with a good deal of respect, even down to the way it is handled, in Japan.

What are some other ways different cultures “put different spins” on money?

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Why are credit cards not included in M-1 or M-2?

Use In-Class Activity 1: Icebreaker: How Much Would That Be in, Say, Chocolate Bars?

Time Limit: 30 minutes

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Learning Objective 16-2: Describe the different kinds of financial institutions that compose the U.S. financial system and explain the services they offer.

The U.S. Financial System A. Financial Institutions Financial institutions ease the flow of money from users with surpluses to those with deficits by attracting funds into checking and savings accounts.

1. Commercial Banks. Commercial banks are companies that accept deposits that they use to make loans, earn profits, pay interest to depositors, and pay dividends to owners.

Every bank receives a major portion of its income from interest paid on loans by borrowers. Banks can set their own interest rates. Traditionally, the lowest rates were made available to the bank’s most creditworthy commercial customers. That rate is called the prime rate. Most commercial loans are set at markups over prime, like prime +1.

2. Savings Institutions. Savings institutions include mutual savings banks and savings and loan institutions. They were once called thrift institutions.

3. Savings and Loan Associations. Savings and loan associations (S&Ls) accept deposits, make loans, and are owned by investors.

4. Mutual Savings Banks. In mutual savings banks, all depositors are considered owners of the bank. All profits, therefore, are divided proportionately among depositors, who receive dividends.

5. Credit Unions. A credit union is a nonprofit, cooperative financial institution owned and run by its members. Its purpose is to promote thrift—careful management of one’s money or resources—and to provide members with a safe place to save and borrow at reasonable rates.

6. Nondeposit Institutions. A variety of other organizations take in money, provide interest or other services, and make loans. They are called nondeposit institutions because, unlike commercial banks, inflowing funds are intended for purposes other than earning interest for depositors. Four of the most important institutions are pension funds, insurance companies, finance companies, and securities investment dealers (brokers). a. A pension fund is a pool of funds that is managed to provide retirement income for its members. Public pension funds include Social Security and retirement programs for state and local government employees. Employers, unions, and other private groups operate private pension funds.

b. Insurance companies accumulate money from premiums and invest in stocks, real estate, and other assets. Earnings pay insurance claims.

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c. Finance companies specialize in making loans to businesses (needing capital or long-term funds) and consumers (small loans to individuals such as mortgages, personal loans). Securities investment dealers (brokers) buy and sell stocks and bonds for client investors and for their own accounts in hopes of reselling them d. later at a profit.

B. The Growth of Financial Services No longer is it enough for commercial banks to accept deposits and make loans. Most, for example, also offer bank-issued credit and debit cards, safe-deposit boxes, ATMs, electronic money transfer, online banking, and foreign currency exchange. In addition, many offer pension, trust, international, and brokerage services and financial advice.

1. Pension and Trust Services. Individual retirement accounts (IRAs) are tax-deferred pension funds that wage earners and their spouses can set up to supplement other retirement funds. Many commercial banks offer trust services—the management of funds left in the bank’s trust.

2. International Services. The three main international services offered by banks are currency exchange, letters of credit, and banker’s acceptances. Currency exchange exchanges U.S. dollars for another country’s currency to make a payment. A letter of credit is a promise by the bank to pay a firm a certain amount, if specified conditions are met. A banker’s acceptance promises that the bank will pay a specified amount at a future date.

3. Financial Advice and Brokerage Services. Serving as financial advisors, banks help customers manage their money by recommending different investment opportunities and serving as a securities intermediary.

4. Electronic Funds Transfer. Electronic funds transfer (EFT) systems transfer many types of financial information electronically. EFT systems provide automatic payroll deposit, ATM transactions, bill payment, and automatic funds transfer. a. Automated Teller Machines. Automated teller machines (ATMs) allow customers to withdraw money, make deposits, transfer funds, and check on account status.

KEY TEACHING TIPS • Remind students that financial institutions include commercial banks, savings and loan associations, mutual savings banks, and credit unions.

• Make sure students understand the distinction between EFT services and ATM services.

• Reinforce that financial institutions of all kinds have had to modify their services to maintain and attract customers.

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QUICK QUESTIONS •

What are ways in which financial institutions have diversified in recent years?

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What was the traditional purpose of a savings and loan association?

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Who are considered the owners of mutual savings banks and credit unions?

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How are nondeposit institutions different from commercial banks?

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When might a letter of credit be used? When might a banker’s acceptance be used?

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How do consumers benefit from EFT?

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Learning Objective 16-3: Explain how financial institutions create money and describe the means by which they are regulated.

How Financial Institutions Create Money and Are Regulated A. How Money Is Created Financial institutions create money by taking in deposits and making loans, which expands the money supply.

B. How Banks Are Regulated Banks create money; therefore, the government regulates them via the Federal Reserve System and the Federal Deposit Insurance Corporation to ensure a sound financial system. This ensures that the failure of some will not cause the public to lose faith in the banking system itself. The Federal Deposit Insurance Corporation (FDIC) insures deposits in member banks up to $250,000.

KEY TEACHING TIPS •

Ensure students understand the purpose of the FDIC.

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Review how banks create money by taking in deposits and making loans.

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Learning Objective 16-4: Discuss the functions of the Federal Reserve System and describe the tools that it uses to control the money supply.

The Federal Reserve System ( Fed ) is the nation’s central bank.

The Federal Reserve System the A. The Structure of the Fed The Fed is comprised of a board of governors, a group of reserve banks, and member banks.

1. The Board of Governors. This group is comprised of seven members appointed by the president for 14-year terms; the board plays a major role in controlling the money supply through reserve requirements, discount rates, and handles the Fed’s sale and purchase of government securities.

2. Reserve Banks. There are 12 banks in the Fed that hold deposits from and set the discount rate for commercial banks in their respective regions; reserve banks also largely contribute to the country’s check-clearing process.

3. Open Market Committee. The Federal Open Market Committee is responsible for formulating the Fed’s monetary policies to promote economic stability and growth by managing the nation’s money supply.

4. Member Banks. All nationally-chartered commercial banks and some state-chartered banks are members of the Fed; depositor accounts in member banks are protected by the FDIC. 5. Other Depository Institutions. Although many state-chartered banks, credit unions, and S&Ls do not belong to the Fed, they are subject to its regulations, pay deposit insurance premiums, and are covered by the FDIC or NCUA. B. The Functions of the Fed The Fed functions as the government’s bank and the “banker’s bank” and controls the money supply.

1. The Government’s Bank. The Fed produces the nation’s currency and lends money to the government by buying bonds issued by the Treasury Department to finance the national deficit.

2. The Bankers’ Bank. Individual banks that need money can borrow from the Fed and pay interest on the loans. In addition, the Fed provides storage for commercial banks, which are required to keep funds on reserve at a Federal Reserve Bank.

3. Check Clearing. The Fed also clears checks. With electronic payments, however, the number of paper checks processed is falling, with fewer than 15.2 billion paper checks cleared by the Fed by 2019.

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4. Controlling the Money Supply. The Fed is responsible for the implementation of U.S. monetary policy—the management of the nation’s economic growth by managing money supply and interest rates. Controlling these influences the ability and willingness of banks to loan money. a. Inflation is a period of widespread price increases throughout an economic system. It occurs if the money supply grows too large. Demand for goods and services increases, and the price of everything rises. b. Deflation occurs when the supply of goods outpaces the supply of money, so demand for goods and services falls. Decreasing prices lead businesses to cut output and also lead to rises in unemployment.

C. The Tools of the Fed In controlling the money supply, the Fed uses these main tools: reserve requirements, interest rate controls, and open-market operations.

1. Reserve Requirements. The reserve requirement is the percentage of its deposits that a bank must hold, in cash or on deposit, with a Federal Reserve Bank. High reserve requirements reduce the money available to lend; low requirements allow the money supply to expand.

2. Interest Rate Controls. As the bankers’ bank, the Fed loans money to banks. The discount rate is the interest rate that the Fed charges on loans made to member banks. An increased discount rate reduces the money supply; a low rate encourages borrowing and lending. The federal funds rate (key rate) is the rate at which commercial banks lend reserves overnight to each other.

3. Open-Market Operations. Open-market operations refer to the Fed’s sale and purchase of securities (usually U.S. Treasury notes and short-term bonds) in the open market, as directed by the open-market committee. The Fed buys government securities from a commercial dealer, whose bank account is credited for the transaction, thus giving that bank more money to lend. This action expands the money supply. When the Fed sells securities, the opposite occurs as it allows the U.S. government to raise money and contract the money supply.

KEY TEACHING TIPS • Reinforce that monetary policy is the management of the nation’s economic growth by managing money supply and interest rates; the Fed is responsible for monetary policy.

• •

Remind students that the discount rate is the interest rate charged by the Fed for loans made to banks.

Make sure students understand that the Federal Reserve System (the Fed) is the central bank of the United States; it is comprised of a board of governors, 12 reserve banks, and thousands of member banks.

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•

Point out that some financial institutions don’t belong to the Federal Reserve System; however, they are still subject to the Fed’s regulations, pay deposit insurance premiums, and are covered by the FDIC.

QUICK QUESTIONS •

How does the Fed serve as the “government’s bank?”

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How does the Fed serve as the “bankers’ bank?”

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What typically happens to demand for goods and services, and their prices, during inflationary times?

How does increasing the reserve requirement help to reduce inflation?

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Remind students that the discount rate is the interest rate charged by the Fed for loans made to banks.

How does the Fed control the nation’s money supply through open-market operations?

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Learning Objective 16-5: Identify three important ways in which the money and banking system is changing.

The Changing Money and Banking System A. Government Intervention for Stabilizing the U.S. Financial System During the recent Government Emergency recession, Investment. the Fed invested heavily, mostly in lending programs to commercial banks, to allow them to get rid of bad investments and gain cash for lending to bank customers. The Troubled Asset Relief Program (TARP) was another source of funds to businesses and banks.

Assurances of Repayment. In return for these investments, the loans to banks were secured by the banks’ assets, such as commercial loans, mortgages, and asset-backed securities.

B. Anti-Crime and Anti-Terrorism Regulations The Bank Secrecy Act requires financial institutions to formulate methods, such as monitoring and keeping records of customer transactions, to deter funding of crimes.

Enforcement includes tracking and reporting on suspicious transactions, such as a sudden increase in wire transfers or cash transactions exceeding $10,000, to cut off funding of criminal and terrorist activities. USA PATRIOT Act and the Customer Identification Program (CIP). The USA PATRIOT Act requires that financial institutions obtain and verify four pieces of information for every customer: name, address, date of birth, and social security number. A customer identification program (CIP) verifies identities, keeps records of customer activities and, for new customers, compares identities with government lists of terrorists.

C. The Impact of Electronic Technologies Investing in new technologies allows banks to improve their efficiency and customer service levels.

1. Automated Clearing House (ACH) Network. ACH is an electronic funds transfer system that provides interbank clearing of electronic payments for the nation’s financial institutions.

2. Check 21: Making the Paper Check Go Away. Check 21 allows banks to present a substitute electronic check for payment instead of the original check. The result is much faster transactions.

3. Blink Credit Cards. This “contactless” payment system allows consumers to wave a card in front of the merchant’s terminal and be on his or her way.

4. Debit Cards. Debit cards allow the transfer of money between accounts and can be used to make retail purchases. In stores with point-of-sale (POS) terminals, customers insert cards that transmit information relevant to their purchases to terminals, after which the bank automatically transfers funds from the customer’s account to the store’s account.

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5. Smart Cards. Smart cards are plastic cards with an embedded computer chip that can be programmed with “electronic money.” Embedded chip technology is also replacing standard magnetic strips on traditional credit cards and debit cards, providing greater security for both parties during transactions.

QUICK QUESTIONS •

How might check writers benefit from Check 21? How might financial institutions benefit from Check 21?

HOMEWORK Interview a Manager Now is also a good time to assign Application Exercise 16-10 from the end-of-chapter materials of the textbook as homework. This assignment asks students to interview the local manager of a bank and determine how requirements of various regulations have affected the bank.

At-Home Completion Time: 1-2 hours Use In-Class Activity 2: Up for Debate: Your Check Is Not in the Mail Time Limit: 20 minutes

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Learning Objective 16-6: Discuss some of the institutions and activities in international banking and finance.

International Banking and Finance Electronic technologies permit nearly instantaneous financial transactions around the globe.

These business asked and paid—are by values theon With today’s exchanges—the global activities,prices travelers, shoppers, investors,affected and businesses oftenofrely currencies banks convert their dollars into currencies. When it comes to choosing one currency among thetovarious nations involved in other the transactions. over others, the best choice changes from day to day. Every currency’s value changes, A. Currency and Exchange Rates reflecting Values global supply and demand—what traders are willing to pay—for one currency relative to others. The resulting exchange rate, the value of one currency compared to the value of another, reveals how much of one currency must be exchanged for another.

1. Strong Currency or Weak: Which Is Better? Most people would prefer a “strong” currency, right? But it depends on how it will be used. “Strong” means that the currency is selling at a higher price and worth more, while “weak” means that it is selling at a lower price and is worth less. This impacts any transaction involving multiple currencies and impacts prices for items in the countries involved, whether domestic or imported products. A weaker dollar makes foreign imports more expensive, so U.S. consumers can afford fewer imported products. However, U.S.-based companies or factories could sell more exported products to other countries.

2. Bank Policies Influence Currency Values. In managing the money supply and interest rates, the Fed strongly influences the dollar’s strength against other currencies. The European Central Bank fills the role for the euro zone. Europe’s economic recovery is slower than desired when the euro is strong because euro-zone companies are less competitive against global counterparts.

Currency exchange rates matter to companies when they buy, sell, and invest with other companies around the globe. Those exchange rates can be the difference between making a living and losing money during any year. Prices for consumer products, such as electronics by Samsung and autos made in Sweden or Germany, depend on currency exchange rates, too.

B. The International Payments Process International payments are simplified through the services provided by their local banks.

Payments from U.S. buyers start at a local bank that converts them from dollars into the seller’s currency, such as into euros, for example, to be sent to a seller in, say, France. At the same time, payments and currency conversions from separate transactions also are flowing between French businesses and U.S. sellers in the other direction. When money inflows and outflows remain equal for both countries, as a result of international transactions, money does not have to “flow” between the two countries. If inflows and outflows are not in balance, then the flow of money—in either direction—is made to cover the difference.

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C. International Bank Structure Worldwide banking stability relies on a loose structure of agreements among individual countries.

1. The World Bank. The World Bank provides only a very limited scope of services, such as funding national improvements by making loans to build roads, schools, power plants, and hospitals. The resulting improvements eventually enable borrowing countries to increase productive capacity and international trade.

2. The IMF. The International Monetary Fund (IMF) promotes the stability of exchange rates, provides temporary loans to member countries, encourages members to cooperate on international monetary issues, and encourages the development of a system for international payments. The IMF makes loans to nations suffering from temporary negative trade balances. By making it possible for these countries to continue buying products from other countries, the IMF facilitates international trade.

QUICK QUESTIONS •

For what purposes has the International Monetary Fund been designed?

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How do changes in currency exchange rates affect business decisions and results?

HOMEWORK Creating Money Now is a good time to assign Application Exercise 16-9 from the end-of-chapter materials of the textbook as homework. This assignment asks students to calculate exchange rates.

At-Home Completion Time: 20 minutes

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: How Much Would That Be in, Say, Chocolate Bars?

Activity Overview: This exercise asks students to consider the characteristics of money when making purchases using something other than “money.”

Time Limit: 30 minutes What to Do: 1. Divide the class into groups of two.

2. Ask each group to consider making the following purchases: a. X number of cans of soda for X number of gallons of gasoline b. X number of hours of overtime for X number of extra vacation days per year c. X number of days without the use of a cell phone for X number of days use of a car 3. Ask each group member to interview his or her partner to determine just how many cans of soda he or she would be willing to “pay” for a gallon of gas; how many hours of overtime would be worth an extra one day of vacation from work; and how many days he or she would be willing to give up the use of a cell phone in order to have access to a car. (15 minutes) 4. Ask each group to discuss whether any “characteristics” of money are evident in these transactions. (5 minutes) 5. Reassemble the class and share some of the groups’ responses. (10 minutes) Don’t Forget: Students’ perceived values in each of the above transactions will vary greatly; for example, a student without a cell phone would not miss it much, etc.

Wrap-Up: Bring the activity to a close by providing a brief overview of the characteristics of money, relating them to the previous transactions.

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In-Class Activity 2: Up for Debate: Your Check Is Not in the Mail Activity Overview: This activity asks students to consider the advantages and disadvantages of replacing traditional check writing with electronic payments.

Time Limit: 20 minutes What to Do: 1. Ask students to work independently to make a list of pros and cons of using traditional check writing and a list of pros and cons of using debit cards. (10 minutes) 2. Bring the class together to discuss the pros and cons of each option. Which option does the class prefer? Why? (10 minutes) Don’t Forget: To come up with an overall class preference, you may want to take a vote.

Wrap-Up: Bring the debate to a close by highlighting some of the advantages and disadvantages mentioned for each option; remind students that check writing is expected to be completely replaced by electronic payments.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 16-1. What are the four characteristics of money?

Money must be portable or light to carry. Money must be divisible, meaning that it can be divided into smaller parts—such as four quarters or ten dimes to equal one dollar.

Money must also be durable and stable, giving it somewhat limited capability to fluctuate. (Learning Objective 16-1 – AACSB –application of knowledge) 16-2. What are the components of M-1 and M-2?

M-1 consists of currency, demand deposits, and other checkable deposits. M-2 includes M-1 as well as time deposits, money market mutual funds, savings deposits, and overnight transactions. (Learning Objective 16-1 – AACSB – application of knowledge) 16-3. What are the roles of commercial banks, savings and loan associations, credit unions, and nondeposit institutions in the U.S. financial system? Commercial banks use deposits to make loans and to earn profits. Savings and loan associations accept deposits and make loans primarily for home mortgages. Nondeposit institutions, including pension funds, insurance companies, finance companies, and securities investment dealers, take in money, provide interest, and/or make loans. (Learning Objective 16-2 – AACSB – application of knowledge)

16-4. How and why does the federal government try to control the money supply?

The federal government controls the money supply through fiscal policy while the Federal Reserve controls the money supply through monetary policy. Students should note that both entities are interested in monitoring and controlling the economy and use their powers to influence things like inflation and gross domestic product. (Learning Objective 16-4 – AACSB – analytical thinking) QUESTIONS FOR ANALYSIS 16-5. As a consumer, when would you favor a strong dollar? What about a weak dollar? Would you consider these factors differently as an employee or employer? The true answer is “it depends” as a consumer about whether a weak or strong dollar is preferable. For the consumer, if he or she has no international activities, there is no direct impact. While prices on items will fluctuate, it will not be apparent that the value of the dollar is the reason for those changes. If the consumer is traveling internationally, a strong dollar will purchase more overseas than a weak dollar. On the other hand, that strong dollar will likely cut down on the number of travelers from other countries traveling to the United States, as their currency will not buy as much.

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It’s unlikely that you would consider these factors differently as an employee or employer. The same conditions exist. As a business, though, the currency value impacts the pricing of the product you want to buy from another country, or that you want to sell in another country.

A weak dollar will result in higher prices in the U.S. on products made elsewhere but sold in the paysU.S. However, if an international company manufactures the product in the U.S., it for that manufacturing using the weaker dollars, and then exports the product to other countries, with stronger currencies, and boosts its profits. (Learning Objective 16-6 – 16-6.

Should–commercial banks be regulated, or should market forces be allowed to determine AACSB reflective thinking) the kinds of loans and the interest rates for loans and savings deposits? Why? Answers will vary. This is a particularly good question to ask in light of the 2008 Government bail-out of the banking sector. (Learning Objective 16-5 – AACSB – reflective thinking) 16-7. If you were choosing a new bank, would you prefer a completely online bank or a more traditional bank with physical locations in the community? Explain your reasoning.

Online banks can offer higher returns because they do not have the same fixed assets required by main street banks. They also have the opportunity to offshore significant portions of their processes, thus keeping costs to a minimum. The disadvantage is that it is not possible to meet a bank representative face-to-face to discuss issues of personal finance.

(Learning Objective 16-5 – AACSB – reflective thinking) 16-8. Start with a $1,000 deposit and assume a reserve requirement of 10 percent. How much would the money supply increase after five lending cycles?

Cycle 1: $1,000 X 0.90 = $900.00 Cycle 2: $900.00 X 0.90 = $810.00 Cycle 3: $810.00 X 0.90 = $729.00 Cycle 4: $729.00 X 0.90 = $656.10 Cycle 5: $656.10 X 0.90 = $590.49 TOTAL = $3,685.59 (Learning Objective 16-3 – AACSB – application of knowledge) Cycle 1: $1,000.00

APPLICATION EXERCISES 16-9.The Federal Reserve Bank maintains historical and current data on exchange rates. Find detailed historical rates by going to http://www.federalreserve.gov/releases/h10/Hist/. If you used $5,000 to purchase Chinese yuan 5 years ago, how many yuan would you have received? What would those yuan be worth today? (Use the data on the Fed site to calculate these values and explain your calculations.)

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The calculation will depend on current exchange rates. As of October 19, 2020, the exchange rate was 6.68 yuan for each U.S. dollar. Five years earlier, the exchange rate (October 19, 2015) was 6.36 yuan for each U.S. dollar. Therefore, $5,000 five years ago would buy 31,800 yuan. That same $5,000 would buy 33,400 yuan today. This, of course, does not take into account the overall effects of inflation in either China or the U.S. (Learning Objective 16-6 – AACSB – application of knowledge) 16-10. Interview the manager of a local commercial bank. Identify and list some of the newer regulations that the bank has to comply with, like the Dodd-Frank Act. Does the bank feel that these regulations are just a burden, or do they provide value? How do you feel about the regulations?

Answers will vary, but most managers willing to discuss this topic will mention how the Bank Secrecy Act requires financial institutions to formulate methods to deter funding of crimes and how the USA PATRIOT Act requires that banks know customers’ true identities.

(Learning Objective 16-5 – AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 16-11 TO 16-15 (Learning Objectives 16-4 and 16-5 – AACSB – interpersonal relations and teamwork, analytical thinking, application of knowledge) This exercise helps students focus on what they need to know to stay up to date on business news and keep track of how fiscal and monetary policy changes (including currency exchange rates, credit policies, etc.) and other external events might affect the company. The challenge is to make sense of what’s going on in the world and keep the company afloat.

TEAM EXERCISE: VIRTUAL BANKING: AN IDEA WHOSE TIME HAS COME? 16-16 TO 16-20 (Learning Objective 16-5 – AACSB – interpersonal relations and teamwork, ethical understanding and reasoning, analytical thinking, reflective thinking, application of knowledge) This could be a really interesting discussion. The students’ responses to the Action Steps will vary will widely due to differences in perception. Many students will argue that a virtual bank better serve customers and permit the bank to continue operations and employment for at least some employees. Other students will argue that a virtual bank will be attractive to younger customers but not appealing to the older generation and the majority of employees will lose – AACSB – ethical understanding and reasoning, reflective their jobs.

EXERCISING YOUR ETHICS: TELLING THE ETHICAL FROM THE STRICTLY LEGAL (Learning Objectives 16-2 thinking) 16-21. From the standpoint of a commercial ATM fees? bank, canaccess you find any economic justification for

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From an economic standpoint, the fees can be justified since the bank is offering a service to noncustomers, and should be compensated for the cost of that service plus a fair profit margin. However, since the cost of the service is likely fairly minimal (as a comparison, processing an EFT is $0.105 and an electronic direct deposit is $0.925), students may find a $3 fee to be more than a fair profit. Perhaps continuing to charge the fee, but reducing it to a more palatable figure would be justified.

16-22. Based on the scenario described for our bank, do you find any ethical issues in this situation? Or do you find the main issues legal and economic rather than ethical?

Answers will vary, and certainly legal and economic issues are present. Potential ethical issues revolve around the bank’s responsibility to the communities in which it operates.

Questions might include: • Is it right to charge people exorbitant fees (from a percentage standpoint) to access their own money?

• What if no other ATMs were available in certain communities?

16-23. As an officer for this bank, how would you handle this situation?

Answers will vary, but students will likely point out that ATM fees are legal and that banks must make money in order to operate. On the other hand, some students will mention how officers in a bank may be concerned with the bank’s image in the community and industry as a result of being targeted by groups, such as the U.S. Public Interest Research Group. Other banks have backed off after being targeted.

CASES: WHERE DID ALL THE MONEY GO? (Learning Objectives 16-1, 16-2, 16-3, and 16-4 – AACSB – analytical thinking, reflective thinking, application of knowledge) 16-24. Describe the differences between fiscal policy and monetary policy. What effects do you think each have on the day-to-day operations of a business? Should a business owner be concerned with these kinds of macro-economic issues? If so, why?

Fiscal policy focuses on taxation and spending by a government while monetary policy is the management of the nation’s economic growth by managing the money supply and interest rates. The government is responsible for fiscal policy, while the Fed is responsible for monetary policy in the United States. Fiscal policy affects businesses by determining the taxes they are required to pay. Monetary policy affects businesses as interest rate changes affect the cost to a business to loan or borrow money. Business owners should try to be aware of these issues, but they will not be able to affect the decisions the government or the Fed make.

16-25. The Fed is supposedly a non-political body. Do you agree with this observation? Do you think it should be, or shouldn’t be? Why? Answers may vary. But students should consider whether decisions affecting the economy,

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and even the global economy, should be made with politics in mind, rather than economic stability as the goal.

16-26. In 2017, the U.S. government was $20 trillion in debt, and by mid-2020 that had ballooned to over $25 trillion. Should the government try to pay off that debt? If so, how, and what effect would such a strategy have on consumers and business?

Since this is based on opinion, student answers may vary, as will the reasoning behind those answers. However, students should be aware that paying off that debt may lead to increasing the money supply, which would then lead to inflation. If the money supply grows too large, demand for goods and services increases, and the prices on everything rise. Therefore, the effect on consumers and businesses would be negative. In addition, spending by the government, such as with coronavirus relief, will increase demand and also increase, rather than decrease, the national debt (which by August of 2020 had reached almost $27 trillion.)

16-27. Why do economically stressed countries with massive debt have difficulty borrowing outside money needed for economic recovery? What solutions could you propose?

The first obstacle is difficulty borrowing outside money for economic recovery, although some have received emergency financing from the International Monetary Fund. Second, when national debt increases, the value of its currency falls on foreign exchange markets and its money then buys less than before, so each of its citizens suffers lower real wealth. Student proposals for solutions will vary, but may include more intervention by the world monetary fund and more flexible loans from wealthier nations in order to improve the global economy.

16-28. The government’s budget of 2020 indicated revenues of $3.6 trillion and outlays of $4.7 trillion. Should the federal government pursue a balanced budget? If so, how should it balance the budget and what would that mean for the economy?

Student answers will vary based on opinion, but should be supported by solid economic theory. However, reducing debt over time would probably help the future economic picture.

GLOBAL TRADING PARTNER RESETS ITS ECONOMIC COMPASS (Learning Objectives 16-1, 16-2, 16-3, and 16-4 – AACSB – analytical thinking) 16-29. Why would a national tendency toward saving cause deflation?

Deflation occurs when the supply of goods outpaces the supply of money, so if people are saving money instead of spending it, demand for goods and services falls.

16-30. Why would the Bank of Japan pump money into the Japanese economy using tactics similar to the Federal Reserve Bank in the United States?

Students should explain how adding money to the economy could increase demand for goods and services.

16-31. What does it mean for Japan to be “weakening” the yen, and how would that happen?

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Compare and discuss the positive implications and the negative implications for both a strong and a weak yen.

When the yen is strong, it is selling at a higher price and is worth more. When it is weak, it is selling at a lower price and is worth less. When the yen is strong, Japanese companies are less competitive against global competitors. Conversely, when it is weak, Japanese companies are more competitive, which strengthens the economy, relative to global 16-32.

Why would a country want to encourage inflation (increasing consumer prices) rather counterparts. than deflation?

Students should be able to articulate the relationship between a robust, growing economy and inflation and may note that deflation signals a contracting economy rather than an expansion of gross domestic product. They may also note how increased demand for goods and services creates a healthier economy and increases standard of living. A rapidly-growing economy would see rapidly-growing inflation, so governments and the banking system work to keep inflation in check, but not to eliminate it.

16-33. Consider Japan’s trading status as the fourth-largest source of U.S. imports, and the fourth-largest market for U.S. goods exports. Would you expect that status to change soon relative to other U.S. trading partners such as Canada, China, Germany, Mexico, and others?

Explain.

It is likely that at least one of the two rankings will change. If Japanese exports to the U.S. increase, then it is possible for Japan to become the third largest supplier. It is not likely that it can move ahead of China, but may be able to move ahead of Canada or Mexico, at least in certain categories of goods. As the third-largest GDP in the world, it could become certainly moved up as an importer, but that will have to occur in spite of the lower purchasing power of a weaker yen, and rely on the desire of the Japanese to spend more easily than they have in the past.

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Chapter 17: Managing Business Finances Chapter Outline Retirement! Now there’s something that most students do not think about, yet it is something that we all must strategically plan for. This chapter introduces us to the concept of the time value of money and the principle of compound growth that is central to our creation of wealth —wealth that we will need to fund our retirements! The chapter introduces the student to the investment opportunities offered by mutual funds and exchange-traded funds. It describes the role of securities markets and identifies the major stock exchanges in the world. The chapter introduces students to the concept of the risk-return relationship and discusses the value of diversifying an investment portfolio. Finally, the chapter examines how a firm can raise funds through equity or debt financing.

Learning Objectives

17-1. Explain the concept of the time value of money and the principle of compound growth, and discuss the characteristics of common stock.

17-2. Identify reasons for investing and the investment opportunities offered by mutual funds and exchange-traded funds.

17-3. Describe the role of securities markets and identify the major stock exchanges and stock markets.

17-4. Describe the risk-return relationship and discuss the use of diversification and asset allocation for investments.

17-5. Describe the various ways that firms raise capital and identify the pros and cons of each method.

17-6. Identify the reasons a company might make an initial public offering of its stock, explain how stock value is determined, and discuss the significance of market capitalization.

17-7. Explain how securities markets are regulated.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: What Should I Buy? 2. Up for Debate: What’s Wrong with a Little Inside Scoop?

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Description Time Limit Students decisions make preliminary about stockspurchasing based on 30 min. what they already know about the companies and the stock market in general.

Students are divided into teams to debate the ethics of insider trading.

30 min.

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CHAPTER OUTLINE Learning Objective 17-1: Explain the concept of the time value of money and the principle of compound growth, and discuss the characteristics of common stock. Maximizing Capital Growth Wise investments are the key to growing your money, especially if you are seeking to build capital to start your own business or simply as a cushion for a sound financial future. A number of concepts come into play when searching for investment opportunities. A. The Time Value of Money and Compound Growth

The time value of money is a concept that recognizes that if we invest money, it makes more money over time by earning interest or yielding some other form of return. Compound growth is the cumulative growth from interest paid to the investor over given time periods.

With each additional time period, an investment grows as interest payments accumulate and earn more interest, thus multiplying the earning capacity of the investment.

1. The Rule of 72 is a handy rule of thumb to estimate how long it will take to double an investment. You can find the number of years it will take to double an investment by dividing 72 by the annual interest rate of the investment (in percent). Thus, a 10 percent investment will take 7.2 years to double. Bottom line for investors: seek higher interest rates because money will double more frequently.

2. Making Better Use of Your Time Value. Each year, interest is added to our investments. If we continually reinvest the principal amount and the interest, the growth of our money will become larger each year.

B. Common Stock Investments is astock portion of the ownership of a corporation. The company’s total ownership is A divided into small parts, called shares, which can be bought and sold to determine how much of the company (how many shares of stock) is owned by each shareholder.

1. Common Stock. A share of common stock is the most basic form of ownership in a company. Individuals and other companies purchase a firm’s common stock in the hope that it will increase in value, provide dividend income, and enable shareholders to vote on major issues that are brought before the shareholders. a. Market value is the current share price in the stock market. b. Book value of common stock is owners’ equity (from the balance sheet) divided by

the number of common shares.

2. Investment Traits of Common Stock. Common stocks are among the riskiest of all investments, though historically stock values rise over time. Growth prospects in various industries change periodically.

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3. Dividend. A dividend is a payment to shareholders, on a per-share basis, out of the company’s earnings. Blue chip stocks are stocks of well-established firms that consistently provide investors with steady income from dividend payouts. Not all strong firms pay dividends, however. Some focus on reinvesting in the company toward future growth.

KEY TEACHING TIPS •

Remind students that compound interest will either work for them or against them. It works for them when they invest, but against them when they borrow.

•

Reiterate that continued reinvestment of interest and principal maximizes the return

• •

achieved by the investment.

Reinforce the point that a stock is a portion of the ownership of a corporation. Common stocks represent the most basic form of ownership in a company.

Common stocks are risky securities, but blue-chip stocks are issued by the strongest, most financially sound firms that often provide investors with steady income.

QUICK QUESTIONS •

What is meant by the time value of money? What is meant by compound growth?

•

What is common stock?

•

What is different about the market value and the book value of a share?

•

What is a dividend? Why do some investors receive dividends?

Use In-Class Activity 1: Icebreaker: What Should I Buy? Time Limit: 30 minutes

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Learning Objective 17-2: Identify reasons for investing and the investment opportunities offered by mutual funds and exchange-traded funds. Investing to Fulfill Financial Objectives Mutual funds and exchange-traded funds are popular alternatives to stocks because they offer attractive investment opportunities for various financial objectives and often do not require large sums of money for entry. Mutual Funds Mutual funds are created by companies such as T. Rowe Price and Vanguard that pool cash investments from individuals and organizations to purchase a portfolio of stocks, bonds, and other securities. The portfolio is expected to increase in value and produce income for the fund and its investors.

Investors in no-load funds pay no sales commissions when they buy into or sell out of funds, while investors in load funds pay commissions of 2 percent to 8 percent. A. Reasons for Investing

Mutual funds are flexible in their investment goals. It is relatively easy to open a mutual fund account. The three most common objectives for opening a mutual fund account are: 1. Stability and Safety. Funds stressing safety seek only modest growth with little fluctuation in principal value regardless of economic conditions. These funds include money market mutual funds and other funds that preserve the fund holders’ capital and reliably pay current income.

2. Conservative Capital Growth. Preservation of capital and current income, alongside some capital appreciation, can be gained through balanced funds. These funds invest in a mix of municipal bonds, corporate bonds, and common stocks.

3. Aggressive Growth. Aggressive growth funds seek maximum long-term capital growth; they sacrifice current income and safety by investing in stocks of new and sometimes troubled companies, firms developing new products and technologies, and other high-risk securities.

B. Most Mutual Funds Don’t Match the Market Many, but not all, mutual funds are managed by “experts” who select the stocks, bonds, and securities in which the fund will invest. Some estimates indicate that up to 80 percent of mutual funds underperform a market’s average return due to management expenses and underperforming stocks. This has led to the development of passively managed or index funds to reduce the management costs of funds.

C. Exchange Traded Funds An exchange-traded fund (ETF) is a bundle of stocks (or bonds) that are in an index that tracks the overall movement of a market. ETFs can be traded like a stock.

1. Advantages of ETFs. ETFs offer three advantages over mutual funds:

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a. They can be traded throughout the day like a stock. b. They have low operating expenses. c. They do not require high initial investments.

KEY TEACHING TIPS •

Students often confuse mutual funds and exchange-traded funds. While both are bundles of stocks or bonds, ETFs can be traded like a stock. Each share of the ETF rises and falls as the market process changes.

•

Remind students that securities include stocks as well as corporate and municipal

•

bonds and mutual funds; they represent secured, financially valuable claims on the part of investors.

Reinforce that mutual funds are an attractive investment since a drop in the price of

one QUICK QUESTIONS or thistwo stocks in the pool is likely to have little impact on the total value of the fund; especially true with index funds.

• is What are mutual funds?

•

Why might an investor find mutual funds attractive?

•

What are the advantages of ETFs?

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Learning Objective 17-3: Describe the role of securities markets and identify the major stock exchanges and stock markets.

The Business of Trading Securities because they represent secured, financially . By facilitating the buying and selling of Stocks and bonds are referred to asorsecurities securities, the securities markets provide the capital thatare companies rely on for survival. markets valuable, claims on the part of investors.

Stocks and bonds sold insecurities A. Primary and Secondary Securities Markets

Newly issued stocks and bonds are bought and sold in primary securities markets. To bring a new security to market, the issuing firm must get approval from the Securities and Exchange Commission (SEC)—the government agency that regulates U.S. securities markets. Investment Banks issue and resell new securities, as well as create the distribution networks for selling the securities. Investment banks provide three important services: 1. They advise companies on the timing and financial terms of new issues. 2.

They underwrite (buy and assume liability for) new securities, providing an issuing firm

with 100 percent of the money (less commission and fees).

3. They create distribution networks to move new securities through groups of banks and brokers to individual investors.

New securities, however, represent only a small portion of traded securities. Existing stocks and bonds are sold in the much larger secondary securities market, which is handled by such familiar bodies as the New York Stock Exchange.

B. Stock Exchanges A stock exchange is an organization of individuals that provides an institutional auction setting in which stock can be bought or sold.

1. The Trading Floor. Each exchange governs the places and times when trading occurs.

Trading is allowed only on the trading floor, which can be a physical location, or an electronic market. Trading floors today are equipped with a vast array of electronic communication equipment to display buy and sell orders. In addition, a variety of news services provide up-to-the-minute information relevant to the business world. Any change in world events may affect share prices.

2. The Major Stock Exchanges. Among the stock exchanges that operate on trading floors in the United States, the New York Stock Exchange is the largest. It faces stiff competition from electronic trading, and large foreign exchanges such as those in London and Tokyo.

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a. The New York Stock Exchange (NYSE). The NYSE is a hybrid market that utilizes both electronic transfers as well as a trading floor in New York. b. Global Stock Exchanges. The value of shares listed on foreign exchanges continues to grow. Major overseas stock exchanges are found in Shanghai, Tokyo, London, Hong Kong, and other locations . c. The NASDAQ. The NASDAQ was the first electronic stock market. NASDAQ orders are gathered and executed solely on a worldwide computer network. NASDAQ is working to replace trading floors of traditional exchanges. d. International Consolidation and Cross-Border Ownership. Technological advances and regulatory factors have driven together the separate stock markets in various parts of the world. Stock exchanges that didn’t have strong enough digital presences have merged or partnered with those having more advanced trading systems. Competition has brought faster transactions and lower transaction fees for investors.

C.Non-Exchange Trading: Electronic Communication Networks.

ECNs are electronic systems that bring buyers and sellers together at specified prices outside traditional stock exchanges. Their popularity has grown rapidly, primarily because they have made the transfer of shares easier and less costly.

D. Individual Investor Trading.

While many investors rely heavily on the advice they receive from brokers, more experienced and well-informed investors often prefer to invest independently without outside guidance.

1. Stock Brokers. Stock brokers receive and execute orders from non-exchange members and earn commissions as a result.

2. Discount Brokers. These brokers are fast and low-cost, providing no advice or sales consultations. They do offer online services such as stock research and industry analysis.

3. Full-Service Brokers. Consulting advice and personal financial planning are provided.

4. Online Investing. This stems from convenient access to online information, fast, nononsense transactions, and is ideal for self-directed investors.

E. Tracking the Market Using Stock Indexes Investors have used stock indexes to track market performance for decades. Market indexes provide some summaries of overall market price trends.

Bull Markets. Bull markets are periods of rising stock prices in which investors are motivated to buy because they are confident of continuing rising prices. Bear Markets. Bear markets are periods of falling stock prices during which investors sell, anticipating lower

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prices in the future. To qualify as a bear market usually means prices are about 20 percent lower than the peak prices.

1. The Dow Jones. The Dow Jones Industrial Average (simply referred to as the Dow) is the oldest and most widely used index. It tracks the performance of the U.S. industrial sector by focusing on 30 blue-chip, large-cap companies. It is used as a barometer of the market’s overall movement and economic health, though it only considers 30 companies.

2. The S&P 500.

The S&P 500 is a broad index that tracks 500 large-cap companies from a number of sectors including IT, energy, industrials, financials, health care, consumer staples, and telecommunications.

3. The NASDAQ Composite.

Unlike the Dow and the S&P 500, the NASDAQ Composite includes all NASDAQ companies, totaling some 3,100 in its index. Because of its company roster, it is overweighted in technology firms.

4. The Russell 2000. The Russell 2000 is a specialized index that tracks the performance of the smallest U.S. companies based on their market capitalization.

5. Index-Matching ETFs. ETFs are available that track the performance of various indexes. For example, the Fidelity NASDAQ Composite Index Tracking Stock holds a portfolio of equities for tracking the NASDAQ Composite Index.

KEY TEACHING TIPS • Remind students that a stock exchange is an organization of individuals formed to provide an institutional auction setting in which stock can be bought and sold.

•

Students may not know that each stock exchange regulates the places and times at which trading may occur; the trading floor is the physical location where trading takes place, though much trading occurs electronically today.

•

Make sure students understand the distinction between stock brokers, discount brokers, and full-service brokers.

QUICK QUESTIONS •

What is the role of an investment bank with regard to new issues of stock?

•

What type of investor is most likely to be attracted to online trading?

•

What type of investor would prefer the services of a full-service broker?

•

Reinforce that the NASDAQ system gathers and executes orders on an intranet

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connecting more than 350,000 terminals worldwide; NASDAQ offers no trading floor.

• What are some differences between the NYSE and NASDAQ?

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Learning Objective 17-4: Describe the risk-return relationship and discuss the use of diversification and asset allocation for investments. which Each type reflects of investment the Relationship notion has arisk-return (risk-reward) relationship, The Risk-Return that safer investments tend to offer lower returns, and riskier investments tend to offer higher returns.

A. Investment Dividends (or Interest), Appreciation, and Total Return. Investors invest for different reasons. In evaluating a potential investment, investors examine returns from dividends, price appreciation, and total returns.

1. Dividends. The rate of return from stock dividends is known as the current dividend yield. This figure is generated by dividing the yearly dollar amount of the dividend income by the investment’s current market value. The dividend yield is expressed as a percentage. It can be compared against yields from other investments.

2. Price Appreciation. Price appreciation is an increase in the dollar value (share price) of an investment. The profit realized from the increased market value of an investment is a capital gain.

3. Total Return. Total returns are the sum of the dividend yield plus the stock’s capital gain. It is calculated by the formula: Total Returns (%) = (Current dividend payment + Capital gain) / Original investment X 100 B. Fantasy Stock Markets Fantasy are popular stockfor markets learning how securities markets work, for trying various investment strategies, and earning a fantasy fortune (or going broke!). Internet-based games, including free ones such as Wall Street Survivor and How the Market Works, provide an investment experience that is educational, challenging, and entertaining. These learn-bydoing experiences can be a valuable resource for learning the “how to” of online investing.

C. Managing Risk with Diversification and Asset Allocation Most investors select a mixed portfolio of investments that provides an overall level of risk and return that feels comfortable.

1. Diversification. Through diversification, investors buy several kinds of investments rather than just one kind; this strategy reduces investor risk by “not having all one’s eggs in one basket.”

2. Asset Allocation. Asset allocation is the proportion of funds invested in each of the investment alternatives. These proportions can be changed at any time.

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3. Performance Difference for Different Portfolios. A portfolio is the combined holdings of all financial investments of any individual or company. These investments include stocks, bonds, mutual funds, and real estate. Investment portfolios have different objectives ranging from aggressive growth/high risk portfolios to stable income/low volatility portfolios.

KEY TEACHING TIPS •

Reinforce that safer investments tend to offer lower returns; riskier investments tend to offer higher returns.

•

Remind students that diversification cuts risk, if only because not all of the funds invested are in one place.

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Learning Objective 17-5: Describe the various ways that firms raise capital and identify the pros and cons of each method.

Financing the Business Firm Although the business owner’s savings may be enough to get a firm up and running, businesses depend on sales revenues to survive. When current sales are insufficient to cover expenses, firms turn to other sources of funding. These typically begin with the owner’s personal savings, but often involve borrowing from banks, soliciting cash from private investors, or selling bonds to the public. A. Secured Loans for Equipment

Money to purchase new equipment often comes in the form of loans from commercial banks. The borrower guarantees repayment of the loan by pledging the asset as collateral.

The amount of money that is loaned and has to be repaid is the principal. Borrowers will also pay interest, expressed in the form of an annual percentage rate (APR). The interest amount is found by multiplying the APR by the loan principal.

B. Working Capital and Unsecured Loans from Banks Firms need more than fixed assets; they also need current, liquid assets available to meet short-term operating expenses. The firm’s ability to meet these expenses is measured by its Working capital is calculated as follows: working capital.

Working capital = Current assets – current liabilities Positive working capital means the firm’s current assets are large enough to pay off current liabilities. When the firm has negative working capital, it may need to borrow money from a commercial bank in the form of an unsecured loan. With an unsecured loan, the borrower does not have to put up collateral. But the bank will require the borrower to maintain a portion of the loan on deposit with the bank, known as a compensating balance. Firms with poor credit cannot qualify for unsecured loans. Small business entrepreneurs underestimate the value of establishing bank credit as a source of funds, financial analysis, cash flow planning, and other services. Once a small business has credit, it can seek more liberal credit policies from other sources. Start-up firms can expect to pay higher interest rates than established companies, because they don’t have a track record. Evidence of a sound financial plan can help show the firm is a good credit risk. Cash flow planning shows lenders that the borrower is using available financial resources prudently.

C. Angel Investors and Venture Capital When a firm needs additional sources of funds to pay for growth, it often seeks out angel investors. An angel invests investor some money in the firm, typically expecting a sizable ownership in the company in return for the investment. Angel investors can help firms grow

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rapidly by providing venture capital, private funds from wealthy individuals or companies that seek investment opportunities.

D. Sale of Corporate Bonds Corporations can raise funds by issuing corporate bonds. A corporate bond is an IOU guaranteeing the payment of interest during the life of the bond and the repayment of the principal when the bond matures (on a pre-set date).

1. Characteristics of Corporate Bonds. The bondholder (the lender) has no claim to ownership of the company and does not receive dividends. However, interest payments and repayment of principal are financial obligations. Each new bond has specific terms and conditions spelled out in the bond indenture. The conditions include the maturity date when the bond’s face value must be repaid.

2. Default and Bondholder’s Claim. If the borrower fails to make a payment then the bond is said to be in default. The lender may request a court order to enforce the terms of the bond. This is known as a bondholder’s claim. If a firm cannot pay the lender, it may have to file for bankruptcy.

3. Risk Ratings. To aid investors in making purchase decisions, several services measure the default risk of bonds. A rating of AAA is the best and safest rating. Lower ratings do not necessarily mean that the bond issue will not be successful, but the lower the rating the higher the interest rate charged is likely to be.

4. Flawed Ratings Misread Recession Risks. The financial crisis of 2008 raised many questions about whether the credit rating agencies are serving any good purpose. The nation’s largest public pension fund, the California Public Employees Retirement Fund (CalPERS) filed a suit against the top three agencies—Moody’s, Standard & Poor’s, and Fitch. CalPERS officials relied on these credit ratings to make investments that turned sour or failed. Furthermore, the collapse of highly rated institutions such as Lehman Brothers, Goldman Sachs, and Citigroup also raised questions about the credit rating agencies. a. Mortgage-backed securities became a trillion-dollar investment industry during the pre-2007 housing market boom. Financial institutions bundled home mortgages into packages and resold them as securities. These investments were given favorable risk ratings by credit rating agencies. Unbeknownst to investors, some $3 trillion of mortgage-backed securities contained subprime mortgages—high-risk loans to applicants with bad credit, low income, and low down payments. These subprime mortgages had received high ratings (AAA) from the agencies. When a significant number of these mortgage holders defaulted in the housing market crash, investors were left with little or nothing for their investment, leading to a collapse of worldwide financial markets.

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KEY TEACHING TIPS •

Students often confuse stocks and bonds. A stock represents ownership in a corporation. A bond represents debt, an issuer’s promise to pay the buyer a certain amount of money by a specified future date.

•

Make sure that students understand the differences between government bonds,

•

municipal bonds, and corporate bonds.

Point out that secured bonds are “backed” by company assets in case of default,

QUICK QUESTION whereas bonds—or debentures—pledge property security.

What are some circumstances under whichno a firm mightaswant to issue bonds?

• unsecured

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Learning Objective 17-6: Identify the reasons a company might make an initial public offering of its stock, explain how stock value is determined, and discuss the significance of market capitalization.

Becoming a Public Corporation An Initial Public Offering (IPO) is a firm’s first sale of its stock to the public. Corporations consider various issues before deciding to take the firm public.

A. Going Public Means Selling Part Ownership of the Company Private owners lose some control when shares are sold to the public. Anyone owning a large proportion of the company’s shares gains a powerful position in determining who runs the corporation and how. While an extreme case, this is particularly seen if the stock price falls and another investor (a corporate raider) mounts a hostile takeover.

Corporations are vulnerable to hostile takeovers if their stock prices become undervalued and the firm’s assets still have high value.

B. Stock Valuations Most investors look for long-term value in stocks, rather than their short-term price. In determining long-term value, investors typically examine the company’s financial health, its past history of results and future forecasts, its record for managerial performance, and overall prospects for competing successfully in the coming years.

1. Why Shares Are Different Prices. Share prices can differ substantially from one stock to another for various reasons. These include the supply and demand of the stock and the desire of corporations to have their shares sell within certain price ranges. A company can restore shares to the desired range by a stock split, a stock dividend paid in additional shares to shareholders.

2. Comparing Prices of Different Stocks. When evaluating the price of Pepsi and CocaCola an investor would compare dividends, price earning ratios, and historical performance consistency over a period of several years, along with indicators of each firm’s prospects for the future. An investor should not simply compare share prices.

C. Market Capitalization Market capitalization is the total value of the company’s outstanding shares, calculated by the current stock price multiplied by the number of outstanding shares. Firms with larger market caps are considered to be less risky investments than firms with smaller market caps.

D. Choosing Equity Versus Debt Capital Firms can meet their capital needs through equity financing (putting the owners’ capital to work) or debt financing (from outside the firm). These both have pros and cons.

1. Pros and Cons of Debt Financing: a. Long-term Loans. Long-term loans are attractive because the number of parties involved is limited, they can be arranged quickly, and there is no need for public

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disclosure to account for how the loan is being used. On the other hand, longterm loans have the disadvantage that borrowers may not easily be able to find lenders and may face some restrictions as a condition for the loan. b. Corporate Bonds. The advantage of bonds is that they can raise large amounts of money when the company needs it. The disadvantage is that they can incur high administration costs and stiff interest payments.

2. Pros andfinancing Cons of Equity Financing.

Equity is sometimes a favorable option for companies. Equity financing includes issuing common stock or using the company’s retained earnings. a. The Expense of Common Stock. Issuing new stock can be expensive when dividend payments need to be made. It may be more costly than paying bond interest. b. Retained Earnings as a Source of Capital. Using retained earnings for capital projects means that this money is not available for dividend payments; this may reduce the stock price and the total market capitalization. However, the firm will not have to borrow money and pay interest.

QUICK QUESTIONS •

What is market capitalization?

•

When might a fall in market capitalization leave a company open to a hostile takeover?

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Learning Objective 17-7: Explain how securities markets are regulated.

Regulating Securities Markets A. The Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is the regulation and enforcement agency that oversees the markets’ activities, including the ways securities are issued. The SEC was created in 1934 to prevent the kinds of abuses that led to the stock market crash in 1929. The SEC regulates the public offering of new securities by requiring that all companies file a prospectus before proposed offerings commence. To protect investors from fraudulent issues, a prospectus contains pertinent information about both the offered security and the issuing company.

B. Regulations Against Insider Trading —the use also of special knowledge about a trading The SEC enforces laws against insider firm for profit or gain. It is illegal, for example, for an employee of a firm to tell others about an anticipated event that may affect the value of the firm’s stock before the information is made public. The SEC offers a reward to any person who provides information leading to a civil penalty for illegal insider trading.

Along with the SEC’s enforcement efforts, the stock exchanges and securities firms have adopted self-regulation by participating with the Financial Industry Regulatory Authority (FINRA) in detecting and stopping insider action, and violations of other industry regulations.

QUICK QUESTIONS •

In light of the crash in 2009, do you think the SEC is doing a good job regulating financial markets?

•

What are the primary roles of the Securities and Exchange Commission?

Use In-Class Activity 2: Up for Debate: What’s Wrong with a Little Inside Scoop?

Time Limit: 30 minutes HOMEWORK Mutual Funds Now is a good time to assign Application Exercise 17-9 from the end-of-chapter materials in the textbook as homework. This assignment asks students to research mutual funds.

At Home Completion Time: 1 hour

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HOMEWORK Researching Insider Trading Now might be a good time to assign Application Exercise 17-10 from the end-of-chapter materials in the textbook as homework. This assignment asks students to research Series A Preferred Stock as an investment structure.

At Home Completion Time: 1 hour

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: What Should I Buy? Activity Overview: This activity asks students to make preliminary purchasing decisions about stocks based on what they already know about the companies and the stock market in general.

Time Limit: 30 minutes What to Do: 1. Ask students to assume that they are being given $20,000 to invest in four company stocks, but that they must choose from the following companies: • McDonald’s Corporation • Microsoft • Corning • Chesapeake Energy • Marketing Technologies, Inc. • JDS Uniphase • Walmart • Amazon.com • Google 2. Divide the class into three-member groups so students can discuss these companies before making their investment decisions. As students make their decisions, ask them to write down their rationale for selecting the stocks they did as well as how much they invested in each one. (15 minutes) 3. Assemble the class as a whole to discuss their choices: (15 minutes) a. How did students select their stocks? b. How much did they know about the companies in which they invested? c. Did the discussion with other group members affect their decisions? d. What factors affected the allocation of the $20,000?

Don’t Forget: Some students will know more about investing than others. Wrap-Up: Bring the activity to a close by discussing the importance of doing “homework” on a particular company before investing in it. Very few students (or potential investors) would know enough about any of the above companies to make a sound investment. Company reputation can mean a

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lot when an individual chooses to make an investment, but this type of investing is not always prudent.

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In-Class Activity 2: Up for Debate: What’s Wrong with a Little Inside Scoop?

Activity Overview: This activity asks students to debate the pros and cons and the key issues surrounding insider trading.

Time Limit: 30 minutes What to Do: 1. Divide the class into four-member groups and ask each group to make a list of the disadvantages of insider trading. Then ask each group to make a list of the advantages facing the market, brokers, and stockholders if insider trading were to be declared legal. Students can consider the following questions as conversation starters in their groups: (15 minutes) a. Would insider trading actually make the market more efficient? b. Who is really hurt in most cases of insider trading? c. Why is insider trading illegal?

2. Assemble the class as a whole and debate the pros and cons of insider trading. (15 minutes) Don’t Forget: In advance, consider giving students some time to research specific cases of insider trading as a supplement to this debate. The class can then discuss specific cases and the levels of perceived fairness in the results of each case. Wrap-Up: Bring the debate to a close by outlining some of the major arguments presented in the debate. Then, provide reasons for the illegal nature of insider trading.

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BUSINESS PLAN PROJECT PART 6 FINANCIAL ISSUES Assignment Overview: The final part of the business plan project asks students to consider how they’ll finance their businesses as well as how to create an executive summary for their plan. Remind students that although the executive summary is the final step in the project, it should be placed at the beginning of their completed business plans. Encourage your students to be concise as they write the executive summary, as investors look at the summary before reading the details of the plan. Because this is the final part of the plan, you will probably want to ask students to submit not just Part 6, but the entire plan at this point. this part of the project, students will be asked to complete Part 6: Financial Issues.

Files For to Provide Students:

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 17-1. What is the time value of money?

The time value of money stems from the principle of compound growth. With each additional time period, interest payments accumulate and earn more interest, thus multiplying the earning capacity of the investment. (Learning Objective 17-1 – AACSB – application of knowledge) 17-2. What are the major securities markets and how are they regulated?

Students should be able to identify major stock exchange markets like the New York Stock Exchange and the NASDAQ as well as other foreign exchange markets like London and Tokyo. They should note that these markets are regulated by governmental bodies specific to that purpose like the Securities and Exchange Commission and other regulatory agencies.

They may also note how those agencies work with the accounting profession. (Learning Objective 17-3 – AACSB application of knowledge) 17-3. What is the relationship between risk and return on investment, and how would you explain that relationship?

Students should note the direct relationship: higher risks may garner higher returns, but come with commensurate potential for loss. (Learning Objective 17-4 AACSB – analytical thinking) 17-4. How is the market value (price) of a stock determined?

The market value of a stock is the current price of the share in the stock market, which is determined by what investors are willing to pay for a share of a particular company.

Students may also note that stock price may have very little direct relationship to the actual value of the assets of the company and may also note that the price of a stock is highly subjective. (Learning Objective 17-6 – AACSB –application of knowledge) 17-5. What is the difference between debt financing and equity financing?

In order to fund expansion, firms might use debt or equity financing. Debt financing is when a firm enters into a long-term loan or issues a corporate bond. Equity financing is where the firm uses retained earnings or offers additional stock for sale. (Learning Objective 17-5 – AACSB – application of knowledge)

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QUESTIONS FOR ANALYSIS 17-6. Research several stocks online. You will notice that they have continually fluctuated in price. What might be the reason for this? Is a higher-priced stock a better investment than a lower-priced stock? What factors would you consider in purchasing stocks?

Stock prices can vary enormously depending upon a number of factors, including the company’s recent performance, future expectations, changes in the company’s competition, inflation rates, and general economic expectations for the economy. Market price is only one factor to be considered in a stock purchase. Investors also look at the track record of the company. (Learning Objective 17-6 – AACSB – analytical thinking) 17-7. Suppose that you are a business owner and you need new equipment and immediate funds to meet short-term operating expenses. From what sources could you gain the capital you need, and what are some of the characteristics of these sources? Are you limited by your form of doing business, and if so, how?

A business owner in need of short-term funds can either opt for debt financing or equity financing. Debt financing in this case would most likely take the form of an operating line of credit or short-term secured loan collateralized by the equipment or even by inventory or receivables. The advantage of borrowing is that there are relatively few parties involved, so they can be often quickly arranged. If the firm opts for equity financing, it might issue new stock or use retained earnings. Students should note that small general partnerships and sole proprietors will find it more difficult, if not impossible, to raise equity capital or sell longterm bonds. (Learning Objective 17-5 – AACSB – analytical thinking) 17-8. Suppose that you are a business owner and you are seeking funds for expansion. From what sources could you gain the capital you need, and what are some of the characteristics of these sources? Are you limited by your form of doing business, and if so, how? How do these kinds of funding sources differ from funding sources for new equipment and short-term operating expenses?

A business owner in need of capital can either opt for debt financing or equity financing.

Debt financing includes taking on long-term loans or issuing corporate bonds. The advantage of long-term loans is that there are relatively few parties involved, so they can be often quickly arranged. Bonds are slower to arrange and can have high service interest rates depending upon the firm’s credit rating. If the firm opts for equity financing, it might issue new stock or use retained earnings. The advantage of bonds is that they can give the organization funds over a long period of time. Students should note that small general partnerships and sole proprietors will find it more difficult, if not impossible, to raise equity capital or sell long-term bonds. (Learning Objective 17-5 – AACSB – analytical thinking) APPLICATION EXERCISES 17-9. Research several mutual funds. What are the investment goals of each fund? What do they invest in? How are they similar, and how are they different? Which ones would you invest in, if any, and why?

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Though answers will vary widely, students should note some specific resources for research, including the website of the Securities and Exchange Commission (www.sec.gov), various stock exchange market reports, current financial news reporting, and specific company financial statements. Students should note the risk profile of their chosen fund and its potential payoff. (Learning Objective 17-4 – AACSB – analytical thinking, reflective thinking) 17-10. Many venture capitalists structure the initial investment in a company using Series A Preferred Stock. What is that, and what are the attributes of such an investment structure that make it useful? Could you, as an individual, buy Series A Preferred Stock? Why or why not?

Students should be able to research Series A Preferred Stocks and summarize how they are used by angel investors and venture capitalists to fund a startup before an initial public offering. They should recognize some of the common terms associated with Series A Preferred Stock, like convertibility to common stock. They may address the value of holding preferred stock instead of common stock and should note that Series A Preferred Stocks are only available to so-called sophisticated investors, who have met specific criteria.

(Learning Objective 17-5 – AACSB – analytical thinking) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 17-11 TO 17-15 (Learning Objectives 17-1, 17-3, 17-5 and 17-6 – AACSB – interpersonal relations and teamwork, analytical thinking, application of knowledge) Students should be encouraged to undertake a careful analysis of the pros and cons of debt and equity financing with an emphasis on a realistic analysis of the markets.

TEAM EXERCISE: MARKETS UPS AND DOWNS 17-16 TO 17-19 (Learning Objective 17-1, 17-2, 17-6 – AACSB – interpersonal relations and teamwork, analytical thinking, application of knowledge) Many factors, both internal and external, affect stock prices, such as the firm’s earnings, layoffs, labor problems, management issues, and mergers, as well as the state of the industry in general and any threats of political crisis, weather conditions, interest rate changes, and inflation and unemployment data and forecasts.

Global corporations are often affected by numerous external factors, sometimes including factors that can have little impact on our own domestic market. Some external factors, such as oil prices, impact stock in the very long run. In some cases, however, a mere change in CEO can impact the price withinofa a stock; and, this impact is likely to be shorter-lasting. Political or legal changes country can impact businesses. Various actions from competitors—external factors—can be both long- and short-lasting, depending on those actions.

Students should provide some assessment of both internal and external factors that can impact 17-26 the stock they chose. to analyze. They should remember that “impact” can be positive or can be

negative. They should acknowledge the difficulty of knowing all possible information about factors that affect stock price and judging accurately what kind of affect those factors will have.

EXERCISING YOUR ETHICS: ARE YOU ENDOWED WITH GOOD JUDGEMENT? (Learning Objective 17-4 – AACSB – ethical understanding and reasoning, reflective thinking) 17-20. Why might a conservative versus risky choice be different at a not-for-profit organization than at a for-profit organization?

The choice might be different, since the ultimate goal of a business is to maximize profit, while the ultimate goal of a nonprofit organization is to provide a service efficiently.

17-21. What are the main ethical issues in this situation?

The main ethical issues in this situation are how to best fulfill YDC’s responsibility to the students it serves, while most effectively stewarding the money entrusted to the organization through charitable donations.

17-22. What options/alternatives/actions would you recommend to the board?

Answers will vary. Given the purpose of the organization and the intrinsic value of the funds being invested, many students may opt to remain conservative in their investment strategies. However, given the disparity between the current return and the potential return, students could recommend the board follow the strategy of a mixed portfolio.

This would involve diversifying from a current very conservative strategy but not moving fully to the other, more aggressive strategy.

CASES: FIRE ON THE GROUND – (Learning Objective 3 AACSB – analytical thinking) 17-23. When the Coser and Ongaratto brothers started Fogo de Chão, what do you suppose were their primary sources of financing?

Since it started simply as the two pairs of brothers in a shed with a grass roof, they began with self-financing, using their own funds.

17-24. After the Coser brothers acquired the Ongaratto brothers’ shares of the company, they brought in GP Investments, a Brazilian venture capital firm. What are the advantages and disadvantages of using venture capital to build a business venture?

Venture capital provides private funds from the investment firm. This can stabilize the financial situation for a business, allow it to pay down debt, or provide funds that enhance its ability to grow. However, the venture capital firm typically gains a significant ownership share of the business. This means the founders may be giving up some control in determining how the firm is run.

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17-25. After the sale of Fogo de Chão to Thomas H. Lee Partners, the board and management team decided to issue an IPO of common stock. What were the goals of the IPO? The goals of the IPO were to repay some of the debt associated with the acquisition of Fogo de Chão and to fund additional expansion of the restaurant chain.

17-26. What are the benefits of an IPO as a source of financing? What other options did the company have?

The benefits of an IPO include reaching far more potential investors, thus providing access to a larger pool of funds. Debt financing and equity financing are the two options of acquiring more capital. Debt financing includes borrowing via long-term loans and issuing corporate bonds. However, these options create binding obligations on the company. Once a company has issued an IPO, issuing more common stock or increasing retained earnings are options.

These result in smaller dividends for shareholders and may decrease the stock price.

17-27. Would you have considered investing in Fogo de Chão in June 2015 when it went public?

Why or why not?

Answers will vary. Students should examine numerous factors, not simply the performance of the stock since the IPO. These factors include the company’s overall financial health, its past history of results and future forecasts, its record for managerial performance, and overall prospects for competing successfully in the coming years. What is the competitive situation?

What are the expansion plans, and where? Are there political or economic factors to consider in expansion?

17-28. If an investor had bought stock during the IPO, what would that investment have been worth when Rhone bought the company for $15.75 per share?

Students should be able to find through research that the stock was offered at $20 per share at the IPO in June 2015, and Rhone purchased the stock at $15.75 in 2018, and be able to demonstrate appropriate calculations.

TIME TO GOGO? (Learning Objectives 17-4, 17-5, and 17-6 – AACSB – analytical thinking) 17-29. Given the risk, what would motivate an investor to purchase stock in Gogo?

An investor would be motivated by the large return on investment should Gogo be able to penetrate the international market. Students should note the risk/return relationship.

17-30. Why would Gogo sell stock rather than taking on additional debt financing? Do you think that this was a good decision?

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They would sell stock because they are already highly leveraged and probably would not have gotten preferable credit terms. Additionally, they do not have to pay interest to the stockholders.

17-31. What role did underwriters, such as Morgan Stanley, JPMorgan, and UBS, play in the Gogo IPO? Underwriters buy and assume liability for new securities. This provided Gogo with 100 percent of the money raised by the IPO, less commission. At that point, it also put the risk for the ability to sell the stock onto the underwriters, not Gogo.

17-32. Using a Web source, such as Yahoo! Finance or www.nasdaq.com, obtain the current price of Gogo stock. What has happened to the price of the stock over the past 6 months?

What about the past 2 years? What do you predict will happen in the future, and why?

The answers will vary depending on when the student researches the stock.

17-33.Would you invest in Gogo right now? Why or why not?

Answers will vary but should note such factors and risk acceptability, motivations for investing, and other investment philosophies.

PART 6 INTEGRATIVE LEARNING PORTFOLIO FINANCIAL ISSUES CRAFTING A BUSINESS PLAN STARTUP COSTS P6-1. How much money will you need to get your business started? Hint: Refer back to Part 5 of the plan, where you analyzed the costs involved in running your business. Approximately, how much will you need to get your business started?

FINANCING P6-2. How will you finance your business? For example, will you seek out a bank loan? Borrow from friends? Sell stocks or bonds initially or as your business grows?

Hint: Refer to Chapter 17 for information on securities, such as stocks and bonds. Refer also to Appendix I: Financial Risk and Risk Management and Chapter 3 for more information on sources of short-term and long-term funds. EXECUTIVE SUMMARY P6-3. Now, create an executive summary for your business plan. The executive summary should be brief—no more than two pages long—and should cover the following points:

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• • • • • • • •

The name of your business Where your business will be located The mission of your business The product or service you are selling Who your ideal customers are How your product or business will stand out in the crowd Who the owners of the business are and what experience they have An overview of the future prospects for your business and industry

Hint: At this point, you’ve already answered all these questions so what you need to do here is put the ideas together into a “snapshot” format. The executive summary is really a sales pitch— it’s the investor’s first impression of your idea. Therefore, as with all parts of the plan, write in a clear and professional way.

Once you have written the executive summary, copy it and paste it at the beginning of your business plan—as the very first element.

CASE PART 6: FORD MOTOR COMPANY, 2008–PRESENT

P6-4. In a free market economy, should the government step in to bail out failing companies? If so, why and under what circumstances? When should the government not step in?

Students should be able to back up their opinions with both historical fact and text-based They may point to the Obama administration’s bailout and financial rescue packages as either a success or failure (or both), and they may point to the auto industry bailouts as evidence. support for their arguments. More recently, they may discuss the COVID-19 economic stimulus packages and their drawbacks and benefits to both consumers and business.

(Learning Objective 17-7 – AACSB – analytical thinking)

P6-5. What is the difference between fiscal and monetary policy? During the 2020 COVID-19 pandemic, which of those strategies were enacted, who enacted them, and how, specifically, were they applied, if at all?

Fiscal policy is set by the federal government and lawmakers. Monetary policy is set and managed by the Federal Reserve. With a bit of research, students should be able to identify measures enacted by both bodies during the economic crisis caused by the coronavirus pandemic. (Learning Objective 1-4 and 16-4 – AACSB – analytical thinking)

P6-6. What changes are occurring in the automotive industry right now? What predictions do you have for the future of the Big Three in the United States? Students should be able to articulate changes in the entire auto industry, from globalization to individual consumer choice. They may point to increasing global competition as well as increased global cooperation. Predictions will vary but should be backed up with historical and text-based evidence. (Learning Objective 4-3 – AACSB – analytical thinking)

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P6-7. How is globalization affecting the U.S. auto market and the U.S. auto industry?

Students will likely note both pros and cons of globalization, like simultaneous increased competition and cooperation (for instance, Fiat now owns Chrysler). They should be able to point to building and maintaining manufacturing facilities worldwide and the impacts of offshoring operations. They may discuss the political implications of globalization as well and the impact of general public opinion.

(Learning Objective 4-3 – AACSB – analytical thinking) P6-8. What kind of political and economic stance did the Trump administration take with regard to imports from countries like China and Mexico, and how do you think that affected the U.S. economy in general? Cite sources for your informed opinion.

The Trump administration took a protectionist stance vis-à-vis other nations, including tariffs, import fees, and other nationalist components. Students may discuss the USMCA, the United States-Mexico-Canada Agreement, and the differences between that agreement and NAFTA, the North American Free Trade Agreement. They may also talk about the impact of tariffs on auto manufacturing due to increased prices of components. Students should be able to cite appropriate resources. (Learning Objective 4-5 – AACSB – analytical thinking)

P6-9. Every business goes through four phases of a life cycle: startup, growth, maturity, and renewal/rebirth or decline. Where do you think Ford is in this cycle? What is your prognosis for Ford’s strategy going forward? Support your opinion.

Students should be able to demonstrate an understanding of the phases of both the business and the product life cycles. Their opinions should be backed up with specific evidence from the text regarding each life cycle. They may bring up Ford’s current strategy of focusing on their bestsellers and removing everything else from their product line. (Learning Objective 12-3 and 17-6 – AACSB – analytical thinking)

FINDING YOUR PATH Careers in Business Finance is a very popular major that requires strong technical and quantitative abilities, along with a strong background in economics. Job opportunities include investment banking, commercial banking, real estate, insurance, and financial planning. Salaries vary significantly by industry.

Making Yourself Employable Getting a job in finance can be enhanced through internships, especially if you can secure more than one during your university studies. It can make you even more appealing as a job candidate if these internships are in different areas of finance.

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Looking for a new job may be attractive for a multitude of reasons, including (but not limited to) your job or industry becoming obsolete because of changes in technology, the fact that the personal costs of your job outweigh its benefits, or the fact that your financial needs have changed. However, changing jobs may not make as much sense as you think. If you see a friend with a job that seems better than yours but you do not really know all the details, you are considering a new job in which extra money or job security is the only plus, or you hear that a certain field is growing but you have not looked at the evidence.

After assessing your motivation and moving forward, revisit Finding Your Path at the end of Part 5. Update your “features” and “product description.” Is moving on the only path, or is there an opportunity at your current organization that you could pursue? If you move on, be prepared to explain why you are leaving, and do not burn bridges with your current employer.

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