Business Essentials, Canadian Edition, 10th edition Ronald J. Ebert Solution Manuals.pdf

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Type:

Solution Manual

Resource:

Business Essentials

Edition: Author(s):

10th Edition Ronald J. Ebert Ricky W. Griffin George Dracopoulos Frederick A. Starke

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INSTRUCTORS ’ M ANUAL George Dracopoulos Vanier College and McGill University

Business Essentials Tenth Canadian Edition Ronald J. Ebert

Professor Emeritus, University of Missouri-Columbia

Ricky W. Griffin

Texas A&M University

George Dracopoulos

Vanier College and McGill University

Frederick A. Starke

Professor Emeritus, University of Manitoba

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Table of Contents Introduction to The Instructor’s Manual ............................................................................ iii CHAPTER 1 Understanding the Canadian Business System ........................................1 CHAPTER 2 The Environment of Business ................................................................22 CHAPTER 3 Conducting Business Ethically and Responsibly ...................................47 CHAPTER 4 Entrepreneurship, Small Business, and New Venture Creation ............75 CHAPTER 5 The Global Context of Business ..........................................................107 CHAPTER 6 Managing the Business Enterprise .......................................................171 CHAPTER 7 Organizing the Business Enterprise .....................................................205 CHAPTER 8 Managing Human Resources and Labour Relations ............................235 CHAPTER 9 Motivating, Satisfying, and Leading Employees .................................272 CHAPTER 10 Operations Management, Productivity, and Quality............................308 CHAPTER 11 Understanding Accounting ..................................................................342 CHAPTER 12 Understanding Marketing Principles and Developing Products ..........372 CHAPTER 13 Pricing, Promoting, and Distributing Products ....................................405 CHAPTER 14 Money and Banking .............................................................................438 CHAPTER 15 Financial Decisions and Risk Management .........................................460

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INTRODUCTION TO THE INSTRUCTOR’S MANUAL This Instructor’s Manual is intended for use with Business Essentials, 10th Canadian edition. Each chapter's manual contains the following features: 1.

Chapter Synopsis—The key topics that are discussed in the text chapter are concisely summarized here.

2.

Chapter Outline—A detailed chapter outline of topic coverage in the chapter is provided. This gives instructors a clear organization scheme for the chapter and helps with planning lectures.

3.

Quick Questions—These questions focus on the major topics that are presented in the chapter, and are designed to test whether students understand fundamental issues.

4.

In-Class Exercises—Several structured in-class exercises are described and specific directions given for conducting the exercises. The topics covered in these exercises relate to topics that are presented in the text chapter; they will increase student interest and engagement in the topics.

5.

Teaching Tips—Numerous teaching tips are presented that help the instructor make topic coverage more interesting. These teaching tips include examples that will clarify concepts for students, interesting scenarios that get students thinking about important issues, and clarifications of topics to increase student understanding.

6.

Using the Boxed Inserts—Each chapter in the text contains an opening case and several boxed inserts which are designed to increase student interest. Questions for Discussion or Critical Thinking Questions are provided for students to consider. Answers to these questions are provided for instructors, as well as ideas for in-class discussions and debates on interesting and controversial topics that may relate to the issues raised in the insert.

7.

Questions and Exercises—At the end of each chapter in the text, several Questions for Analysis and Application Exercises are presented. Answers to the questions and exercises are provided for instructors.

8.

Team Exercises—Three team exercises are found at the end of each chapter in the text: Building a Business: Continuing Exercise, Building Your Business Skills, and Exercising Your Ethics. Answers to the questions raised in these exercises are provided.

Suggestions for in-class activities related to these exercises are also provided.

9.

Case Analysis—A case study is presented at the end of each chapter in the text.

Included at the end of the case study are Questions for Discussion which ask students to use concepts presented in the chapter to analyze the case. Answers to these questions are provided for the instructor.

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10.

Crafting a Business Plan—The business plan feature is found at the end of each major section of the text (i.e., at the end of Chapters 5, 9, 11, 13, and 15). Further information for instructors is provided here.

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CHAPTER 1 UNDERSTANDING THE CANADIAN BUSINESS SYSTEM CHAPTER SYNOPSIS Chapter 1 creates a context for understanding the business concepts that are presented throughout the text. This chapter presents the ideas of business and profit, outlines the world’s major economic systems, and describes the key aspects of Canada’s market economy, including markets, demand, supply, private enterprise, and the different degrees of competition that are evident in various industries. An Appendix at the end of the text provides a brief history of business in Canada.

CHAPTER OUTLINE I.

THE IDEA OF BUSINESS AND PROFIT A business is an organization that seeks to earn profits by providing goods and services to customers. Profit is what remains after a business’s expenses incurred are subtracted from its sales and revenues. Profits are what encourage people to open and expand business and are required for the organization to be “a going concern.” In Canada, not-for-profit organizations such as charities, educational institutions or government agencies are also important. As the term suggests, these are organizations that do not try to make a profit; instead, they use the funds they get from government grants or from the sale of goods and services to provide various services to the public.

II.

ECONOMIC SYSTEMS AROUND THE WORLD An economic system is the way in which a nation allocates its resources among its citizens. Various systems differ in terms of who owns or controls these resources, or “factors of production.”

Factors of Production—The basic resources used by a business to produce A. goods and services include natural resources, human resources, capital, entrepreneurs, and information.

1.

Labour—The people who work for a company.

2.

Capital—The funds needed to operate a business.

3.

Entrepreneurs—Those people who accept the opportunities and risks involved in creating and operating a business.

4.

Natural resources—Land, water, mineral deposits, trees and other naturally occurring resources that businesses need to operate. .

Part 1—Introducing the Contemporary Business World

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Information—Market forecasts, specialized knowledge possessed by employees, and various forms of economic data about the economy and consumers that are used by businesses.

Types of Economic Systems—Different types of economic systems B. manage the factors of production in different ways. Command economies, market economies, and mixed economies are three basic types.

Command economies—Government controls many (or all) of the 1. factors of production. The government decides how much will be produced and who will produce it. Command economies have fallen into disfavour during the past decade, and only a few are left (e.g., Cuba and North Vietnam).

2.

Market economies—Factors of production are controlled by markets, not by government. Individuals are free to start their own businesses, and consumers are free to buy from whomever they wish. a.

Input and output markets—In input markets, companies buy resources from households; in the output market, companies supply goods and services in response to demand from households.

3.

III.

Mixed market economies—Have features ofboth command and market economies. Most countries of the world, including Canada, have mixed market economies.

INTERACTIONS BETWEEN BUSINESS AND GOVERNMENT A. Government Influences Business—The government influences How business by taking on the roles of customer, competitor, regulator, taxation agent, provider of incentives, and a provider of essential services.

Government as a customer—Government buys many services and 1. products which amount to billions of dollars each year.

Government as a competitor—Crown corporations at both federal 2. and provincial levels compete with business.

Government as a regulator—The federal and provincial 3. governments regulate many aspects of business activity, including the following: a.

Promoting competition—Competition policy seeks to

eliminate restrictive trade practices to stimulate maximum business

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Chapter 1—The Canadian Business System activity. The guidelines for Canada’s competition policy are contained in The Competition Act. Protecting b. consumers—The Canada Consumer Product Safety Act, the Tobacco Act, Weights and Measures Act, Textile Labelling Act, and the Food and Drug Act, are examples of regulations that protect consumers. c.

Achieving social goals—The achievement of social goals promotes the well-being of our society. Social goals include universal access to health care, safe workplaces, employment insurance and decent pensions. d.

Protecting the environment—Legislation to protect the environment includes the Canada Water Act, the Fisheries Act, and the Environmental Contaminants Act. 4.

Government as a taxation agent—Taxes are imposed and collected by all three levels of government. Revenue taxes (e.g., income taxes) are levied primarily to fund government services and programs; they form the majority of all taxes. Progressive and regressive taxes are described.

Restrictive taxes, such as excise taxes on alcohol, tobacco and gasoline serve as both a revenue source and a “deterrent to excesses.”

5.

Government as a provider of incentive programs—These programs are intended to stimulate economic development. Governments offer numerous incentive programs through various government organizations.

Several examples of grant incentive programs are described. Incentives are also provided through the services provided to companies by the government (several examples are given).

6.

Government as a provider of essential services—Business activity is facilitated by the government services that are supplied, e.g. roads, postal service, police and fire departments.

IV.

B. How Business Influences Government—Business can influence governments with lobbyists, trade associations, and advertising.

THE CANADIAN MARKET ECONOMY A. Demand and Supply in a Market Economy—Markets, demand, supply, the law of demand, the law of supply, equilibrium, surplus, and shortage are defined.

1.

The laws of supply and demand—Demand is the willingness and ability of buyers to purchase a product or service. Supply is the

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Part 1—Introducing the Contemporary Business World

service for sale.

2.

willingness and ability of producers to offer a good or Demand and supply schedules—Show how many units of a product are likely to be sold at various prices.

Demand3.and supply curves—A demand curve shows how many products will be demanded at different prices, while a supply curve shows how many products will be supplied at different prices.

4. and shortages—When the quantity demanded exceeds Surpluses the to V.

the quantity business are willing to supply, a shortage exists. When quantity demanded is less than the quantity businesses are willing supply, a surplus exists.

PRIVATE ENTERPRISE AND COMPETITION Adam Smith’s belief that allowing individuals to pursue self-interest would eventually benefit society as a wholethrough “the invisible hand of competition” is discussed. Four elements must be present in private enterprise: private property rights, freedom of choice, profits, and competition.

A.

Degrees of Competition—Four degrees of competition within private enterprise are identified. Examples of each are given.

1.

Perfect competition—A market or industry characterized by a large number of small firms producing an identical product so that no one firm is powerful enough to influence the price of their product in the marketplace. Agriculture (wheat production) is given as an example.

2.

Monopolistic competition—A market or industry characterized by a large number of firms supplying products that are similar but distinctive enough from one another to give firms some ability to influence price.

Examples given: detergents, soft drinks, fashion.

Oligopoly—A market or industry characterized by a small number 3. of large firms that have the power to influence the price of their product and/or resources. Generally large initial capital investment is necessary for new competitors to enter the market, therefore, barriers to entry are high.

Examples given: automobile, rubber, and steel industries.

Monopoly—A market or industry with only one producer, who can 4. set the price of its product and/or resources. Natural monopolies like provincial utilities are described.

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Chapter 1—The Canadian Business System QUICK QUESTIONS 1.

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

2.

Entrepreneurship involves risk-taking, which is an important ingredient in a freemarket system. What characteristics of our free-market system encourage risk-taking?

Give an example of a country with a planned economy. What makes this 3. economy planned? Give an example of country with a market economy. How is the economic system different in this country?

4.

What is an equilibrium price? What happens if incomes rise and demand increases? What happens if producers have a surplus and supply increases?

5.

Which level of competition best describes the market in each of the following scenarios: Your local pizza restaurant? A local farmer selling apples for apple sauce?

Gap jeans?

IN-CLASS EXERCISES Exercise #1: 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: Ask each student to take out a piece of paper and divide it into two columns. In 1. the first column, students should write the most important four or five things they currently know about business, and in the second column, the four or five things they would like to learn. Tell them if they are having difficulty coming up with items to list, look at the table of contents of the text. It will give them some clues so that this task doesn’t frustrate them. (5 minutes) Divide students into groups of three to five people and ask them to share their lists 2. 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)

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Part 1—Introducing the Contemporary Business World 4. students to switch to a third group of all new people. With this group, the Ask 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.

Exercise #2: Comparing Economic Systems Activity Overview: This activity gets students talking about the similarities and differences between the Canadian economic system and other economic 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, “Canada 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.

Re-assemble 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, it will be very interesting to hear them describe the characteristics of the economic system in their native country.

Wrap-Up: Wrap up the discussion by reminding students that the Canadian 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 Canada as well as various aspects of the market through agencies such as the Hazardous Products Act, The Food and Drug Act, and the Canadian Radio-Television and Telecommunications Commission.

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Chapter 1—The Canadian Business System Exercise #3: Is Competition Good?

Activity Overview: This activity asks students to think about competition and the role that it plays in our economic system.

Time Limit: 45 minutes What to Do: 1.

Ask students to think about competition as an essential ingredient in a freeenterprise system.” (10 minutes) 2.

Divide the class into small groups and ask them to discuss and make notes on some situations in which competition is good for the Canadian economy and some situations in which competition is bad for the Canadian economy. Group members should try to reach agreement. (15 minutes) 3.

Regroup the class and ask the groups to explain the rationale for their answers, asking for feedback from the class as the various situations are discussed. On what parts of the discussion does the class agree or disagree? (15 minutes) 4.

Ask the class to come to a consensus: Is competition good or bad? (5 minutes)

Don’t Forget: If the class cannot arrive at a consensus, they might consider voting.

Wrap-Up: Remind students that competition is an essential part of a free-enterprise system, as entrepreneurship invites competition in many industries. Not every enterprise will succeed in the marketplace, but competition does hold prices at market level and contributes to a high quality of goods and services.

TEACHING TIPS 1.

Individuals set up businesses in Canada with the intention of making a profit. As a course opener, ask students to provide a definition for the term “profit.”

2.

Though the definition of business includes profit as a motive, remind students that most business principles also apply to not-for-profit organizations.

There have been businesspeople who have said: “For me, making a profit is NOT 3. the most important thing about operating my business!” Ask students to identify some other good reasons for opening a business and going through the work of making that business a successful venture.

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Part 1—Introducing the Contemporary Business World 4. the students imagine a typical new small business that has just completed its Have first period of operation. If there are profits from operations, where are some places to which these profits might be allocated? Have students make the list as long as possible.

Most, if not all, of the students have heard of non-profit or not-for-profit 5. organizations. Ask the students to explain what such terms mean. Is there really such a thing as a non-profit organization?

6.

Profits reward owners for taking the risks involved in investing their money and time in a business. Ask students to describe some of the risks involved.

7.

Remind students that inputs used to produce outputs are also called factors of production: they include physical resources, labour, capital, entrepreneurship, and information resources.

8. make the factors of production—labour, capital, entrepreneurs, and natural To resources—stay with the students, engage in a synonym game. Ask students, perhaps in teams, to develop a string of synonyms for the four factors. Here’s an example: “people, money, risk takers, and raw materials.”

9. since the factors of production were first proposed, various individuals have Ever attempted to indicate which of the four is most important. Have students do the same.

Usually, entrepreneurs come out ahead. However, you can point out that all are needed and making one of them the “star” could be a mistake.

10.

It has been said that entrepreneurs are a special breed. Encourage some students to indicate why they would or would not like to be an entrepreneur.

11.

Ask students to evaluate this statement: “An owner of a business can take more time away from work than a hired employee can.”

12.

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.

Encourage students to see the logic behind some of the ideas that Karl Marx 13. espoused. Students should also be encouraged to take from Marxian theory several notions that we accept in Canada today.

If students agree that some Marxian ideas truly have merit, they are ready to 14. tackle a timely question: “What has gone wrong in so many nations that have tried to follow the teachings of Marx?”

15.

Ask students to do some investigative research on the status of human rights in

communist countries like Cuba, North Korea, and Vietnam. Is there a common thread?

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Chapter 1—The Canadian Business System If students find a common thread, ask them this: “What seems to be the relationship between communism and the value placed on the rights of the individual?”

16. is on the list of communist countries. Assume that tomorrow morning, the Cuba leader of Cuba calls the Canadian Prime Minister and says: “I want to restore full economic stability to my country. Please help me!” Appoint one of your students (or a student team) as High Commissioner for Economic Restoration in Cuba. What will that student (or student team) do to help Cuba?

17.

Have students reveal what picture comes to mind when someone uses the term “capitalist.” Is the first reaction positive or negative? Why? 18.

Make sure students understand that a mixed market economy is characterized by government ownership of major industries working alongside privately owned industries.

19.

Ask students to give examples of how government plays each of the roles mentioned in the text (customer, competitor, regulator, taxation agent, provider of incentives and financial assistance, and provider of essential services).

20. represents a balance between supply and demand, so consumers should be Price able to do a lot to determine prices of products and services. Why do consumers often feel that they have little or no power over prices they are charged?

21.

Ask the students to show ways in which consumers can cause the price of certain products to fall.

22.

Degrees of competition are best taught through liberal use of examples. Moderate a class discussion where the goal is to develop examples of each of the four degrees of competition.

23.

What degree of competition exists in professional hockey? In major league baseball?

24.

Remind students that perfect competition is characterized by (a) many buyers, (b) many sellers, and (c) buyers and sellers who accept a going price.

25.

Remind students that monopolistic competition is characterized by (a) many buyers, (b) many sellers, and (c) products that are differentiated.

26.

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

27.

The concept of the “invisible hand of competition” is often hard for students to

grasp. Help them understand the concept by working through an example which begins with an individual perspective and show how many individuals working for their own .

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Part 1—Introducing the Contemporary Business World benefit actually help a much larger group of people. Price reductions, which occur over time in products (e.g., electronic calculators or computers) are good examples.

28.

Remind students of the importance of learning the key terms in the text. Although the “jargon” of a field of study can be annoying to some, it provides a useful shorthand for describing concepts and learning about the field.

29.

Remind students that in an introductory course the material is not covered in depth. Rather, the approach is to “sample” all the important areas of business.

30.

One of the review questions at the end of the chapter asks students to give examples of the four basic degrees of competition. Ask students to share these in class.

31.

Have students interview an entrepreneur and ask the person about their experiences. Have students make a brief report to the class about their findings.

32.

Have students make a list of products they use every day. Compile a master list as part of a class discussion. Most will be surprised at how long the list is.

33. way to end the chapter discussion is to play a form of Jeopardy with the One class. Divide the class into teams and ask teams quick questions about the chapter material. The winning team continues to get the first chance to answer until they lose to another team. You, the instructor, serve as timekeeper, scorer, and moderator.

USING THE BOXED INSERTS Opening Case: Shopify: Canadian Tech Royalty Powering Small Businesses Globally 1. Shopify is a Canadian-based company that thrives in the global marketplace. In what ways has Canada’s mixed-market economy environment helped its development? Do you think that this success would have been possible if Shopify were based in a command economy (communism, socialism)?

Shopify clearly benefits from the freedoms afforded to entrepreneurs in Canada’s mixed economy while also benefitting from a mixed market environment in which the federal and provincial governments actively support growing companies like Shopify with grants and subsidies (not a free market, capitalist idea).

The most fundamental feature of the Canadian economy that helped to make Shopify a success is freedom of choice, i.e., in a market economy, entrepreneurs are free to develop products that have the potential to satisfy consumer needs, and consumers are free to either accept or reject such products. Success is not guaranteed; rather, it depends on how well the company’s product offerings satisfy customer needs.

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Chapter 1—The Canadian Business System This contrasts sharply with the situation in a command economy, where the central government controls the factors of production and makes production and allocation decisions. Over the past 50 years, there has been a global movement away from command economies and toward market economies because market economies do a much better job of satisfying consumers than command economies do. Tight government control and regulation does not incentivize entrepreneurs and offer ideal conditions for growth and creativity.

2. What are Shopify’s primary benefits for merchants who decide to use its services?

What obstacles does Shopify help these merchants overcome?

Shopify is an all-in-one commerce platform that allows entrepreneurs to 1) start, 2) run, and 3) grow their business. It serves its clients in 20 languages including: English, French, Spanish, Chinese, Italian, Portuguese, Japanese, German, Hindi and Korean. It is a global player and the leader in cloud-based, multi-channel commerce. Although it was geared toward small and medium-sized businesses it now serves firms of all sizes including major manufacturers and retailers like Heinz and Staples (Bureau en Gros).

3. How does Shopify illustrate the fundamental economic concepts of demand and supply?

Student answers will vary but they must demonstrate the fundamental concepts. Whether you are selling a good, service, or idea your ultimate success is based on being able to deliver value to consumers. The increased demand for their services is based on a track record of successfully helping entrepreneurs. With success comes new competition (added supply) that emerges to copy successful firms and meet growing demand. Today, Shopify cannot simply raise prices indiscriminately since clients in this space (for the most part have limited budgets) and Shopify will price themselves out of the market as new competition vies for that business. Economic conditions also have a great impact on demand. In growth and boom times the services of Shopify and its competitors are in high demand. As businesses suffer and close their doors in recessionary periods, demand is usually also greatly reduced as most of the remaining companies minimize investments to conserve cash.

4.Look for latest news on Shopify’s site and search the company’s press releases. Have they added any new features? Have they built any new major partnerships? What new challenges do they face today?

Answers will vary based on the news at the time of the search.

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Part 1—Introducing the Contemporary Business World Disruptions in Business: Pandemic: The Ultimate Disruption 1.Consider the following statement: As citizens dealt with the harsh realities of Covid-19 there was a greater reliance on technology (ironically the source of so much disruption) but simultaneously there was a new respect for the simple things in life like going for a walk with a loved one. We should be more concerned about our quality of life than we are about new gadgets and new ways of doing things. Do you agree or disagree with the statement? Explain your reasoning.

This should lead to a very interesting discussion because our students will not be talking about theories but their actual experiences. To spice up the discussion you might want to split the class up in half and tell each side that they must present only one side of the argument. After preparing responses the class can debate the two sides. Once that is completed you can then open discussion from both sides to share any additional examples.

Social Responsibility & Social Responsibility: Saving the World One Camp Stove at a Time 1.Consider the following statement: According to Michael Porter (Author, Consultant and Professor at Harvard University) we need to rethink the role of business in the preservation of the environment. Porter states that governments lack the capabilities, technology, and resources to truly solve the world’s environmental problems. Only businesses, through profit-seeking goals, are capable of scaling and making a true impact. He believes that businesses must re-examine their role and take the lead. Do you agree or disagree with the statement? Make sure to fully integrate EcoZoom as part of your response. Defend your reasoning.

The topic of climate change is very important to most students. Before debating this question force the students to reflect on their beliefs versus their actions. Many students will leave school to join a downtown rally on climate change but ask them to honestly assess their day-to-day behavior. What concrete actions do they take? Some will have a long list while others may struggle or admit that they don’t really do much. Probe further and ask: Are you willing to pay twice the price for a coffee that is ethically sourced? If we tracked your purchases what percentage are made with the environment and sustainability in mind? Do you sacrifice personal finances (cheaper prices) for social responsibility and green initiatives?

After that exchange, split the class in half and tell each side that they must present only one side of the argument. After preparing responses the class can debate the two sides.

Once that is completed you can then open discussion on the merits of Porter’s proposal.

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Chapter 1—The Canadian Business System

QUESTIONS AND EXERCISES Questions for Analysis 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 company with an overall negative effect. Justify your response.

The benefits of businesses are: 1) businesses produce most of the goods and services consumed, employ most working people, 2) create new innovations, and provide opportunities for new businesses to serve as suppliers, 3) 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.

2. an example of a situation in which a surplus of a product led to decreased Give 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. Students may have difficulty coming up with an example of a product where a surplus has led to decreased prices, but most of them will use oil as an example of a product where a shortage has led to increased prices (although depending on the time frame of analysis, they could obviously also use oil as an example of a product where a surplus led to decreased prices). It is likely that the examples students come up with will be consistent with what economic theory predicts. That is, the law of demand states that buyers will purchase (demand) more of a product as its price drops.

Conversely, the law of supply states that producers will offer more for sale as the price rises. If there seem to be inconsistencies, analyze why they might exist (for example, too short a time frame of analysis).

The Canadian government provided export assistance to Bombardier Inc. with its 3.

Technology Transfer Program. Is this consistent with a basically free market system?

Explain how this might distort the system.

Government incentive programs may or may not have the desired effect of stimulating the economy. The free market is one in which decisions about what to produce and in what quantities are made by the market- that is the buyers and sellers negotiating prices for goods and services. Financial incentives by government are inconsistent with a free market system.

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Part 1—Introducing the Contemporary Business World 4.

Familiarize yourself with a product or service that is sold under conditions of pure competition. Explain why it is an example of pure competition and identify the factors that make it so. Then do the same for a product in each of the other three competitive situations described in the chapter (monopolistic competition, oligopoly, and monopoly).

Answers will vary. This is a good exercise for assisting students in understanding that not all industries are equally competitive.

5.

Government plays a variety of roles in the Canadian mixed economy (customer, regulator, taxation agent, provider of services, etc.). Consider each of the roles discussed in the text and state your view as to whether government involvement in each role is excessive, insufficient, or about right. What criteria did you use to make your assessment?

Answers will vary. Some government rules and regulations are necessary to make sure that all of a business’s stakeholders are protected and that people who are unable to work get the basic care they need.

Application Exercises 6. a local shopping mall or shopping area. List each store you see and Visit determine what degree of competition it faces in the immediate environment. For example, if there is only one store in the mall that sells shoes, that store represents a monopoly. Note the businesses with direct competitors (for example, two jewellery stores) and describe how they compete with each other.

This assignment will provide students with an opportunity to understand different degree of competition in a setting where they spend a fair bit of their time.

7.

Pick a specific product that you use. Explain how the factors of production work together to make that product available.

There are many examples that students could use. One example is a meal purchased at a restaurant. The restaurant owner is the entrepreneur who is operating the business for profit and risking the possibility of failure. The business employs a variety of chefs, cooks, managers, wait staff, kitchen staff, and cleaners. The entrepreneur may or may not be employed in the operation of the restaurant and may or may not do the hiring of all the staff members, depending on the size of the restaurant. While most of the staff members are hired for their physical skills, the chef must have creative talents to make the business successful. Most restaurants are privately owned, and therefore financed by the owner’s personal resources, credit from suppliers, bank, or credit union financing, and possibly loans from friends and family. Another important source of financing is cash flow provided by the profitable operation of the restaurant. The natural resources employed include the land on which the restaurant is situated.

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Chapter 1—The Canadian Business System 8.

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.

This should be an interesting exercise for students. Have them categorize the factors of production to make class comparison easier. After the information is brought back to class, have a class discussion about (1) whether supply and demand issues vary across businesses, (2) whether some businesses have an “easier” time locating the factors of production and why, and (3) how fluctuations in economic factors affect the business.

TEAM EXERCISES Building a Business: Continuing Exercise In this initial stage of building their business, groups should consider the various external environments (see Chapter 2 in the text) as they try to identify three trends that will create business opportunities.

Groups must also answer some very fundamental questions about their business in this initial stage of their work. These questions are: What is our product or service?

Who are our customers?

Where are our customers located?

Is our business idea easily copied?

If there are substitutes for our product or service, how can we make our product/service stand out from competitors’ offerings?  How can having competition benefit our company?     

Building Your Business Skills: Competition in the Mobile Economy Follow-Up Questions 1.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.

2. Develop specific pricing strategies based on each of the following situations: .

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Part 1—Introducing the Contemporary Business World • •

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 to make up the drop in volume.

3. Discuss the role that various incentives other than price might play in affecting demand and supply in this market.

Incentives 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.

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

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

Exercising Your Ethics: Team Exercise: Getting Caught Out In the Cold Activity Overview: This activity asks students to examine the economic and ethical issues that can arise when making business decisions.

Time Limit: 35 minutes What to Do: 1.

Divide students into four-member teams. Ask them to read the description of the situation and then answer the three questions that follow. (20 minutes) 2.

Reassemble the class as a whole and have each group briefly give its answers to each of the three questions. (15 minutes) .

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Chapter 1—The Canadian Business System

1.What are the roles of supply and demand in this scenario?

Seema anticipates that the supply of heating oil will be higher this winter, resulting in the need to charge less than last winter. She also believes that demand will increase if the company offers consumers the option of locking in a price, since that price is lower than what customers 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.

2.What are the underlying ethical issues?

Underlying ethical issues revolve around the dilemma of wanting to charge customers a “reasonable” price, but also wanting to build up financial resources because of tough times for the company during the last few years.

3.What would you do if you were actually faced with this situation?

Answers will vary, but student answers must demonstrate an understanding of the ethical issue that is evident, as well as an understanding of the pros and cons of each possible action the company might take.

Don’t Forget: Remind students that there is typically an interaction between economic incentives and the level of ethical behaviour that is evident.

Wrap-Up: There is seldom a yes/no, right/wrong, black/white answer to ethical decisions in business. One rule of thumb is to make the decision that positively affects the greatest number of people. But rules of thumb might or might not work in each situation.

CASE ANALYSIS Closing Case: Spin Master: Canadian Toy and Entertainment Giant Reaching New Heights This case study tells the story of Spin Master, a company started by three entrepreneurs about 30 years ago, that originally focused mainly on developing and selling children’s toys. It has now grown from a one-product company to a large international company that is involved in several areas beyond children’s toys.

Questions for Discussion

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Part 1—Introducing the Contemporary Business World 1.

Based on what you read in this feature, what are the primary reasons for the longterm success of Spin Master?

There are two primary reasons for Toy Master’s long-term success. First, the entrepreneurs who founded the company learned important lessons about business activities such as sales, manufacturing, and finance because of their initial market offering of a single product called Earth Buddy. Their success with that product, in turn, motivated them to expand their thinking about the kinds of products they could sell, and to find new ways to satisfy customer demand.

Second, the entrepreneurs have been very aggressive in searching for new product ideas, and when necessary, acquiring other companies to broaden Spin Master’s product offerings.

Now the company has over 1,800 employees and it describes itself as “a leading global children's entertainment company that creates, designs, manufactures, licenses, and markets a diversified portfolio of innovative toys, games, products, and entertainment properties.”

2.

In what ways does Spin Master demonstrate the basic principles of business, the power of entrepreneurship, and creativity in a global economy?

Two key principles of business in a country like Canada are the profit motive and the need to satisfy consumer needs. Spin Master illustrates both principles and has from its inception.

To survive and be profitable, the entrepreneurs had to first come up with a new product that would appeal to the market and would satisfy consumer needs. It was also necessary to coordinate marketing, production, finance, and human resource activities to get the product to many consumers. All of this had to be done in such a way that the company was profitable (i.e., its sales revenues exceeded the costs that were incurred to develop and market products).

The power of entrepreneurship is evident in the risk-taking behaviour of the three founders when they started the company 30 years ago. There was no guarantee that they would be successful, but with a great deal of hard work and interesting new product choices, they succeeded in gradually building their company into the significant market force that it is today. The creativity they demonstrated as they developed new products for the international market was crucial in the company’s success.

In this chapter, we will discuss the different types of economic systems. After 3. reading that section, answer the following question. What features of the Canadian economy helped make Spin Master’s success a reality? In what ways would this task have been more difficult in a command economy? Explain.

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Chapter 1—The Canadian Business System The most fundamental feature of the Canadian economy that helped to make Spin Master a success is freedom of choice, i.e., in a market economy, entrepreneurs are free to develop products that have the potential to satisfy consumer needs, and consumers are free to either accept or reject such products. Success is not guaranteed; rather, it depends on how well the company’s product offerings satisfy customer needs.

This contrasts sharply with the situation in a command economy, where the central government controls the factors of production and makes production and allocation decisions. Over the past 50 years, there has been a global movement away from command economies and toward market economies because market economies do a much better job of satisfying consumers than command economies do.

4.

What are the greatest challenges facing Spin Master today? What do they need to do to thrive for another 30 years or more?

One of the greatest challenges facing Spin Master is the general decline in toy sales. As noted in the case study, other products (e.g., cell phones) have become interesting even for younger children, and this has suppressed the sales volume of traditional children’s toys. Spin Master can meet this challenge by continuing to do what they have done in the past, i.e., constantly look for new products that will satisfy emerging consumer needs. This might mean, for example, introducing more electronic products instead of traditional ones like teddy bears.

Another challenge is the issue of distribution. The case study notes, for example, that the decline of Toys R Us was partly due to the growth of online sales at the expense of sales at bricks-and-mortar stores. One way to get students involved in this issue is to ask them to research how Spin Master distributes its products and what its online presence currently is.

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CHAPTER 2 THE ENVIRONMENT OF BUSINESS CHAPTER SYNOPSIS All businesses, regardless of their size, location, or mission, operate within a larger external environment. This external environment consists of everything outside an organization’s boundaries that might affect it. The external environment plays a major role in determining the success or failure of any organization.

The economic environment refers to the conditions of the economic system in which an organization operates. The basic goals of an economic system are stability, full employment, and growth. Measures of how well an economy has accomplished these goals include gross national product, gross domestic product, productivity, balance of trade, and national debt. The Canadian government uses fiscal policies to manage the effects of its spending and revenue collection and monetary policies to control the size of the nation’s money supply.

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

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

The socio-cultural environment includes the customs, mores, values, and demographic characteristics of the society in which an organization functions. Socio- cultural processes determine the goods and services as well as the standards of business conduct that a society is likely to value and accept.

Successful companies are responding to challenges in the external environment by redrawing traditional organizational boundaries. Major trends include acquisitions and mergers, divestitures and spinoffs, employee-owned corporations, strategic alliances, and subsidiary/parent corporations.

CHAPTER OUTLINE I.

ORGANIZATIONAL BOUNDARIES AND ENVIRONMENTS The external environment refers to everything outside an organization’s boundaries that might affect it. Managers must have an accurate understanding of the external environment in which their company operates, as the environment has a significant impact on its success or failure.

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Chapter 2—The Environment of Business

A. Organizational Boundaries—These separate the organization from its environment. Today, boundaries are becoming increasingly complicated and difficult to identify, as interactions between businesses and suppliers alter traditional roles.

B. Multiple Organizational Environments—The external environment actually consists of many separate environments, including general and local economic conditions, technology, political-legal considerations, social issues, the global environment, issues of ethical and social responsibility, the business environment itself, and numerous other emerging challenges and opportunities.

II.

THE ECONOMIC ENVIRONMENT The economic environment refers to the conditions of the economic system in which an organization operates. The three components of most concern are the rate of economic growth, level of unemployment and rate of inflation.

A. Economic Growth—More efficient use of resource, that is, greater output from the same inputs, or the same output with fewer inputs.

1.

Aggregate output and the standard of living—Aggregate output refers to the total quantity of goods and services produced by an economic system during a given period. The standard of living refers to the quantity and quality of goods and services that a country’s citizens can purchase with the currency used in their economic system 2.

The business cycle—The growth and contraction pattern of shortterm ups and downs in an economy.

3.

Gross Domestic Product (GDP) and Gross National Product (GNP) —GDP is the total value of all goods and services produced within a given period by a national economy through domestic factors of production, regardless of who owns the factors of production. GNP is 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.

Real growth a. rates—The growth rate of GDP must be adjusted to remove the effects of inflation and changes in the value of the country’s currency; this is the real growth rate of an economy. If the rate of real growth of GDP exceeds the population growth rate, the standard of living improves.

GDP perb.capita—This is the GDP per person in a country.

It is a better measure of the economic well-being of the average person in the country than GDP. .

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Part 1—Introducing the Contemporary Business World

Real GDP—Is c. calculated to remove the effects of changes in currency values and price changes. Nominal GDP is measured at current prices in current dollars. d.

Purchasing Power Parity—Allows a comparison of the standard of living in different countries.

Productivity—is a measure of economic growth that compares how 4. much a system produces with the resources needed to produce it.

Improved productivity allows more output with the same inputs. As supply increases, prices drop, consumers can purchase more, and the standard of living improves.

5. balance of trade and the national debt—Several factors The influence economic growth, including the balance of trade and the national debt. a. balance of trade—The balance of trade equals the The economic value of all the products that a country exports minus the economic value of the products it imports. A negative balance of trade results when a country imports (what it buys from other countries) exceeds it exports (what it sells to other countries). A trade surplus (positive balance of trade) results when a country exports more than it imports. b.

National debt—A country’s national debt is the amount of money that the government owes its creditors.

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

Inflation—Exists when widespread price increases occur 1. throughout an economic system.

Measuring a. inflation: the CPI—The Consumer Price Index (CPI) measures the price of a basket of typical products purchased by consumers living in urban areas.

2.

Deflation—A period of generally falling prices. Can result from reduced costs due to increased productivity (good) or because consumers have high debt loads and are unwilling to consume much (bad).

3.

Unemployment—The level of joblessness among people actively

seeking work in an economic system.

There are four different types of

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Chapter 2—The Environment of Business unemployment: frictional, season, cyclical, and structural. Wage rates vary depending on the relationship between supply of and demand for labour.

C. Managing the Canadian Economy—Fiscal policies are government economic policies that determine how the government collects and spends its revenues. Monetary policies are government economic policies that determine the size of a nation’s monetary supply, primarily through the Bank of Canada and management of the interest rate.

III.

THE TECHNOLOGICIAL ENVIRONMENT Technology has a variety of meanings, but as applied to the environment of business, it generally includes all the ways in which firms create value for their constituents.

A. Research and Development—Part of the innovation process that provides new ideas for products, services and processes. Pure research seeks new knowledge, without a particular product in mind.

Applied research and development focuses on making the technological innovation into a commercial success. R & D spending in Canada makes up a lower proportion of GDP than in other countries, partly because many Canadian businesses are subsidiaries of U.S. companies and the research is being done in the U.S., not Canada. R& D intensity refers to R&D spending as a percentage of a company’s sales revenue.

Companies that select a competitive strategy that relies on being a leader in technology will have greater R&D intensity. It is a riskier strategy, but has the potential for significant rewards.

Other companies do not want to create technological innovations, but prefer to compete on the basis of refining the technology and finding a way to be the low-cost producer of the technology, which is less risky.

B. Product and Service Technologies—The technologies employed for creating products (both physical goods and services) for customers. Technology is important in manufacturing, but it is also a significant force in the service sector. The internet is a recent technological advance affecting all businesses.

Businesses must be alert to new technologies with the potential to dramatically impact their operations. Innovative use of new technology can radically alter an industry and make an existing business or industry obsolete. The length of time it takes to accomplish a recurring activity from beginning to end is the cycle time.

Reductions in cycle times reflect increased productivity and make the businesses more competitive. Technology transfer is the process of getting new technology out of the lab and used in practical applications in the marketplace.

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Part 1—Introducing the Contemporary Business World IV.

THE POLITICAL-LEGAL ENVIRONMENT The relationship between business and government is important in Canada, since businesses are subject to government regulations. Pro- or anti-business sentiment in government can further influence business activity, whether on a federal, provincial or local level. Political stability is an important consideration, for firms interested in expanding internationally. Import and export opportunities may be affected by the relations between the Canadian government and the government of a potential trading partner.

V.

THE SOCIO-CULTURAL ENVIRONMENT The socio-cultural environment includes the customs, mores, values, and demographic characteristics of the society in which an organization functions.

A. Customer Preferences and Tastes—Customer preferences and tastes vary from one part of the country to another, and between different countries. Product usage also varies between countries, such as the marketing of bicycles as a recreational item in Canada and as a mode of transportation in many other countries. Consumer preferences and tastes change over time, with some changes driven by consumers and other driven by companies trying to increase sales.

Finally, socio-cultural factors influence the standards of business conduct that are acceptable in the society, and the attitudes that workers in a society have toward their jobs and their employers.

B. Ethical Compliance and Responsible Business Behaviour—This is an especially critical element of the socio-cultural environment. The central issue is the failure of businesses to provide their stakeholders with a fair accounting of their financial health and competitive position. Another important issue is the determination of appropriate ethical behaviour when different ethical standards exist in different countries and Canadian companies are expected to participate in behaviours that are acceptable in the foreign country but clearly unethical in a Canadian business setting.

The Business Environment—Includes expectations of customers, C. suppliers, shareholders, and employees. Current trends such as a more global economy are also an important element of the business environment.

The Industry Environment—Understanding the competitive environment D. in which a business operates is critical to developing a successful competitive strategy. One of the most popular tools for analyzing the competitiveness of the industry is Michael Porter’s five forces model. The stronger the forces, the more competitive the industry, and the more difficult it is for an individual company to operate profitably. If the forces are strong, the company normally has little ability to set its own selling prices and must be able to produce at a low cost to be profitable.

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Chapter 2—The Environment of Business

1.

Rivalry among existing competitors—Can be seen in activities like intense price competition and elaborate advertising campaigns.

2.

Threat of potential entrants—The lower the barriers to entry, the easier it is for new competitors to enter the market.

3.

Suppliers—The existence of few suppliers limits the opportunities a company has to obtain the inputs it needs and provides the suppliers with strong bargaining power.

4.

Buyers—The existence of few customers when there are many suppliers provides the customers with strong bargaining power.

5.

Substitutes—If substitutes are readily available for the product a company sells, the industry is more competitive.

VI. EMERGING CHALLENGES AND OPPORTUNITIES IN THE BUSINESS ENVIRONMENT At present, companies are refocusing on their core competencies, those skills and resources with which they can gain a competitive advantage and create the most value for owners. Outsourcing activities that are outside their core competencies to businesses that do have the expertise needed can reduce the costs of performing those functions, but create dependencies on those suppliers.

A. Outsourcing—The strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials or resources.

The Growing Role of Social media—The strategy of using social media B. sites and word-of-mouth marketing to spread product information has become very important. By using various formats—games, contests, chat rooms, and bulletin boards—marketers encourage potential customers to try out products and tell other people about them.

C. Business Process Management—Creating team structures focused on processes rather than functional areas of business. By identifying those activities that are critical to the business’ success, the processes that must be performed well to effectively carry out these activities, and then ensuring the necessary skills and resources are available, decision-making is faster and more customeroriented, materials and production are better coordinated, and products are delivered more rapidly.

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Part 1—Introducing the Contemporary Business World VII.

REDRAWING CORPORATE BOUNDARIES Companies are joining together in a variety of ways to take advantage of opportunities more effectively than is possible alone. Various methods have been used in recent years.

A. Mergers and Acquisitions—An acquisition is the purchase of another business, whereas a merger is a more collaborative process where two firms are consolidated into one. A horizontal merger means that two firms that have been direct competitors in the same industry now become one firm. A vertical merger is the joining together of two firms that had previously been in a customersupplier relationship. A conglomerate merger occurs when two firms in completely different industries join together. A friendly takeover is an acquisition in which management of the acquired firm supports the change in ownership A hostile takeover is an acquisition in which management of the acquired firm fights the attempt to acquire control. A poison pill is a defence that management adopts to make a firm less attractive in the event of an attempted hostile takeover.

B. Divestitures and Spinoffs—A divestiture is the sale of part of an existing business operation to another company. A spinoff is the strategy of setting up one or more corporate units as independent businesses, motivated by the belief that the units will be more valuable as a separate company.

C. Employee-Owned Corporations—Employee stock ownership plans occur when corporations buy back their own shares on the stock market, and then transfer the stock to a trustee for the benefit of the employees, who then gain ownership of the stock through prearranged terms.

D. Strategic Alliances—The joining together of two or more companies on a temporary basis to undertake a particular project. Benefits include spreading the risk of the project between the allied businesses, and the sharing of expertise.

E. Subsidiary and Parent Corporations—A subsidiary corporation is one that is owned by another corporation (through the acquisition of more than 50% of the voting shares). A parent corporation is one that owns (or controls) the subsidiary.

QUICK QUESTIONS 1.

How will the various phases in the business cycle affect a small manufacturing firm?

2.

How can economic growth be measured through aggregate output, standard of living, gross domestic product, and productivity?

3.

How does the national debt affect economic growth?

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Chapter 2—The Environment of Business 4.

Why have the items in the “basket of goods” making up the CPI changed over the years?

5.

In what ways does the political-legal environment affect business activity?

6.

In what ways does the socio-cultural environment affect business activity?

IN-CLASS EXERCISES Exercise #1: The Geography of Jobs Activity Overview: This activity asks students to give some serious thought to the issue of outsourcing and its effect on the Canadian economy and on Canadian workers.

Time Limit: 30 minutes What to Do: Make sure that students are familiar with outsourcing before you conduct this 1. exercise. Ask them to read the brief section on outsourcing in Chapter 2 in the text and the information found in italics below prior to the day when the exercise will be conducted. Make copies of the material in italics and hand it out to students in advance.

-------------------------------------------------------------------------------------------------------Outsourcing Businesses are accountable to numerous external constituents. Also, managers sometimes have to optimize their decision making when dealing with conflicting interests.

Nowhere is this more visible than in the current debate over the continued outsourcing of jobs to foreign employees.

Outsourcing is not a recent phenomenon. For years manufacturers have subcontracted their labour to low-cost factories in developing nations. Nike and Reebok, for instance, outsource the production of all their athletic shoes to factories in Southeast Asia. And many other companies have similar practices. In general, the jobs that have been outsourced have been relatively low-skill in nature. While labour and other observers have long been aware of this practice, business leaders have been able to argue with some conviction that this practice would lead to more high-quality jobs in places like the United States.

In recent years, a major change in outsourcing has occurred as more companies have started to outsource skilled and/or white-collar jobs to other countries. Companies like Microsoft find that highly skilled software programmers in places like India can perform as well as their North American counterparts for about a quarter of the salary costs. Boeing is now having some of its engineering work done abroad. And some experts

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Part 1—Introducing the Contemporary Business World are beginning to visualize how many other basic services, ranging from income tax preparation to financial analysis to medical records interpretation, can also be exported.

How big is the problem? For example, experts expect that 3.3 million jobs will be exported from the United States by 2015, and that another 14 million jobs have been identified as being “at risk.” The same sorts of concerns are being expressed in Canada.

Many experts also agree that while outsourcing may be bad for various specific individuals, in the long term it will be good for the country as a whole. And besides, as one CEO argues, “If your competitor is sending jobs overseas, you’re almost forced to do the same.”

That sentiment sums up the debate nicely. On the one hand, if businesses are accountable to their shareholders, they are obligated to keep their costs as low as possible and to remain competitive in their respective marketplaces. From this perspective, then, they should outsource whenever and wherever feasible. On the other hand, to the extent that businesses have a social obligation and an obligation to their current workers, they must take into account the social and human cost of displacing U.S. workers. So which side is right? This is a case in which there is no simple answer, and what is right or wrong is in the eye of the beholder.

-------------------------------------------------------------------------------------------------------2.

Divide students into three- or four-member groups and ask them to discuss within their groups the pros and cons of (a) outsourcing in order to keep prices down, and (b) reducing dependence on outsourcing in order to better fulfill social obligations toward stakeholders. (15 minutes) 3.

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

Don’t Forget: This is a case in which there is no simple answer.

Wrap-Up: Wrap up the activity by reminding students that some industries may rely more heavily on outsourcing than others. Further, some industries gain higher-quality standards and expertise through outsourcing. Also remind students of positive trade relationships that evolve through dependence on outsourcing.

Exercise #2: Experiential Exercise: Competing For Your Business Activity Overview: The purpose of this exercise is to demonstrate the “invisible hand theory” by voting with your dollars.

Time: 50 minutes What To Do:

1.

Divide half the class into teams of three or four students. Each Copyright © 2023Pearson Canada Inc. 30

Chapter 2—The Environment of Business team will be the owner of a video store. The other half of the class will act as customers (see below).

2.

Each store will develop an offering they think is unique (20 minutes).

3.

The group designated as customers should list their criteria for choosing a video store. (15 minutes) 4.

The entrepreneurs will explain their store’s offering to the rest of the class who are potential customers (10 minutes).

5.

Customers will line up in front of the store of their choice. Count the people in front of each store (5 minutes).

Follow-up Questions: 1.

2.

Is one store more popular than the others? Why is that?

What can the less-popular stores do to attract customers?

3.

How would that affect the most-popular store?

4.

Are the customers voting with their dollars?

Exercise #3: Scanning the Environment Activity Overview: This activity asks students to consider how various parts of the external environment affect businesses and industries.

Time Limit: 25 minutes What to Do: 1.

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

2.

Assign each group a specific industry (for example: automotive, airline, fast food, computer, apparel, or restaurant).

3.

Ask each group to consider what variables from the technological, political-legal,

socio-cultural, 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.

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Part 1—Introducing the Contemporary Business World 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.

Exercise #4: Feeling the Heat from Bad Results: Praying for Good Weather Activity Overview: This activity helps students understand the important role played by uncontrollable natural events on the bottom line.

Time Limit: 45 minutes What to Do: 1.

Divide students into groups of four or five and ask them to follow the instructions for the Building Your Business Skills exercise found at the end of Chapter 2. (30 minutes) 2.

Reassemble the class as a whole and discuss the Follow-Up Questions. Each group should share input. (15 minutes) Possible answers to the Follow-Up Questions are found later in this chapter under the heading “Team Exercises.”

Don’t Forget: This exercise can also be used to focus on small businesses and entrepreneurs instead of large businesses. If this is of interest to either the instructor or students, focusing on small businesses and entrepreneurs will be useful.

Wrap-Up: Wrap up the activity by summarizing student group suggestions for how businesses can minimize disruptions that are caused by uncontrollable events like the weather.

TEACHING TIPS 1.

Before discussing the chapter material, ask students to form groups and define inflation, the national debt and budget deficits. Then have a general discussion to ensure that everyone understands these important fundamental concepts. Also, ask students why it is important to reduce the national debt and ask them to provide ideas for how this might be done.

Ask students to identify current events, court rulings, or legislation which present 2. threats or opportunities for businesses. For example, what impact does a war have on business, and why? Emphasize how something as small as uncertainty can have a major impact.

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Chapter 2—The Environment of Business 3.

Ask students to identify political events taking place in other countries and the potential impact that these events could have on Canadian businesses.

4. students to identify current events or general conditions which may impact Ask the success of a business today. List their answers on the board by organizational environments.

5. students form groups and discuss/list all the external factors (global, Have national, provincial, or municipal) that have influenced specific businesses in their city of residence.

6.

Identify Ask thestudents obvious demographic to describe their class. characteristics and also those factors, which may not be disclosed, such as, religion, sexual orientation, etc. Now speculate on how these factors might impact the decisions made by a business. Are there any opportunities? Threats?

7. the students when a recession becomes a depression. Have them look up Ask various downturns in the economy on the Internet. Many students may be surprised to hear that the Canadian economy has suffered more than one or two recessions over the last hundred years. Keep in mind there is no “official” benchmark on when a recession becomes a depression. Although the best answer may be from former U.S. president Harry Truman, who said: “It’s a recession when your neighbour loses his job; it’s a depression when you lose your own.”

8.

Make sure that students understand that gross domestic product (GDP) 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.

9.

Reinforce that gross national product (GNP) includes the value of products produced by a country regardless of where they are produced; this figure does not include the value of products produced within the country by a foreign company.

The following should generate a good discussion about productivity. A relevant 10. example is typically helpful here. “If two student groups each produced a ten-page paper by the end of the term, but one group had six members and the other group had three members, which group was more productive?” The answer often leads to a good discussion of the relationship between quality and productivity measures.

11.

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.

Have students look up Canada’s current balance of trade with various trading 12. partners, including the U.S. Ask them about the importance of the American market. Do they see a need to diversify trading partners?

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Part 1—Introducing the Contemporary Business World 13. students to identify technological innovations that have had a profound effect Ask on an industry. There are a wide variety of examples from both the present and the past that may be discussed. Past innovations include the gas-powered motor, which allowed for the development of the automobile and the decline in businesses which manufactured wagons and carts, harnesses, etc. This also led to the development of a network of service stations. If alternate fuel sources are successfully developed, what impact will that have on current industries? In the current environment, the development of internet capabilities has had a significant impact on many industries, including the music recording industry. What impact has the internet had on the sale of encyclopaedias?

Reinforce that the government regulates the money supply and interest rates 14. through monetary policy; the government influences money supply via taxation and spending through fiscal policy.

15. students to describe the monetary policy currently in place in Canada. What Ask does this indicate about the current state of the Canadian economy? What would be the expected change in interest rates if the government felt that the economy was slowing down and there was a strong possibility of a recession?

USING THE BOXED INSERTS Opening Case: McCain Feeding Canadians, Feeding the World for Over Six Decades Questions For Discussion 1.Describe how the various external environmental factors impact McCain?

The case provides information on how certain external environments of business (discussed in Chapter 2) are influencing McCain. For example, the economic environment impacts consumer choices in the grocery aisles. With high inflation and rising costs consumers may reduce purchases of more expensive items (i.e., steak) in favour of more staple inexpensive items (i.e., potatoes and pasta). The technological environment is not one you would naturally think about for a company that has been around for as long as McCain especially in terms of their potato product sales but as the case indicates the new innovations for McCain and Simplot have led to a major fight for market share and has also led to a legal battle. The Covid-19 pandemic also led to more cooking at home which surely influenced their frozen potatoes revenues positively from the grocery stores but there was also certainly a dip in sales from the restaurant market at least in the early days of the pandemic.

2. What are the biggest competitive challenges for long-term success and profitability for McCain?

The company is facing direct competitive challenges in the form of a lawsuit from Idahobased Simplot which has accused McCain of copying their Sidewinder (curly potato wedges) with McCain’s Twisted Potato (a curved wedge that comes with a peel). The company must continuously adapt to meet the needs of customers and the new threats of Copyright © 2023Pearson Canada Inc. 34

Chapter 2—The Environment of Business their competition (new products, competitive marketing, social media presence etc.).

3. Describe the main opportunities for McCain at the present time. In addition to the ones mentioned in the case can you think of any other important trends in this industry?

The good news for McCain was that the global frozen food market was projected to grow by a compound annual growth rate (CAGR) of 3.1% from 2021 to 2027. McCain is constantly looking at other emerging possibilities for growth. For example, the company announced a new partnership with Nuggs, a plant-based chicken nugget start-up company as more and more consumers adapt their eating habits and embrace plant-based food McCain is there.

4. What are the main ethical and social challenges for McCain and other industry players?

Since McCain Foods sells approximately one out of every four french fries in the world and they process over 4.5 billion potatoes each year in Canada alone their ability to do so efficiently with as little waste as possible is impactful. McCain made an investment of $1 billion in facility improvements as part of a commitment to sustainability and growth. It has made a commitment to use 100% renewable energy by 2030. Over 93 percent of their potato production was certified for Good Global Agricultural Practices in 2019. In 2020, McCain Foods Australia announced construction plans on a new renewable energy system that would reduce CO2 emissions, at its Ballarat food plant, by 27,000 tonnes per year. This move was consistent with the company’s goal to reduce CO2 emissions by 50% by 2030 and eliminating coal usage by 2025. There was also a commitment to making healthier food and a promise to reduce sodium content by 15% by 2025.

Social Responsibility and Social Justice: What’s in a Name? Logos and Branding in the Age of Social Justice Critical Thinking Question 1.What is the latest news in this area? Research the teams and brands mentioned in this case and find out the status of the names, brands, and logos. Are there any other highprofile cases that have been recently highlighted or resolved through action?

Student answers will vary based on the latest news. If there are no obvious examples ask the students to find articles on based on the teams named in the case: Chicago Blackhawks, Kansas City Chiefs, the Florida State Seminoles, and the Atlanta Braves.

E-Business and Social Media Solutions: ZOOM: Ready or Not… We all Connected Critical Thinking Question 1.Debate the following. Using an online communications platform like Zoom enables workers to be more productive than if they were working full-time in an office setting. .

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Part 1—Introducing the Contemporary Business World Answer this in a group of four to six students with half the team taking one position and the other half taking the opposite position.

This should lead to a very interesting debate since these students now fully understand the positive aspects and the severe challenges that they faced during the peak of the pandemic.

Entrepreneurship and New Ventures: Goldline Curling: New Industry Threats and Challenges This insert describes an innovation in the curling industry that has implications for the competitive strategy that Goldline Curling should use in the future.

Critical Thinking Question 1.

Debate the following: Should Goldline continue to uphold the spirit of the game or should he create a sub-line for those recreational curlers that want that extra edge?

Who is it hurting after all? Choose a side and debate with your classmates.

This case provides yet another opportunity to increase student involvement in an interesting and real business situation. Form two teams and ask one team to make the argument that Doug should create a new product for recreational curlers that will feature the innovative new brush and ask the other team to make the argument that Doug should not create a new product for recreational curlers. Then ask each team to make its arguments to the class. Then moderate an in-class discussion with additional input from the class.

Illustrative points that are likely to be made if the above process is used are as follows. Doug will have to decide whether he wants to focus on the recreational market or on the professional market, or both. If he decides to focus on the professional market, he will not have to worry about competition from Hardline’s new brush because the curling federation has banned its use in professional curling matches. Since Goldline has a very high profile among professional curlers, this may be a viable strategy. However, if he focuses strictly on the professional market, he will be foregoing considerable sales revenue that can be generated in the recreational market. If he doesn’t want to lose that sales revenue, he will have to address the issue of the new Hardline brush. It is likely that many recreational curlers will continue to use nylon brushes (and Goldline will be competitive in this segment), but it is also likely that many other recreational curlers will want to use the new brush because it will improve their game. Doug cannot simply ignore this segment of the recreational curling market. He will likely have to begin producing the new brush, and he will also have to develop a competitive strategy to counter the effects of Hardline, which may well have an advantage since it invented the new brush.

Overall, it seems most reasonable for Doug to pursue both markets. Goldline is the market leader in curling equipment, and as the case notes, Doug’s daughter is passionate about ensuring that Goldline continues to hold its place in the competitive Copyright © 2023Pearson Canada Inc. 36

Chapter 2—The Environment of Business curling landscape. It therefore seems unlikely that Goldline will simply ignore the disruptive effect of the new brush and thereby cede part of the market to its smaller competitors. If Doug focuses strictly on the professional market to avoid dealing with the new brush issue, that will likely harm his business in the recreational market.

QUESTIONS AND EXERCISES Questions for Analysis 1.

Why is it important for managers to understand the environment in which their businesses operate?

It is important because managers must develop strategies, schedule resources, assess capacity, improve production (performance), be competitive, and anticipate and handle problems. A lack of understanding about the environment makes good performance in these activities difficult to achieve.

2.

It has been argued that inflation is both good and bad. How can this be? Explain.

Are government efforts to control inflation well advised? Explain?

Inflation is bad because it can lead to a spiral of rising wages chasing rising prices, which must rise to cover the cost of increased wages. It is good because it can signal the beginning of a period of growth for the economy. Government tries to control inflation by adjusting interest rates through monetary policy. If the economy is strong and inflation is occurring because demand exceeds supply, a tight monetary policy can reduce demand and slow inflation and the economy to an acceptable level.

3.

What are the benefits and risks of outsourcing? What, if anything, should be done about the problem of Canadian companies outsourcing for foreign countries? Defend your answer.

Benefits: saving costs, receiving independent know-how, avoiding idle capacity, availing of experts in a particular field, transferring operational responsibilities Risks: relinquishing operational control, creating dependency, facing reliability issues, neglecting management supply chain In terms of what, if anything should be done about outsourcing, answers will vary.

The varying answers provide the instructor with an opportunity to lead a discussion that focuses on critical thinking about outsourcing. This would include analysis of unintended outcomes if some oversimplified solutions (for example, banning outsourcing) were attempted. It would also involve an analysis of whether certain assumptions are really reasonable (for example, it would seem that outsourcing increases unemployment, but .

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Part 1—Introducing the Contemporary Business World does it also have other positive effects that might overwhelm reduced employment levels in the company that did the outsourcing?).

4.

Explain how current economic indicators such as inflation and unemployment affect you personally. Explain how they will affect you as a manager.

Inflation: Shows the increase in prices of products which impacts consumer purchasing power (CPI) and other personal aspects. It is also, to a certain extent, a gauge of how well the overall economy evolves something that has a bearing on our personal lives as well.

Unemployment: Knowing how many people are out of work can provide you with an indication of the demand of certain skills, the state of employment benefits, the state of the economy (e.g., upswing, recession, depression), and how effectively government is managing the economy.

This question provides an opportunity to make the point that economic issues that may seem somewhat dry to students in the abstract become much more interesting when they are related to their own experiences. For example, students will be very interested in the amount of inflation that is evident with respect to increasing university tuition.

5. first glance, it might seem as though the goals of economic growth and At stability are inconsistent with one another. How can this apparent inconsistency be reconciled?

Answers will vary. The most general answer is that economic growth increases employment, output, and wealth creation, while stability sustains growth and reduces the threat of inflation.

6.

What is the current climate in Canada regarding the regulation of business? How might it affect you if you were a manager today?

The recent corporate financial scandals have motivated the general public to call for increased government regulation of business and stricter enforcement of existing legislation. This increase in control measures will place additional constraints and burdens on management.

Application Exercises 7. this exercise, you are going to examine how the Covid-19 pandemic impacted In businesses in Canada. While disruption and suffering was felt by all people in society the economic fortunes of individuals and specific companies were quite different based on sectors of the economy. Select two examples of companies that suffered harsh losses in revenues (i.e., airlines, restaurants etc.) and two companies that were impacted positively (strictly in terms of financial results). Provide statistics (revenues, sales growth etc.) to make your points.

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Chapter 2—The Environment of Business Answers will vary.

Assume that you are the owner of an internet pharmacy that sells prescription 8. drugs to U.S. citizens. Analyze the factors in the external environment (economic, technological, political-legal, and socio-cultural) that might facilitate your company’s activities. Analyze the factors in the external environment that might threaten your company’s activities.

Answers will vary.

Select a technology product, such as the Samsung Galaxy Smartphone or FitBit, 9. and research how the various environments of business (economic, technological, sociocultural, global, political–legal, and general business) are currently impacting the sales possibilities of the product or service.

Each of the external environments of business has some impact, but some environments will be seen by students are more salient. For example, students who pick a product like the FitBit will recognize that the economic environment has an overall influence (i.e., when times are good, consumers purchase more products like a FitBit), but they are more likely to say that the technology and socio-cultural environments have a bigger influence for that particular product. The technological environment is influential because consumers in the 18-35 age bracket are attracted to the latest technological gadgets. This fact obviously has positive implications for sales. The sociocultural environment is also important because having the latest electronic gadget can be an important issue in one’s social standing.

If students view an automobile as a technology product, the following ideas would be relevant: Political-legal environment: This will include environmental protection legislation that will set emission standards the manufacturer will have to meet in order for the automobiles produced to be sold. Economic environment: If the economy is strong, sales should also be strong as customers with money to spend acquire new automobiles.

If the economy is weak however, sales of automobiles may decline substantially, as automobiles are durable goods with a long life, and automobile owners may decide to drive the automobiles they already own for a much longer period of time. Socio-cultural environment: Products that are environmentally-friendly are increasingly valued. As a result, automobiles that are not fuel-efficient may not sell well, while automobiles that run on alternative fuels may sell very well. This may also impact the total sales volume of the industry, as some individuals will opt for public transportation rather than purchasing a car. Consumer preferences for particular colours, standard versus automatic transmission, front-wheel drive, rear wheel drive or four-wheel drive, etc. will all affect which automobiles sell best. Technological environment: Technological advances such as improved safety features may increase customer demand for some automobiles compared to others, which affects sales of particular models. Technological changes such as the .

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Part 1—Introducing the Contemporary Business World manufacture of small scooters have affected the overall demand for automobiles, rather than just a preference for one particular brand of automobile over another.

Students who pick a service (for example, a university or college education) will identify other environments as significant. For example, students might conclude that the political-legal environment is very important because provincial government decisions about tuition rates are very important to them.

10.

Interview two business owners or managers. Ask them to answer the following questions: (a) what business functions, if any, they outsource; (b) are they focusing more attention on business process management now than in the past; (c) how have internet applications and the growth of social media changed the way they conduct business?

Answers will vary. To get a better idea of the pattern of answers, summarize the findings of individual class members for each of the three questions to determine what trends are evident in each area.

TEAM EXERCISES Building a Business: Continuing Exercise As they refine their plans for their new business, groups must give serious consideration to the issue of how various changes in the external environment might positively or negatively affect their business. Groups should systematically identify each external environment—economic, technological, political-legal, socio-cultural, and business—and then think about specific challenges or opportunities that are likely to be evident in the near future. For example, how will the various stages of the business cycle affect their sales? Are there legal or political issues on the horizon that may facilitate or inhibit their plans? How susceptible to technological change is their product line? How much emphasis will they need to place on research and development of new products or services? All these questions, and many others, require much deliberation to maximize the chances of long-term success for their new business.

Building Your Business Skills: How Weather Impacts the Bottom Line Questions for Discussion How could Rona better prepare for and handle negative weather patterns?

1.

One option is to discount the price of certain products that have been negatively influenced by unfavourable weather. Management obviously does not want to do this, but it is costly to carry inventory that is not moving off the shelves, so they may have to discount. They can analyze the trade-offs between incurring increased inventory carrying costs and receiving a lower price for the products they must discount. Another possibility is to keep only minimal inventory until a pattern becomes apparent in the weather (either negative or positive). This strategy is not simple, but with Canada’s reliable Copyright © 2023Pearson Canada Inc. 40

Chapter 2—The Environment of Business transportation system, products can be brought in very quickly to replenish stock if more favourable weather conditions suddenly develop. But it is clear that alternatives like these are largely reactive, not proactive. And it is difficult to be proactive regarding the weather.

Are unfavourable natural weather patterns more dangerous for major retailers like 2.

Rona or for small businesses? Provide at least one argument on each side before making a choice.

It could be argued that unfavourable weather patterns are more dangerous for a small retailer because the small retailer has fewer financial resources to fall back on if weather depresses sales. The lack of financial resources means that one misstep by a small retailer may drive it out of business. Put another way, a small retailer has less ability to weather the financial storm that may be created by poor weather.

On the other hand, it could be argued that unfavourable weather could be more dangerous for a major retailer because the major retailer counts so much on a high volume of products that, at various times during the year, may be necessary to smooth out the overall fluctuations in demand for the total range of products that the company sells.

At Rona, for example, gardening supplies and equipment are important contributors to profitability during the spring season. When the weather doesn’t cooperate, profit declines, investors are unhappy, and the value of the company’s stock may decline.

This question can be expanded by asking students to develop a list of organizations that will be hurt by a certain weather pattern (e.g., a cold spring) and a list of organizations that might benefit from exactly the same weather conditions.

3.

Is it possible for a manger to spend too much time trying to anticipate future events? Why or why not?

Managers should spend considerable time trying to anticipate future events if (a) the events pose a significant threat to the company’s survival, and (b) if the potential events can be predicted with a fair chance of success. This is the essence of contingency planning (see Chapter 6). For example, it is useful for a company making smartphones to monitor the latest technological developments as it tries to predict new product offerings that competitors may develop. But spending a lot of time trying to anticipate future events which are essentially unpredictable (e.g., a volcanic eruption that causes commercial passenger flights to be cancelled, or a terrorist attack, or unusual weather that will affect consumer demand) is not advisable (even though such events may have a very negative effect on the company if they happen).

Planning is a crucial management function (see Chapter 6), but spending a lot of time trying to predict events in the distant future is not likely worth the effort either. A good example is predicting the supply of oil. While it is interesting to read about the vigorous debates between supporters and opponents of “peak oil,” it’s hard to know what is going to happen because there are so many factors that enter into the equation. .

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Part 1—Introducing the Contemporary Business World Managers who spend a lot of time on issues like these are unlikely to get a good return for their effort (i.e., an accurate prediction that will help their company do well).

Exercising Your Ethics: Prescribing a Dose of Competitive Medicine Activity Overview: This activity asks students to examine the ethical issues that can arise when making business decisions.

Time Limit: 35 minutes What to Do: 1.

Divide students into four-member teams and ask them to read and follow the instructions for the Exercising Your Ethics: Team Exercise entitled “Prescribing a Dose of Competitive Medicine,” which is found near the end of Chapter 2. Students should each choose one of the different roles in the exercise. (20 minutes) 2.

Reassemble the class as a whole and discuss the disagreements that were evident within each group. How did the role that students were assigned affect their perspective?

(15 minutes) Some possible responses to the Questions for Discussion are as follows: 1.

What are the roles of supply and demand in this scenario?

Because prescription drugs are essentially the same regardless of the supplier, the market has determined an equilibrium price at which supply and demand are equal.

Competition keeps the price in check. One of the pharmacies could raise its prices only if it offered additional services that differentiated its products enough that consumers were willing to pay extra. However, the owner of the competing pharmacy needs to keep in mind that if prices are raised too much, other suppliers will find a way into the market.

2.

What are the underlying ethical issues?

The success of our economic system is based on competition and choice. By engaging in collusion, the pharmacy owners are inhibiting the fair operation of the market. This is problematic because for many people prescription drugs are crucial to achieving or maintaining health. By colluding, the pharmacy owners would be forcing the weakest residents of the town to pay exorbitant prices, at least in the short term.

3.

What would you do if you were actually faced with this situation?

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

For example, engaging in collusion inhibits the fair operation of the market. One competitor is dealing unfairly with another, and the innocent consumers are paying for it.

This question can also form the basis for an in-class discussion about the problem of people saying they would do something if they were in a certain situation, but then doing something different when they actually find themselves in that situation.

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Chapter 2—The Environment of Business

Don’t Forget: Remind students to stay within their assigned roles.

Wrap-Up: Remind students that management decision making is complicated by the fact that what is beneficial to a given decision maker may be harmful to others who will be negatively affected by the decision. But even if a manager knows this, it may be difficult to resist making a decision that will financially benefit the manager while it financially harms others.

CASE ANALYSIS Closing Case: Dollarama: Overcoming New Obstacles in a Competitive Landscape This case study briefly describes the history of Dollarama, which is one of several competitors that focus on low prices as a means of attracting customers. The case also describes some of the potential problems that Dollarama faces in its external environment.

Questions for Discussion 1.

What are the biggest competitive challenges to long-term success and profitability for Dollarama?

There are multiple retail companies that are pursuing the “dollar store” strategy of providing very low prices. This competitive challenge is complicated by the fact that the prices at dollar stores have been creeping up over the last few years. For example, the case notes that two-thirds of Dollarama’s sales revenue now come from products priced above $1.25. At what price levels will stores like Dollarama begin getting too close to the prices charged by retail giants like Walmart? And what are the competitive implications if that happens?

The Covid-19 disruption impacted Dollarama stores with closures and with major staffing issues and has also let to major supply delays and inflationary pressures. A more specific challenge comes from a new entry into the market: Japan-based Miniso. This increase competition in an already highly competitive market. One part of Dollarama’s strategy to cope with this new competition is to increase efficiency through more computerized distribution and making more bulk sales online. The company is also looking at international markets to generate more sales revenue.

2.

How do the external factors other than competition (economy, technology, sociocultural, political-legal) impact Dollarama?

.

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Part 1—Introducing the Contemporary Business World The case provides information on how certain external environments of business (discussed in Chapter 2) are influencing Dollarama. For example, the economic environment has provided an impetus for stores like Dollarama as consumers have become interested in ultra-low-price items. Dollarama has satisfied the low-cost, no-frills niche and in the process has created a mega-success story.

The business environment obviously has an impact on Dollarama. Businesses try to differentiate themselves along some dimension, and Dollarama is using price as the differentiating dimension.

The industry environment also has an impact, most importantly in terms of the degree of competition in the industry. As noted in the case study, the retail environment has always been hyper-competitive, and the recent entrance of Japan-based Miniso will increase the level of competition.

The technological environment has also had an impact. Dollarama has added new technology by giving associates hand-held scanners to improve efficiency; it has also added smart cameras in stores and has invested heavily in its e-commerce platform so that it can sell some of its products in bulk online.

The political-legal environment also presents some potential challenges for Dollarama since it sells many knock-off products. The company could face prosecution for those sales, but to date enforcement of the counterfeiting laws has been minimal.

3.

Form a group of 4-6 people and split your group in two. One side should provide arguments in favour of international expansion. The other will prepare arguments against.

Debate the main points.

This question provides an opportunity for students to think clearly about the benefits and costs of getting involved in international business. (Note: Also direct students to the “Going International” discussion in Chapter 5 as background material for their discussion.)

Ask each sub-group (pro and con) to make a 5-minute presentation of their findings. Then expand the discussion to include additional ideas that other members of the class may come up with. Once this discussion is complete, students will have a much more balanced view of the pros and cons of going international.

Copyright © 2023Pearson Canada Inc. 44

CHAPTER 3 CONDUCTING BUSINESS ETHICALLY AND RESPONSIBLY

CHAPTER SYNOPSIS The chapter introduces the concept of ethics, explains how individuals develop their personal codes of ethics, and shows why ethics are important in the workplace. The distinction between unethical and illegal behaviour is also made. The chapter discusses social responsibility in terms of the company’s relationship with customers, employees, suppliers, investors, and the local community. Four common approaches to social responsibility are discussed, and the four steps a firm should take to implement a social responsibility program are presented. An appendix at the end of the text provides information on business law.

CHAPTER OUTLINE

I.

ETHICS IN THE WORKPLACE Ethics are individual standards or moral values regarding what is right and wrong.

Business ethics refers to ethical or unethical behaviour of managers or employees.

Individual Ethics—Vary from person to person, situation to situation and A. culture to culture. Differences of opinion arise as to what is ethical or unethical.

Laws reflect social norms, and laws and the interpretation of the laws evolve as ethical standards change. Context may affect whether an individual believes a specific action is unethical. Someone who would never consider taking a chocolate bar from a store might routinely take-home pens and pads of paper from work.

Individual values and morals—Ethical standards initially form in 1. children as they observe the behaviour of parents and other adults. Later on, peers have a big effect.

B. Business and Managerial Ethics—Standards of behaviour that guide individual managers in their work.

1.

Behaviour toward employees—Issues addressed include hiring,

firing, establishing wage rates and working conditions, privacy and respect.

2.

Behaviour toward the organization—Ethical issues arise from the

behaviour of employees toward the employer. Important areas are conflict .

Part 1—Introducing the Contemporary Business World of interest (occurs when an activity benefits an individual at the expense of the organization), confidentiality, and honesty.

3. dealers,

Behaviour toward other economic agents—Relationships between the firm and its customers, suppliers, competitors, stockholders,

unions, etc. Examples are given of ethical issues in pricing, competitive espionage, and the differences in acceptable behaviour in different countries.

Assessing Ethical Behaviour—A three-step model is introduced: Gather C. the relevant factual information, determine the most appropriate moral values, and make an ethical judgement based on the rightness or wrongness of the proposed activity or policy. The model looks straightforward, but not everyone will agree on the most appropriate moral values, nor will they make the same ethical judgement. Situations can be addressed using 4 ethical norms: utility (to provide the best result for all affected), rights (to respect the rights of the individuals involved), justice (to be consistent with what is believed to be fair), and caring (to be consistent with people’s responsibilities to each other).

D. Encouraging Ethical Behaviour in Organizations—Three factors (pressure, opportunity, and rationalization) cause unethical behaviour to occur.

Organizations try to promote ethical behaviour and discourage unethical behaviours by using three strategies: 1.

Demonstrate top management commitment to values and high ethical standards—It is crucial for top management to demonstrate a public commitment to high ethical standards.

2.

Adopt written codes—These formally acknowledge a company’s intent to do business in an ethical manner. Most codes of ethics are designed to perform one or more of four functions: increase public confidence in a firm or its industry, self-regulation (therefore perhaps reducing or preventing government regulation), improve internal operations (by providing consistent standards of ethical and legal conduct), and help managers respond to problems that arise as a result of unethical or illegal behaviours Provide ethics training—Companies must take the lead in 3. providing ethics training for employees. Business ethics can be taught and ethical responses can be learned through evaluating previous experiences of others.

.

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Chapter 3—Conducting Business Ethically and Responsibly II.

CORPORATE SOCIAL RESPONSIBILITY Whereas ethics guide an individual's behaviour, social responsibility refers to the way in which a business tries to balance its commitments to certain groups and individual in its social environment. These organizational stakeholders include the groups, individuals, and organizations that are directly affected by the practices of an organization. Companies that strive to be responsible to their stakeholders concentrate on five main groups: customers, employees, investors, suppliers, and the local communities in which they do business. When defining their sense of social responsibility, most firms consider four areas: the environment, customers, employees, and investors.

A. Stakeholder Model of Responsibility—Organizational stakeholders The are individuals and groups that are directly affected by the practices of an organization and therefore have a stake in its performance. Most companies that strive to be socially responsible concentrate on the following stakeholders: (1) customers, (2) employees, (3) investors, (4) suppliers, and (5) the local communities where they do business.

1.

Responsibility toward customers—There are three areas that are often in the news: Consumer a. rights—Consumerism, or social activism to protect the rights of consumers, has prompted much of the current business interest in responsibility toward customers. Consumer rights include the right to: safe products, right to be informed about all relevant aspects of a product, the right to be heard, and the right to choose what they buy (central to this is free and open competition among companies), the right to be educated about purchases, and the right to courteous service.

Unfair pricing—Collusion, b. or price fixing, is illegal. Price gouging refers to the practice of charging inflated prices when demand increases.

Ethics inc.advertising—Four areas of concern here are truth in advertising (advertisements should not make claims about product performance that are not factual), advertising of counterfeit brands (the advertising and sale of counterfeit brands is unethical and illegal), stealth advertising (the use of paid individuals to promote a product to others without disclosing that they are being paid to do so), and morally objectionable advertising (advertising that consumers consider to be morally wrong, such as tobacco companies targeting young people).

Responsibility towards employees—Fair and equitable practices 2. comply with legal regulations and lead to a more competent, motivated .

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Part 1—Introducing the Contemporary Business World staff. Examples of companies that go well beyond legal requirements are discussed. Responsibility toward employees as people means ensuring a safe workplace, respecting their privacy, and encouraging ethical behaviour.

Whistle-blowers—Individuals a. who attempts to stop a company’s unethical, illegal, or socially irresponsible actions by going public with the information. New legislation to protect whistle-blowers has been introduced in Canada, because whistle-blowers are often demoted or fired for going public.

3.

Responsibility toward investors—Irresponsibility can take several forms, including improper financial management, misrepresenting of finances, cheque kiting, and insider trading.

Improper a. financial management— Improper financial management can take many forms, including executives making bad financial decisions, paying executives outlandish salaries and bonuses, or sending them on extravagant "retreats" to exotic resorts.

Misrepresentation b. of finances—Companies must follow generally accepted accounting practices in maintaining and reporting their financial status. Managers may be motivated to overstate revenues and assets, and understate expenses and liabilities in order to inflate profits, usually for personal gain, such as receipt of bonuses based on net income.

Chequec.kiting—This is an illegal activity of writing cheques against money that has not yet arrived at the bank on which the cheque has been written.

Insider d. trading—This activity (also illegal) occurs when someone uses confidential information to gain from the purchase or sale of stock.

Responsibility toward suppliers— Businesses that are socially 4. responsible are careful when managing their relationships with their suppliers because they recognize the importance of mutually beneficial partnership arrangements. Thus, they keep suppliers informed about the company’s plans, and they negotiate delivery schedules and prices that are acceptable to both firms.

Responsibility toward local and international communities— 5.

Businesses can demonstrate socially responsible behaviour in their local communities by contributing to local programs like community hockey, by donating to charities such as the United Way, and by many other actions that support an improved quality of life for people who live in the local community where the business operates. .

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Chapter 3—Conducting Business Ethically and Responsibly

a.

Corporate charitable donations—Many companies donate money, products, and/or employee time to different causes.

Responsibility Toward the Environment—There are three types of 6. pollution that are the focus of most of the anti-pollution efforts by business and government. a.

Air pollution—Air pollution results when a combination of

factors lowers air quality. Legislation to prevent air pollution and its costs are discussed. Increasing levels of carbon dioxide are discussed in the context of climate change. There is a debate about whether global warming is caused by human activity or is simply a natural phenomenon. b.

Water pollution—Water quality is improving in many areas due to new legislation and increased awareness. Examples of zero discharge processing facilities are noted. c. pollution—Two key issues are considered: how to Land restore the quality of land damaged in the past and how to prevent such problems in the future. Several examples of Canadian firms operating abroad are provided. Recycling is a possible solution.

Some products can be recycled efficiently, while others are more troublesome. d.

Consumers and pollution—There are several actions that consumers can take to reduce air, water, and land pollution, including recycling, walking instead of driving, reducing household waste, using environmentally-friendly products, etc. But each of these actions requires consistent effort, and not everyone is motivated to make the effort.

III .

IMPLEMENTING SOCIAL RESPONSIBILITY PROGRAMS Opinions on the appropriateness of social responsibility as a business goal differ widely, and the motivation behind beliefs differs widely as well.

Approaches to Social Responsibility—Four approaches are common in A. making decisions about social responsibility. There are several stances an organization can take concerning its corporate social responsibilities: Obstructionist stance—Companies using this approach do as little 1. as possible to solve social or environmental problems. These firms have little regard for ethical conduct and will generally go to great lengths to hide wrongdoings. .

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Part 1—Introducing the Contemporary Business World

2.

Defensive stance—These firms do only the minimum required by law and nothing more (e.g., tobacco companies).

Accommodative stance—A firm goes beyond the bare minimum if 3. specifically asked. The point here is that someone has to “knock on the door and ask;” the firm does not volunteer to go beyond what is prescribed.

Proactive 4. stance—This is the highest degree of social responsibility a firm can exhibit. Firms taking a proactive stance view themselves as citizens in society and proactively seek opportunities to contribute.

Managing Social Responsibility Programs—Managers must take four B. steps to foster social responsibility. First, top managers must take a strong stand on the importance of social responsibility and communicate this by preparing a formal policy statement and including social responsibility as a factor during strategic planning. Second, a committee of top managers needs to develop a plan detailing the level of financial support to be directed toward social responsibility, and set specific priorities to be addressed. Third, a specific executive needs to be given the authority to act as director of the firm's agenda for addressing social issues. Fourth, the firm needs to conduct occasional social audits to determine whether the program is successfully meeting the established social responsibility goals.

1.

Formal activities—Top management must state strong support for CSR and make it a factor in strategic planning. Without the support of top management, no program can succeed. A specific executive must be given the authority to act as the director of the firm’s social agenda. This individual monitors the program and ensures that its implementation is consistent with the policy statement and the strategic plan.

Informal activities—The culture of an organization (see Chapter 6) 2. is very important in either inhibiting or facilitating social responsibility activities.

IV.

SOCIAL RESPONSIBILITY AND THE SMALL BUSINESS Small firms face the same general kinds of ethical and social responsibility issues that large firms do. Examples are provided.

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Chapter 3—Conducting Business Ethically and Responsibly QUICK QUESTIONS 1.

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

2.

What is a “conflict of interest”? Can you provide an example from your own experience or from a friend’s experience?

3.

What is the goal of the fair-trade movement?

What are some examples of what companies can do to act in a socially 4. responsible way toward the environment? Toward customers? Toward employees?

Toward investors?

5.

People are exposed to hundreds of advertisements daily. What types of ads do you feel contain the greatest unethical content? Explain your reasoning.

6.

Firms taking a defensive stance will do everything that is required of them legally, but nothing more. Can you think of any firms that adopt a defensive stance?

7.

Firms taking a proactive stance view themselves as citizens of society, always looking out for ways to act in a socially responsible way. Can you think of any firms that have adopted such a stance?

IN-CLASS EXERCISES Exercise #1: Ethical and Unethical Business Practices Activity Overview: This exercise is designed to make students aware of how differing views of business ethics makes it difficult to get agreement on what is ethical and what is unethical.

Time Limit: 35 minutes What To Do: 1.

Form 4-person groups and ask each group to come up with examples of ethical and unethical business behaviour. (10 minutes) Some examples might be: Donating a percentage of profits to charity and community causes (Ben & Jerry’s donates 7.5 percent of pre-tax profits, and Levi Strauss donates 2.4% of pre-tax profits to a variety of causes), encouraging employees to engage in volunteer work using paid work-release time (Walt Disney’s VoluntEARS program), and recycling (McDonald’s has a far-reaching environmental protection program).

Some examples of unethical business practices might be: Forwarding “marketing research” results to salespeople, planned obsolescence, marketing R-rated movies to kids, .

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Part 1—Introducing the Contemporary Business World excessive violence in video games, and various forms of illegal behaviour (e.g. deliberately selling cigarettes or alcohol to minors).

2.

Ask student groups to determine why companies engage in both kinds of behaviour. (15 minutes) 3.

Moderate a discussion about whether the downloading of music is ethical or unethical. This example will generate a lot of debate, and will illustrate to students that ethics is very much a personal choice. That, in turn, means that it will be difficult to decide what is ethical or unethical. You might also ask students to discuss the relationship between the legality of a practice and whether or not it is ethical. (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. This will spark a lively debate.

Exercise #2: Mom’s Sweatshop Activity Overview: The purpose of this exercise is to explore the ethical and social responsibility issues resulting from abusive labour practices by companies that subcontract in foreign countries.

Time Limit: 45 minutes What To Do: 1.

Make copies of the following scenario and hand out to students in advance of the class when this exercise is to be conducted.

------------------------------------------------------------------------------------------------------You are the son (or daughter) of the CEO of a small manufacturing company that produces running clothes. Your mother struggled to build the company, and it is just now starting to be profitable in a very competitive field. In fact, you know it was a sacrifice for her to give you this trip to China as a graduation gift. She has asked you to meet with the head of the company that is producing 40 percent of the goods she markets to be sure that they are meeting her specifications for next season’s product. When you get there, you find that “sweatshop” is too kind a description for the plant. There are very younglooking children working in the factory, some workers are being physically abused by the supervisors, and the plant is filthy and full of textile dust. But the merchandise looks great! .

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Chapter 3—Conducting Business Ethically and Responsibly ----------------------------------------------------------------------------------------------------------Divide the class into groups of three or four students and have them answer the 2. following questions (assign a sub-set of questions to each group to make sure that all questions are covered. (25 minutes) (a)

What do you say to the head of the company in China?

(b)

What do you tell your mom?

(c)

What should you do?

(d)

Is there a legal remedy?

(e)

What are the legal and ethical implications of this situation?

(f)

What is the impact of outsourcing on Canadian workers?

(g)

Are workers who live in poverty better off with sweatshop jobs than no jobs at all?

3.

Moderate a discussion which allows each group to gives its views on these questions. (20 minutes) Don’t Forget: Make sure that students adopt the role of the son or daughter of the CEO and do not simply make abstract observations about this difficult situation. Emphasize that tough decisions must routinely be made by managers who are actually in the situation.

Wrap-Up: Remind students once again that what is ethical or unethical is influenced by a person’s perspective. Question (g) above is one that makes this point clear.

Exercise #3: 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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Part 1—Introducing the Contemporary Business World 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. Further, in considering justice, considering what is consistent with what is fair can also pose challenges.

Exercise #4: 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. a class, ask students to consider whether ethics can be taught. Is ethics training As valuable or does ethical behaviour stem more from how we are raised or from the situations we find ourselves in?

2.

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

3. those students who believe that ethical behaviour comes more from how we For are raised and that ethics training really does not affect our ethical behaviour 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 that the company’s ethical norms are upheld. Asking whether these codes are effective will spark a lively debate as well.

Exercise #5: To Lie or Not to Lie: That Is the Question Activity Overview: This activity encourages students to apply general concepts of business ethics to specific situations.

Time Limit: 45 minutes

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Chapter 3—Conducting Business Ethically and Responsibly What to Do: Divide students into groups of four or five and ask them to follow the instructions 1. for the Building Your Business Skills exercise found at the end of Chapter 3. (30 minutes) Reassemble the class as a whole and discuss the Follow-Up Questions. Each 2. group should share input. (15 minutes) Possible answers to the Follow-Up Questions are found later in this chapter under the heading “Team Exercises.”

Don’t Forget: This activity can be completed at three different intervals, with students completing each step during different class sessions. Alternatively, Step 2 may be eliminated, depending on time availability.

Wrap-Up: Wrap up the activity by stressing to students that designing and writing a code of ethics may be the easy part—educating employees and enforcing the code may be more difficult. Remind students that what works for some organizations may not work for others; many environmental factors play a role.

Exercise #6: 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 comment that a co-worker overheard at the water cooler: “I guess it was simple. Once the boss looked into everything Jason had been doing on the Internet, she 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.

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Part 1—Introducing the Contemporary Business World 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 me access to it.” 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.

TEACHING TIPS 1. a search for origins of ethics, try this one on members of the class: "Humans do In not hatch from eggs nor are they delivered by storks. In the same way, codes of ethics do not materialize out of a vacuum, but rather they are reflections of centuries-old religious beliefs." Students may be asked to provide an opinion on the influence that religion has on the continual evolution of ethical standards today.

2.

Should making a firm free of instances of sexual harassment be included in that firm's code of ethics? So many lawsuits over sexual harassment have revealed that when female employees complained of such alleged incidents to their supervisors, the supervisors did not take such claims seriously. In some cases, the supervisor did nothing.

Ask the students whether the existence of a code of conduct is likely to make any real difference.

3. is a disguised, but actual incident: Arlene Johnson seemed to have all the Here qualities necessary to rise in the management ranks of Mid-Canada Stores, Ltd., a large chain of department stores. She broke in at the Vancouver store and was assigned as director of adjustments. This meant she headed the department that handled all customer complaints about faulty merchandise. Arlene became quite popular with the store's clientele, and she established a superb ethics-in-business reputation for the company.

Then, one Friday afternoon at 5:00 P.M., she was fired. She was told that she was not managerial material. Behind her back, the top officers of the store said: "She was too good to the customers when she made adjustments." Students may be asked to guess at the code of ethics, if any, that exists at Mid-Canada Stores, Ltd., and the degree to which the code was observed.

Lead the class in discussing to what degree we currently find a "general climate of 4. business greed" in the conduct of Canadian business. If it can be determined that "business greed" exists, then what are some of the benefits of it? The costs?

When students leave the campus and enter the business world, one of the 5. frustrations they will face is a manager who cannot establish a sense of priority. To young employees especially, such a boss will stress that EVERYTHING is top priority. What is the TOP priority for a business firm: responsibility to the environment, responsibility to customers, responsibility to employees, or responsibility to investors? The students may want to establish their own list of priorities in this regard.

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Chapter 3—Conducting Business Ethically and Responsibly 6. a sequel to the previous tip, it could be said that devotion to one of those areas As of social responsibility will tend to have a negative impact on the others. For example, providing generous dividends for investors can easily mean that salary raises for employees may have to be forsaken. Exploring such conflicts may be a fruitful avenue for class discussion.

7.cynical observer of the business scene might find it difficult to utter the two A words "ethics" and "advertising" in the same phrase. You may want to conduct a quick mini-survey by asking this question: Is advertising basically honest and ethical? A follow-up search might be to determine on what basis we are capable of making such judgments. An interesting discussion may occur if students are asked to describe how ads they have seen have affected their opinion of the company or product being promoted.

8.

British American Tobacco has followed a strategy of becoming the leader in the global tobacco industry. With few opportunities for growth in the North American and Western European markets, British American Tobacco has looked to developing countries with less regulation for increased growth and increased profitability. At the same time, the corporate website includes a section on Corporate Social Responsibility, which describes the company’s commitment to environmental management, tackling underage smoking, globalization and human rights, and the elimination of child labour.

Ask the students to discuss the company’s commitment to social responsibility, given the industry and strategy they have chosen. This is an exercise that is useful for illustrating the point that ethical beliefs are situation specific.

9. the students evaluate the worthiness of "responsible drinking" campaigns in Have light of various social responsibility criteria discussed in the current chapter. Which "approach" does this campaign illustrate best?

10.

Evaluate the following conflicting statements: Statement #1: Social responsibility for a small sole proprietorship can be easily achieved because the owner-manager can more carefully control what his or her firm does. Statement #2: Social responsibility for a large corporation can be easily achieved because of the vast resources available for such efforts.

Could 11. a socially-conscious small business operator become so involved in socially responsible undertakings that his or her business suffers? Example: "Where is the boss; I need a quick decision right now?" "Oh, the boss is out cleaning up a section of highway for a civic club!"

Some students may feel uncomfortable talking about ethics because they think it 12. is too much like preaching. As a starting point, ask students whether they feel that ethics is "situational" (i.e., a given behaviour—for example, lying—may be acceptable in one situation but unacceptable in another) or whether ethics is "absolute" (i.e., a given behaviour is either right or wrong). Moderate a class discussion on the practical implications of the two points of view. .

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Part 1—Introducing the Contemporary Business World

13. your students to write down an ethical issue they have faced in school. How Ask did they deal with it? What criteria did they use to make a decision when faced with an ethical dilemma?

14. students do a bit of research to determine if local business firms have Have written statements about what their view of social responsibility is toward their investors, customers, and employees. Compare several different firms, and note the similarities and differences across companies.

15.

A number of libel cases against business firms have been brought by former employees because their former employer gave them a bad reference. Moderate a debate between student groups on the issue of the rights and responsibilities of employees and employers in this kind of situation.

16.

Develop a code of ethics for classroom behaviour. Recommendations for encouraging ethical behaviour in the classroom include ways to hold all participants accountable for their choices, what to do in a questionable situation, and specific statements of behaviour expectations.

17.

Give students examples of business firms that exemplify each of the basic approaches to social responsibility: social obligation, social reaction, and social response.

18. companies have listed on their web site that they are “socially responsible Many because they only use recycled paper for their promotional materials (e.g., flyers). Ask the students to think about this and have them determine if this is indeed socially responsible. After the students have substantiated their position, if the students do not mention that most flyers are unsolicited, therefore is it really socially responsible?

19.

A whistle-blower is an individual who breaches confidentiality rules to expose mismanagement and fraudulent behaviour. Is this ethical? Have students discuss the factors a whistle-blower should consider before going public, and the importance of each factor.

20.

Most students will have had jobs at some time or another, and may have encountered coworkers who were acting inappropriately, from spending significant amounts of time on the job on personal business to theft of business assets. Have the students evaluate the ethics of reporting or not reporting such employees to management.

Another scenario would be to place this discussion in an academic setting, where classmates are plagiarizing.

21.

Managers are often remunerated with bonuses based on achieving net income

targets, in addition to their normal salaries. Channel stuffing is the practice of shipping inventory at year-end to customers who do not want the inventory and will return it after year-end. In the meantime, net income at year-end is increased enough that the manager receives the bonus. Two separate ethical issues can be discussed. The first is the .

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Chapter 3—Conducting Business Ethically and Responsibly manager’s behaviour. The second is the dilemma the accountant is placed in, as the manager can make the decision to ship the inventory, but must persuade the company’s accounting department to record the transaction.

Many grocery stores now have bins placed by the checkouts where customers 22. may donate food to be distributed to local soup kitchens and shelters. Have students evaluate the ethical issues involved in the practice.

Pollution control is very expensive and often businesses and industries lobby hard 23. to prevent enactment of legislation to reduce levels of pollution. Alternatives would include letting the businesses operate without pollution controls or having these costs paid for by government. Have students identify who receives the benefits and who bears the costs if (1) there are no pollution controls, (2) pollution controls are paid for by the businesses, or (3) pollution controls are paid for by government.

24.

Remind students that individual ethics vary by person, situation, and culture.

What is acceptable and unacceptable is broad enough that people may develop varying behaviours without violating general standards.

25.

Remind students that actions deemed unethical in Canada may be seen as ethical in other countries, and vice versa. For example, in some countries outside of Canada, bribing is acceptable and even expected in business.

26. something you can propose to students in the class: Assume that you have Here's been hired as Social Responsibility Officer for a major tobacco company. Your job is to propose and to implement proactive programs that will bring praise to your company.

This does not mean altering the product in any manner, but rather setting up societybetterment projects, such as a scholarship program for underprivileged high school students or full funding of a multi-million-dollar religious festival. What are your first proposals?

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

28.

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

One study suggests that about half of all whistle-blowers eventually get fired, and 29. about half of those who get fired lose their homes and/or families. Discuss with students the laws that protect whistle-blowers. Do they work?

Make sure that students understand that firms taking the obstructionist stance 30. usually do as little as possible to solve social or environmental problems. If possible, list some examples of firms that take such a stance.

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Part 1—Introducing the Contemporary Business World 31.

Remind students that firms taking an accommodative stance meet their legal and ethical requirements and may also go further in certain cases.

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

33.

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

USING THE BOXED INSERTS Opening Case: EpiPen: Balancing Morals and Profits 1. 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. Of course, the importance of delivering lifesaving EpiPens must be front and center in the discussion and students will rightfully argue that saving human life is much more important than the bottom line of the corporate world. It might be useful to split the class in two to make sure that the arguments are developed. Clearly, the position is very different in Canada as opposed the United States since governments on this side of the border have a much more direct input on lowering prices and subsidizing costs.

2. 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).

3. What options are available in Canada to consumers who 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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Chapter 3—Conducting Business Ethically and Responsibly

4. Compare the situation faced by Canadians and Americans as it relates to EpiPens.

What are the main reasons for the different circumstances?

The circumstances are quite different as the industry is much more regulated in Canada and the 500% price gouges did not occur in Canada but as we saw there were major supply issues that impacted the deliver if these life-saving devices.

Entrepreneurship and New Ventures: Steel River Group: Building More Than Just Projects CRITICAL THINKING QUESTION 1) In your opinion, what makes Trent Fequet an effective entrepreneur and how does SRG promote social justice in a unique way?

Clearly, Trent Fequet demonstrates the leadership, the vision, and the work ethic of a true entrepreneur. He founded The Steel River Group. Trent is a contrarian that does not accept stereotypes and misconceptions. He is also a leader and role model.

According to Mr. Fequet, First Nations people, Metis and Inuit people have a lot more to offer than the natural resources from their lands. They possess ideas, skills, knowledge, and strategies. Trent Fequet is an entrepreneur, a natural self—starter. Like many successful entrepreneurs he learned through experience. He spent over two decades working for large companies in Yellowknife and Fort-McMurray, Alberta. So, in that time, he gained valuable experience and knowledge in the field, and he also gained another vital resource for any ambitious entrepreneur: connections! But what distinguishes Trent (and by extension his company) is a deep caring and commitment for the community.

Social Responsibility & Social Justice: From Arctic Plastic to Space Junk: Save the …?

CRITICAL THINKING QUESTION 1.It is easy to point at companies and blame them for this situation. They deserve to be blamed for a major portion. But consumers reward those behaviours with their purchases. They have a voice. Get into groups and truly assess your own actions and behaviours? Create a list of all the things you and your teammates can do to impact your own consumption patterns. Create a list of positive actions already taken.

This case describes all the various failures of companies, governments and ultimately people on earth, in the seas, and even in space. Divide the students in groups of 5-6 and ask them to examine their own consumptions. .

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Part 1—Introducing the Contemporary Business World ** Before starting this exercise, challenge the students. Most will probably be holding their prized smartphones and the majority will have an iPhone. Ask them if they are aware of the suicide nets that have been installed where their Apple products are made because of terrible working conditions. Does it change their perception? https://www.scmp.com/magazines/post-magazine/books/article/3082307/dying-iphoneinvestigating-apple-foxconn-and-brutal? module=perpetual_scroll_0&pgtype=article&campaign=3082307 The factories may be outsourced but the fact remains that the luxuries we enjoy are often made in terrible environments and as consumers we feed the system.

Students may talk about the greed of companies (and they are right!) but how often do they make personal sacrifices. Would any of them consider boycotting or eventually replacing their iPhone. After this discussion have a practical discussion on the changes that they propose but don’t let them simply complain about the actions of companies. We are all part of the system.

QUESTIONS AND EXERCISES Questions for Analysis 1.

Write a one-paragraph description of an ethical dilemma you faced recently (including the outcome). Analyze the situation using the ideas presented in this chapter.

Make particular reference to the ethical norms of utility, rights, justice, and caring in terms of how they impacted the situation. What would each of these suggest about the correct decision? Is this analysis consistent with the outcome that actually occurred? Why or why not?

Student answers will obviously be very diverse in terms of content, but the key element in assessing their answers is to make sure that they are applying the chapter material regarding the ethical norms of utility, rights, justice, and caring. To do this, they must demonstrate an accurate understanding of how each of these norms will influence the decisions they made. If students report that the outcome that actually occurred was not consistent with the ethical norms, they should state exactly why it was not consistent by reference to the specific norm or norms that were violated.

2.

What kind of company wrongdoing would most likely prompt you to become a whistle-blower? What kind of wrongdoing would be least likely? Explain the difference.

Student answers will obviously be subjective, so patterns in their responses should be looked for. For example, would the class generally blow the whistle if their firm was violating pollution laws? What about violations of human rights?

In your opinion, which area of social responsibility is most important to you?

3.

Why? Are there areas other than those noted in the chapter that you consider important to you? Describe these areas, and indicate why they are important. .

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Chapter 3—Conducting Business Ethically and Responsibly

Student answers will vary depending on their individual perceptions and values.

Other areas that they consider important could be anyone that is affected by the business.

4.

Identify some specific social responsibility issues that might be faced by smallbusiness managers and employees in each of the following areas: environment, customers, employees, and investors.

Some possible examples: Environment (“the cost vs the social responsible thing to do”) Customers (“are we charging the customer “outrageous prices?”)

Employees (“can we afford to offer a completely “safe environment”?)

Investors (“are we spending money for personal gain at the expense of the investor?)

5.

Choose a product or service and explain the social responsibility concerns that are likely to be evident in terms of the environment, customers, employees, and investors.

Answers will vary depending on the product.

What role should the government play in social responsibility? Should 6. government create more regulations to encourage businesses to uphold their responsibility to stakeholders? Or, should government take a laissez-faire approach and allow businesses to be as socially responsible as they choose? Explain your reasoning.

Student answers to this question will cluster around two general positions. The first position will be that governments should be actively involved in influencing businesses to act in a socially responsible manner. Students with this view will suggest that government should create more legislation to ensure that companies adhere to strict standards of behaviour. The contrasting position—that government should take a laissezfaire approach to social responsibility—will be put forward by those students who accept the more traditional position that businesses should be allowed to pursue profit without being overly concerned about whether or not they are socially responsible. In assessing student answers, it is important to look at the reasoning that students give to support their position. This issue of “how much social responsibility” has been a contentious point for decades, but on a society-wide basis it appears that the supporters of social responsibility have made considerable headway with their arguments. This question is a good opportunity to have an in-class debate on the merits of managerial capitalism (which argues that businesses have a primary responsibility to their shareholders) vs. social responsibility (which argues that businesses have a responsibility to multiple stakeholders, not simply shareholders).

Application Exercises

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Part 1—Introducing the Contemporary Business World 7.

Describe your personal code of ethics. Include what you think constitutes right and wrong, as well as your ethical framework for making decisions. Do you think your personal code of ethics might clash with the practices of some companies? If so, how might you resolve these differences?

It will be interesting to see the wide variety of ethical frameworks that are described by students. Given that students have heard a great deal about how various companies behave, they are likely to think that their personal code of ethics might clash with the practices of some companies. How they might deal with such a clash is obviously fairly speculative on their part since most of them have not yet occupied a career job. As a result, they will not yet have experienced a challenging ethical dilemma (e.g., what would they do if they were presented with a situation where in order to retain their job they would have to do something that violated their ethical code).

8.

Develop a list of the major stakeholders of your college or university. What priority does the school assign to these stakeholders? Do you agree or disagree with this priority? Explain your reasoning.

The stakeholders include students, professors, support staff, maintenance personnel, parents of students, the business community, etc. The balance of the question will depend on the students’ perception, but an interesting discussion will be evident whenever the issue of prioritization is raised.

9.

Interview the owner of a local small business. Ask the owner to (a) describe the kinds of socially responsible activities the company is currently involved in, and (b) identify the factors that facilitate and inhibit socially responsible behaviour in small businesses.

The information student generate will obviously vary, so it is best to summarize the information for parts (a) and (b) and then look for trends. For example, for (b), do small business owners generally say they don’t have the time or money to get involved in socially responsible activities, or is there a trend that small business owners are more likely to get involved in socially responsible activities because they have a normative commitment and they control what their business does?

Using newspapers, magazines, and other business references, identify a company 10. that illustrates the obstructionist approach. Then find one company that illustrates each of the other three approaches (defensive, accommodative, and proactive). For each company, briefly explain the actions it took that led you to categorize it as you did.

In assessing these answers, make sure that students (a) have clearly identified the behaviour in question with the proper approach, and (b) that they have provided clear evidence regarding the behaviour in question.

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Chapter 3—Conducting Business Ethically and Responsibly

TEAM EXERCISES Building a Business: Continuing Exercise This exercise challenges 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 a proactive approachfor to prevent problems.

The is primary stakeholders most of future 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.

Building Your Business Skills: To Lie or Not to Lie: That Is the Question Follow-Up Questions 1.

What personal, social, and cultural factors do you think contribute to lying in the workplace?

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

2. you agree or disagree with the following statement? “The term business ethics Do is an oxymoron.” Support your answer with examples from your own work experience or that of a family member.

Answers will vary, but make sure that examples that students come up with are consistent and address the issue. For example, if a student agrees with the statement, a relevant example demonstrating unethical business behaviour should be offered. A student who disagrees with the statement should come up with an example of a business behaving in an ethical fashion. Even if these consistency rules are adhered to, there is still likely to be debate about whether the action in question was actually unethical or ethical.

If you were your company’s director of human resources, how would you make 3. your code of ethics a “living document?”

Answers will vary but students should recognize that top-management support and example are most important. .

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4. you were faced with any of the ethical dilemmas described in Step 1, how If would you handle them? How far would you go to maintain your personal ethical standards?

Answers will vary widely. Students should clearly explain why they would handle the situations as they would.

Exercising Your Ethics: You Can’t Have Cake Activity Overview: This activity asks students to consider what they would do when faced with a management decision making situation.

1. 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. What would you do in this situation? Explain your course of action.

Answers will vary, but students should 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 accept, or take other courses of action, such as resignation or outright defiance.

3. 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.

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Chapter 3—Conducting Business Ethically and Responsibly CASE ANALYSIS CLOSING CASE: Marijuana Big-Business, Government and Ethics This case describes the concerns and uncertainties that are evident when a significant new law—the legalization of marijuana for recreational use—comes into force. This is particularly true when a substantial portion of the population thinks the legalization of marijuana is not a good idea. Business firms wonder how they will deal with the human resource issues that arise from employee use of the drug, and politicians worry about the economic impact and cost of enforcing the new law.

Questions for Discussion 1.

Consider the following statement: Legalizing the recreational use of marijuana is a good idea because most Canadians think it should be legal. If consumers are allowed to legally buy the product, this will also reduce the involvement of organized crime in the marijuana business. Do you agree or disagree with the statement? Explain your reasoning.

Students who agree with the statement will likely make the argument that when the majority of Canadians favour legalization of a product, that product should be legal.

That’s what happened with alcohol and cigarettes. In other words, in a democracy, the will of the people should be followed. Students who disagree with the legalization of marijuana will likely argue that just because the majority of people favour something doesn’t mean it’s a good idea. In an ironic twist, they might even use the example of prohibition in the U.S. in the 1920s. The majority of the states in the U.S. ratified the constitutional amendment banning the sale of alcohol, but all sorts of unanticipated problems arose once the ban was in place (e.g., criminals got into the business of making alcohol, amateurs made alcohol that killed the people who drank it, and the average citizen became a lawbreaker whenever they drank alcohol). Thus, even though the majority of people voted ban alcohol, things didn’t work out well. (Students who agree with the statement will respond to this line of argument by saying that the U.S. example proves that marijuana should be legal.)

One of the issues raised in the statement is the goal to get organized crime out of the marijuana business. Student answers should clearly indicate whether or not they think legalization of marijuana will accomplish this goal, and why it would achieve the goal.

For example, there may be supply issues if government administration of the legalization process is not effective. If that happens, organized crime may continue to be involved in order to fill any shortfalls. Student answers regarding this issue should make the point that predicting what will happen once marijuana becomes legal is difficult. A major change in the law will probably lead to changes in human behaviour, but exactly what those changes will be is not clear ahead of time.

2.

Use the three-step model presented in the chapter to analyze the issue of whether

the use of marijuana, alcohol, and cigarettes is ethical. In your analysis, indicate what .

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Part 1—Introducing the Contemporary Business World each of the four common ethical norms (utility, rights, justice, and caring) would say about the use of the three drugs. After doing your analysis, do you feel that it is ethical to use any of these products? Explain your reasoning.

As noted in the text, individuals can rationalize almost any behaviour as ethical. It is therefore important for students to systematically consider the four ethical norms of utility, rights, justice, and caring because, if nothing else, they will realize why some issues are so controversial. (Note: The following analysis parallels the approach used in the text, where an example is presented describing a manager who submits an expense voucher for a questionable activity. The four ethical norms are then used to determine if the manager’s act was ethical. In the text example, the outcome was quite clear, i.e., the act was unethical, but in the case of marijuana legalization, things are not as tidy.)

The utility norm asks the question “Does a particular act optimize what is best for those who are affected by it?” People who like to use marijuana feel that they benefit from doing so, even though there may be both negative physical and mental health issues with the use of marijuana. For example, medical research suggests that teenagers who use marijuana experience a lack of motivation, and this harms their future career prospects.

As well, if marijuana is smoked, it may have the same negative effects as smoking cigarettes. The answer to the utility norm question is therefore somewhat ambiguous (the same ambiguous answer will also be given for both cigarette and alcohol usage). The rights norm asks the question “Does it respect the rights of the individuals involved?”

Answering this question requires recognition of the fact that use of marijuana by some portion of the population creates the possibility that non-users may also be harmed (if, for example, they are injured in a car accident where the driver who caused the accident was under the influence of marijuana). This situation is obviously similar to the problem of alcohol-impaired drivers creating problems for other people who are not under the influence, and for cigarette smokers harming non-smokers with second-hand smoke. The justice norm asks the question “Is it consistent with what we regard to be fair?” On the one hand, it could be argued that it is not fair to deny people the right to use marijuana if it is legal. On the other hand, it’s also true that legalization of an intoxicant will inevitably cause problems (again, the example of alcohol-related injuries and deaths is relevant). Of course, the counter argument to that argument is that alcohol has been legal for many years, so why shouldn’t marijuana be legal? The caring norm asks the question “Is it consistent with people’s responsibilities to each other?” Those who oppose legalization of marijuana will obviously argue that its use is not consistent with people’s responsibilities to each other because people should not do things that might harm others.

By contrast, those who want to use marijuana will argue that one person shouldn’t be allowed to tell another person how to live their life, as long as they are not doing anything illegal. The back-and-forth that is so evident in this analysis clearly shows how the legality of something is not the same thing as the ethicality of that thing.

To sum up: For many people, the legalization of marijuana is a bad idea because they see it as a moral or ethical issue, i.e., it’s just not right for people to use drugs.

Others, of course, think the use of drugs is perfectly OK. It is highly unlikely that either side will convince the other of the rightness of its position. As noted in question #1, the .

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Chapter 3—Conducting Business Ethically and Responsibly issue in democratic societies is settled by majority rule, and in Canada at the moment, the majority of people favour the legalization of marijuana for recreational use. This point helps students to see the difference between legal behaviour and ethical behaviour.

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CHAPTER 4 ENTREPRENEURSHIP, SMALL BUSINESS, AND NEW VENTURE CREATION CHAPTER SYNOPSIS The chapter starts by identifying the link between small businesses, new ventures and entrepreneurship, and then describes the role small and new businesses play in the Canadian economy. The entrepreneurial process is then explored and examples are provided. The main reasons for success and failure in a small business are discussed.

The various ways in which one can start up a small business are outlined, with the advantages and disadvantages of each discussed. The four forms of business organization are described, including their advantages and disadvantages. CHAPTER OUTLINE

I.

INTERRELATIONSHIP OF SMALL BUSINESS, NEW VENTURE CREATION, AND ENTREPRENEURSHIP New businesses create the most jobs, are noted for their entrepreneurship, and are typically small, but this does not mean that most small businesses are The concepts of a small business, a new venture, and entrepreneurial. entrepreneurship are explored in this chapter.

A. Small Business—The definition used is that of an owner-managed business with fewer than 100 employees. A description of the inconsistencies in the definition of a small business and the resulting difficulties in accumulating information on the level of small business in Canada are provided. Nascent entrepreneurs are people who are trying to start a business from scratch.

B. New Venture/Firm—A new venture is one that has become operational within The the previous 12 months, has adopted any of the main organizational forms (proprietorship, partnership, corporation or co-operative), and sells goods or services.

C. Entrepreneurship—The process of identifying an opportunity in the marketplace and accessing the resources needed to capitalize on that opportunity. Small businesses often require the use of entrepreneurial skills, but entrepreneurial skills are also very important to the success of well-established firms, whether for profit or not, and whether subject to rapid growth, or not. Intrapreneurs are people who exhibit entrepreneurial characteristics and create something new within an existing large firm or organization. They differ from entrepreneurs in that access to capital is not normally a difficulty.

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Part 1—Introducing the Contemporary Business World 1.

Entrepreneurship goals—Some entrepreneurs launch a new business with the goal of independence and working for themselves, and some reasonable degree of financial security. Such entrepreneurs want to achieve a safe and secure financial future for themselves and their families, but do not necessarily want to grow their business beyond their capacity to run it. Other entrepreneurs, however, launch new businesses with the goal of growth and expansion—that is, to transform their venture into a large business.

2.

Entrepreneurial characteristics—Successful entrepreneurs share certain characteristics like resourcefulness and a concern for good longterm customer relations. Most of them also have a strong desire to be their own bosses. Many express a need to “gain control over my life” or “build for the family” and believe that developing a successful business will help them satisfy that need. They can also deal with uncertainty and risk.

Intrapreneurs— People who exhibit entrepreneurial characteristics and

II.

D. create something new within an existing firm or organization are called intrapreneurs. A key difference between intrapreneurs and entrepreneurs is that intrapreneurs typically do not have to concern themselves with getting the resources needed to bring the new product to market, since big companies tend to have the necessary resources already available.

THE ROLE OF SMALL AND NEW BUSINESSE IN THE CANADIAN ECONOMY A. Small Businesses—Close to 98% of all business in Canada have less than 100 employees. Private sector companies and organizations are not owned or controlled by the government.

B. Ventures— Government excludes businesses without employees New from its data. A business is considered new when it hires its first employee, even though it may have operated for a long time. New ventures are the main source of new jobs, and are responsible for the vast majority of new products and services.

A variety of statistics and examples are provided to illustrate the varying growth rates by province and by industry. The number of female entrepreneurs has grown rapidly over the past two decades. Examples of small business initiatives started by young entrepreneurs are provided.

III.

THE ENTREPRENEURIAL PROCESS See Figure 4.3 for an illustration of the entrepreneurial process, which involves the identification of a business opportunity and accessing the needed resources, but must also consider the social, economic, political, and technological factors in the environment which impact on the success in bringing the opportunity to a successful implementation. The entrepreneur is at the heart of the entrepreneurial .

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Chapter 4—Entrepreneurship, Small Business, and New Venture Creation process, and researchers have paid considerable attention to the personal characteristics of entrepreneurs, the wide ranges of personality traits, and behavioural characteristics and skills that are employed. An entrepreneur is differentiated by his or her actions in identifying an opportunity and accessing resources to take advantage of the opportunity.

A. Identifying Opportunities—Involves generating ideas for new or improved products, processes or services, and evaluating them to identify the best opportunity.

Idea generation—Many new ideas come from work and personal 1. experience, where the entrepreneur is familiar with a product, process or service and its current failings in meeting consumer demand. Someone who can ignore the traditional assumptions and look at how things ought to work is often most successful at new idea generation.

2.

Screening—The more quickly that dead-end ideas can be weeded out, the more time is available for pursuing ideas with potential. Ideas are more likely to provide greater opportunities if they: a.

The idea creates or adds value for the customer

b.

The idea provides a competitive advantage that can be sustained c.

The idea is marketable and financially viable

d.

The idea has low exit costs

3.

Developing the opportunity—While a clear vision of the business concept and entry strategy are necessary and important, the entrepreneur must also incorporate new information that becomes available as the process continues, as this can significantly improve the results. New ventures use one of three main entry strategies: i) introduce a totally new product or service, introduce a product or service that will compete directly with existing products or services but add a new twist, or purchase a franchise where the buyer (franchisee) purchases the right to sell the product or service of the seller (franchiser). A business plan is a document that identifies the proposed business venture, explains why it is an opportunity, and outlines the marketing, operational and financial plans, and the manager’s skills and abilities. The business plan is a critical document when outside financing is required. See Table 4.2 for a summary of the contents of a business plan.

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Part 1—Introducing the Contemporary Business World B. Accessing Resources—Entrepreneurs typically “bootstrap,” which means doing more with less.

1.

Financial resources—These are discussed in more detail in Chapter 15. Choosing between debt and equity financing requires trade-offs with respect Since a to potential profitability, financial risk and control. business is at its riskiest stage during the start-up phase, equity financing is usually more appropriate and available than debt financing. Equity financing refers to money contributed by investors in exchange for an ownership interest. Lenders perceive that an equity investment by the entrepreneur is an indication of his or her commitment to the venture.

Sources of equity financing include personal savings, “love” money (investments from friends, relatives and associates), private investors (angels), and venture capitalists. Debt financing means borrowing money, which requires payment of interest and repayment of amount borrowed, and is therefore higher risk than equity financing. Debt financing provides the opportunity for increased returns to the owners when the business is performing well. Collateral means assets that a borrower uses to secure a loan. If the borrower defaults, the lender can seize and sell the assets.

Sources of debt financing include financial institutions (the challenges faced by small businesses in trying to obtain loans from banks are described) and suppliers (who provide trade credit by allowing companies to pay at a later date).

2.

Other resources—These include the Business Development Bank of Canada, incubators, and the internet. a.

Business Development Bank of Canada—Has a mandate to help develop Canadian businesses, with a particular focus on small- and medium-sized companies. It provides financing, venture capital, and consulting strategies. b.

Incubators—Business incubators provide new businesses with support to help nurture them into a successful future. Key forms of assistance include consulting services, legal advice, accounting services, business contacts, clerical services, and office space. See Table 4.3 for a list of incubators.

The internet—Many resources are available online which c. can help entrepreneurs to gather information, write a business plan, and access government grants.

Crowdfunding— This is the practice of collecting financial d. contributions from various individuals through an online platform.

It gives the average person the chance to invest in a company.

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Chapter 4—Entrepreneurship, Small Business, and New Venture Creation C. Building the Right Team—Various stakeholders can provide resources to the new venture. Deciding whether to share ownership by forming a venture team depends on two main issues: the size and scope of the venture, and the personal competencies that are available.

D. Assessing the “Fit” Between Elements in the Entrepreneurial Process—An ongoing task as the opportunities change, requiring changes to the resources and people required.

The entrepreneur-opportunity fit—A successful fit is critical, 1. requiring the entrepreneur to do a realistic self-assessment of skills, abilities and personal interests to determine whether the opportunity is something that he or she wants and is able to do.

2. opportunity-resources fit—The entrepreneur must consider not The only the requirements at start up, but must also anticipate and plan for changing resource requirements as the business opportunity evolves.

3. entrepreneur-resources fit—The entrepreneur must consider The whether he or she has the capacity to meet the resource requirements of the venture, including established networks that can be utilized.

IV.

STARTING UP A SMALL BUSINESS Three options are available when starting a small business: starting from scratch (which was described in the preceding section), buy an existing business, or buying a franchise.

A. Buying an existing business—Higher success rate than businesses started from scratch. Potential advantages: i)An existing business has proven its ability to attract customers, ii) it has established relationships with lenders, suppliers and other stakeholders, iii) it provides potential buyers a clear picture in what to expect in terms of sales, market potential, target customers, etc. Potential limitations: i) there may be uncertainty about the exact financial shape of the business, ii) the business may suffer from a poor reputation, location and/or relationship with stakeholders, and iii) it is often difficult to determine a fair purchase price for small businesses.

Taking over a family business—May provide access to 1. funds not otherwise available to the purchaser and access to management experience. Major problems may occur, however, due to the challenges of dealing with family members, including: i) arriving at a reasonable purchase price, ii) determining who assumes control of the operations, iii) deciding who is employed in the business, iv) choosing an appropriate successor, and v) disagreements about the future of the business. .

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Part 1—Introducing the Contemporary Business World

B. Buying a franchise—This is a popular way to start a business. Examples of franchises are described with a brief description of the history of franchising. A franchise agreement is a contract that gives the purchaser (franchisee) the right to sell the product or service of the franchiser, and sets out the duties and responsibilities of each party. Financial responsibilities of the franchisee typically include: i) initial payment for the right to operate a local outlet of the franchise, ii) royalty payments to the franchiser (ranging from 2 to 30% of revenues), and iii) advertising fees for ads run in the franchisee’s local area.

The advantages and disadvantages of franchising—The a. benefits of franchising to both the franchisee and franchiser are set out in Table 4.4. There are many disappointed franchisees. It is necessary to carefully read the franchising agreement before buying a franchise. b. franchising for you? —Potential franchisees should Is consider the following costs that will be incurred when entering into a franchising agreement: i) the franchise sales price, ii) expenditures that will be incurred before the business opens, iii) training expenses, iv) operational expenses for the first six months, v) personal financial needs for the first six months, and vi) emergency needs.

V.

SUCCESS AND FAILURE IN A SMALL BUSINESS Interpreting available data is difficult because it excludes businesses with no employees, and includes all businesses that ceased operations (which will include business that stopped operating for reasons other than failure, such as retirement of the owner).

A. Reasons for Success—Key reasons include hard work, drive and dedication of owners, market demand for the product or service, managerial competence, and luck.

VI.

B. Reasons for Failure—Key reasons include managerial incompetence, neglect, weak control systems, and insufficient capital.

FORMS OF BUSINESS OWNERSHIP Entrepreneurs must decide on the legal form of ownership of the business. See Table 4.6 for a comparison of the characteristics of the four types of business organization.

A. The Sole Proprietorship—A business that is owned and operated by one person, but is not a separate legal entity. .

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Chapter 4—Entrepreneurship, Small Business, and New Venture Creation

1.

Advantages of a sole proprietorship—The sole proprietor makes all business decisions, the business is easy to form, and there are tax benefits (losses incurred in the start-up phase can be deducted against other personal income on the proprietor’s personal tax return).

Disadvantages 2. of a sole proprietorship—Unlimited liability (the proprietor is personally responsible for all of the debts of the business), the business ceases to exist when the owner dies, dependent on the financial and managerial resources of the sole owner, and may be difficult to borrow money.

B. The Partnership—Two or more individuals agree to own and operate the business. A partnership is not a separate legal entity, and each partner is taxed individually on his or her share of partnership profits.

General partners are individuals who are actively involved in managing the firm, with unlimited liability for debts of the partnership. In a general partnership, all partners are liable individually for all the debts of the partnership. Limited partners are partners who do not participate in running the firm and whose liability is limited to the amount invested in the partnership. Every limited partnership must have at least one general partner.

1.

Advantages of a partnership—Ability to grow by adding talent and money, easier to borrow funds, simple to organize.

Disadvantages 2. of a partnership—Unlimited liability (each partner is personally responsible for all of the partnership’s debts, even if a partner incurred the debt without the other partners’ knowledge), lack of continuity (when one partner leaves or dies, the partnership ceases to exist), difficult to transfer ownership, as the remaining partners must all agree to the admission of the new partner, and if the partnership agreement states that all partners have an equal share in the partnership, it may be challenging to solve disagreements.

The Corporation—A separate legal entity that has the ability to C. own assets and incur liabilities, and whose owners’ liability is limited to their investment in the corporation’s shares. Very large and very small businesses may be incorporated. Stockholders are the owners of the corporation who receives shares or stocks in the corporation in return for their investment. The board of directors is the governing body of the corporation, which sets policies for the business and delegates the management of the business to the executives it hires. Inside directors are members of the Board of Directors that also work for the company in top .

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Part 1—Introducing the Contemporary Business World management. Outside directors are members of the Board of Directors that are not employed by the business.

1.

Types of corporations—There are two types of business corporations: public corporations (shares are widely held and offered for sale to the general public) and private corporations (shares are held by only a few shareholders, and restrictions often exist on the sale of share). Most new corporations start as private corporations as individuals are not willing to invest in unknown businesses. The initial public offering (IPO) is the first sale of shares to the general public, which transitions a private corporation into a public corporation. Private equity firms buy publicly traded corporations and take them private. Income trusts distribute most or all of their earnings to investors.

2.

Formation of the corporation—Federal incorporation under the Canada Business Corporations Act is required for corporations intending to operate in more than one province.

Provincial incorporation under the relevant province’s Business Corporations Act is sufficient if the corporation intends to operate in only one province. Articles of Incorporation must be drawn up and filed to register the corporation. Information included in the Articles of Incorporation is described.

“Limited,” “Incorporated,” or “Corporation” must be included in the company name to communicate the limited liability of the shareholders.

3.

Advantages of incorporation—Limited liability of shareholders, corporation can live forever, easy to sell shares or bequeath to heirs, and advantage in raising funds through the sale of stock.

Disadvantages 4. of incorporation—Cost of incorporation is high, much more heavily regulated than proprietorships and partnerships, double taxation (both the corporation and the shareholder pay tax on the income, as dividends are not deductible from income, but the dividend tax credit largely offsets the corporate tax paid).

The Co-operative—An incorporated entity that is organized, D. owned and democratically controlled by the people who use its products and services, and whose earnings are distributed on the basis of their use of the co-operative, rather than their investment. Each member has one vote, regardless of number of shares he or she owns.

1.

Advantages of a co-operative—Limited liability of

members, co-operative can live forever, structure of one vote per .

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Chapter 4—Entrepreneurship, Small Business, and New Venture Creation member prevents voting and financial control by a few wealthy individuals, and a co-operative does not pay tax on income it distributes to its members.

2.

Disadvantages of a co-operative—Difficult to attract investment as benefits to members come from use, not return on investment, some entrepreneurs are not interested in the cooperative form of organization.

QUICK QUESTIONS 1.

2.

3.

4.

5.

6.

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

Why is entrepreneurship such an important part of our economic system?

What are some common characteristics shared by all entrepreneurs?

What is the purpose of a business plan?

What are some of the advantages and disadvantages of franchising for the franchisee?

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

7.

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

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

8.

What are the advantages and disadvantages of sole proprietorships?

9.

What are the advantages and disadvantages of partnerships?

10.

What are the advantages and disadvantages of corporations?

11.

What is meant by double taxation?

12.

What is corporate governance?

13.

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Part 1—Introducing the Contemporary Business World IN-CLASS EXERCISES Exercise #1: 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 the small businesses they patronize in their hometowns or communities. (5 minutes) 2. students to share how those businesses are important to their towns or Ask 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. This is a good time to review the difficulties in precisely defining what a small business is.

Wrap-Up: Conclude the discussion by noting the large number of jobs that small businesses create, and the innovations they launch. Remind students that almost all businesses begin small.

Exercise #2: The Wide World of Risk Activity Overview: This activity is designed to get students thinking about the importance of entrepreneurship in the Canadian economy.

Time Limit: 30 minutes What to Do: Divide the class into small groups and have them answer the following questions: 1. (a) How is entrepreneurship valuable to an economic system? (b) In what types of businesses is entrepreneurship especially important? (c) How has the entrepreneurial spirit been evident throughout Canada’s history? (15 minutes) Reassemble the class and discuss the degree of entrepreneurial spirit discovered 2. by the groups. In which area(s) of the Canadian economy is entrepreneurship most important? (15 minutes)

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Chapter 4—Entrepreneurship, Small Business, and New Venture Creation Don’t Forget: Entrepreneurship is a factor of production and an essential part of a free-market economy.

Risk-taking promotes competition, which in turn improves quality and maintains market pricing, which is valuable to the Canadian economy.

Wrap-Up: Remind students that entrepreneurial behaviour indicates a high level of risk-taking.

Exercise #3: 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.

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 Canada. (5 minutes) 2.

Ask each group to determine what role entrepreneurship 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 Canada. Students should assess some of the more popular, commonly cited businesses like Tim Hortons, Shopify, and Lululemon.

Wrap-Up: Remind students that entrepreneurial success is influenced 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.

Exercise #4: A Tasty Idea Activity Overview: This activity asks students to think about options for financing a new business.

Time Limit: 30 minutes What to Do: 1.

Divide students into groups of three and ask them to follow the instructions for the Building Your Business Skills exercise found at the end of Chapter 4. (20 minutes)

.

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Part 1—Introducing the Contemporary Business World 2.

Reassemble the class as a whole and discuss the Follow-Up Questions. Each group should share input (10 minutes). Possible answers to the Follow-Up Questions are found later in this chapter under the heading “Team Exercises.”

Don’t Forget: For variety, you may want to assign Steps 1 and 2 to be completed in groups, while the Follow-Up Questions can be completed individually— maybe as homework—and later followed by team discussion.

Wrap-Up: Remind students that finding options for financing a new business is one of the key activities that entrepreneurs must spend time on if they hope to be successful.

Exercise #5: 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: Divide the class into small groups and ask each group to put together a list of 1. factors that might mean the difference between 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: Remind students that 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.

Exercise #6: 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

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Chapter 4—Entrepreneurship, Small Business, and New Venture Creation 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 it 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 ideas which seemed silly have become multimillion-dollar ones. If you want them to develop their ideas even more, you may want to assign Step 1 as group homework and then discuss their ideas 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.

Exercise #7: Entrepreneurship and Management Activity Overview: This exercise is designed to help students assess their level of knowledge about entrepreneurship, management, and small business.

Time Limit: 30 minutes What To Do: Form three- or four-person groups and have them develop a list of characteristics 1. of an ideal entrepreneur. Then have them develop a list of the characteristics of an ideal manager.

Have groups identify the differences between the two lists. Can entrepreneurs be 2. good managers? What are some potential problems entrepreneurs might have to overcome in managing a firm?

Don’t Forget: Many small businesses are started by entrepreneurs who have identified a product or service they have the experience and expertise to provide, but who lack education and experience in managing a business.

Wrap-Up: .

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Part 1—Introducing the Contemporary Business World Ask students to consider ways in which entrepreneurs might access advice and knowledge in the area of managing a business. What are the benefits and downsides of the alternatives available?

TEACHING TIPS 1.

Remind students that precisely defining a "small business" is difficult, so the textbook has provided a broad set of criteria for determining whether or not a business is classified as “small.” First, the business must be independently owned, and second, it must not dominate its market.

2.

The text notes that innovations are as likely to come from small business as from

big business. Moderate a discussion dealing with the issue of why it is that small business can have such a major impact on industry innovations. Students should consider the environment that exists in large and small businesses, such as opportunities for individual initiative; the existence of a creative atmosphere availability of free time on the job; how structured the decision making process is; the attitude towards risk taking, or the availability of smarter people with better ideas. Students should also consider to what extent small businesses create innovation compared to the extent to which innovation creates new business. Entrepreneurs wanting to seize opportunities cannot start large businesses!

3. of the requirements for being a successful entrepreneur is the willingness to One take risks, even enjoying doing so. Have the class explore their own willingness to take risks and innovate. Many students indicate a clear preference for the security that they perceive exists when working for a well-established company, while others can’t wait to graduate and own their own business. Have the class consider the types of jobs within established companies that require entrepreneurial talents, to help them realize that risktaking is an essential component of large businesses as well.

4. reason for entrepreneurial success that is provided by the textbook is luck, One but you certainly do not want to make your students feel that luck is the most important factor in business success. The example given in the text is of lucky timing. Stress to the class that an entrepreneur can often create his or her own luck by observing and understanding current trends in the environment, and identifying opportunities that capitalize on these trends. Ask students to think of new products or services that have capitalized on the aging population in Canada. What other products or services do they think could be developed to take advantage of this trend? This exercise can also be carried out with any other current trend, such as increased concern with health status, environmental concerns, etc.

5.

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

6.

Ask how many students want to launch their own business. (Typically one-third to

one-half of each class will raise their hands.) Call on these students to share their .

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Chapter 4—Entrepreneurship, Small Business, and New Venture Creation interests, including type of business and timeframe. You can then use their personal goals to illustrate concepts for each section you teach.

7.

Remind students that your 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.

One of the reasons given for new venture success is the existence of a large 8. demand in the market for the product or service that the firm in question is seeking to offer. Mass producing and shipping of a product that nobody wants or needs will certainly not lead to success for the firm. Ask students to identify ways in which an entrepreneur can determine just how much demand there will be for a new product or service that he or she is thinking of offering. Should the entrepreneur start by searching the market to see what people want before devising a product or service? What are the most common sources of ideas for new products and services?

9.

Some students may be dreaming of opening their own business so they can set their own hours and work at a pace they set themselves. The textbook notes, however, that small business owners who are unwilling to work long hours and perform many different tasks are likely to fail. Ask some students to tell whether or not they believe what the textbook has said. If possible, have the students relate this question to an entrepreneur they know.

10.

Reinforce that although starting a business from scratch is riskier than buying an existing business, the owner is free to choose lenders, suppliers, workers, equipment, and so on, and the business doesn’t suffer from a prior owner’s mistakes.

11.

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

12.

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 (Google and so on).

The business plan is an important part of the development of an opportunity. The 13. text suggests that extensive research and planning provide little benefit when the market conditions are changing rapidly. The opposite point of view can also be taken - when market conditions are rapidly changing, it is very important that the firm carefully evaluate the opportunities and threats in order to be able to anticipate and responded to changing circumstances. Ask the students to identify the benefits and disadvantages of preparing a comprehensive business plan in rapidly changing market conditions.

14.

Love money involves obtaining financing from family, friends, and business

associates. Ask students to identify who they could approach if they needed funds to start a new venture, and how easy or difficult it would be to approach these individuals for assistance. What type of strain does such a request put on the relationship? Then ask .

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Part 1—Introducing the Contemporary Business World students to consider what their response would be if they were approached by a member of their family, a friend or a business associate to provide funding for a new venture.

What factors would they take into consideration in making the decision to lend or not?

Managerial incompetence is an important reason for small business failure. There 15. can be at least two kinds of managerial incompetence. First, there is the matter of general and universal managerial skills and experience that may be lacking. Second, there is the matter of knowledge of the particular business in which the firm operates. A superb manager may fail in a furniture store because he or she knows nothing about furniture.

On the other hand, a superb furniture person may fail because of ignorance about management. Ask students to debate which type of knowledge constitutes the greater importance for a manager.

16. new ventures are created by entrepreneurs with technical knowledge and Many experience with the new product or services, but with limited managerial training and experience. When resources are limited, the entrepreneur often perceives that he or she must do it all. Ask the students to identify affordable ways in which an entrepreneur can obtain needed assistance with various management functions until the business can afford to hire qualified staff.

17.

Experienced small business people will tell you that there is no tried and true, guaranteed formula for success in small business. The textbook points out that there are many advantages to purchasing an existing business. At the same time, the textbook does not deny that starting from scratch means the new business will not "suffer the ill effects of a prior owner's errors." One "ill effect" that can be present in an existing business is its location. Tell your students this true tale of a restaurant. On what seemed like an ideal corner--near a university campus, near a fairly well-to-do residential area, on a main highway running through town--a restaurant was established. It faltered, and a pizza parlour took over the facilities. The parlour faltered, and another restaurant moved in. It was a flop. Today, that location is doing well; it is an insurance company's branch office.

In other words, buying an existing business (in this case a restaurant) at a bad location can cause a new firm to "suffer the ill effects of a prior owner's errors."

18.

An issue that is very important when purchasing an existing business is the

purchase price. The purchase price normally exceeds the amount the buyer would spend to purchase the land, buildings, equipment, and inventory separately, as the business has a reputation and an existing clientele, which adds value to the business. These assets are referred to as the goodwill that has been established by the business. The current business owner will place a high value on the goodwill, and often the buyer will pay large amounts for the goodwill. Have the students consider the purchase of a local restaurant that is very successful and well established. At the time of the sale, it has a large base of regular customers. Ask the students to discuss the importance of the goodwill the buyer purchased, if the quality of the meals declines and the new wait staff is surly. This illustrates that buying a successful well-established business is not a guarantee that the new owner will also be successful. It is also a caution not to pay too much for goodwill.

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Chapter 4—Entrepreneurship, Small Business, and New Venture Creation In a service business, the new owner must create his or her own goodwill very quickly to be successful.

19.

Purchasing a business from a family member has its own risks, as well as benefits.

Often the business is a significant portion of retiring parents’ retirement income. It becomes difficult to negotiate the price downward to minimize the amount paid for goodwill when the seller is a parent. Second generation businesses sometimes fail, however, when the profits the business earns are not sufficient to pay off the loans incurred to buy the business and still provide a reasonable living for the new owners.

Have the students discuss how difficult the negotiation process would be if they were negotiating with their parents.

20.

Invite a person who is involved in a family business to give a talk to the class on the special problems of working in a family business.

21. most textbooks say about venture capital firms is that they will help a firm What get started but will ask for a rather healthy reward in return for their being helpful. Ask students if the following statement is accurate: "A venture capital firm will help firms that have great difficulty getting funding elsewhere." Is this fair to say? Why or why not?

22. of the disadvantages of being a franchisee is the possibility that the franchiser One will locate a competing franchisee too near the location of the original franchisee. Ask students if they can recall a situation from their home town in which several outlets of the same chain have located very close together. In such a situation, what can the original franchisee do? Are there guarantees against such behaviour by the franchiser? How could the franchisee have protected his or her interests?

23.

Identify several franchising organizations in your local community. Moderate a class discussion where the focus is on identifying the strengths and weaknesses of each franchise. Which franchise would students prefer to own? Why? 24.the textbook has indicated, a franchiser does not give a great amount of As freedom and innovation to its franchisees. Ask students to develop a list of reasons that fully support this attitude on the part of the franchiser. Do students feel that such rigid rules will have to be eased a bit when a major franchise system places outlets in foreign countries? If, then, franchisees in foreign countries are allowed some freedoms, why can't these freedoms be allowed to franchisees here at home?

Interview a local entrepreneur while the class listens. This will convey two 25. important points to students: (a) the characteristics of entrepreneurs, and (b) what is involved in running a small business.

Describe a small firm in your area that has recently gone out of business.

26.

Moderate a class discussion in which the goal is to identify as many factors as possible that led to the company's failure.

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Part 1—Introducing the Contemporary Business World 27. textbooks identify that an advantage to incorporating a business is the Many access the business then has to additional sources of capital from the issuance of shares and bonds. In reality, however, the corporate form of business organization is less important than the nature, size and established track record of the business. To emphasize this point, use a very small business, such as a hot dog stand or other mobile food cart. Ask students what sources of funds might be available to the owner. Would the students be interested in buying shares or bonds if the hot dog stand was incorporated? Why or why not? Students should realize that incorporation does not provide instant access to funds.

28.

Make sure that students understand the different forms of business ownership. For example, a sole proprietorship is owned and usually operated by one person.

29.

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.

30.

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

31.

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.

32.

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

33.

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.

34.

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

35.

Ask students which of the four basic methods of starting a small business they would choose. Why did they pick the alternative they picked?

Ask students whether they think franchisees are really small business owners or 36. simply employees of a large corporation who must follow specific rules and regulations set down by the corporation. You might want to invite a franchisee to speak to the class on this issue.

USING THE BOXED INSERTS Opening Case: Pattison: West Coast Business Legend Still Says No to an IPO!

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Chapter 4—Entrepreneurship, Small Business, and New Venture Creation CRITICAL THINKING QUESTIONS 1.From what you have read, how does Jim Pattison fit the profile of an entrepreneur?

Jim Pattison is a Canadian billionaire and a true entrepreneur! His private empire includes holdings in the automotive, food and beverage, agricultural equipment, real estate, forestry, media, financial, advertising, and entertainment sectors. Regardless of their goals, many successful entrepreneurs share certain characteristics. Among these characteristics are resourcefulness and a concern for good long-term customer relations. They can also deal with uncertainty and risk. Research shows that these characteristics are wide-ranging. Some are behavioural (e.g., taking initiative), others are personality traits (e.g., independence), and still others are skills (e.g., problem solving). What is important is not who the person is but what the person does. Jim Pattison’s track record speaks for itself.

2.Why do you think Jim Pattison resisted the temptation to take his successful company public over all these years?

As indicated in the case, an Initial Public Offering (IPO) is a great way to help finance future expansion and it is also a source of pride and market credibility when a company is listed and has a successful transition. However, in 2021, not only was Jim Pattison still not interested in that path, but he had also been reportedly active in the opposite direction. While his company has significant shares in some public corporations like Canfor and West Fraser Timber Company Limited, Jim Pattison prefers the private route. As he explains, he has been able to run his conglomerate far away from public eyes for six decades. By doing so, he avoids short-term market pressures and his 48,000 employees and $10.9 billion in annual sales indicate that the company is doing just fine!

3.Conduct some research and read the latest news about the Jim Pattison Group. Is the news positive or negative? Is there any additional news concerning new acquisitions, expansions, management changes?

Answers will vary based on the time of research.

4.How has the COVID-19 pandemic impacted the Jim Pattison Group both negatively and positively?

Some businesses were devastated during the COVID-19 pandemic (hotels, movie theatres, airlines etc.) while others saw increased demand and revenues (pool and spa companies, Netflix, Amazon etc.). As a diversified company, Pattison had some positive and felt the negative impact in most areas. The case itself mentions that Pattison, and his team of private executives, still held weekly high-level meetings (albeit with social distancing in mind temporarily). As part of the adjustment plan Pattison increased his investment in the forestry sector (increasing his share of West .

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Part 1—Introducing the Contemporary Business World Fraser Timber Company Limited) and quickly put in place changes in his grocery stores. Some additional research may allow the students to find additional details that have been accounted for at the time of their assignment.

Social Responsibility &Social Justice: Manitoba Mukluks: Authentic to the Core CRITICAL THINKING QUESTIONS 1.How does the story of Sean McCormick, and the evolution of Manitobah Mukluks, demonstrate the power of the entrepreneurial spirit?

Like many entrepreneurs he had previous experience in a related area. He started selling leather and fur to aboriginal artisans at a very young age. He has demonstrated the passion, vision, and energy to build the company into an organization with approximately $50-million-dollars in revenues and over 300 employees. His products are now sold around the world with many famous celebrities counted among the client list including Kate Moss and Cindy Crawford (featured in Vogue Paris), Oprah Winfrey, Prince Harry, and Megan Markle. Regardless of their goals, many successful entrepreneurs share certain characteristics. Among these characteristics are resourcefulness and a concern for good long-term customer relations. Most of them also have a strong desire to be their own bosses. Research shows that these characteristics are wide-ranging. Some are behavioural (e.g., taking initiative), others are personality traits (e.g., independence), and still others are skills (e.g., problem solving). Sean McCormick exemplifies the spirit of an entrepreneur and in his case, it has also made an impact on his community.

Entrepreneurship and New Ventures: Crowdfunding: Finance from the Masses Crowdfunding means raising money online through the use of social media, usually by getting a small amount of money form a large number of investors. Various aspects of crowdfunding are discussed in the boxed insert.

Critical Thinking Questions 1. to Kickstarter, or another crowdfunding site, and pick one campaign to Go analyze. Describe the key benefits that the product offers. Do you think the concept is truly viable? What is the likelihood of success? Would you invest your hard-earned money?

Student answers will, of course, vary depending on the campaign that they choose. When assessing student answers, ensure that opinions are backed up by some facts. This is particularly important for the three sub-questions that are posed in Q. #1. In each of those cases, student answers may be influenced (either positively or negatively) by their own biases and preferences. They must therefore present some objective evidence for their answer. For example, consider the question “Do you think the concept .

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Chapter 4—Entrepreneurship, Small Business, and New Venture Creation is truly viable?” A student who is really intrigued about a campaign (because it focuses on something the student happens to be interested in) may well overstate the viability and likely success of a campaign. The reverse is also true. Another example: student risk preferences will influence their response to the question “Would you invest your hardearned money?” They must therefore make their risk preference clear.

2.

Consider the following statement: “Crowdfunding websites should not be allowed to raise equity funds because con artists will be able to fleece unsophisticated investors.”

Do you agree or disagree with the statement? Explain your reasoning.

Students who agree with this statement will likely be those who are (a) cautious about financial matters, and (b) have heard a lot of horror stories about how investors have been duped by con artists. There have been numerous stock frauds that have been perpetrated over the years, and those frauds have been highly publicized. Stock manipulators are out there, and they are willing to provide all sorts of inflated claims about products and companies in order to lure investors in. So, these students will conclude that allowing crowdfunding will almost certainly increase this problem.

Students who are very entrepreneurial will tend to disagree with this statement because they will see it as limiting their freedom to raise money for ideas that they think have great potential. They will cite evidence showing how important entrepreneurship is for the Canadian economy, and how difficult it is for entrepreneurs to raise money for new ventures. They will argue that entrepreneurs who have trouble raising money through traditional sources could really benefit from raising money through crowdfunding, and that this opportunity should not be denied to them.

How are we to resolve these conflicting viewpoints, both of which have some merit? Put another way, how do we strike a balance between freedom for entrepreneurs and protection for investors, and what does that mean in practice? To encourage students to think about this, the instructor can moderate an in-class discussion about how to overcome this dilemma. In that discussion, it will become apparent that those who oppose crowdfunding have reasonable concerns, and so do those who favour it. So, the emphasis should be on dealing with the negative aspects of each position. For example, if crowdfunding is not allowed, we need to deal with the problem of entrepreneurs not having various avenues of raising funds; if crowdfunding is allowed, we need to deal with the problem of potential fraud. It is difficult to predict what specific suggestions will be made during this discussion, but here are some possibilities: (a) allow crowdfunding, but put limits on the total amount of money that can be raised; (b) limit the amount that individuals can invest, based on their net worth (the higher their net worth, the more they will be allowed to invest); (c) allow a simplified prospectus for entrepreneurs who want to use crowdfunding (as opposed to requiring audited financial statements); and (d) allow crowdfunding only if the company has already received some funds from a venture capital firm or an “angel” (this would demonstrate that the product has some realistic chance of being successful).

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Disruptions in Business: The Rise of the Gig Economy CRITICAL THINKING QUESTIONS 1.Are you involved in the gig economy? Get in teams of four and list some of the gig employment tasks your team members have been involved in.

Student answers will vary based on their own personal experiences.

2.From an employer’s perspective, looking to hire and train employees for long-term development, list both the positive and negative impact of the increased participation in the gig economy.

There are various positive and negative implications for employers. The ability to hire freelance employees to complete tasks without the commitment of a full-time employee offers greater flexibility. However, employers are also finding it harder to keep talent as freelance workers are in high demand especially in this tight economy and a growing percentage of workers wants to maintain their own flexibility and prefer to work in the gig economy rather than the 9-5 corporate routine.

QUESTIONS AND EXERCISES Questions For Analysis 1.

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. Student analyses should compare and contrast their personality characteristics with those of successful entrepreneurs.

2.

If you were going to open a new business, what type of business would it be?

Why? Student answers will obviously vary, depending on their interests. But interest alone is not sufficient when considering a new business or an idea for a new product or service. Student answers should show an appreciation of the material under the heading “Identifying Opportunities” in Chapter 4. Specifically, their answers should show that they have carefully considered the screening stage of the entrepreneurial process and that the characteristics that a new product idea should possess have been addressed (e.g., the .

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Chapter 4—Entrepreneurship, Small Business, and New Venture Creation idea creates added value for the customer, the idea provides a competitive advantage that can be sustained, the idea is marketable and financially viable, and the idea has low exit costs). Students might also decide to choose a business within an industry that offers ease of market entry, primarily because their resources are limited. They may not have built much personal credit and are not at the peak of their income-earning capacity.

3.

Which industries are easiest for a small business to enter? Which are hardest?

Why? The easiest industries for new start-ups include services, which are the fastestgrowing 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. Startups in manufacturing and transportation are difficult because of the higher initial outlay of cash required.

4. Identify three sources of funding for new businesses. What are the advantages and disadvantages of each?

Students should identify personal resources, borrowing (debt), governmental assistance, and equity financing such as investors and venture capital.

5.

Why might a private corporation choose to remain private? Why might it choose to “go public”?

The decision to remain private may be motivated by the following: ability to obtain sufficient funding without issuing shares to the public; maintain control within the small ownership group; avoid the cost and inconvenience of complying with stock market regulations; and maintaining the confidentiality of the firm’s financial and operating information that would have to be made public if the stocks were traded publicly.

The decision to go public may be motivated by the following: ability to raise additional capital, desire for rapid growth to capitalize on expanding market opportunities that require additional financing more quickly than is available from other funding sources; and the dispersion of financial risk.

Consider a new product or service that has recently become available for purchase 6. by consumers. To what extent did this product or service possess the “screening” characteristics that are described in the chapter (adding value, providing competitive advantage, and so on)?

Student answers will vary depending on the product they select. The important thing in this exercise is to have them consider all the issues that should have been considered during the screening process: how does the new product or service add value compared to previous products/services; how has the company been able to sustain the

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Part 1—Introducing the Contemporary Business World competitive advantage of the new product/service; how marketable and financially viable is the new product/service; and are the exit costs low.

Students will not necessarily have detailed information on the financial viability, marketability, and exit costs, but they should try to arrive at logical conclusions, based on how the company has chosen to market the product/service, and whether the production is very capital intensive (high exit cost) or not.

Application Exercises 7.

There are thousands of mobile applications on the various mobile platforms (you probably use some of them on a weekly or daily basis). Identify an idea for a new application that can serve a consumer need that is currently unmet or can be improved upon.

Student answers will vary. One way to increase interest in this exercise is to have a competition for “best new product idea.” Before making the assignment, appoint a 4person team of students to screen all the ideas that are generated by the other individuals in the class (team members do not have to generate new ideas). The team then meets outside of class time and decides on the top five ideas. The individuals who proposed each of these ideas will then make a 5-minute class presentation. At the end of the presentations, the class can vote on which idea is most promising.

8.

Interview the owner/manager of a sole proprietorship or a general partnership.

What characteristics of that business form led the owner to choose it? Does he or she ever plan on changing the form of the business?

To give students insights here, summarize the interview findings of each student for the two questions they asked. Then tabulate the most popular reasons the interviewees gave for choosing a proprietorship over a partnership (or vice versa).

9.

Identify two or three of the fastest growing businesses in Canada during the last year. What role has entrepreneurship played in the growth of these firms?

In order to answer this question, students will have to do a bit of research to determine which businesses are growing the fastest. Once they have determined that, they must draw some conclusions about the role that entrepreneurship played in the business’s growth. The examples provided in the text will provide some insights about the impact of entrepreneurial activity, but students should also search for articles that highlight fastgrowing businesses in Canada because those articles will typically provide a rich source of information about the entrepreneur’s work patterns, values, company strategy, and philosophy. That will enable students to make an assessment about the role that entrepreneurship has played in the growth of the business. As they are drawing conclusions, make sure that students are actually focusing on entrepreneurship (i.e., the

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Chapter 4—Entrepreneurship, Small Business, and New Venture Creation process of identifying an opportunity in the marketplace and accessing the resources needed to capitalize on that opportunity).

10.

Although more than half of all small businesses don’t survive five 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 Subway, and detail the requirements for net worth and liquid cash for the franchisee as well as up-front and annual fees.

This will be an interesting (and eye-opening) exercise. Students should carefully evaluate the costs and the various success rates among popular franchises in the food industry. A good source of information for this exercise is Restaurant News.

TEAM EXERCISES Building a Business: Continuing Exercise 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) developing a sales forecast for the new business, and (c) developing 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 activity of writing a business plan will prevent 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 financing might come from friends, banks, or venture capitalists.

Building Your Business Skills: A Tasty Idea 1.

Before getting financing, what will be expected of you and your business partners?

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) the sales forecasts for the new business, and (c) the business’s financial plan.

2.

Which source of financing would be best for you and your partners? Why? .

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Part 1—Introducing the Contemporary Business World Students will identify a variety of sources of funding including small business loans, 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 favourable (e.g., low interest rate, long life of loan) and the entrepreneur has future plans that would ensure that the funds would be used effectively, the venture capital source may be a good idea.

3.

What form of business ownership would be most appropriate for your new restaurant and why?

When deciding on the form of business students will need to focus on the key issues that will help them make their decision (e.g., is liability limited or unlimited, how decision making rights will be distributed, the ease of dissolution of the business, start-up costs, etc. A business venture like this one would typically start out as either a partnership or a private corporation. If it is very successful and its scope of operations increases substantially over time, it might make sense to create a public corporation.

Exercising Your Ethics: Team Exercise: Breaking Up Is Hard To Do Activity Overview: This activity asks students to think about several important questions that must be answered after two partners have gotten into a disagreement.

Time Limit: 40 minutes What to Do: 1.

Divide students into four-person teams and ask them to read and follow the instructions for the “Exercising Your Ethics: Team Exercise” which is found at the end of Chapter 4. (25 minutes) 2.

Reassemble the class as a whole and discuss what disagreements came up within their groups. How did the role they played affect their perspective? (15 minutes) Possible answers to the Questions for Discussion are as follows: 1.

Identify the ethical issues, if any, regarding Mark’s and Connie’s respective positions on Mark’s proposed $2,000 salary increase.

Mark’s additional responsibilities are not necessarily worth a $2,000 salary increase. Connie’s desire to take $2,000 worth of inventory may also not be reasonable.

2.

What kind of salary and profit adjustments do you think would be fair in this situation? Explain why.

Answers will vary, but students should consider how the contributions from.

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Chapter 4—Entrepreneurship, Small Business, and New Venture Creation both partners would change.

3.

There is another way for Mark and Connie to solve their differences: Because the terms of participation have changed, it might make sense to dissolve the existing partnership. What do you recommend in this regard?

Answers will vary, but dissolution is worth considering given that both parties appear to feel wronged. Given Connie’s plan to remove inventory for personal use each month, further conflict seems inevitable.

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Part 1—Introducing the Contemporary Business World Don’t Forget: As with most ethical dilemmas, it may be difficult to decide what the best action to take will be. The benefit of this uncertainty is that students will be required to think about how their view differs from those of other students and why it differs.

Wrap-Up: Wrap up the activity by discussing tradeoffs that each partner might make in order to resolve the difficulty.

CLOSING CASE Tim Hortons: The Pros and Cons of Franchises Questions for Discussion How does this case help to demonstrate the challenges of entrepreneurship?

1.

When students think of entrepreneurs, they probably think in terms of starting a new business rather than buying a franchise. But, as noted in the case, franchisees are entrepreneurs too, and like all entrepreneurs that encounter challenges. In this particular case, the challenges facing Tim Hortons franchisees have arisen within the context of a franchise system rather than within a single, stand-alone company that an entrepreneur is managing. So, although the specific challenges that have arisen in this case are a bit unusual, they are every bit as real as the challenges that are normally listed for entrepreneurs (e.g., coming up with a new product idea that will be in demand, raising funds to start a business, hiring employees, dealing with financial institutions, dealing with crises as they arise in the business, etc.). An additional challenge for franchisees is their lack of freedom to make changes that they think might help the business (e.g., adding new products or adjusting product quality). Instead, they must adhere to strict requirements that are laid down by the franchisor. If those requirements reduce the franchisees profits, this is very frustrating for the franchisee. Thus, one of the biggest challenges for franchisees is having to act in ways that are consistent with the franchisor’s demands even if the franchisee thinks he or she has some better ideas. face.

2.

The last paragraph in the case nicely summarizes the challenges that entrepreneurs

What are the greatest differences between starting a business from scratch and joining a franchise system?

Perhaps the greatest difference between starting a business from scratch and joining a franchise system is that the likelihood of success is greater when joining a franchise system. The reason is simple: the franchise system is a proven business idea and this increases the chance that the franchisee will be successful. Table 4.4 in the text summarizes the benefits of franchising for both the franchisee and the franchisor. But the fact that a franchisee has a greater chance for success than an entrepreneur working alone .

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Chapter 4—Entrepreneurship, Small Business, and New Venture Creation does not mean that franchising is necessarily the best alternative for an entrepreneur, and the text describes several disadvantages associated with franchising (the purchase price for a successful franchise is very high, the franchise agreement can be very limiting, territories may not be protected, royalty payments must be made to the franchisor, etc.).

Starting a business from scratch generally involves more risk than buying a franchise, but if the new business is successful, the rewards can be far greater than those that would have been achieved by buying a franchise. But entrepreneurs who start a business from scratch are on their own and do not have a support system like franchisees have.

Business owners must always analyze the external factors (the economy, 3. government regulations, social trends, etc.) to compete and adjust to new market realities.

From the contents of the case, and based on your knowledge of recent developments with Tim Hortons, what are the greatest external threats and opportunities for Tim Hortons franchisees?

The state of the economy can be either a threat or an opportunity. If times are good and the economy is in the “recovery” phase of the business cycle, unemployment levels are low, and consumers are more willing to spend money. But if the economy is in the “recession” phase of the business cycle unemployment levels rise and consumers spend less overall as they become concerned about their own financial position. This means lower demand for the products and services that entrepreneurs are selling. Another external factor—social trends—can also be a threat or an opportunity. Tim Hortons can benefit from social trends that favour “eating out” but it may also be threatened by social trends like “eating healthy” if consumers see Tim Hortons menu as being unhealthy.

Government regulations—such as an increase in the minimum wage—can be a threat because Tim Hortons franchisees are required to pay higher wages to their employees and higher labour costs reduce profits (other things being equal).

Of course, the pandemic and seating restriction and COVID-19 protocols were a tremendous added challenge for all companies in the food and hospitality industry. Tim Hortons was no exception. The pandemic created revenue gaps due to closures, scheduling staff issues due to illness and employees choosing to stay home or not return; as well as major cost increases due to supply chain issues. In short this has been the greatest challenge in 100 years!

Consider the following statement: Franchisees should not complain about actions 4. that a franchisor takes because franchisees sign an agreement that specifically lays out how the franchise will operate. Franchisees should be grateful to the franchisor, who provides a ready-made opportunity for individuals who want to run their own business.

Do you agree or disagree with the statement? Explain your reasoning.

There are two key ideas contained in the statement: (a) the franchisee signs an agreement that lays out how the franchise will operate, and (b) the franchisor provides a ready-made opportunity for the franchisee. Both these statements are true, but it does not necessarily mean that students should agree with the statement because the statement also .

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Part 1—Introducing the Contemporary Business World says that franchisees should not complain about certain actions that a franchisor takes. If the actions that the franchisor takes violate the spirit or the letter of the agreement, franchisees may be harmed financially and should challenge the questionable action the franchisor took. Of course, it may be difficult to prove that the questionable action was taken, or that it was financially harmful to the franchisee.

In the case of Tim Hortons, for example, franchisees provided a long list of complaints (e.g., the franchisor charged excessive franchisee fees for supplies, provided lower quality ingredients, reduced profitability opportunities for franchisees, failed to meet system standards, compromised product quality, failed to deal with health and safety concerns, paid administrative costs with money that franchisees had contributed to the advertising fund, tried to intimidate franchisees who had formed the Great White North Franchise Association, and cut costs in such a way that financial damage was done to the franchisees). The franchisor disputed these claims and made a counter-claim: that franchisees were damaging the company’s public image by complaining about how the franchisor was running the company. The franchisor also threatened to sue certain franchisees for releasing confidential company information to the public.

Consult the National Post and the Globe and Mail to determine what eventually happened at Tim Hortons as a result of all the claims and counter-claims. Present this information to students and moderate an in-class discussion that focuses on the lessons that franchisees should learn from the outcome.

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CHAPTER 5 THE GLOBAL CONTEXT OF BUSINESS CHAPTER SYNOPSIS The global market has evolved into major world marketplaces, held together by trade agreements and alliances. Several factors affect how countries and businesses respond to the international environment. Further, managers and entrepreneurs find themselves challenged by several factors In this chapter, we discuss the overall dynamic nature of international business and that influence international involvement. explain how ittheir 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.

We then look at the factors involved in deciding to do business internationally and in selecting the appropriate levels of international involvement and international organizational structure. We also discuss how differences in import-export balances, exchange rates, and foreign competition determine the ways in which countries and businesses respond to the international environment.

Finally, we look at barriers to international trade and the free trade agreements that have been developed to overcome these barriers.

CHAPTER OUTLINE I.

THE CONTEMPORARY GLOBAL ECONOMY Globalization means that more and more firms are engaging in international business. As the world becomes more globalized, the number of imports—goods that are produced and grown abroad and shipped into Canada and exports—goods that are produced or grown in Canada but shipped abroad will continue to increase. International trade is not a new concept, yet it is increasingly becoming central to the fortunes of most nations and their businesses.

The Major World Marketplaces— Distinctions are made between countries based A. on per-capita income. The World Bank classifies countries into high-income, upper middle-income, lower middle-income, and low-income.

Distinctions based on wealth—The World Bank uses per capita income to 1. make distinctions between four kinds of countries: high-income, upper middle income, lower middle income, and low income.

Geographic clusters—The contemporary world economy revolves around 2. three major marketplaces that represent the home to most of the world’s largest economies, biggest multinational corporations, most influential financial markets, and highest-income consumers. a.

North America—This is the single largest marketplace and enjoys the most stable and sound economy. .

Part 1—Introducing the Contemporary Business World b.

Europe—Has evolved into a unified marketplace through the European Union. c.

Pacific Asia—The Pacific Asia economies grew rapidly in the 1970s and 1980 and are now an important force in the world economy and a major source of competition for North American firms.

Emerging Markets: BRICS and Beyond—Five countries (Brazil, Russia, India, B. China, and South Africa) are increasingly important in world trade. Each of these countries has somewhat different strengths.

C. Forms of Competitive Advantage—No country can produce all the goods and services that its people need, so countries tend to export those things that they can produce better or less expensively than other countries.

1.

Absolute advantage—Exists when one country can produce something more cheaply than any other country.

Comparative advantage—Exists when a country can produce certain

2. goods more efficiently or better than other goods.

3.

National competitive advantage—This idea has become a widely accepted model of why nations engage in international trade (derives from four conditions: factors of production, demand conditions, related and supporting industries, and strategies, structures, and rivalries). International competitiveness refers to the ability of a country to generate more wealth than its competitors in world markets.

D.

The Balance of Trade—A country’s balance of trade is the difference between in value between its total exports and its total imports. A favourable balance of trade means that a country exports more than it imports, and an unfavourable balance of trade means that a country imports more than it exports. Canada's overall trade balance has traditionally been generally favourable (very favourable with the U.S., but unfavourable with its other major trading partners).

The Balance of Payments—A country’s balance of payments is the difference E. between money flowing into the country and money flowing out of the country as a result of trade and other transactions. Canada has had an unfavourable balance of payments for many years.

Exchange Rates—An exchange rate is the rate at which a currency of one nation F. can be exchanged for that of another. The effect of fluctuations in the exchange rate is discussed in terms of balance of trade. The significance of exchange rates is also discussed in terms of how fluctuations affect demand for companies that conduct international operations.

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Chapter 5—The Global Context of Business Exchange rates and competition—Companies that conduct international 1. operations must watch exchange-rate fluctuations very carefully because these changes can affect foreign demand for their products. The exchange rate for the Canadian dollar has fluctuated greatly during the last decade and this has influenced exports to, and imports from, the U.S. II.

INTERNATIONAL BUSINESS MANAGEMENT No matter where it is located, the success of a business firm depends largely on how well it is managed.

A. Going International—Several factors enter into the decision to conduct business internationally (see Figure 5.3) 1.

Gauging international demand—Products that are vital in one country may not be needed in another country, so careful assessment of demand is necessary.

2.

Adapting to customer needs—A firm must decide whether it needs to adapt its product or service offering for sale in a foreign country. An example is given.

B. Levels of Involvement in International Business—Several different levels are possible.

1.

Exporters and importers—An exporter is a firm that makes products in one country and then distributes and sells them in others. An importer buys products in foreign markets and then imports them for resale in its home country.

Almost 40 percent of all goods made in Canada are exported. The benefits of exporting are discussed, as are the drawbacks, and the need for improvement in Canada's export record.

2.

International firms—An international firm conducts a significant portion of its business abroad.

Multinational firms—These firms control assets, factories, mines, sales 3. offices, and affiliates in two or more countries. Their impact on world markets is described in terms of revenues generated, profits, assets, and as employers.

C. International Organizational Structures—Different levels of involvement in international business require different kinds of organizational structures.

1.

Independent agents—A foreign individual or organization who agrees to represent an exporter’s interests in foreign markets.

Licensing arrangements—An owner of a process or product allows 2. another business to produce, distribute, or market the product or process for a fee or royalty. Several examples are given. .

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Part 1—Introducing the Contemporary Business World 3.

Branch offices—Locations that an exporting firm establishes in a foreign country to sell its products more effectively (i.e., more direct control, better reputation in foreign country, etc.).

4.

Strategic alliances—Enterprises in which two or more persons or companies temporarily join forces to undertake a particular project (also known as joint ventures). The increase of the use of strategic alliances indicates the benefits associated with them (e.g., increased control, easing the way into new markets, etc.).

Foreign direct investment—Buying or establishing tangible assets in 5. another country. The concerns about foreign direct investment in Canada are discussed.

III.

BARRIERS TO INTERNATIONAL TRADE A. Social and Cultural Differences—Lack of understanding cultural differences will hinder and may prevent a company's success in international business activities. A variety of differences are discussed (e.g., language, physical stature, average age of population, shopping habits, etc.).

B. Economic Differences—Although cultural differences are often subtle, economic differences can be fairly pronounced. Different economies (market economies vs. planned economies) require different strategies for success. Planned economies require establishing a close relationship with the government. In mixed economies firms must be aware of when and to what extent government is involved.

C. Legal and Political Differences—These include tariffs and quotas, local-content laws, and business-practice laws.

1.

Quotas, tariffs, and subsidies—A quota restricts the number of units of certain products that can be imported into a country. An embargo is a government order forbidding the importation of any units of certain products into a country. A tariff is a tax charged on each unit of certain products that are imported. A subsidy is a government payment to help a domestic business compete with foreign firms.

The pros and cons of protectionism—protecting domestic businesses at the expense of free market competition—are also addressed.

Local-content laws—These require that products sold in a particular 2. country be at least partly made in that country. Examples are given. When they exist within a country, as they do inter-provincially in Canada, they act as trade barriers.

Business-practice laws—What is legal or accepted business practice can 3. differ from one country to another. Examples are given, including discussion of cartels and dumping. Corruption in global trade is also discussed. .

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Chapter 5—The Global Context of Business Cartels a. and dumping—A cartel is an association of producers whose purpose is to control the supply and price of a commodity (OPEC is a prominent example). Dumping refers to the practice of selling a product abroad for less than the comparable price charged in the home country.

IV.

OVERCOMING BARRIERS TO TRADE World trade is flourishing despite the barriers because both organizations and free-trade treaties exist to promote trade.

A. The General Agreement on Tariffs and Trade (GATT)—Its goal is to reduce or eliminate trade barriers such as tariffs and quotas.

B. World Trade Organization (WTO)—Its goal is to promote international trade.

The European Union—The EU includes 27 countries in western Europe that have C. eliminated quotas and set uniform tariff levels on products that are imported and exported within their group.

D. North American Free Trade Agreement (NAFTA)—This agreement took The effect in 1994; its goal is to create a free trade area for all North America (including Mexico). This agreement was replaced in July 2020 when the new United States-MexicoCanada agreement (USMCA) came into effect.

E. Major New Agreements: CPTPP and CETA—The Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP) is an agreement that will increase Canada’s foothold in Asia-Pacific. Canada is one of 12 members. The Canada– European Union Comprehensive Economic and Trade Agreement (CETA) is a comprehensive trade deal with the EU. Before CETA, only 25 percent of Canadian goods were duty-free in the EU. With CETA, 98 percent of EU tariffs are now duty-free and eventually 99 percent of tariffs will be eliminated.

Other Free Trade Agreements Around the World—Mercosur includes Argentina, F. Brazil, Uruguay, and Paraguay. Several other regional trade associations have been formed; these include the ASEAN Free Trade Area, the Asia-Pacific Economic Cooperation, The Economic Community of Central African States, and the Gulf Cooperation Council (several countries in the Mideast).

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Part 1—Introducing the Contemporary Business World QUICK QUESTIONS 1.

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

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

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5.

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What countries are included in BRICS? How do the concepts of comparative advantage and absolute advantage differ?

How might a firm benefit from global outsourcing?

What are licensing arrangements?

What is the difference between an international firm and a multinational firm?

What are the arguments for and against protectionism?

Why are cartels and dumping illegal in Canada?

IN-CLASS EXERCISES Exercise #1: Shoes in the Global Marketplace Activity Overview: This activity asks students to think about why certain countries produce labour-intensive products more than others in the global marketplace.

Time Limit: 20 minutes What to Do: Ask students to remove their shoes and find the country where it was made. Go around 1. the class and keep a tally of country of origin. Most students will have shoes from China. (5 minutes) 2.

Ask students why they think shoes are often made in China. Possible answers include low wages and a workforce willing to perform this type of work. (5 minutes) 3.

Examine how other countries on the list are similar to China. Point out that the production of shoes is labour intensive and cost savings can be significant. (10 minutes) 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 sunglasses or handbags.

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Chapter 5—The Global Context of Business 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.

Exercise #2: Assessing Your Own Culture Activity Overview: Students often think of how different other cultures are compared to the Canadian culture. This discussion helps students recognize how different Canada’s culture seems to business managers from other countries.

Time Limit: 20 minutes What to Do: Ask students to form groups of three or four people.

1.

2. student groups identify parts of Canada’s culture that might appear interesting, Have strange, or uncomfortable for a businessperson from overseas (international students in your class this will add to the reality of the discussion).

Don’t Forget: Ask students how many of them have had experience with foreign business managers.

Determine how that experience influenced their responses in this exercise.

Wrap-Up: Bring the discussion to a close by asking students for suggestions as to how to acclimate business managers to different cultures. Input from foreign students will be very useful, so be sure to elicit their responses.

Exercise #3: All the Jobs Are Going South!

Activity Overview: This activity is designed to get students thinking about the pros and cons of USMCA. Time Limit: 30 minutes What to Do: 1.

Assign half the class to argue the pros of USMCA (which replaces NAFTA) and half the class to argue the cons of USMCA on the Canadian economy. Split each half into three-member groups, with each group making a list of key points to support its view; this will provide variety later in the classroom discussion. (15 minutes) 2.

Ask each group on both sides of the argument to share their views in a classroom discussion. (15 minutes) Don’t Forget: .

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Part 1—Introducing the Contemporary Business World Remind students to stay focused on their specific side of the argument. Because so much information is available regarding USMCA, you may want to allow a day or two for students to research the topic prior to discussion. This is particularly important given the recent pressure the U.S. has put on Canada as the U.S. attempts to get a more favourable agreement.

Wrap Up: Most students will agree that USMCA is achieving its purpose in creating a more active North American market. However, those students arguing against USMCA will likely focus on individuals who have lost their jobs and those communities that have suffered as a result of businesses moving to Mexico or the U.S. Remind students that it is especially difficult to classify something as complicated as USMCA as simply “good” or “bad.”

Exercise #4: Finding Your Place Activity Overview: This activity encourages students to apply global business strategies to a small-business situation.

Time Limit: 30 minutes What to Do: 1.

Divide students into groups of three and ask them to read and follow the instructions for the Building Your Business Skills exercise found at the end of Chapter 5. (20 minutes) 2.

Reassemble the class as a whole and moderate a discussion of the Follow-Up Questions.

Each group should share input. (10 minutes) Don’t Forget: Every possible international strategy has its pros and cons. What may appear to be the best option to some students may not appear so to others.

Wrap-Up: Wrap up the discussion by reminding students that each decision that Lang is considering brings its own set of challenges and opportunities.

Exercise #5: When in Rome . . .

Activity Overview: This activity encourages students to stop and think about their own culture.

Time Limit: 20 minutes What to Do: 1. students to assume they have just met a foreign manager who has recently moved to Ask Canada to manage a company that sells swimwear. The manager has stated, “I know very little about Canadians and the Canadian culture. What can I expect?” How would students answer this manager’s question? (20 minutes) .

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Chapter 5—The Global Context of Business Don’t Forget: Students’ comments will vary somewhat, depending on where in Canada they are living.

Wrap-Up: Common responses will include a discussion of the social and cultural environments in Canada.

The political and legal environments will also present some distinct differences between Canada and other countries.

Exercise #6: Sharpening Your Communication Skills Activity Overview: Languages never translate on a word-for-word basis. When doing business in the global marketplace, choose words that convey only their most specific meaning. Avoid using slang or idioms (words that can have meanings far different from their individual components when translated literally).

Time Limit: 20 minutes What To Do: 1.

Organize students into 3-person groups and have them list 5 examples of slang (in their own language) that would probably be misinterpreted or misunderstood during a business conversation with someone from another culture. Next to each example, have them suggest other words that might be used to convey the same message. Make sure the alternatives mean exactly the same as the original slang or idiom. (20 minutes) Don’t Forget: Have the groups compare their lists with the lists of other groups.

Wrap-Up: Remind students of the importance of cross-cultural communication in an increasingly globalized world.

Exercise #7: Stories About the World Economy Activity Overview: This exercise is designed to help students gain a broader understanding of how products they are familiar with are marketed and used in other countries.

Time Limit: 20 minutes What To Do: 1.

Ask several international students or students who have travelled extensively to share stories of different products and marketing approaches that are used in other countries and compare them to the approaches used in Canada. Topics that usually elicit engaging personal stories include things like the different taste of Coca Cola in different countries, more frequent .

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Part 1—Introducing the Contemporary Business World use of nudity in European advertising, and different menu items at McDonald’s in different locations around the world. (20 minutes) Don’t Forget: Caution students about making value judgments about how worthwhile or how effective they think the differing approaches are in different countries.

Wrap-Up: Ask students to write down three basic principles about international business that they have learned because of listening to the discussion.

TEACHING TIPS 1. economy of one nation can greatly impact the economies of neighbouring nations.

The Moderate a discussion focusing on how the economic activity of the U.S. has affected Canada.

Consider both the positives and negatives.

2. textbook gives several examples of approximate absolute advantage: Saudi oil, The Canadian timber, and Brazilian coffee. Although it is wise to stress that "true examples of absolute advantage are rare," the class may want to play around with the concept, nevertheless.

Here are a few starters: South African diamonds and Australian wool. Ask the class to come up with additional candidates.

3.

Imagine that there is a nation that has absolute advantage in EVERY product that it produces. Ask students if such a nation can gain anything at all by engaging in trade with another nation.

Have 4. the students monitor the Canadian dollar in terms of some of the other major currencies of the world over the term. Since there are several ways to access this information, perhaps form student groups that are each responsible for collecting the information from different sources (e.g., print, electronic, etc.).

5.

A Canadian firm that tiptoes into international business by opening a branch office is faced with a major decision. To what extent should the business staff the branch office with our tried-and-true Canadian employees? Here are a few suggestions for getting the discussion started. If every Canadian we send over to the branch office in, say, France is totally fluent in French, will we gain anything by hiring French citizens for the office? Why or why not? Can the high standards of the firm and the corporate culture be maintained if we bring in many French employees? Should we demand that any French persons employed by our branch be fluent in English? Why or why not?

6.

As a Canadian, when you're travelling in a foreign country, there is a comforting feeling

that comes from walking into a unit of a familiar fast-food chain from back home. For this reason, Canadian tourists can be seen flocking to such franchises. Now, here is a question to throw out to the class: Can a fast-food franchise in a major European city like Paris be financially successful by specifically catering only to Canadian tourists? On the other hand, .

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Chapter 5—The Global Context of Business would such a franchise be wise to concentrate on meeting the needs of the local populace? Such a franchise must answer these questions as a part of establishing its strategy for success.

7. is a thought related to the previous tip and providing perhaps an answer to questions Here posed there. A Canadian in his or her own home city may see a sign containing strange symbols situated in the window of a shop. The symbols translate as: "Thai language spoken fluently in this shop." To the Canadian, the sign has no significance and is not a means of drawing the Canadian into the shop. However, to a person from Thailand that sign is a lighthouse of hospitality, a welcome port in a storm. To attract Canadian customers, the Thai shop must devise another sign.

8. be successful, a firm must first determine what consumers want and need. Such a To process can be surprising costly and time-consuming. When such a process is undertaken in a foreign culture, the task can be even more formidable. At this juncture, the "natives" must be brought in; they know the language with its nuances missed by Canadians, and they know the culture.

9.

Tariffs and subsidies are but two of the devices used by nations to protect their own businesses. Administering these on a basis that seems fair to all nations is absolutely impossible.

Ask the students “What issues has Canada and the U.S. recently engaged in discussion regards tariffs or subsidies?” Recently, the governments of Canada and the U.S. have had issues related to softwood, agricultural products, etc.

10. students to consider the role of quotas, tariffs, and subsidies. What impact do these Ask have on domestic production? What impact do these have on the standard of living within the country?

11. is a provocative statement: “Globalization is in the best interests of multinational Here corporations, not the citizens of Canada. As countries open their borders, we are losing our highly skilled, high paying jobs to other countries, and returning to a dependency on our natural resources. Prices of goods may be lower than they would otherwise be, but so are our incomes.”

Ask students to respond to this statement.

A second provocative statement: “Globalization is in the best interests of Canadian 12. citizens. NAFTA (now called USMCA) has opened the borders to our nearest trading partner, the United States, and the increase in exports has created significant growth in our economy.”

Ask students to respond to this statement.

Ask students to share their opinions on the impact of increased globalization on the 13. economies of the poorest countries in the world. The major players in the world market have been criticized for a lack of interest in such countries and the problems they face, unless there are natural resources available that are of interest. Are these criticisms valid? Is it possible to become involved in the economic activities of these countries without appearing to take advantage of their situations?

14. The current trend is to move manufacturing and service sector jobs to countries that pay much lower wages and benefits, and that have fewer regulations in place. Is this a sustainable .

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Part 1—Introducing the Contemporary Business World solution for corporations wanting to reduce their costs? Will these new jobs bring sufficient funds into these countries to make a difference in the standard of living and therefore the costs of production?

15.

Canada has historically had a positive balance of trade and a negative balance of payments. Ask students to consider the reasons for this, and whether they, as future if not current taxpayers, believe this situation is acceptable. Students should support their answers with their reasons.

16.

Invite a speaker from a local manufacturing firm to come in and talk about how globalization has affected the company's operating procedures and products.

17.

Ask your students to comment on the claim that "English is the international language of business." How would one go about assessing whether this is true?

18.

Numerous qualified observers have noted that Japanese barriers to U.S. imports are far more formidable than U.S. barriers to Japanese imports. Ask your students why they think a powerful country like the U.S. allows this situation to continue.

19. students to predict what would happen if Canada tried to return to the "good old Ask days" (i.e., when domestic businesses were secure behind tariff barriers and sold their products almost exclusively to Canadians). Have them consider the political consequences as well as the economic consequences.

20.

Moderate a class discussion on the question of whether a manager will do better careerwise by staying in Canada or by taking one or more overseas postings during his or her career.

21.

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

22.

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

Make sure students understand that when the value of exports exceeds the value of 23. imports, a country enjoys a trade surplus; when the value of imports exceeds the value of exports, a country suffers from a trade deficit.

24.

Make sure students understand that the balance of payments reflects the inflow and outflow of money because of a country’s balance of trade.

Emphasize that a company must make three decisions when considering globalization: 25.

(1) whether to go international at all, (2) its level of international involvement, and (3) its organizational structure.

26.

Remind students that independent agents often act as sales representatives. .

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Chapter 5—The Global Context of Business Remind students that importing and exporting entail the lowest level of involvement in 27. international operations.

28.

Reinforce that economic differences between countries are often driven by the amount of government involvement in industries.

29.

Reinforce the distinction between a quota—a limitation on the number of products allowed into a country—and an embargo—a complete stoppage of trade between countries.

30.

Remind students that local content laws require that products sold in a country be at least partly made there.

31. the students monitor the Canadian dollar in terms of some of the other major Have currencies of the world over the term. Since there are several ways to access this information, perhaps form students groups that are each responsible for collecting the information from different sources (e.g., print, electronic, etc.).

32.

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

USING THE BOXED INSERTS Opening Case: Car Wars: Canada, USA, Mexico, China, and the World Questions For Discussion 1.How does foreign manufacturing competition drive companies like GM to move manufacturing facilities out of Canada and other developed nations? What other economic factors are at play in such a decision?

The competition for global auto manufacturing is intense and ever changing with countries vying to get a piece of the business and offering incentives in the form of grants and other subsidies to attract and retain companies. The national cost of labour and the additional labour related costs (i.e. insurance) makes domestic manufacturing in Canada very difficult when compared to wages in Mexico, China, and other low-cost countries.

2.What effect will the United States–Mexico–Canada Agreement (USMCA) have on the Canadian auto industry? In answering this question, describe the link between the economic, legal, and political environments in the three countries of USMCA. 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.

The new USMCA deal may have given a new boost to the Canadian auto industry.

According to Craig Basinger, analyst at Richardson GMP, the new terms appear largely favourable for Canada. Here are some of the reasons. Under the newly revised automotive rules of origin require higher levels of North American content (up from 62.5% to 75%). The agreement also requires that 40% to 45% of the labour be completed by workers earning at .

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Part 1—Introducing the Contemporary Business World least USD$16 per hour. The average wage for Mexican auto workers stood at USD $4.50 per hour. Finally, at least 70 percent of the manufacturers steel and aluminium must originate in North America. These new rules and terms were put in place to help protect both Canadian and U.S. jobs.

3. Based on this case, what are the greatest challenges and biggest opportunities for the Canadian auto sector in the next 5 years?

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 domestic forces and globalization.

Here are just a few more of the temporary and long-term challenges and opportunities for companies in the auto industry:  a worldwide shortage of semiconductors, used for computer chips for cars  disruptions in supply chains and shipping complications transformation of the industry as production of electric vehicles ramps up for major   companies artificial intelligence (AI), robotics, and machine learning 4.Look at the latest government statistics about the Canadian auto industry at: https://www.ic.gc.ca/eic/site/auto-auto.nsf/eng/home. In addition, search for some of the latest news articles and stats. Report your findings.

Student answers will vary based on the available research at the time.

E-Business and Social Media Solutions: The Goose is Flying East: CanadaGoose.cn This insert provides information on the iconic Canadian brand Canada Goose, a company that has become famous for its high-quality winter outerwear.

Critical Thinking Question 1.

What factors will influence the long-term success or failure of Canada Goose’s ecommerce venture in China? Find recent articles to see just how strong Canada Goose’s sales are in China.

One approach to addressing this question is for students use the general barriers to international trade that are discussed in Chapter 5 as an organizing scheme for their answer. They should then comment on how each of those barriers may affect a specific product. For example, language is one of several important social and cultural differences that can affect a company’s success in selling its products in a foreign market. Especially for online sales, product descriptions will have to be carefully thought out to make sure that no unintended negative consequences occur due to poor translations. Another example of social and cultural differences might be the willingness of individuals in China to buy clothing online from a foreign seller. Are certain products more amenable to easy sales online? One positive factor is the predicted strong growth rate of sales in the “premium products” segment. Canada Goose is well positioned to .

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Chapter 5—The Global Context of Business capitalize on that trend. Students should work through the economic and legal/political barriers as well and determine which factors are most likely to inhibit sales, and whether any of the factors will actually facilitate sales. For example, legal barriers like quotas and/or tariffs will inhibit sales, but teaming up with Alibaba’s Group Tmall should facilitate sales.

Student answers to the second part of the question will vary, depending on when they take the introduction to business course. There will also be differing interpretations on what constitutes “strong” sales. When assessing student answers, make sure they have a clear time series of sales data, and that they also identify the point in time when the Chinese e-commerce venture started to have an effect. Two other issues that students should mention are (a) the cost of setting up the e-commerce venture relative to the benefit that Canada Goose has gained, and (b) whether or not the margins it has been able to achieve in the e-commerce venture equal the margins they have historically achieved in selling through more traditional outlets.

Entrepreneurship and New Ventures: Women Entrepreneurs Grow Global Critical Thinking Question 1.What specific additional obstacles might women face in taking their entrepreneurial businesses global? In what ways does wegg help female entrepreneurs overcome those obstacles?

As indicated in the mini-case women-owned exporting businesses face unique challenges.

Clealry there are markets where women do not participate or have small roles in the business environment. In other cases, there are stereotypes that can hinder progress. How does a femaleowned business conduct transactions in such nations where such obstacles are blatant?

Delaney stays focused on her original goal: “I wanted to change the landscape for women from being risk-averse to having confidence to go for it—with the appropriate support.”

Disruptions in Business: Brexit: A Symbol of Trade Disruption to Come? Critical Thinking Question 1.

Conduct some additional research and find recent articles on BREXIT. Analyze the pros and cons of this decision based on your findings and the details in this case.

As the world transformed into a global village with integrated supply chains (in recent decades) it has not been without a counter movement. In recent, years we have seen this turn into old nationalist arguments. Every nation sees the benefits of global trade but also wants to control and maintain its national identity and sovereignty over major decisions. Nationalist fears take over in some cases and the bigger picture is ignored. For the UK the experiment came to a drastic course change with the surprising vote that ushered in a new era (Brexit). Since this is a very new course of action the ramifications will take years to fully take hold. Student responses will be based on recent news and available facts at the time. There will be winners and losers from this action.

QUESTIONS AND EXERCISES .

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Part 1—Introducing the Contemporary Business World Questions for Analysis 1.

What are the advantages and disadvantages of globalization from a Canadian consumer’s point of view? From a Canadian manufacturer’s point of view?

For Canadian consumers, there are numerous potential benefits of globalization. For example, new technologies have made international travel, communication, and commerce faster and cheaper than ever before. The prices of foreign goods can be quite low and Canadian consumers benefit from these low prices. Overall, Canadian consumer may experience a higher standard of living as a result of globalization. There are also potential advantages for Canadian businesses, including increased sales and profits made from selling Canadian-made goods in foreign countries.

But of course, these potential benefits may not actually be realized for either Canadian consumers or for Canadian businesses. This will occur if Canadian business practices and Canadian government policies do not increase Canada’s competitiveness in global markets. In that case, the result will be a lower standard of living for Canadians and reduced profitability for Canadian businesses. More generally, critics argue that there are several other disadvantages associated with globalization. These include the possibility of businesses exploiting workers in less-developed countries, and businesses bypassing domestic environmental and tax regulations.

Also, globalization may harm the cultural heritage of less-developed countries.

2. you think that a firm that is operating in many countries is better advised to adopt a Do single global standard of ethical conduct or to adapt to local conditions? Under what kinds of conditions might each approach be preferable?

Whether a firm adopts a single standard of ethical conduct or adapts to local conditions depends on the ethical standards in each country. It is important for an international firm to realize that it is operating in multiple environments. A Canadian firm operating unethically (by Canadian standards) in a foreign country is responsible for its actions in its home country, too.

The argument that the acts were ethical in the host country may not be considered valid. A single standard of ethical conduct would be preferable when one country's ethical standards are clearly more stringent than another. It may then become important for the company to universally adopt the more stringent standard to avoid ethical violations in each country. On the other hand, if adopting a single standard significantly limits the firm's ability to compete in one of its markets, the firm may want to consider adapting its standard to each country. Common business practice (assuming it is legal) in one country may demand that a firm act in ways that may be considered unethical in a different cultural environment.

3.

Explain how it is possible for a country to have a positive balance of trade and a negative balance of payments.

Positive balance of trade means there are more exports than imports while negative balance of payments means there is more money flowing out of the country than into the country. So this is possible in that there are more things leaving the country and therefore means more money flowing out of the country. .

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Chapter 5—The Global Context of Business 4. 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.

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 country.

This question is designed to motivate students to consider the practical implications of the long-standing concepts of absolute advantage and comparative advantage, and of the more recent idea of national competitive advantage. An absolute advantage exists when a country can produce something more efficiently than any other country—in other words, if it can produce a larger output of goods or services using the same or fewer input resources. A country has a comparative advantage in goods that it can produce more efficiently or better than other goods.

For example, if businesses in a given country can make computers more efficiently than they can make automobiles, that nation’s firms have a comparative advantage in computer manufacturing.

In recent years, the theory of national competitive advantage has become a more widely accepted model of why nations engage in international trade. National competitive advantage is stronger when four conditions are evident: (1) factor conditions (the factors of production that were identified in Chapter 1), (2) demand conditions (a large domestic consumer base that promotes strong demand for innovative products), (3) related and supporting industries (including strong local or regional suppliers and/or industrial customers), and (4) strategies, structures, and rivalries (firms and industries that stress cost reduction, product quality, higher productivity, and innovative new products).

Student answers should include a brief discussion of how the products they chose illustrate these concepts. For example, if a student picks Brazilian coffee, the hypothesis will be that absolute advantage is the reason. If a student picks an electronics product from South Korea, the hypothesis will be that South Korea has a comparative advantage in electronics manufacturing because of efficient operations and cheaper labour. The same can be said for imports for a wide range of products that are imported from China. If a student hypothesizes that a certain product is based on national competitive advantage, the four factors influencing that advantage should be identified.

Application Exercises 6.

China is one of the fastest-growing markets in the world. Conduct research to uncover how to best describe China’s economic and social environment.

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Part 1—Introducing the Contemporary Business World China is a very complex country from an economic perspective. In Chapter 1 of the text, the observation was made that during the past few decades, most countries have abandoned communism in favor of a more market-based economy. Even countries like China that still claim to be communist now contain clear elements of a market-based economy. However, in China’s case, the adoption of elements of a market-based economy does not mean that there has been an easing of political control. In 2018, Chinese leader Xi Jinping and his party eliminated term limits which gave him the ability to potentially stay in power for life. This was not a step forward towards a more democratic society.

As noted in the chapter, China’s growth rate is very high, and its GDP is now triple that of the former leader of the Asia-Pacific (Japan). During the past twenty years, China has become known for its dominance in manufacturing and its low wage rates. But now wage rates in China are steadily moving higher, and a large middle class is developing.

In terms of China’s social environment, much has been reported in the press about how China’s leaders are very concerned about the rising expectations of its citizens. The government is therefore attempting to keep the economy growing in order to accommodate these rapidly rising expectations. Some observers argue that China is unstable because its economic and social environments are more consistent with capitalism, yet the political environment continues to be communistic.

7. the website of a major global company such as Coca-Cola and enter some of their Visit international sites. Make sure to choose countries from different parts of the world. What are some of the differences that you see in the international sites? Identify some of the similar themes and report your findings.

Since students will be reporting on a variety of different companies, a diverse set of findings will likely result. Summarize the findings of several students and develop a list of the similarities and differences across the various companies. These can probably be organized under a few general headings (for example, are the companies similar or different in terms of how they view foreign markets, that is, do they focus on differences in the various markets they serve, or do they try to use basically the same approach in marketing their products even if the products are sold in countries with widely different cultures? Material on “International Promotion Strategies” (see Chapter 13) will be helpful here.

The World Bank uses per-capita income to make distinctions among countries. Research 8. and identify at least three countries in the following categories for last year: high-income countries, upper-middle-income countries, lower-middle-income countries, and lower-income countries. In addition, identify the source of the data that you used to draw these conclusions.

Student answers will vary. When assessing student answers, make sure they have properly categorized the countries they have included in each of the four categories on the basis of the World Bank figures provided in the chapter. Also make sure they identify the sources of the data they used.

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Chapter 5—The Global Context of Business The best student answers to this question will be those that (a) go beyond simple categorization and identify qualitative differences among the countries in the different categories, and (b) explain how per capita income creates these qualitative differences among countries.

9.

What attributes of your province or region (cultural, geographical, economic, etc.) would be of interest to a foreign firm thinking about locating there? Visit provincial government sites and find resources that are available for businesses to help them invest in your province. Identify a company that has recently invested in your province. What reasons did they give for their decision?

Student answers will vary depending on the province or region from which they come.

Students may identify a common language, income level, level of unemployment, work ethic, types of skills available, a large concentration of people with a specific ethnic background, or level of education, among other things. For example, one company relocated to a region of Canada that had a low average income, expecting there would be a significant proportion of the population that would be happy to work in jobs that paid less than workers in its current location were willing to accept.

10. Identify a manufactured product (car, plane, snowmobile, electronic device, etc.) you think is made in Canada. Do some research and try to determine where the component parts are made. How much of your chosen product is made in Canada? 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 Canada. They may also address the ethics of labeling a product as “Made in Canada” when in fact it is merely assembled in Canada.

TEAM EXERCISES Building a Business: Continuing Exercise 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.

Building Your Business Skills: Weighing the Trade-Offs Follow-Up Questions 1.

Considering the interests of all stakeholders, what is the best option in this situation?

This exercise should generate a lively discussion since some students may have experienced outsourcing first hand or they know someone whose job has been outsourced. The eventual option that students pick is not as important as the analysis they conducted to reach their .

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Part 1—Introducing the Contemporary Business World conclusion. Some students will look at this issue fairly simplistically and conclude that Canada and its people are hurt when jobs are outsourced, and some foreign country and its people benefit when it receives outsourced jobs. But a more global view should be encouraged in order to explore all aspects of this situation. This can be achieved by asking certain questions. For example, is it true that when a job is outsourced that a foreign country benefits and Canada is hurt? Or might it be the case that such outsourcing is part of an increasing worldwide efficiency in the production of goods and services which benefits everyone? Is there a difference between outsourcing production jobs and service jobs? Questions like these are complex and perhaps provocative, but they should be considered by the group.

In conducting their analysis, the group should make specific reference to the various stakeholders of the organization (employees, investors, suppliers, the local community, etc.) and how they may be differentially affected by the outsourcing decision. For example, investors may benefit if the company is able to lower its costs by outsourcing, but support workers will be hurt because many of them will lose their jobs.

2.

Develop a group response to the following question: Can your team identify other solutions to this dilemma?

It is difficult to specify in advance what kinds of creative solutions the group may come up with, but each suggestion should be analyzed in terms of its feasibility, its impact on profits, and its impact on the various stakeholders of the company. Much of the analysis that the group did in Question #1 when analyzing the differential effects on various stakeholders will be helpful in assessing possible solutions to the dilemma posed in this case.

Exercising Your Ethics: Team Exercise: Paying Attention to Foreign Practices Activity Overview: This activity is designed to introduce students to the ethical dilemmas that can arise when a company decides to begin operations in a foreign market.

Time Limit: 45 minutes What to Do: 1.

Divide students into four-member teams and ask them to read and follow the instructions for the Exercising Your Ethics exercise (Paying Attention to Foreign Practices), which is found at the end of Chapter 5. Students should choose one of the two different roles in the exercise. (20 minutes) 2.

Reassemble the class as a whole and discuss what disagreements came up within the groups. How did the role they were assigned affect their perspective? (15 minutes) Possible answers to the Questions for Discussion are as follows: 1.

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 Canadian attitude about ethical behaviour, .

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Chapter 5—The Global Context of Business which is codified in law (i.e., never pay bribes), to a country that doesn’t consider bribes to be unethical or illegal?

2.

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 Canadian law forbidding bribery domestically or abroad, and the possibility that some managers would hire an intermediary to “do the dirty work” for them.

3.

What would you do?

Answers will vary, but make sure that students address the main ethical issues discussed in the exercise.

Don’t Forget: Remind students not to stray from their assigned roles when completing the exercise.

Wrap-Up: Wrap up the exercise by reminding students that increasing globalization means that situations like this one are likely to arise for Canadian companies that are expanding into global markets.

On the other hand, perhaps there will be a move toward more uniform attitudes toward prohibiting bribes as the world economy matures.

CLOSING CASE Couche-Tard: Canadian (Global Player) Seeks Further Expansion This case describes how domestic and global acquisitions over the past two decades have made Couche-Tard the largest company in Canada.

Questions for Discussion 1.

What motivates Couche-Tard to continue to enter new foreign markets? What are some of the obstacles that they may face?

There are two reasons why Couche-Tard continues to enter foreign markets. First, the company wants to grow sales revenue and profits. Second, it wants to improve the operations of the companies it acquires so they will appeal to more consumers (which, in turn, helps reach the first goal of increasing sales revenues and profits).

2.

What role do social, economic, and political factors play in the successful expansion and management of a network of convenience stores around the world?

Student answers to this question should be based on information provided in the text under the heading “Barriers to International Trade.” These social, economic, and political factors apply not only to convenience store operations, but to the operations of all business firms. The .

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Part 1—Introducing the Contemporary Business World following paragraph is illustrative of what a reasonable answer is regarding social factors.

Student answers should cover social, economic, and political factors.

Firms involved in international business must understand the society and culture of the foreign country in which it is operating. Understanding the culture means knowing the nuances of (a) language (subtle differences in meaning can cause many problems, including the inappropriate naming of products); (b) taking into account the average height of people in various foreign countries (obviously important when selling clothing, but also important for a variety of other products); (c) taking into account differences in the average age of the local population (countries with growing populations tend to have a high percentage of young people, and electronics and fashionable clothing products would likely sell well, but countries with stable or declining populations tend to have more old people, so generic pharmaceuticals might be more successful in such markets); (d) taking into account subtle value differences (in France, many people shop almost daily, so fresh ingredients are important, but in Canada prepared and frozen foods are popular); and (e) knowing that business activity can be influenced by very subtle behavioural differences ( for example, crossing your legs in a business meeting in Saudi Arabia is considered inappropriate, because showing the sole of your foot is viewed as an insult to the other people in the room).

3.

How might government policies (Canadian and foreign) hurt or help Couche-Tard as it continues to expand globally?

There are many different government policies (Canadian and foreign) that may be in place at any given time, and some of them will facilitate Couche-Tard’s operations and some of them will inhibit it. On the positive side, either Canadian or foreign governments may pass laws that favour companies like Couche-Tard (e.g., reducing government red tape which makes it easier to start up and to operate a business). On the negative side, government may put tariffs on imported goods which effectively raises the price of those goods so high in the foreign country that they are non-competitive. The best student answers here will incorporate the material in Chapter 1 which describes the various roles that governments play, as well as the issue of business-government relations in general. Those government roles may be perceived to help or hinder a given company’s operations, depending on the details of the situation. For example, if corporate income tax rates in Canada are higher than they are in the U.S., Canadian companies may have trouble effectively competing with U.S. companies in the U.S. market. If Couche-Tard has to pay higher corporate taxes than some its competitors in foreign countries have to pay their governments, then Couche-Tard essentially has a higher cost of operations and may find it difficult to be price-competitive.

As you will read in this chapter, the ideological debate between protectionism and free 4. trade is heating up. Which side of the debate do you think the directors of Couche-Tard are on?

Explain the practical reasons for your answer from their perspective.

Directors of Couche-Tard are likely on the side of free trade because they have operations in so many countries, and because the company clearly has a strategy of acquiring companies in many different countries. But two qualifications should be noted. First, the directors recognize that free trade cuts both ways, i.e., while Couche-Tard can gain access to customers in foreign .

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Chapter 5—The Global Context of Business countries under free trade agreements, it is also true that companies located in foreign countries can get access to Canadian consumers if their country has a free trade agreement with Canada.

That means foreign companies could pose a competitive threat to Couche-Tard’s domestic operations. Second, Couche-Tard’s strategy of acquiring foreign companies means that they can effectively sell to foreign consumers even without any free trade agreement being in place (because the foreign retail outlets are already operating).

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Part 1—Introducing the Contemporary Business World CRAFTING A BUSINESS PLAN PART 1: THE CONTEMPORARY BUSINESS ENVIRONMENT Assignment Overview: The first part of the business plan project asks students to generate a “big idea” for a business.

Students will usually fall into one of two categories. The first are those who are very worried at the prospect of completing the project. These students often need help in generating an idea for their business. The second type of student already dreams of owning a business. These students are quite responsive to feedback and find the project especially rewarding.

Files to Provide Students:

• Because this is the first part of the project, you may want to give students a copy of the Student FAQs for the business plan project (see below).

• ive students a clear explanation of the project, your expectations for how it should be G completed, and due dates. For a sample syllabus business plan project outline as well as an actual sample business plan, see below.

• For this part of the project, students will be asked to complete Part 1: The Contemporary Business World.

Part 1 Estimated At-Home Completion Time: 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 wish to simply give a range regarding the number of pages you expect them to submit for the assignment. Keep in mind that students who display a grasp of the concepts and demonstrate higher-level thinking may write a total of 20 pages or more for the total project. For Part 1, expect an approximate range of 2 to 4 pages from most students.

The four documents listed below are found on the pages that follow:    

Sample syllabus business plan project outline Student FAQs for the business plan project Student business plan project template Sample business plan

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SAMPLE SYLLABUS BUSINESS PLAN PROJECT OUTLINE Part 1: Introducing the Contemporary Business World 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.

Suggested due date:

End of week 5

Part 2(a): The Business of Managing This part of the business plan asks students to think about goals of their business, some internal and external factors affecting the business, and the organizational structure of the business. As part of the assignment, students will perform a basic SWOT analysis for their business and create an organizational chart. Students will also explain the role of each employee, and how each relates to the others.

End of week Suggested 7 due date: Part 2(b): The Business of Managing (continued) 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(a) 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 2(b) of the Business Plan also asks students to consider how they’ll lead employees and keep them happy and motivated.

Suggested due date:

End of week 8

Part 3: Managing Information In this section, students are asked to examine various factors relating to operating their business, and to think about their business in terms of information technology needs and costs. Students are also asked to complete a balance sheet and income statement for their business.

Suggested due date:

End of week 10

Part 4: Managing Marketing 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, students must connect those described features and benefits to a targeted buyer. Once the targeted buyer has been identified, students will describe advertising and promotional efforts to get the buyer’s attention.

Suggested due date:

End of week 12

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Part 1—Introducing the Contemporary Business World Part 5: Managing Financial Issues This part of the business plan asks students to consider how they’ll finance their business as well as create an executive summary for their plan.

Suggested due date: End of week 14

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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 of the things 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 and brand name that already exists. 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 that 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 have answered 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 parts of the business plan project is fully explained in your textbook. These assignment instructions fall at the end of Chapters 5, 9, 11, 14, and 16.

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 that you will be using the same Business Plan 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 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? .

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Part 1—Introducing the Contemporary Business World It depends on the business that you will be starting. A good explanation normally requires between 12 to 15 pages. Most sections will average 2 to 3 pages.

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STUDENT BUSINESS PLAN PROJECT TEMPLATE PART 1: INTRODUCING THE CONTEMPORARY BUSINESS WORLD Business Name What is the name of your business?

Hint: When you think of the name of your business, make sure that 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 that your business plan will look more professional.

Description of Business What will your business do?

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

Form of Business Ownership What form of business ownership (sole proprietorship, partnership, or corporation) will your form? business take?

Why did you choose this For more information on the types of business ownership, refer to the discussion of the Hint: different forms of business ownership in Chapter 4.

Ideal Customer Briefly describe your ideal customer. What are they 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 Why will customers choose to buy from your business, instead of your competition?

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

Ethical Issues All businesses have to deal with ethical issues. One way to address these issues is to create a code of ethics. List three core (unchanging) principles that your business will follow.

To help you consider the ethical issues that your business might fact, refer to the Hint: discussion in Chapter 3.

Social Responsibility A business shows social responsibility by respecting all of its stakeholders. What steps will you take create a socially responsible business? to Hint: To help you consider issues of social responsibility, refer to the discussion of social responsibility in Chapter 3. 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 Do you think that you’ll sell your product in another country? If so, what countries would you choose, and why?

What challenges will you face?

Hint: To help you consider issues of global business, refer to Chapter 5. Consider how you will expand internationally (i.e. independent agent, licensing, etc.). Do you expect global competition for your product? What advantages will foreign competitors have?

PART 2(a): THE BUSINESS OF MANAGING Mission Statement Provide business a brief mission statement for your Refer to the discussion of mission statements in Chapter 6. Be sure to include the name of Hint: your business, how you will stand out from your competition, and why a customer will buy from you.

Business Goals Consider the goals for your business. What are three of your business goals for the first year? goals?

What are two intermediate to long-term Refer to the discussion of goal setting in Chapter 6. Be as specific and realistic as Hint: 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 on selling a good, how many do you hope to sell?

SWOT Analysis Perform a basic SWOT analysis for your business, listing its main strengths, weaknesses, threats. opportunities, and We explained above what factors you should consider in your basic SWOT analysis. Look Hint: around at your world, talk to classmates, or talk to your instructor for other ideas in performing your SWOT analysis.

Strengths Weaknesses Opportunities Threats Management Who will manage the business?

Hint: Refer to the discussion of managers in Chapter 6. Think about how many levels of management as well as what kinds of managers your business needs.

Organization Chart Show how the “team” fits together by creating a simple organizational chart for your business.

Make sure that you organizational chart indicates who will work for each manager as well as title. each person’s job Most businesses start off quite small. However, as you create your organizational chart, Hint: consider what your business will look like in the future. What different tasks are involved in the .

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Chapter 5—The Global Context of Business business? Who will each person report to in the organizational structure? Refer to the discussion of organizational structure in Chapter 7 for information to get you started.

PART 2(b): THE BUSINESS OF MANAGING Corporate Culture What do you see as the “corporate culture” of your business? What types of employee expect? behaviours, such as organizational citizenship, will you Will your business demand a casual environment or a more professional environment?

Hint: Refer to the discussion on corporate culture in Chapter 6, and the discussion on organizational citizenship and other employee behaviours in Chapter 9.

Leadership Philosophy 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 Looking back at your organizational chart in Part 2(a), briefly create a job description for each member. team As you learned in Chapter 8, a job description lists the duties and responsibilities of a Hint: 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? (Note that if your business is very large, you should ask your instructor how many positions he or she would like you to create job descriptions for.)

Job Specifications Next, create a job specification for each job, listing the skills and other credentials and effectively. qualifications needed to perform the job As you write your job specifications, consider what you would write if you were making Hint: 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: Insert Job Title #3: Insert Needed Skills/Credentials/Qualification for Job: Training Employees 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 Chapter 8. Will you offer your employees on-the-job training? Off-the-job training? Vestibule training?

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Part 1—Introducing the Contemporary Business World Compensation A major factor in retaining skill workers is a company’s compensation system—the total package of rewards that it offers employees in return for their labour. Part of this compensation system includes wages/salaries. What wages or salaries will you offer for each job? Why did you decide on that pay rate?

Hint: Refer to Chapter 8 for more information on forms of compensation. You may also want to check out sites like www.salary.ca which includes a salary calculator you can use to determine how much people with different job titles are making in your area and across Canada.

Incentives As you learned in Chapter 8, incentive programs are special programs designed to motivate high performance. What incentives will you use to motivate your workforce?

Be creative and look beyond a simple answer such as giving pay increases. Ask yourself, Hint: who are my employees and what is important to them? Refer to Chapter 8 for more information on the types of incentives you may want to consider.

PART 3: MANAGING OPERATIONS AND INFORMATION IT Resources require? kind What of IT resources will your business Hint: about the employees in their business and what they will need in order to do their Think 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 Appendix B for a discussion on IT resources that you may want to consider.

Customer Services How will you use information technology to keep track of your customers and potential customers?

Many businesses—even small businesses—use databases to keep track of their customers.

Hint: Will your business require a database? What about other information systems? Refer to Appendix B for more information on these topics.

Cost of Doing Business 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: Insert the costs associated with doing business in the following table. 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 below: 

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 information on government websites such as http://www.bsa.canadabusiness.ca/ can also be helpful in answering this question. .

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 Salaries: Refer to the organizational chart. How much will each employee earn? How many hours will each employee be needed on a weekly basis? Once you’ve determined the weekly cost, then expand it to a monthly and a yearly cost.  Supplies: Refer to the floor plan. How much will all of the computers, equipment, and furniture cost? What kinds of general office supplies will you need? Most prices for this information can be found on an office supply website such as http://www.staples.ca/.  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 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, then this cost may be similar to what a homeowner pays. However, if your business involves making a product, then the costs will be significant.  Insurance: This value will be affected by the nature of the business. More equipment will usually mean higher insurance costs.

Expected Monthly Cost

Expenses Rent Salaries and Wages Supplies: Technological, Equipment, and Furniture (computers, copy software, machine, desks, chairs, etc.), other Advertising and Other Promotions Utilities: Electricity, etc.

Telephone

Heat,

and

Internet Insurance .

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Expected Yearly Cost

Part 1—Introducing the Contemporary Business World Other (specify) Other (specify)

Expected Revenue How much will you charge for your product? How many products do you believe that you can sell in one year (or how many customers do you think your business can attract)? Multiply the price that you will charge by the number of products that 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. You will use the amounts you calculate in the costs and revenues questions in this part of Hint: the plan in the accounting statements in the next part, so be as realistic as you can.

Income Statement and Balance Sheet Create a balance sheet and an income statement (profitand-loss statement) for your business. Note that you will have two options for creating these reports. The first option is to use the Microsoft Word versions that are found within this Business Plan Student template (shown below). The second option is to use the specific Microsoft Excel templates created for each statement. You’ll find these templates in the file called Business Plan Part 3 Spreadsheets, which is available with the MyLab Intro to Business for your text at https://www.pearsonmylabandmastering.com/northamerica/mybizlab/. These Excel files are handy 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.” Note that the Excel templates also include helpful hints as to where you can get the information you need to complete the balance sheet and income statement.

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Chapter 5—The Global Context of Business 12-Month Income Statement (Profit & Loss Statement) June

July

Aug.

Sept.

Oct.

Nov.

Revenue (Sales) Category 1 Category 2 Total (Sales) Revenue 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 .

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Dec.

Jan.

Feb.

Mar.

Apr.

May

YEARLY

Part 1—Introducing the Contemporary Business World (specify) Total Expenses Net Profit

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Part 1—Introducing the Contemporary Business World Balance Sheet Assets Current Assets Cash in Bank Cash Value of Inventory Prepaid Expenses (insurance) Total Current Assets Fixed Assets Machinery & Equipment Furniture & Fixtures Real Estate / Buildings Total Fixed Assets Total Assets

Liabilities & 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 & Net Worth Floor Plan Create a floor plan of the business. What does it look like when you walk through the door?

When sketching your floor plan, consider where equipment, supplies, and furniture will Hint: .

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Part 1—Introducing the Contemporary Business World be located. Ask your instructor how they would like you to submit the floor plan for your business.

Raw Materials and Supplies Explain what types of raw materials and supplies will you 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 in Chapter 10 for information to get you started.

Quality Assurance 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)?

Refer to the discussion of quality improvement and Total Quality Management in Chapter Hint: 10 for information to get you started.

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Chapter 5—The Global Context of Business PART 4: PRINCIPLES OF MARKETING Target Market Describe your target market in terms of age, education level, income, and other demographic variables.

Refer to Chapter 12 for more information on the aspects of target marketing and market Hint: segmentation that you may want to consider. Be as detailed as possible about who you think your customers will be.

Product Features and Benefits Describe service. the features and benefits of your product or As you learned in Chapter 13, a product is a bundle of attributes—features and benefits.

Hint: 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 How crowd? will you make your product stand out in the Hint: are many ways to stand out in the crowd, such as a unique product, outstanding There 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 What pricing strategy will you choose for your product, and what are the reasons for this strategy?

Refer to Chapter 14 for more information on pricing strategies and tactics. Since your Hint: 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 Where will customers find your product or service? That is, what issues of the distribution mix consider? should you If your business will sell its product directly to consumers, what types of retail stores will Hint: sell your product? If your product will be sold to another business, which channel of distribution will you use? Refer to Chapter 14 for more information on aspects of distribution you may want to consider.

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Part 1—Introducing the Contemporary Business World Advertising How will you advertise to your target market? Why have you chosen these forms of advertisement?

Marketers use several different advertising media—specific communication devices for Hint: carrying a seller’s message to potential customers—each having its advantages and drawbacks.

Refer to Chapter 13 for a discussion of the types of advertising media you may wish to consider here.

Promotions What other methods of promotion will you use, and why?

There’s Hint: 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 Chapter 13 for ideas on how to promote your product that go beyond just advertising.

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Chapter 5—The Global Context of Business PART 5: MANAGING FINANCIAL ISSUES Start-Up Costs How much money will you need to get your business started?

Hint: Refer back to Part 3 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 How will you finance your business? For example, will you seek out a bank loan? Borrow from friends? Sell stocks or bonds at the outset, or as your business grows?

Refer to Chapters 15 and 16 for information on securities such as stocks and bonds.

Hint: Refer also to Chapter 4 for more information on sources of short-term and long-term funds.

Executive Summary 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:  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 of 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 and paste it so that it comes at the beginning of your business plan, as the very first element.

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SAMPLE BUSINESS PLAN THE FRIENDLY CAFÉ II Executive Summary The Friendly Café II will be located in the town of Mt. Vernon, a city of approximately 12,000 people. The café will offer a nostalgic atmosphere for people of all ages. We will serve a large variety of home-cooked meals and desserts.

The mission of The Friendly Café II is to provide a quality product at a quality price served by quality people. We will demonstrate our devotion to the community through customer service and community relations.

Our ideal customers are many. Some of them will be middle class families with young children.

These are people who earn a modest income. Our prices and convenience are reasons to visit our café. Our other ideal customers will be retirees. These are folks who may drop in for lunch or an early dinner. Some retirees have a good income from their retirements, but some may be on a fixed income.

Customers will visit us for several reasons. First is the quality of the food at an affordable price.

People want to believe that they are getting a good deal. We are dedicated to serving hot, delicious meals at a fair price.

Our café is also part of the local history. The original Friendly Café was owned by my greatgrandfather and was open from the 1940s until the late 1960s. In fact, we plan to rent the old building that housed the original café. Visitors will remember the original café and be curious to see the new version. We will have pictures from the old café on the walls, which will take diners on a trip down memory lane.

Our business will be a partnership. My family members and I will run the café together. We are a close family, and we work well together. Financially, we could not open the café without each other.

Each partner will serve as a manager in the café. My mother will be the floor manager, my aunt will be the grill manager, and I will handle the accounting for the café.

Our business will thrive for a number of reasons. First, the city of Mt. Vernon has a stable population, with a number of healthy industries. Secondly, the local population is somewhat older than the national average. We believe that this segment of the population longs for “days gone by.” Our nostalgic theme will appeal to this particular segment of the population.

Our skills and knowledge in food service, combined with our connections to the community, will make this business a sound investment.

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Chapter 5—The Global Context of Business PART 1: INTRODUCING THE CONTEMPORARY BUSINESS WORLD Business Name The Friendly Café II Description of Business The Friendly Café II will be located in the small town of Mt. Vernon, where I grew up. The café will offer a nostalgic atmosphere for people of all ages and will serve a large variety of homecooked meals and desserts.

Form of Business Ownership The business will be a partnership, meaning that my family members and I will run the café together. Each partner will also serve as a manager and has special skills that they can bring to the business. My mother will be the floor manager. She has work experience in this area and knows how to organize floor space and is good with customers. My aunt has worked at a number of restaurants in the grill area and will therefore serve as grill manager. She will handle orders and manage all backroom employees. These two managers can substitute for one another so that they both do not have to be in the café everyday. Finally, I will handle the accounting responsibilities for the café. I am currently completing my degree in accounting, and I will also have two clerks that will help me keep all accounts up-to-date and accurate.

Ideal Customer Our ideal customers are many. Some will be middle-class families with young children. These customers will visit our café for its reasonable prices and convenience. Our other ideal customers will be retirees who may drop in for lunch or an early dinner. We will have special promotions focused on each of these two groups that will be discussed later.

Our Advantages Customers will visit us for several reasons. First is the quality of the food and the affordable price. People want to believe that they are getting a good deal. We are dedicated to serving hot, delicious meals at a fair price.

Our café is also part of the local history. The original Friendly Café was owned by my greatgrandfather and was open from the 1940s until the late 1960s. We plan to rent the old building that housed the original café. Visitors will remember the original café, and be curious to see the new version. We will have pictures from the old café on the walls, which will take diners on a trip down memory lane.

Ethical Issues Most restaurants deal with suppliers. We will be no different. Many restaurants must make a choice between buying higher-priced produce and supplies or buying lower-priced produce and supplies. The ethical issue facing The Friendly Café II therefore is the choice between buying quality products and earning a little less money, or buying lower-quality products and perhaps earning a higher profit. In the long run, we believe that a higher-quality product will lead to higher profits because our customers will notice the difference and come back for more. We also believe we must behave ethically toward our employees, treating them fairly at all times.

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Social Responsibility Our business is in a small town. My family grew up in this town, so we feel an obligation to “give back” to the community. Our family owns a farm, so we all feel a strong bond with animals. Because of this, we are actively involved with the local Humane Society. And because our business is selling food, we believe that the best way to connect our business with our hometown is to provide free, hot meals to a local charity during the holiday season.

Global Issues The business will be a local one, so at this point in time we do not foresee there being any global issues we will need to address.

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Chapter 5—The Global Context of Business PART 2(a): THE BUSINESS OF MANAGING Mission Statement The mission of The Friendly Café II is to provide a quality product at a quality price served by quality people. We will demonstrate our devotion to the community through customer service and community relations.

Business Goals First Year Goals: 1.

2.

3.

To break even To build a strong customer base To minimize employee turnover

Intermediate to Long-Term Goals: 1.

To earn net profits of $25,000 within five years 2.

To open a second restaurant in a neighbouring community within five years SWOT Analysis for The Friendly Café II

Weaknesses

 Highly motivated management  Insufficient money for start team up Small store will limit our  Expertise in the business  growth Located in a small Restaurant is familiar to the town, not easily reached by community  drop-in customers  Community-oriented business

Organizational

Environmental

Strengths

Opportunities

Threats

 Customers attracted to  Economy may weaken in nostalgia-themed products communities that depend on  Markets trending away from industry fast-food restaurants  More restaurants opening in  Retirees having more the community discretionary income

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Part 1—Introducing the Contemporary Business World Management There is one level of management in the restaurant, with three different types of managers as follows: Floor Manager Grill Manager Accounting Manager All managers are also co-owners.

Organization Chart The organization chart for The Friendly Café II is quite simple given that it contains only one level of management. As the business grows, further levels of management and more employees may be added.

Owner/Floor Manager

Owner/Grill Manager

Owner/Accounting Manager

Servers/Hosts

Cooks/Dishwashers

Accounts Payable Clerks

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Chapter 5—The Global Context of Business PART 2(b): THE BUSINESS OF MANAGING (CONTINUED) Corporate Culture Our culture is reflected in our mission statement. We want excellence in every part of our restaurant, and every employee must understand how to achieve this standard once they have completed their training. Every employee must have a commitment to pleasing the customer, both in the quality of the food and in the overall experience they will have once they are inside the store.

Our employees will be encouraged to improve the quality of the restaurant through their own suggestions and input.

We are also committed to improving our community through participation in events that make our hometown a better place to live.

Leadership Philosophy We believe that a participative approach will work well with our family-oriented business.

Because each family member will have an equal stake in the restaurant, each family member (manager) will have an equal input into the operation of the store. Naturally, each manger will have an area of specialty, which will allow them to have control over their assigned functional area. We will also encourage input from our employees, inviting them to participate in some of the decision making.

Job Descriptions The job descriptions at the Friendly Café II will be as follows: Floor Manager: The floor manager will be responsible for the “front end” of the café. This includes the staffing and training of servers and hosts. The floor manager will also be involved with customer relations. The floor manager will also help coordinate and work with those in the grill area to ensure customer satisfaction. Finally, the floor manager will be responsible for ordering any new non-kitchen inventory that the café needs, including new tables, chairs, dishes, and so on.

Grill Manager: The grill manager will be responsible for the “back end” of the café. This includes the staffing and training of cooks and dishwashers. The grill manager will also be involved with customer relations by overseeing that all food served is of high quality. The grill manager will also work with the floor manager to help coordinate with those on the floor to ensure customer satisfaction. Finally, the grill manager will be responsible for ordering any foodrelated and cooking-related inventory that the café needs, including produce, cooking equipment, and so on.

Accounting Manager: The accounting manager will be responsible for the financial side of the business and for the hiring and training of accounting clerks. Most importantly, the accounting manager will be responsible for interacting with suppliers and managing the accounts payable that the business incurs and all other matters relating to taxes and finances.

Servers/Hosts: The servers/hosts will be responsible for serving food to customers and responding to their needs. This includes keeping their sections of the café clean and orderly and bussing dishes back to the grill area for cleaning. They will also be responsible for “side work,” .

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Part 1—Introducing the Contemporary Business World such as rolling silverware and refilling the condiments on their tables. These employees will spend most of their time serving meals, but some of their time will be spent as hosts, greeting and seating customers.

Cooks: These employees will be responsible for meal preparation. They will have to “prep” everything needed for business on any given day. This includes mixing salads, estimating the amount of different foods needed for a given day, and making desserts. The closing cook will also be responsible for cleaning the kitchen so that the café will be ready for the next day’s business.

Dishwashers: The dishwashers will be responsible for washing all dishes and placing them in the correct racks. If the café is busy, they will help servers bus the tables. Dishwashers will also be responsible for cleaning the restrooms each morning and for taking out the trash at closing time. Finally, dishwashers will help the closing cook prep the back of the restaurant for the next day. This “prep” includes washing/scrubbing floors and cleaning all the food preparation tabletops.

Accounts Payable Clerks: The clerks will assist the accounting manager in recording and organizing the accounts payable that the café will assume during the course of business.

Job Specifications The job specifications for the three managers at the Friendly Café II will be as follows: Job Title: Floor Manager Needed Skills/Credentials/Qualification for Job: The floor manager must have strong human relations skills. These skills will be needed to deal with customers and employees. The floor manager must be energetic and willing to work long hours on his or her feet. The floor manager will be responsible for training servers and hosts. To be a successful floor manager, one must have at least two years of work experience in management, preferably in restaurant management.

Job Title: Grill Manager Needed Skills/Credentials/Qualification for Job: The grill manager must have strong human relations skills. These skills will be needed to deal with customers and employees. The grill manager must be energetic and willing to work long hours on his or her feet. The grill manager will be responsible for training cooks and dishwashers. To be a successful grill manager, one must have at least two years of work experience as a restaurant cook.

Job Title: Accounting Manager Needed Skills/Credentials/Qualification for Job: The accounting manager will need good human relations skills. These skills will be needed to deal with the clerks and with the café’s creditors. The accounting manager will also be responsible for training the accounts payable clerks. This position will require a degree in Accounting or a minimum of two years work experience in Accounts Payable or Receivable.

Training Employees Our employees will have a variety of skills that they will bring to the workplace. However, it will sometimes be necessary to train new employees so that they can be successful at work. Most of the training will focus on performing the specific tasks needed to do each job efficiently. The

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Chapter 5—The Global Context of Business managers of each area will be responsible for seeing that the training program is completed but may assign team members to lead that training. In many cases, the new hire will simply “shadow” the training employee for a few days to get an idea of how to do the job.

Compensation Each of the managers will earn $22,500 per year as salary. The food service industry does not tend to pay high salaries. Because the managers are also the owners, they will hope to earn more beyond their salary from the profits of the café. Compensation for all in-store personnel will begin at $8.00 per hour, with pay increases scheduled every 120 days. These increases will be connected to performance reviews. By having reviews three times per year, we hope to create greater incentives for our team members. Compensation for the accounts payable clerks will begin at $8.50 per hour. Because the clerks will need a higher level of skill and training, their compensation will be a bit higher.

Incentives We know that pay alone does not create sufficient incentive for our workers. The thrill of a pay raise does not last long. First and foremost, we want to offer a fun workplace to our employees, and we want them to feel like extended members of our family. We will be loyal and fair to good employees, and offer them benefits. We would also like to build relationships with other local businesses to exchange rewards for each business’s employees. Our community has florists, golf courses, salons, and a number of other small businesses. We believe that by trading with these businesses, each employer can benefit, and the employees will also benefit.

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Part 1—Introducing the Contemporary Business World PART 3: MANAGING OPERATIONS AND INFORMATION IT Resources We plan to use technology to create a small Web site about the café, and to help us keep track of our customers. Specifically, we believe that we can use the coupons we offer to measure the success of our advertising and to create a database of customers. We will ask customers who use coupons to fill in their name and address when redeeming the coupon. We will then create an address list to make customers aware of special promotions for our preferred customers.

Customer Service Like any good restaurant, our café will be customer-centred. We believe that customer satisfaction begins with a well-trained staff. First and foremost, as members of the community ourselves, we will keep in close contact with our customers, getting to know them and their families and finding out what they are looking for in an eating establishment.

Our managers will also be dedicated to a strong employee training program to ensure that our focus on customers is part of every job. Our “front-end” staff will “shadow” trainees for at least three days before they are allowed to work on their own. It is not enough to simply know how to take an order; employees must also understand policies and procedures that are unique to our café. The training for cooks will take approximately ten days. The time spent with the cooks is longer because we want to ensure the quality standards of the variety of dishes they will prepare.

We will also keep a suggestion box at the front of the store to be used for customer feedback. We will encourage customers to submit ideas by rewarding them for their suggestions. Their incentive will be free appetizers, free drinks, and so on. We hope to use their input to improve our café.

Cost of Doing Business

Expenses Rent Salaries and Wages Supplies

Expected MonthlyExpected Cost Yearly Cost 500

6,000

10,000

120,000

167

2,000 2,000

Advertising and Other 167 Promotions Utilities: Heat, Electricity, etc.

500 Telephone and Internet Insurance Total

6,000 1,200 4,000

100

141,200

333 11,766

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Chapter 5—The Global Context of Business Expected Revenue We believe that we can average 100 customers per day. However, the café will experience different traffic for each day of the week and during different times of the year. We believe that the average meal ticket will be approximately $5.00 per customer. This number will also vary, depending on the time of day that the customer enters the café. This will provide our café with revenues of $500 per day. We plan to be closed on Christmas. This will lead to yearly revenues of approximately $182,000 per year.

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12-Month Income Statement (Profit & Loss Statement) The Friendly Café II

Jun-05

Jul-05

Aug-05

Sep-05

Oct-05

Nov-05

Dec-05

Jan-06

Feb-06

Mar-06

Apr-06

May-06

YEARLY

2006

15,166

15,166

15,166

15,166

15,166

15,166

15,166

15,166

15,166

15,166

15,166

15,166

182,000

15,166

15,166

15,166

15,166

15,166

15,166

15,166

15,166

15,166

15,166

15,166

15,166

182,000

Cost of Goods Sold

3,333

3,333

3,333

3,333

3,333

3,333

3,333

3,333

3,333

3,333

3,333

3,333

39,996

Gross Profit

3,333

3,333

3,333

3,333

3,333

3,333

3,333

3,333

3,333

3,333

3,333

3,333

39,996

11,833

11,833

11,833

11,833

11,833

11,833

11,833

11,833

11,833

11,833

11,833

11,833

142,004

Salary/Wage Expense

500

500

500

500

500

500

500

500

500

500

500

500

6,000

Supplies Expense

10,000

10,000

10,000

10,000

10,000

10,000

10,000

10,000

10,000

10,000

10,000

10,000

120,000

Advertising Expense

167

167

167

167

167

167

167

167

167

167

167

167

2,004

Utilities Expense

167

167

167

167

167

167

167

167

167

167

167

167

2,004

Telephone/Internet Expense

500

500

500

500

500

500

500

500

500

500

500

500

6,000

Insurance Expense

100

100

100

100

100

100

100

100

100

100

100

100

1,200

Interest from Loans

333

333

333

333

333

333

333

333

333

333

333

333

3,996

Other Expenses (specify)

0

0

0

0

0

0

0

0

0

0

0

0

0

11,767

11,767

11,767

11,767

11,767

11,767

11,767

11,767

11,767

11,767

11,767

11,767

141,204

66

66

66

66

66

66

66

66

66

66

66

66

800

Revenue Sales

(Sales)

Category

2

Revenue (Sales) Goods

Food Total

Cost of

Sold

Food

Purchases Category 2 Total

Expenses Rent Expense

Total Expenses Net Profit

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Balance Sheet Assets Current Assets Cash in Bank Inventory Prepaid Expenses (insurance) Total Current Assets Fixed Assets Machinery & Equipment Furniture & Fixtures Real Estate / Buildings Total Fixed Assets Total Assets Liabilities & 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

$25,000 $3,000 $4,000 $32,000

$12,900 $8,000 $0 $20,900 $52,900

$3,000 $6,000 $0 $9,000

$0 $0 $0 $9,000

Owners' Equity (Net Worth)

$43,900

Total Liabilities & Net Worth

$52,900

Floor Plan Because we are planning to occupy the space that was previously used for the original Friendly Café, we will be keeping the basic layout of the café intact. The café will include a counter area

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Part 1—Introducing the Contemporary Business World for those who wish to sit facing the kitchen, as well as a number of booths and tables to fit different sized parties.

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Chapter 5—The Global Context of Business Raw Materials and Supplies If we are able to lease the space used by the original Friendly Café, we will use the existing tables and chairs. These may be in need of slight repair, but are in good condition at present.

They carry the nostalgic look and feel we are striving for, so we prefer not to replace them.

The café will also need the following initial inventory: (2) Cash registers @ $225 each..............................................................................................$450 Squirrel POS system...............................................................................................................1500 (3) Microwave ovens @ $150 each..........................................................................................450 Deep Fryer..............................................................................................................................2500 Refrigeration Unit...................................................................................................................2000 Freezer.....................................................................................................................................4000 Dishwashing Unit....................................................................................................................2000 (100) Small Glasses @ $1.00 each...........................................................................................100 (100) Large Glasses @$1.25 each............................................................................................125 (100 sets) Plates, Bowls, Mugs @$10.00 each.......................................................................1000 (100 sets) Silverware @ $12 per set.......................................................................................1200 Total...................................................................................................................................$15,325 Most of our food products will be made fresh in the store, so we do not plan to carry much in the way of food inventory. We will stock some canned sauces, but most food will be shipped fresh.

Our inventories will not be affected by change in seasons or holidays. We plan to be open from 6 a.m. to 10 p.m., Monday through Saturday, and 8 a.m. to 6 p.m. on Sunday.

Quality Assurance All employees will have some responsibility to ensure quality, but we believe quality begins with the management team. The floor manager will be responsible for the appearance of the café and the performance of the servers and hosts. The floor manager is responsible for pleasing the customer. The grill manager will ensure that quality food is purchased from distributors and prepared for customers. The entire management team will work to ensure that our café is synonymous with quality.

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Part 1—Introducing the Contemporary Business World PART 4: PRINCIPLES OF MARKETING Target Market Our café will have two markets: The first target market is the seniors in our community. Many of these have retired with a comfortable pension from the local industries. They do not necessarily have a high education level, since it was not needed in that time. Retirees will tend to have a good deal of discretionary income, and also time to socialize in the morning and lunchtime hours.

The second target market is middle-class families with younger children. These families will be looking for a well-cooked dinner after work. They will likely have a higher education level than the retirees, but will have a modest income. Dining out is probably a once-a-week event for these families.

Product Features and Benefits The Friendly Café II is a small café that will serve a variety of home-cooked meals in a nostalgic atmosphere. It is a place where friends can gather over a cup of coffee, or a family can sit down for a well-cooked meal. We will strive to serve the best meals in a happy and familiar place.

Product Differentiation People have a lot of choices when it comes to dining out. We know that we have to offer a product that stands out from the competition. We will have two major differences from our local competitors. The first is the quality of the food. Without good meals, nothing else will matter.

Diners will place the highest importance on the meal itself, and so will we. By providing good meals at reasonable prices, word-of-mouth advertising will take care of itself. However, the food is only part of the dining experience. Our nostalgia theme will connect well with the local population. Our community is small and tightly-knit. Our older citizens grew up with the original Friendly Café, and they have happy memories of the local diner. We hope that our décor will help to build a bond with the older members of our community and create a new one with younger members.

Pricing Our pricing strategy is fairly simple. Because our target markets are seniors (who remember how much things used to cost) and young families, we will focus on keeping prices low. The food will be simple, home-cooked meals. The pricing will reflect the simplicity of the café. We will also offer coupons to encourage visits by customers who are price conscious.

Place (Distribution) Issues Our family (and our business) is connected to this small community and offers a family-oriented setting and a connection to history and nostalgia. The small-town setting allows us to emphasize our strengths, and we foresee no distribution issues. In the future, we hope to expand into other communities like ours.

Advertising Because we have two target markets, we will have two advertising approaches. For the seniors market, we will advertise in the local newspaper and in the retirement centre in our town. These advertisements will include coupons for discounts on our morning and afternoon menus. .

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Chapter 5—The Global Context of Business Coupons will also allow us to track the success of the advertising. We will also attempt to advertise on local radio stations that feature news and talk. These are stations that have a strong

senior listening audience.

To get the attention of the middle-class family market, we will hang door flyers that feature our menus in the two local housing subdivisions. Many young families in our community live in these subdivisions. The flyers will also contain coupons, which will allow us to track the success of the advertising. We will also be listed in the local phone book and will have a small site on the Internet. These ideas are fairly inexpensive ways to get our message out to our target markets.

Promotion Because we have two main target markets, we will have two types of promotions. For the senior market, we will have “2 for 1” priced coffee on weekday mornings. Coffee is not a great expense, but can be a great draw into the café for other items in the morning. We will also offer breakfast specials Monday through Wednesday, since these are the days with the least amount of customer traffic.

For the young family market, we will have a “Kids Eat Free” special on Monday nights. Again, the goal is to get the family into the café on a slow night.

We will also have promotions during the fall, when our community has a street festival. This festival attracts visitors from outside our community. These promotions will build attention (and word of mouth) from those who live in nearby towns.

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Chapter 5—The Global Context of Business PART 5: MANAGING FINANCIAL ISSUES Start-up Costs Our balance sheet shows total assets of $52,900. By subtracting the $25,000 that our three managers will invest, we will have start-up costs of $27,900.

Financing The three managers will put a total of $25,000 into the start-up of this business. The remaining $27,900 is the amount that we are requesting for bank financing.

CHAPTER 6 MANAGING THE BUSINESS ENTERPRISE CHAPTER SYNOPSIS This chapter introduces the foundations of effective management.

The nature of management management is explained, and the four basic functions that constitute the process are identified. The different types of managers that are found in organizations are described, as are the basic skills required of managers, the importance of strategic management, and how goal setting facilitates organizational success. The chapter concludes with a discussion of contingency planning, crisis management, and corporate culture.

CHAPTER OUTLINE I.

II.

WHO ARE MANAGERS? All businesses depend on effective management, and all managers perform similar functions, even though they work in dramatically different kinds of companies.

The principles of management also apply to non-business organizations such as churches, charities, government institutions, and labour unions.

THE MANAGEMENT PROCESS Management is the process of planning, organizing, leading, and controlling an organization's resources (i.e., financial, physical, human and informational) in order to achieve the organization's goals.

A. Planning—A manager must determine what the business needs to do and how best to achieve it. Planning involves a 5-step process: establishing goals, identifying whether a gap exist between the company’s desired and actual position, developing plans to achieve the desired objectives, implementing plans that have been decided upon, and assessing the effectiveness of plans.

B. Organizing—This is the process of structuring of necessary resources and jobs in order to complete a particular task.

C. Leading—This is the part of a manager's job that involves guiding and motivating employees to meet the firm's objectives.

Controlling—A manager also needs to monitor performance and, if D. necessary, act to bring it in line with the organization's goals. The basic control process is described.

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III.

E. Management: Science or Art?—Many management problems can be approached in ways that are rational, logical, objective, and systematic. Managers can use quantitative models and decision-making techniques to arrive at “correct” decisions. This approach is especially useful when managers deal with relatively routine and well-defined issues. But managers also make many decisions that are not routine, and when doing so they must rely heavily on interpersonal skills and on abstract conceptual thinking. Thus, effective management is a blend of both science and art, and successful executives recognize the importance of combining both the science and art of management as their carry out the functions of management.

BECOMING A MANAGER The most common way to acquire the skills necessary to blend the science and art of management is a combination of education and experience. The primary advantage of education as a source of management skills is that you can follow a well-developed program of study and become familiar with current research and thinking on management. However, management education is often general (to meet the needs of a variety of students), so specific know-how may be hard to obtain. This is where experience comes in. The day-to-day experiences that managers have as they try to achieve company goals and keep their subordinates productive and happy are crucial in improving their effectiveness.

IV.

A. What Should You Expect in a Management Job?—In your first career position, you will use the technical skills that you have developed during college or university (e.g., accountant, engineer, lawyer, salesperson, computer technician, etc.). Your focus will be largely on your own performance and how you can contribute to the organization. If you demonstrate high performance, you may be promoted to a management position after a time. When you become a manager, your focus must shift, and making this shift is a challenge for many newly-appointed managers, who are expected to focus on completing tasks in an effective manner. They should not worry about whether they are working too many hours per week.

TYPES OF MANAGERS All managers perform the four functions of management, but they differ in the emphasis they put on the four functions.

A.

Levels of Management 1.

Top managers—They are responsible for a firm’s overall performance and effectiveness and for developing long-range plans for the company.

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Middle managers—They are responsible for implementing the strategies, policies, and decisions of top management.

3.

First-line managers—They supervise the work of operative employees.

Areas of Management—The numbers and importance of each type of

B. manager varies with industry.

1.

Human resource managers—Are responsible for hiring, training, evaluating and compensating employees. Examples are given.

2.

Operations managers—Are responsible for controlling production, inventory, and quality of a firm's products. Examples are given.

3.

Information managers—Are responsible for the design and implementation of systems to gather, process, and disseminate information. Examples are given.

4.

Marketing managers—Are responsible for developing, pricing, promoting, and distributing goods and services to buyers. Examples are given.

5.

Financial managers—Are responsible for planning and overseeing the financial resources of a firm. Examples are given.

6.

Other managers—More specialized managers (e.g. Research and Development) may be created to meet the particular needs of a firm.

V.

MANAGEMENT ROLES AND SKILLS Regardless of their level or area within an organization, all managers must play certain roles and possess certain skills if they are to be successful.

Management Roles—Describing managers’ jobs by referring to functions A. like planning, organizing, leading, and controlling gives us a good general picture of what managers do, but it may not give a clear idea of the specific activities that managers are involved in. The answer to the question “What do managers actually do?” is that they play a variety of roles in organizations. Ten different roles in three general categories are described, based on Mintzberg’s research.

B.

Management Skills—The success that people enjoy in managerial

positions is often limited by their skills and abilities. Effective managers must possess several skills: technical, human relations, conceptual, decision-making,

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Part 2—The Business of Managing and time management skills. Figure 6.3 shows how the different levels in an organization require different combination of managerial skills.

1.

Technical skills—The ability to perform specialized tasks within a company. Examples are given. These skills are particularly important for first-line managers and less so as one moves up the corporate ladder.

2.

Human relations skills—The ability to understand and work well with other employees. These skills are important in most management settings, regardless of level.

Conceptual skills—The ability to think abstractly, to diagnose 3. problems, and to plan for the future. Their importance increases as one rises in the corporate hierarchy.

4.

Time management skills—These skills allow managers to productively use their time.

5.

Decision-making skills -- These are the skills which allow managers to recognize problems, to analyze alternatives, and to select those which solve the problem. The steps in the rational decision-making process (see Table 6.2) are as follows: a.

Recognizing and defining the decision situation—The first step in the process is recognizing that a decision is necessary. Both problem and opportunity decisions confront managers. b.

Identifying alternatives—The second step is to identify alternative courses of action that might solve the problem or take advantage of the opportunity that exists. c.

Evaluating alternatives—Alternatives that have been identified as promising must be systematically analyzed to determine if they will likely be successful.

Selecting the best alternative—Choosing the best d. alternative is a key (if difficult) activity. Both objective and subjective factors normally must be taken into consideration when deciding. Since there is no guarantee that the chosen alternative will work, two other steps are required.

Implementing the chosen alternative—Steps 1-4 focus e. largely on mental activity, but step 5 focuses on action, i.e., putting into practice the alternative that has been chosen.

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Following up and evaluating the results—This final step in the decision-making process requires that managers evaluate the effectiveness of their decision. An example of all the steps in the decision-making process is provided in the text.

Behavioural aspects of decision making—Managers sometimes

6. make decisions with insufficient attention to logic and rationality. Nonlogical and emotional factors often influence managerial decision making.

Organizational politics--Organizational politics refers to the a. actions people to get what they want without regard for its impact on other people and the organization. b.

Intuition—Means making a decision because it “feels right.” Intuition can lead to spectacular successes or failures. c.

Escalation of commitment—Occurs when a manager remains committed to a course of action even when evidence shows it isn’t working. d.

Risk propensity—Refers to how much of a risk a manager is willing to take when making a decision.

VI.

STRATEGIC MANAGEMENT Strategic management is the process of effectively aligning the organization with its external environment. The starting point in strategic management is setting goals that a business wants to achieve.

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 The systematically because it sets goals and plans accordingly. Goals provide direction and guidance for managers at all levels; help firms allocate resources; help to define corporate culture; and help managers assess performance.

2.

Kinds of goals—Every enterprise has a mission. A mission

statement indicates how the enterprise will achieve its vision (or purpose) in the environment in which it conducts its business. Every firm needs long-term, intermediate, and short-term goals. Long- term goals are typically five years or more into the future. Intermediate goals are set for a period of one to five years into the future. Short-term goals are set for one year. Managers at all levels are responsible for setting different kinds of goals. The higher the manager’s level in the organization, the broader and .

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Part 2—The Business of Managing longer-term are the goals that are set. Whatever the level at which goals are set, they should be SMART goals, i.e., goals that are Specific, Measurable, Achievable, Relevant, and Time-framed.

B. Formulating Strategy—Strategy formulation involves setting strategic goals, analyzing the organization and its environment, and matching the organization and its environment. Strategy tends to have a wider scope than planning and is by definition a broad program that describes what an organization intends to do.

1.

Step 1: Setting strategic goals—Strategic goals are long-term goals derived directly from the firm's mission statement.

2. 2: Analyzing the organization and its environment—After Step strategic goals have been established, organizations usually go through a process called a SWOT analysis. The process involves the identification and analysis of the organization’s strengths and weaknesses and environmental opportunities and threats as part of strategy formulation.

Environmental analysis involves scanning the environment for threats and opportunities (external to the organization). Changing consumer tastes and hostile takeovers, for example, are threats. Managers undertake an organizational analysis to better understand a company's strengths and weaknesses (internal to the organization). Strengths might include surplus cash, a dedicated workforce, managerial talent, technical expertise, or little competition. The absence of any of these strengths could represent an important weakness.

3. 3: Matching the organization and its environment—This final Step step in strategy formulation is matching environmental threats and opportunities against corporate strengths and weaknesses. More than any other facet of strategy, matching companies with their environments lays the foundation for successful planning and conducting business.

Some strategy a. realities: Sobeys—When Sobeys acquired rival Safeway, it seemed like a good strategic decision that would create greater efficiencies and give Sobeys a national footprint. But Sobeys integration of Safeway into its business was messy, and consumers complained about higher prices and out-of-stock situations for products they wanted to buy. It took many months for Sobeys to resolve these problems.

4.

A hierarchy of plans—The 3-step strategy formulation process requires a hierarchy of plans on three different levels: strategic plans (which reflect decisions about resource allocations, company priorities, and the steps needed to meet strategic goals, and which are usually set by top management), tactical plans (which are shorter-range plans concerned .

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Chapter 6—Managing the Business Enterprise with implementing specific aspects of the company’s strategic plan), and operational plans (which are developed by middle and lower-level managers who set short-term targets for daily, weekly, or monthly performance).

C.

Levels of Strategy—There are three levels of strategy in a business firm: 1.

Corporate-level strategies—Identifies the various businesses that a company will be in. There are various strategies. a.

Concentration—Focusing the company on one product or product line b.

Growth—Several specific strategies are available (e.g., market penetration, geographic expansion, and product development) c.

Integration—Horizontal integration means acquiring control of competitors in the same or similar markets with the same or similar products. Vertical integration means owning or controlling the inputs to the firm’s processes or the channels through which its products and services are distributed. d.

Diversification—means expanding into related (related diversification) or unrelated products or market segments (conglomerate diversification). e.

Investment reduction—Means reducing the company’s investment in one or more of its lines of business.

Business-level (competitive) strategies—A plan to establish a 2. profitable and sustainable competitive position against the forces that determine industry competition. These include: cost leadership (being the low cost leader), differentiation (unique in its industry along some dimension that is valued by buyers), and focus (selecting a market segment and serving the customers in that market niche better than competitors do).

Functional strategies—These are the basic course of action that 3. each department follows so that the business accomplishes its overall goals.

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CONTINGENCY PLANNING AND CRISIS MANAGEMENT Due to the dynamic business environment, most managers recognize that even the best plans sometimes become impractical. Therefore, managers often develop alternative plans in case things go awry. Two common methods are contingency planning and crisis management.

Contingency Planning—Attempts to identify in advance factors in the A. market that might change in the future and how the company will react if the factors do indeed change.

B. Crisis Management—Involves an organization's plans for responding with an emergency (for example, an oil spill) that has actually occurred and requires an immediate response.

VIII.MANAGEMENT AND THE CORPORATE CULTURE When recruiting new managers, organizations must make sure that these managers will fit into the organization's culture. Corporate culture is the shared experiences, stories, beliefs and norms that characterize a firm (i.e. its style). It is important to establish and maintain a strong, clear culture. The advantages of a strong corporate culture are noted, and examples are provided.

A. Communicating the Culture and Managing Change—Managers must consider the kind of culture they want for their organization and then work to nourishing that culture.

1.

Communicating the culture—To communicate effectively, managers must have a clear understanding of the culture, they must transmit the culture to others in the organization, and they must maintain the culture by rewarding those who work toward maintaining it.

Managing change—Sometimes a cultural change is required, and 2. such a change may cause conflicts to develop. Examples are given of organizations that changed their cultures.

QUICK QUESTIONS 1.

What are the four basic functions of management that all managers must perform?

2.

How are roles of management different than the functions of management?

3.

What are some types of managerial responsibilities associated with each level of management?

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What are the basic skills of management?

5.

What is the relationship between the skills of management and the functions of management?

What are the purposes of goal setting?

6.

7.

8.

9.

10.

11.

12.

What is included in your university or college’s mission statement?

What are the three steps in the strategy formulation process?

What is the difference between environmental analysis and organizational analysis?

What is the difference between crisis management and contingency management?

What is corporate culture?

What is the corporate culture in the organization where you work? How might that culture be different from the culture in the Canadian Forces? On an NHL team? In a beauty salon?

IN-CLASS EXERCISES Exercise #1: 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 had earlier arranged to cater a dinner party for 300 people two days from now. 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.

Ask each group to think of ways in which the caterer can use the four basic 2. 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)

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Part 2—The Business of Managing 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, several situations can occur that require major or minor changes in the management process.

Exercise #2: 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-year-plus 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 time frame 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.

Exercise #3: SWOT Analysis Activity Overview: This activity asks students to brainstorm in small groups in order to complete a SWOT analysis.

Time Limit: 30 minutes

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Chapter 6—Managing the Business Enterprise What to Do: Divide the class into small groups, asking each group to identify internal strengths 1.

(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, these factors can sometimes be perceived quite differently by different individuals. For example, what is perceived as a threat by one person may be perceived as an opportunity by another person.

Exercise #4: 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 three- and four-person groups and ask each group to assume that you (i.e., the instructor) have been suddenly called away for the next three weeks, but that class must go on. Appropriate course material, course objectives, and all syllabus content must be covered in a classroom setting—but there is no time to bring in a replacement instructor. Instead, the students themselves are responsible.

2.

Each group must decide on the best way to continue. How can material and objectives be adequately covered? Who should carry out the instruction? (20 minutes) 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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Part 2—The Business of Managing Exercise #5: Developing a Consensus Activity Overview: This activity is designed to help students improve their group discussion and decisionmaking skills.

Time: 30 minutes What To Do: Divide the class into groups of four to six students. You may want to do this by 1. numbering one to six and having all of the ones work together, all of the two’s, etc., so students will have to work with people they are not likely to know.

2.

Present them with a controversial statement on which they must reach agreement.

This could be a current political or legal issue of your choice or try one of the following: the priorities for the Federal budget should be; or China should not receive most-favoured trading partner status in light of their record on human rights; or bribing officials in Russia/Nigeria/China is permissible because it’s a part of the culture there; or ecommerce transactions should be taxed by the Federal government; or the college’s grading system should be changed.

3.

Hand out the Guidelines for Reaching Consensus. Remind students that when voting and majority rule is used to make decisions, there are winners and losers. In contrast, consensus builds commitment from everyone to pursue a common goal.

-------------------------------------------------------------------------------------------------------Guidelines for Reaching Consensus Consensus is the decision process used to make the best use of resources and to solve problems creatively. Consensus is difficult to reach and not everyone will agree completely. Complete unanimity is not the goal, but everyone should be able to accept the result based-on logic and the feasibility of success. When all group members feel this way, the judgment may be entered as a group decision. This means that any one member can block the group if necessary, but should remember that this action could be reciprocated.

1.

Avoid arguing for your own view. Present your position as clearly and rationally as possible, then listen to others and consider carefully.

2.

Do not assume winners and losers when there are conflicts, but seek creative solutions.

Do not change your mind simply to avoid conflict. Give way only to logical and 3. objective reasons. Be wary of agreement that is too quick and easy. Explore the reasons to learn if there are similar reasons for the position.

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Avoid conflict-reducing techniques such as majority vote, coin flips, and bargaining. Don’t trade by giving in on a later point to satisfy someone who gave in earlier.

Differences of opinion are to be expected and are desirable. They bring more 5. information and can help the group’s decisions. Try to involve everyone in the decision process.

This exercise is adapted from Jay Hall, “Decisions, decisions, decisions,” Psychology Today, 5(1971): 51–54, 86,88, as found in, The Second Handbook of Organizational Development in Schools, R. A. Schmuck, P. J. Runkel, J. H. Arends, and R. I. Arends, Palo Alto, CA: Mayfield Publishing Co., 1977, pp. 344–347.

-------------------------------------------------------------------------------------------------------4.

Give students 15 minutes to reach a consensus.

5.

Have students report on the activity in their group.

Follow up Questions: 1.

Did a leader emerge in your group?

2.

Did everyone participate?

3.

Did any one person dominate the discussion?

4.

How did you resolve conflicts?

5.

Did you reach a consensus?

Exercise #6: 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 creates corporate culture. Ask the groups to consider these conversation starters: (15 minutes) • If top managers create corporate culture, how do they get everyone else to follow?

• If first-line managers or employees create corporate culture, how do they get top managers to go along with it?

• How often does corporate culture change?

• When corporate culture changes, what typically causes the .

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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 everyone in the organization.

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

Exercise #7: Working as a Top Management Team Activity Overview: The activity is designed to help students practice the conceptual and human relations skills needed for strategic planning and participative management.

Time Limit: 30 minutes What To Do: 1.

Break class into groups of four by counting off. Make all of the “ones” a management team, and so forth.

2.

Each team should select a president. Others are to act as vice presidents of finance, marketing, production, or some other function.

3.

Have each team choose a company with which they are familiar and write a mission statement for the company.

4.

Each team should then write three goals to fulfill the mission statement.

5.

Each team will write objectives to fulfill the goals.

Don’t Forget: Ask the students several questions, including the following: 1.

Did everyone participate in the discussion?

2.

Who led the discussion? Why?

4.

What leadership styles did you observe?

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Chapter 6—Managing the Business Enterprise Wrap-Up: Ask students if they thought this was a good situation in which to use participative techniques. Determine why or why not.

TEACHING TIPS 1. text indicates that long-term goals stretch beyond five years into the future.

The In the financial press we sometimes encounter a story about a firm that has laid plans for twenty or thirty years ahead. Knowing how rapidly situations can be altered in this age of ever-changing technology, we could question the wisdom of setting strategies for a horizon so far ahead. There is merit in discussing with the class the usefulness of really long-term goals.

2.

When discussing corporate level strategy, it is important that the students understand that some of the strategies discussed in the chapter are mutually exclusive, while others or not. Students can be asked to do some on-line searching to identify businesses that have pursued various strategies. An in-class exercise is to have students identify which strategies are compatible and which are not.

3.

Internal growth can be achieved by selling more of existing products to the existing target market (market penetration), selling new products to existing consumers (product development), selling existing products to new target markets (maybe geographic expansion or expansion to new demographics), or selling new products to new customers. Have the students evaluate the four alternatives in terms of the degree of risk each strategy entails.

4. textbook offers explanations of contingency planning and crisis management.

The Contingency planning could be called "what if" planning. Any firm knows that their dreams for the future may not come true. Make sure that students are aware that the key to contingency planning is not merely being able to handle severe disappointment, but also to have an alternate set of actions ready to go when the dream falls apart.

In this chapter, several kinds of managerial skills are discussed. One of these is 5. conceptual skills—the ability to deal with broad, abstract ideas, and to be a visionary. A problem with conceptual ability is that if one's thinking is at a very high level of abstraction, others may find the "vision" lacking in practicality. Managers must watch out for this potential problem when doing long-term planning.

6.

Here's an example of the abstraction referred to in the previous tip. A new

chairperson is elected for the board of trustees at your institution of higher learning and declares that starting right now, "everything we do at this institution is dedicated to making our students more active members of society." Other members of the board are so impressed that they give the new chairperson a standing ovation. But what does the new chairperson mean by "more active members of society"? What that chairperson has done

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Part 2—The Business of Managing is to enunciate a long-term goal that has little concrete meaning for those who hear about it.

7.

Following up on the previous tip, it must be said that businesses are usually more specific when stating long-term goals. A visionary president will not say something so vague as, "We want to be the finest steel company in the world ten years from now."

Rather, a specific will be included like this: "Ten years from now, this company intends to have captured 37 percent of the domestic steel market." That's okay.

The text indicates that directing is one aspect of the management process. Every 8. student in the class has at some time or other held a job and had a boss. Elicit from students how many times they have worked for a manager who had the ability to inspire confidence and trust in subordinates. It is likely that students will often say they didn't see this in their bosses. Point out that when a manager does not inspire confidence and trust, the organization suffers.

9.

When professors speak to students about career plans, there is a trap into which professors often fall. The trap is exemplified by a remark such as this: "Whatever line of work you go into, work as hard as you can and you will get to the top. If you go with IBM, don't be satisfied to be a salesperson, but keep punching until you're the president of the firm!" That sounds very inspirational, but it’s probably bad advice. Not every student possesses the proper skills to function at that high level, and besides, IBM needs only one president at a time. One of your graduates could be of far more value for IBM working in advertising, setting up an office in Ulan Bator, or adding a new twist to some software. All of these thoughts should come to mind when we consider that what happens at the top-manager level is far different from what happens at the first-line level. A firm needs qualified people at all levels.

10. years ago, Dr. Laurence J. Peter wrote a book entitled “The Peter Many Principle,” which indicated that individuals in an organization will rise to their level of incompetence. Simply put, individuals who are very good at their jobs will be rewarded with promotions until they reach a position for which they are not qualified and cannot do a good job, at which point they will no longer be promoted. There is also a tendency not to demote or fire these individuals at this point, so instead they function incompetently.

Common stereotypes can be used to explore this concept with students. Accountants and engineers are often stereotyped as having excellent technical skills but poor people skills.

While any individual accountant or engineer may have excellent people skills, students can consider what may have created the stereotype, and if this possibly reflects that the skill sets needed to be successful in a particular job may not prepare one to be a successful manager. Other stereotypes may also be explored.

The Peter Principle is one that students can often relate to from personal 11. experience. Another task might be to have students describe their own experiences and then look for common threads that might help students understand the skills that are necessary to be a good manager.

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Conceptual skills are critically needed at the top level of management, while technical skills are critically needed at the first-line level. Although human relations skills are important at all levels, the text says they are particularly necessary for the middle manager. This can be explored a little further with your class. Here are some debate starters. First proposition: Human relations skills are far more important for first-line managers than for the top-level managers. Second proposition: Human relations skills are far more important for top managers than for first-line managers.

13.

Have a discussion of why the students think that the conceptual skills are so important for top management.

14.this course is being taught as an introductory course, students may have If difficulty with the decision-making process outlined in the chapter, and it may be reflected in their own work in analyzing cases. Instructors may find that a developmental model, “Steps for Better Thinking”, developed by WolcottLynch, may be helpful in assisting students develop their critical thinking skills. (Detailed information on the model is available on WolcottLynch website, www.wolcottlynch.com, and in the College Faculty Handbook: Steps for Better Thinking, copyright January 2006, authored by Susan K. Wolcott, also available on the website). Thank you to the author for her permission to reference this work.

There are five distinct levels of critical thinking skills: Confused Fact Finder—The student believes there is one correct answer that must be identified and memorized. The student is unable to recognize that uncertainty exists, or believes that uncertainty is due to temporary lack of information.

Biased Jumper—The student recognizes that uncertainty exists, and is able to identify alternative solutions or outcomes. Analysis of alternatives in not fully understood, however. The student jumps to an alternative, and the evaluation of pros and cons of the alternative consists of providing the pros for the preferred alternative and the cons of the remaining alternatives.

Perpetual analyzer—The student identifies alternatives, evaluates the pros and cons of each appropriately, but then cannot provide a recommendation. This may be due to the student’s inability to draw a conclusion or to determine the appropriate criteria for evaluating the alternatives.

Pragmatic performer—The student can recognize the problem, provide and evaluate alternatives, and make an appropriate recommendation with reasonable supporting arguments.

Strategic revisioner—The student can do it all: recognize the problem, provide and evaluate alternatives, make appropriate recommendations with reasonable supporting arguments, and can then go to on to identify the types of information that should be gathered to address the issue over time.

The model also indicates that students must progress through these stages in order. It is not possible to develop the ability to draw an appropriate conclusion and support it unless the student has developed the ability to effectively evaluate alternatives.

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Part 2—The Business of Managing I have found this of great help when students demonstrate very weak critical thinking skills, as it helps to identify the next step they need to be exposed to and practice.

15.

Changing a corporation’s culture can be difficult. Ask students to deal with this situation: A large firm has historically gone to great lengths to avoid bringing minorities into management. Now, the move is on to strongly encourage the promotion of minority employees. How can top management get across to all employees that the corporate culture must now do a complete turnaround, and that the firm will henceforth be known as an encourager of minority employees seeking to rise into management?

The "levels of management" and "areas of management" ideas can be nicely 16. demonstrated by using examples from the educational institution the students are attending. They will have at least some knowledge of these positions and will be able to get a better idea of what levels and areas mean in practice.

17. a career placement person to your class to talk about how companies recruit Invite managers and what they look for. Allow time for student questions to be asked of this person.

Interview a manager while the class listens. This is one of the best ways to 18. convey to students the dynamic nature of managerial work. It will also show them that the functions of management are important in conceptualizing the managerial job, but managers probably don't give much thought to these functions as they go about their hectic work pace each day. Leave time for student questions (some will surely come up that you have not asked).

19.

Moderate a class discussion on the importance of management in modern society.

Be sure to point out that managers are critical in all types of organizations, not just business firms.

20.

Provide students with examples of company strategies that you have gathered from the business press or from personal experience. Students may also be able to make significant contributions to the discussion based on their own experiences.

Engage students in a discussion of the factors that would lead an organization to 21. choose to purchase an existing business to grow, rather than relying solely on internal growth. What risks does a business avoid or create when acquiring an existing business?

Ask how many students belong to a student organization of some type. Then ask 22. how many know their organization's mission (most don't). Then ask why they think this is so.

Use 23. examples of your educational institution's policies, procedures, and rules to demonstrate these concepts to students. Ask them whether they think these are necessary.

If they say no, ask them to describe how the organization will work in the absence of policies, procedures, and rules. .

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24.numerous informal and unscientific surveys, it is quickly determined that most By managers are very poor at the job. Which surveys are we talking about? Nothing more than asking a group of friends how sharp they think their bosses are. Numerous negative comments are sure to flow. Related to the previous tip, many managers perform poorly because they have aggressively pushed themselves up in the hierarchy where they do not belong. Becoming a manager is often a matter of a person having high aspiration rather than a high level of managerial ability. The fact that a first-line manager functions very well in his or her job is no indication that the same person would be effective at a toplevel position. See if your students agree with this line of reasoning.

25.

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

26.

Time management skills refer to the productive use that managers make of their time.

27.

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.

28.

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

29. text indicates that directing is one aspect of the management process. Every The student in the class has at some time or other held a job and had a boss. Elicit from students how many times they have worked for a manager who had the ability to inspire confidence and trust in subordinates. It is likely that students will often say they didn't see this in their bosses. Point out that when a manager does not inspire confidence and trust, the organization suffers.

30 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.

Remind students that strategic management is the process of maintaining an 31. effective alignment of the organization with its environment; it is most closely associated with top managers.

Remind students that strategic planning is commonly performed by top managers.

32.

Top and middle managers carry out tactical planning. Middle and first-line managers carry out operational planning.

Remind students that the most successful organizations are those that make their 33. mission statements clear, remain open about internal policies and external relationships, and are adaptive to change.

34.

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

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35.

Remind students that strategic planning is commonly performed by top managers.

Top and middle managers carry out tactical planning. Middle and first-line managers carry out operational planning.

36.

Students often confuse the types of strategy. Highlight the difference between corporate strategy, business strategy, and functional strategy.

37.

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

38.

Explain the difference between environmental analysis and organizational analysis.

39.give students a better understanding of the sometime elusive concept of To corporate culture, moderate a class discussion of the history, traditions, and rituals that are part of your educational institution.

40. several students who have worked in organizations with very different Ask corporate cultures (e.g. an advertising agency, a law office, a film production company, a coffee house) to speak for a few moments about the culture of their workplace. Possible questions to write on the board: Who has power, and how do you know that? What is the level of formality, and how do you know that? How do people dress? How do people communicate regarding large issues? Regarding small issues? How are offices distributed and decorated? Who gets the good gossip? Is there a difference between who has official power, and who has “real” power?

USING THE BOXED INSERTS Opening Case: Canadian Tire: Fighting a Crisis, Planning for Tomorrow This opening case summarizes the recent history of Canadian Tire and some of the key strategic decisions made during the pandemic as a new CEO took over at a critical moment.

Questions for Discussion 1.Based on what you read, explain how Greg Hicks (and his team) demonstrate the four basic functions of management? Use examples.

The case is filled with examples that demonstrate long-term planning and short-term tactical adjustments. CTC had invested heavily in its e-commerce platform in recent years. But they were also able to make quick tactical adjustments and reorganize with the crisis conditions in mind. During the pandemic Greg Hicks and his team were surveying all options and adjusted their product allocations to meet the challenges (i.e., rerouting bikes to open stores). The control function requires access to good information to deal with issues and adjust mid-course, when your system is tested. For example, CTC sales .

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Chapter 6—Managing the Business Enterprise were up by 11.8% in the third quarter of 2020. But when ecommerce orders jumped from 4,000 daily to 120,000 daily (pretty much overnight) there were major strains on the system. In the early days of the pandemic nearly a quarter of customers could not get onto the site on their first attempt. As discussed in this chapter, good managers plan, lead, organize and control. Extra resources were added to optimize all operations. Quick decisive leadership moves were the key.

2. How does this case demonstrate the concepts of contingency planning and crisis management?

Greg Hicks was already a senior management before he became CEO and he and the rest of the executive team had made decisions in previous years that helped prepare contingency options that were helpful in the crisis. They also made quick flexible. As indicated, Hicks has a simple philosophy; do not overreact but be prepared to pounce on opportunities. Extra resources were added to optimize all operations. Here are some examples: 1) re-directed 200 containers of bicycles from closed SportChek locations (because of government mandates in malls) to open Canadian Tire outlets; 2) anticipating major shifts in demand (invested in more exercise equipment and paint products for consumers with time to fix up their homes).

3. Describe the different types of management skills (technical, human relations, conceptual, time-management and decision-making) and explain how they relate to a CEO and President like Greg Hicks. Use examples from the case to support your answers.

Technical skills are associated with performing specialized tasks within a firm. Human Relations Skills are based on understanding and getting along with people. Conceptual Skills relate to the ability to think in the abstract, diagnose and analyze various situations, and see beyond the present situation. Time Management Skills are associated with the productive use of time. Clearly the need for effective conceptual skills to deal with a problem that nobody had faced or anticipated in their business career before. There was no manual to follow and no policies that could guide all actions. The effective use of time and the ability to manage communications in various forms was also a vital element.

E-Business and Social Media Solutions: Managing Contingent Workers Critical Thinking Question 1.Managing employees and increasing productivity is one of the biggest challenges today. Name and describe some of the specific challenges that organizations face with a contingent workforce.

For managers, a contingent workforce has its pros and cons.  Companies can scale up and down to meet the changing demands of both internal  and external customers  Gig workers are not subject to the same employment laws If the contractor does not perform up to standards, you simply don’t hire them again .

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Part 2—The Business of Managing  Hiring contractors for shorter terms presents challenges in strategic planning and consistent workforce development.

Entrepreneurship and New Ventures: Khan Academy: Innovative Management This insert describes the entrepreneurial work of Salman Khan, who has developed informational videos to help managers be more effective in their work. The insert also briefly describes Khan’s three core strategies.

Critical Thinking Question 1.

Based on what you have read in this boxed insert, as well as the notes on management theory in this chapter, what type of leader is Salman Khan? Explain your reasoning. (Note: Also read the “Leadership and Motivation” section in Chapter 9 before answering this question.)

As noted in the insert, Khan is himself discovering a lot about management because of his development of videos that help other managers to deal with the challenges that inevitably arise in their work. Khan does not accept the traditional idea that the job of a manager is to simply motivate subordinates to do work. Instead, he thinks the manager’s job is to mentor and develop subordinates. This means that he likely subscribes to the “leader as coach” approach to management. Just as a professional sports coach allows talented players to execute key plays in a game, Khan trusts that his “players” will do the right things so that his organization is successful. Khan is therefore very likely to use a democratic leadership style where his team members are encouraged to participate in the making of decisions that will affect them. In terms of the use of power, Khan obviously has legitimate power (i.e., authority), although he probably prefers to use reward power and referent power.

Khan also has characteristics that are consistent with charismatic leadership (see Figure 9.8 in the text). While the insert does not provide a lot of detail, it seems likely that Khan would, for example, model consistent behavior for subordinates, demonstrate personal excitement, and express confidence in his team members.

Disruptions in Business: Managing Against Disruptive Forces Critical Thinking Questions 1.How do the four functions of management (planning, leading, organizing and control) relate to network security?

Planning is the forward-thinking aspect which is based on analysing the previous experiences and external threats. Leadership must prioritize cyber security and organize resources to proactively deal with such threats. Finally, any cyber security program is only as good as the controls and the ability of the firm to verify, control and address any attacks and identify perceived gaps before a problem occurs. .

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Chapter 6—Managing the Business Enterprise 2.Explain how contingency planning and crisis management are relevant for dealing with the problem of cyberattacks.

The relevance of crisis management for dealing with cyberattacks is obvious, because these attacks cause a crisis that must be immediately dealt with.

The situation for contingency planning is a little different because managers are not in a situation where they need to make an immediate response. Rather, they need to think carefully about what they might do if something like a cyberattack happens. Since these attacks are becoming more frequent, more experience has been gained about ways to deal with them when they occur. So, a contingency plan like moving some activities to the cloud is one response that is more frequently being adopted, because that reduces the chance of disruption. But, as noted in the boxed insert, other problems that have nothing to do with cyberattacks can also occur, and contingency plans must also be developed for those.

QUESTIONS AND EXERCISES Questions for Analysis 1.

How are the four functions of management related to the five skills of management? Use examples to clarify your answer.

Planning—Conceptual skills are needed so the manager can recognize and analyze new opportunities and threats for the businesses as a whole, conceive of alternative plans of action, and develop a strategy for implementation. Human relations skills are necessary to lead staff and to ensure that information flows effectively both down and up the chain of command. Technical skills are necessary to carry out such activities as the actual forecasting process. Decision-making skills are essential, otherwise nothing would ever get accomplished. Time management skills are critical to a top manager because there are always more demands on his or her time than can be dealt with. The manager must use time effectively to get as much done as possible but must also prioritize well to make best use of the available time.

Organizing—Conceptual skills are used to evaluate the benefits of providing resources to projects and activities competing for resources. Technical skills are required to determine the benefits each project will create. Decision-making skills are needed to make the allocations. Human relations skills are needed to ensure that those individuals not receiving requested funding remain committed to the organization.

Leading—Human relations skills are necessary to clearly communicate goals and objectives, motivate employees, and maintain strong morale. Conceptual skills are used to envision how the company can improve employee motivation. Decision-making skills are needed to evaluate alternatives and select the most effective of means of encouraging employee involvement and commitment to organizational goals.

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Part 2—The Business of Managing Controlling—Technical skills are necessary to properly interpret performance measures. Decision-making skills are necessary to take the appropriate actions once the evaluation is done, and human relations skills are important to provide positive feedback and motivate employees to improve performance.

2.

What is the relationship between Mintzberg’s roles of management and the more traditional functions of management? Use examples to clarify your answer.

Planning organizing, directing, and controlling are the functions of a manager whereas the managerial roles according to Mintzberg consist of three groups: interpersonal (figurehead, leader, liaison) informational (monitor, disseminator, spokesperson) and decisional (entrepreneur, disturbance handler, resource allocator).

While performing their functions managers assume the various roles identified by Mintzberg.

3. 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.

4.

“Consider the following statement: In some companies, it is important that the CEO put more emphasis on technical skills than on human relations skills.” Do you agree or disagree with the statement? Defend your answer.”

In a high-tech company (e.g., software development), a top manager with technical skills might have some advantages over another top manager who does not have as much in the way of technical skills. Subordinates might, for example, be more willing to adopt ideas of the top manager because the possession of technical skills gives the top manager an extra measure of legitimacy. But the argument that more emphasis should be put on technical skills than on human relations skills is questionable because it implies that (a) human relations skills aren’t as important as technical skills, and (b) that managers can be effective without much emphasis on human relations skills. If a top manager’s human relations skills are poor, that manager is not going to be effective in motivating, leading, and communicating with subordinates. Such a manager will likely spend too much time on technical matters, and not enough time on using human relations and conceptual skills. That manager is also likely to become too involved in the details of subordinates’ work, and that will reduce their motivation. Even in a situation where a lot of technical skills are needed, human relations skills are critical for the effective management of people.

The same sort of argument might also be made when comparing the relative importance of technical and conceptual skills. Conceptual skills are needed by every company wishing to succeed with its mission. The mission of a firm, by its very nature,

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Chapter 6—Managing the Business Enterprise requires that conceptual skills be applied. This is as true in high-tech companies as it is in other types of companies. Conceptual skills are critical in a top manager’s job.

5.

What differences might you expect to find in the corporate cultures of a 100-yearold manufacturing firm based in Winnipeg and a five-year old e-commerce firm based in Ottawa?

The 100-year-old manufacturing firm probably has a well-established, ingrained culture that is managed by a top-down approach (don’t fix if it ain’t broke attitude). By contrast, the five-year old e-commerce firm is probably more flexible with more input encouraged by all levels of employees (due to the nature of the industry and the “youth” of the company).

6.

Consider the various corporate-level strategies discussed in the text (concentration, growth, integration, diversification, investment reduction). What is the relationship between these various strategies? Are they mutually exclusive? Are they complementary? Explain.

Most can be seen as growth strategies and, in fact, the strategies can be considered as complementary.

Concentration—Focus on a single product/service and involves increasing sales, profits, or market share faster than it has increased in the past.

Integration—Horizontal integration: add one or more business of similar type Vertical integration: involves extending an organization’s present business in two possible directions.

Backward integration—More control on raw materials.

Forward integration—Control over sales and distribution Diversification—Move to area that is different from its current business Investment reduction—Most companies’ products or services eventually reach a point where future growth appears doubtful or not cost effective. The usual approach is to limit additional investment and expenses and to maximize short-term profit and cash flow Application Exercises 7.

Interview a manager at any level of a local company. Identify that manager's job according to the level and area. Explain what planning, organizing, directing, and controlling mean in terms of the manager’s job. Also indicate which management skills are most important for the manager’s job.

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Part 2—The Business of Managing This is a fairly comprehensive assignment. To help students get the kind of information they need, you might make up a form with the desired information and hand it out to them. They can then use this as a template for gathering information and focusing their thinking.

8.

Analyze mission statements from three companies. How effective do you think the mission statements are? Explain your reasoning. Do you think the mission statements clearly reflect the identity of the company? Explain.

When assessing student answers, determine what criteria (either explicit or implied) students are using to reach their conclusions about how effective the mission statements are. It is also useful to ask whether the criteria being used (profit, customer satisfaction, employee satisfaction, company reputation, etc.) are appropriate.

Determining whether the mission reflects the identity of the company will be more subjective, but there must be at least some evidence (and explanation of that evidence) to support their conclusion.

9.

Interview an administrator at your college or university and get that person’s views on the school’s strengths and weaknesses, and on the threats and opportunities the school is facing. Then use this information to write up a SWOT analysis for the school.

Answers will vary here, but there will definitely be similarities. For example, most administrators will identify uncertainties about provincial funding as a threat, and many will identify new programs as an opportunity. Keep in mind that administrators may be reluctant to list weaknesses. Summarize the findings of students in the class to construct a comprehensive list of strengths, weaknesses, opportunities, and threats. Make sure that students are properly categorizing items into the four categories (strengths and weaknesses are factors internal to the organization, while opportunities and threats are factors external to the organization).

10. any organization of which you are a member (your company, your family, Select your place of worship, or a club). Explain the relevance of the management functions of planning, organizing, directing, and controlling for that organization.

Planning takes the form of choosing which activity is to be conducted, who will participate, how the activity will be run, and what the techniques for evaluation of the effectiveness of the activity will be. Organizing takes place when the members of the club are given certain duties to perform and when the resources are gathered that will allow the activity to be undertaken. Leading is the function involved with taking charge of the authority and responsibility for the club in general. This function is also accomplished when the club leader delegates responsibilities and commensurate authority to others.

Controlling occurs when, during the steps leading to an event, measurements are taken actual versus planned performance, and corrective action, if required, is taken. Also, once the event has occurred, a final evaluation of the results from all aspects is conducted, and analysis or corrective action is taken.

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Chapter 6—Managing the Business Enterprise TEAM EXERCISES Building a Business: Continuing Exercise In this exercise students are asked to focus on the expertise necessary to successfully manage their business. They must indicate what each of the functions of management mean for their specific business. They should also incorporate information from their SWOT analysis to determine their goals and strategies, and they need to develop contingency plans.

Building Your Business Skills: Dreams Can Come True 1.

Working with your group, develop a mission statement for Dream Vacations.

Why is developing a mission statement important?

Mission statements will vary a bit from group to group, but they should be assessed on the basis of how well their mission statement fits with the text definition (a mission statement defines how an organization will achieve its purpose in the environment in which it conducts its business). It’s difficult to develop other goals if this one is unclear or undefined.

2.

Considering Dream Vacations’ mission statement and the information provided in the case, state several key short-, medium-, and long-term SMART goals. How should Arturo measure these goals? What types of corrective action should Arturo take if the company fails to meet these goals?

Long-term goals should address the types of trips, the types of customers, and the destinations which Dream Vacations expects to focus on. The specific goals that groups identify will determine the methods of measurement that will be necessary.

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

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.

3.

What would contingency plans look like for Dream Vacations? What about crisis management plans? .

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Contingency planning means identifying in advance changes that might occur that would affect a business and developing a plan to respond to such changes. For this scenario, one obvious contingency plan would deal with weather-related problems (particularly for destinations in the Caribbean which might be hit by a hurricane). The contingency plan would indicate the kinds of alternate locations that would be looked at for customers if intended location cannot be reached because of an unexpected hurricane.

Crisis management means dealing with an emergency that demands an immediate response. A crisis management plan in this scenario would include plans for alternate transportation home if an airline the customers have a booking with suddenly goes bankrupt.

Exercising Your Ethics: Team Exercise: Clean Up Now, Or Clean Up Later?

Activity Overview: This activity asks students to examine the ethical issues that can arise when making business decisions and recognize how easy it might be to take the “easy way out” and not comply.

Time Limit: 45 minutes What to Do: 1.

Divide the class into four-member teams and ask them to read and follow the instructions for the Exercising Your Ethics: Team Exercise. Students should choose one of the different roles in the exercise. (30 minutes) 2.

Reassemble the class as a whole and discuss the disagreements that arose within their groups. How did the role they were assigned affect their perspective? (15 minutes) Don’t Forget: Remind students to stay within their assigned roles.

Wrap-Up: Wrap up by noting that there is seldom a yes/no, right/wrong, black/white answer to ethical decisions in business. Sometimes, however, it is obvious that certain actions are illegal or unacceptable by the majority of those concerned.

CLOSING CASE Harley-Davidson: Managing a Legendary Brand for Over a Century 1.Managing a company for over one century requires effective management techniques.

Using examples from this case explain how leaders at Harley Davidson demonstrate the four functions of management (planning, leading, organizing and control-PLOC)?

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Chapter 6—Managing the Business Enterprise Planning is the process of determining the firm’s goals and developing a strategy for achieving those goals. Leading involves the interactions between managers and their subordinates as they work to meet the firm’s objectives. Organizing involves mobilizing the resources required to complete a particular task. Controlling is the process of monitoring a firm’s performance to make sure it is meeting its goals. Examples from the case could include the use of PLOC for the development of the initial bikes, to the creation of new models in the early days all the way to this new revolutionary LiveWire product. The students can also discuss how top managers handled international expansion as well as all the major crisis and wars in the last 100 plus years.

2. Conduct a SWOT analysis on Harley-Davidson today? What are the three key issues that your team believes Harley must address in the short-term?

SWOT involves identifying organizational internal Strengths and Weaknesses and identifying environmental Opportunities and Threats. A core strength for Harley is their strong brand name and their devoted fans. Weaknesses include the aging of their core demographic and their difficulty in attracting the latest generation to their iconic bikes.

When it comes to external opportunities and threats one clear example is that traditional bikes are not environmentally friendly. In launching this LiveWire extension, they are acknowledging that and trying to capitalize on a growing opportunity but strategically it is a difficult fit with their traditional core brand elements and image.

Encourage students to look beyond the case at the latest issues in the news in general and in Harley’s press releases.

3. Harley is known for their rebellious image and large and loud bikes? Was the launch of the LiveWire electric motorcycle a good strategic management decision? Why? Why not?

Student answers may vary. This might be a nice exercise to have a debate. Ask the students in half the class to find arguments in favour (i.e., evolving with the times, reaching a new demographic, creating a more sustainable model) and ask students on the other side to focus solely on arguments against (i.e., this product goes against the core image of the brand: loud and rebellious).

4. Using one or two of the major critical moments, described in the case from the past century, highlight some of the good and bad management practices/actions that were identified.

Positive examples:  The company was truly innovative: in 1909, it introduced its first V-twin engine —a 49.5-cubic-inch monster that delivered all of 7 horsepower. Because of the rather awkward 45-degree angle of the two cylinders, the bike had a unique rumbling noise that Harley is known for.  It survived the Great Depression. In 1929, Harley sales had reached 21,000 bikes but dropped to 3,703 by 1933. Because of its solid reputation, its brand awareness level and strong presence in the marketplace, and with some intelligent diversification by management, Harley was one of only two motorcycle manufacturers that survived the Great Depression. .

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Part 2—The Business of Managing  Despite increased competition in the 1990s Harley chased a new batch of innovations, such as the Softail, and joint ventures (such as Buell). By 1998, demand for Harley-Davidson motorcycles exceeded supply, driving up prices, profits, and the stock price.  For over a century the way that the company has cultivated its brand and kept its customer’s loving Harley is a testament to good management.

Negative examples:  The first Harley-Davidson motorcycle was a disappointment. The tiny 7-cubic inch engine could not even make the bike go up a small hill.

At various stages in its history the company suffered from aging and outdated equipment. **Younger riders are looking for smaller bikes and scooters. Has the company been slow to appeal to this new market? Is the new line of sport bikes and other entry-level cruisers, along with the electric LiveWire and the Pan America adventure bike just reactionary?

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CHAPTER 7 ORGANIZING THE BUSINESS ENTERPRISE CHAPTER SYNOPSIS This chapter discusses the building blocks of organizational structure— specialization and departmentalization. decentralization,

Important

concepts

like

centralization

and

delegation, and authority are introduced. The differences between functional, divisional, matrix, and international organizational structures are noted, and the most popular new forms of organizational design are described. The chapter concludes with a discussion of the informal organization and the effect it has on the formal organization structure.

CHAPTER OUTLINE I.

WHAT IS ORGANIZATIONAL STRUCTURE? Organizational structure is defined, its appropriateness discussed, and organization charts and the chain of command are described.

A. Determinants of Organizational Structure—The organization’s purpose, mission, and strategy are important determinants of its structure. The organization’s size, technology, and environment are also important.

B. Chain of Command—This refers to the reporting relationships within The an organization. When these reporting relationships are not clear, problems develop.

II.

THE BUILDING BLOCKS OF ORGANIZATIONAL STRUCTURE The first step in developing the structure of the business is to determine specialization and departmentalization.

A. Job Specialization—This process breaks down the activities to be done into specific jobs. The advantages and disadvantages are discussed.

Specialization and growth—As an organization increases in size 1. and in the scope of its activities, work becomes more specialized to gain the benefits of increased efficiency.

B.

Departmentalization—This refers to the grouping of jobs into logical

units.

1.

Functional departmentalization—A common structure in service

and manufacturing companies, it is based on functions or activities that are .

Chapter 7—Organizing the Business Enterprise necessary in order for the organization to be successful (e.g., marketing, production, finance, etc.).

2.

Product departmentalization—More likely to occur in some manufacturing firms, this structure is divided according to the specific goods that are being produced.

Customer departmentalization—This structure, typical of general 3. department stores, organizes according to the type of customer likely to buy a given product.

4.

Process departmentalization—Another structure that is often used in manufacturing, it sets up departments based on the production process that is used to make a product.

5.

Geographic departmentalization—This structure is based on geographic areas where the company does business.

III.

Multiple6.forms of departmentalization—Because different forms of departmentalization have different advantages and disadvantages, as firms grow in size, they tend to adopt different types of departmentalization for various levels in the organization. See Figure 7.2.

ESTABLISHING THE DECISION-MAKING HIERARCHY A. Assigning Tasks—Responsibility is the duty to perform an assigned task, while authority is the power to make the decisions necessary to complete the task.

B. Performing Tasks—Delegation occurs when a manager assigns a task to a subordinate. Accountability falls to the subordinate, who must then complete the task. Some managers fail to delegate tasks because they assume that subordinates can never do anything as well as the manager can, or because they fear that their subordinates will “show them up” in front of others by doing a superb job, or because they simply want to control everything. Remedies for this problem are discussed.

Distributing Authority: Centralization and Decentralization—In a C. centralized firm, top management retains the right to make most decisions; in a decentralized firm, there is a conscious effort to push decision making rights down to middle and lower level managers.

Tall and flat organizations— Decentralized firms tend to have a 1. flat organizational structure with only a few layers, while centralized organizations usually have multiple layers of management and a tall organizational structure (see Figure 7.3).

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Part 2—The Business of Managing Span of2. control—This refers to the number of subordinates a manager can effectively supervise. The more diverse the subordinates' activities, the smaller the span of control is likely to be.

D. Three Forms of Authority—Three forms of authority typically found in organizations are line authority, staff authority, and committee (or team) authority.

Line authority—Line managers are the "doers" and producers in a 1. company. Line authority means making the decisions that are needed to achieve the goals of the organization.

2. authority—Staff authority is based on special expertise (e.g., Staff law, accounting, market research, etc.). Staff experts generally have the right to advise line managers, rather than the right to decide. In their own departments, staff managers have authority over their subordinates.

3.

Committee and team authority—This is authority granted to work teams that play key roles in the firm's operations. Teams may be allowed to plan and organize their own work.

IV.

BASIC ORGANIZATIONAL STRUCTURES A. Functional Structure—In this structure, the various units in the The organization are formed on the basis of the functions that must be carried out to reach organizational goals. The advantages and disadvantages of this structure are summarized in Table 7.1.

B. Divisional Structure—The divisional structure divides the The organizations into several semi-autonomous divisions that act as profit centres.

The advantages and disadvantages of this structure are summarized in Table 7.2.

C. Project Organization—This involves forming a team of specialists from different functional areas to work on a specific project. If the project organization is temporary, when the project is completed, the team is disbanded. If it is permanent, the team members start a new project when the current one is completed.

D. Matrix Structure—See Figure 7.6 for an example of matrix organization, which is a variation of a project structure. In the matrix organization, the project manager and the regular line manager share authority.

E.

International Structures—Many business firms do business worldwide,

and they find they need special structures to facilitate their activity. The most

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Chapter 7—Organizing the Business Enterprise common international structure is to set up an international division that handles production and sales for all foreign markets.

V.

ORGANIZATIONAL DESIGN FOR THE TWENTY-FIRST CENTURY The increasingly complex and fast paced world encourages business to look for new forms of organization.

A. Boundaryless Organization—Traditional boundaries and structures are minimized or eliminated altogether.

B. Team Organization—This relies almost exclusively on project-type teams, with little or no underlying functional hierarchy.

C. Virtual Organization—Typically has only a small number of permanent employees. There is little or no formal structure, and work is outsourced as the need arises (see Figure 7.8).

D. Learning Organization—These organizations facilitate lifelong learning and personal development of employees, while transforming themselves to respond to changing demands and needs.

VI.

THE INFORMAL ORGANIZATION The everyday social interactions among employees have an impact on the functioning of the formal organization. The unofficial (informal) structure of an organization effectively alters a company’s formal structure. Sometimes the informal structure can be more powerful than the formal structure. Sometimes the informal structure helps the formal organization and sometimes it hinders it.

A. Informal groups—Groups of people who decide to interact even if the formal organization does not recognize or require their interaction.

The organizational grapevine—The grapevine is the informal B. communication network that exists in every organization. It can both help and hinder the company.

QUICK QUESTIONS 1.

What does an organization chart tell us?

2.

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

3.

What type of company might opt to use product departmentalization?

4.

What type of company might opt to use process departmentalization? .

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5.

What type of company might opt to use functional departmentalization?

6.

What type of company might opt to use customer departmentalization?

7.

What type of company might opt to use geographic departmentalization?

8.

How many employees do you think a manager 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 can be

9.

10.

11.

12.

13.

14.

done to resolve this problem?

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?

What are the strengths and weaknesses of the functional structure?

What are the strengths and weaknesses of the divisional structure?

What is the informal organization like at your place of employment?

What are the strengths and weaknesses of the grapevine?

IN-CLASS EXERCISES Exercise #1: 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 structured the way that it is.

Time Limit: 30 minutes What to Do: 1.

In advance, have students obtain a copy of the organization chart of their college or university.

Divide the class into four-person groups, asking each group to determine (a) the 2. chain of command, (b) who reports to whom, and (c) why the organizational is structured the way it is. (20 minutes)

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Reassemble the class and discuss each group’s findings. Are the groups consistent with one another in their conclusions? (10 minutes) Don’t Forget: Students will likely identify many types of reporting relationships within their 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.

Exercise #2: Centralization Versus Decentralization 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-person 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 system do they think is best? (15 minutes) Don’t Forget: Remind students that not everyone has worked in both a centralized and a decentralized organization; however, the advantages and disadvantages for each will become more apparent as students discuss the issue.

Wrap-Up: Bring the activity to a close by reminding students that since top managers make all (or most) of the decisions in a centralized organization, employees may actually “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 pointed out that cohesiveness may appear to be higher in some centralized organizations.

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Part 2—The Business of Managing Exercise #3: Just Following Orders Activity Overview: This activity asks students to read a supplemental article and think about the hierarchy of authority within organizations and the ambiguous roles they are expected to play in light of resulting ethical dilemmas.

Time Limit: 30 minutes What to Do: 1.

Make copies of the material below and distribute to students prior to the class in which the exercise is to be conducted.

-----------------------------------------------------------------------------------------------------The business world is replete with examples of people behaving in ways they presumably knew were wrong because someone “higher up” in the organization told them to do so. Examples of such practices include these: • Staff members at Arthur Andersen shredded documents related to the Enron debacle because their senior manager told them to.

• Crewmembers on board Royal Caribbean cruise ships dumped toxic waste into the ocean because their boss told them to.

• anagers at Firestone and Ford did not report known defects on tires that were M being used on the popular Explorer model because higher-level managers told them to keep quiet.

What accounts for such practices? While there are a number of explanations, one common one is that people are often indoctrinated to believe they need to follow the chain of command and not question orders or directives from those above them in that chain. More specifically, people may come to believe that if someone higher up in their organization tells them to do something, they have little choice but to follow orders, and, in doing so, they also absolve themselves of responsibility.

This tendency was powerfully demonstrated in a classic series of studies conducted by noted Yale psychologist Stanley Milgram. Milgram told subjects in an experiment that they were to administer electric shocks to another “subject” in the next room on his commands. They were also informed that each successive command would result in a more powerful shock than the previous one. As the shocks increased in intensity, the other individual began to yell and scream in pain and eventually started to beg the subject to stop. (The other individuals were actually confederates in the study and were only acting like they were getting shocked.) While many subjects became uncomfortable and some asked if the experiment could be halted, upon hearing Milgram order them to continue (because “the experiment cannot be stopped” or “you don’t need to worry, I know what I’m doing”), most did so. Indeed, more than half of the subjects .

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Chapter 7—Organizing the Business Enterprise actually administered a shock clearly labeled as dangerous and potentially lifethreatening when ordered to do so.

So, what is the bottom line? Each individual has to make her or his own decisions when confronted with a situation in which their boss instructs them to do something they know or suspect to be wrong. Too much questioning or unwillingness to carry out orders can result in sanctions or even job loss, but people need to exercise some degree of selfcontrol and be willing to accept personal responsibility for their actions.

Questions for Discussion 1.

In what situations should subordinates go against what they are taught by questioning authority that may appear questionable?

In what situations should subordinates not question authority?

2.

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Divide students into three-person groups and ask them to answer the questions for discussion in their groups. (15 minutes) 3.

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

Don’t Forget: Remind students not to hold back in their answers and discussions by “what has always been done.” Students should feel comfortable in offering whatever suggestions they have in this exercise.

Wrap-Up: Bring the activity to a close by noting that individuals have to make their own decisions when confronted with a situation in which their boss instructs them to do something they know or suspect to be wrong.

Exercise #4: Getting with the Program Activity Overview: This activity helps students understand the relationship between organizational structure and a company’s ability to attract and keep valued employees.

Time Limit: 45 minutes What to Do: 1.

Divide the class into three- or four-person groups. Ask each group to read the situation in the “Building Your Business Skills” exercise at the end of Chapter 7. (10 minutes)

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Ask the groups to discuss the specific organizational changes that might improve the working environment and encourage employee loyalty in this scenario. (20 minutes) 3.

Reassemble the class as a whole and discuss each group’s suggestions. (15 minutes) Possible answers to the Follow-Up Questions are found in the “Team Exercises” section later in this chapter.

Don’t Forget: There are several other industries in which managers face similar situations.

Wrap-Up: Bring the activity to a close by discussing the value of job specialization and what it can do for employee morale. Also discuss employee empowerment in decision making and how team empowerment can make a difference in situations.

Exercise #5: Who Runs the Grapevine?

Activity Overview: This activity invites students to think more about the grapevine, focusing on who 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-person 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 because of overhearing information or making assumptions about other workers, departments, the company’s strategic plans, and so on.

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Chapter 7—Organizing the Business Enterprise Exercise #6: Cooking Up a New Structure Activity Overview: This activity gets students involved in answering the discussion questions for a case study on organizational structure.

Time Limit: 30 minutes What to Do: 1.

Make copies of the following case study and distribute to students in advance of the class when this exercise will be conducted.

---------------------------------------------------------------------------------------------------------Cooking Up a New Structure A few years ago, Sara Lee CEO John H. Bryan realized that he had a problem.

During the 25 years of his tenure, the firm had grown beyond its foundation in food products to encompass dozens of lines of business—everything from cake mixes to insecticide to lingerie. The new businesses were acquisitions, and the original managers controlled each one as if it were a separate company. Calculating the cost of all this duplication, Bryan reached the conclusion that the company could not afford high costs at a time when price competition was heating up.

In an effort to fix things, Bryan sold or eliminated about one-quarter of the firm’s 200 products. He cut redundant factories and the workforce, reduced the number of products, and standardized company-wide processes. He called his extensive restructuring program “deverticalization,” and his goal was to remove Sara Lee from manufacturing while strengthening its focus and effectiveness as a marketer. In the meantime, however, he continued to acquire rival firms to sustain the company’s growth.

Despite Bryan’s efforts, Sara Lee continued to suffer from high costs and remained unfocussed and inefficient. Said one industry analyst about Bryan’s strategy: “Sometimes, the more chairs you move around, the more dust you see behind the chairs.”

When C. Steven McMillan took over from Bryan at Sara Lee, it was, in the immortal words of Yogi Berra, “. . . déjà vu all over again.” McMillan quickly realized that Bryan’s moves had had little impact on the firm’s performance and that he himself would need to start making some big changes. Borrowing a page from rival Kraft Foods, he began by merging the sales forces that specialized in various brands to create smaller, customer-focussed teams. In meats alone, for instance, Sara Lee had 10 different brands, including Ball Park, Hillshire Farms, Bryan, and Jimmy Dean. “So if you’re a Safeway,” explained McMillan, “you’ve got to deal with 10 different organizations and multiple invoices.” Teams reduced duplication and were more convenient for buyers—a win-win situation. National retailers like Wal-Mart responded by increasing their orders for Sara Lee products.

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Part 2—The Business of Managing McMillan also centralized decision making at the firm by shutting down 50 weaker regional brands and reorganizing the firm into three broad product categories: Food and Beverage, Intimates and Underwear, and Household Products. He abolished several layers of corporate hierarchy, including many of the middle managers the firm had inherited from its acquisitions. He created category managers to oversee related lines of business, and the flattened organizational structure led to improved accountability and more centralized control over Sara Lee’s far-flung operations.

McMillan also borrowed some tactics from his predecessor, divesting 15 businesses, including Coach leather goods, and laying off 10 percent of his workers. In another move that was widely questioned by industry observers, he paid $2.8 billion for breadmaker Earthgrains. The move increased Sara Lee’s market share in baked goods, but many observers felt that McMillan paid too much for a small potential return.

McMillan still had a few tricks up his sleeves. One bold move was developing a chain of retail stores named Inner Self. Each store features a spa-like atmosphere in which to sell Sara Lee’s Hanes, Playtex, Bali, and Wonderbra products. Susan Nedved, head of development for Inner Self, thinks that the company-owned stores provide a more realistic and comforting environment for making underwear purchases than do some specialty outlets. “There seems to be an open void for another specialty concept that complements Victoria’s Secret,” says Nedved. “There was a need for shopping alternatives that really cater to the aging population.”

McMillan remains confident that his strategy—more centralization, coordination, and focus—will do the trick at Sara Lee. “I do believe the things we’re doing will enhance the growth rate of our company,” he says. But many observers are less optimistic. As for Inner Self and underwear, one analyst points out that “even if you fix that business, it’s still apparel, and it’s not really viewed as a high-value-added business.”

Even if McMillan’s strategy does manage to cut costs and increase market share, skeptics point out that there is no logic behind the idea of housing baked goods, meats, coffee, underwear, shoe polish, and household cleaners under one corporate roof. Unless McMillan can find some as-yet-undiscovered synergy among such disparate units, Sara Lee is probably headed for a breakup into several smaller, more focussed, more profitable companies.

Questions for Discussion 1.

Describe the basic structural components at Sara Lee.

2.

What role does specialization play at Sara Lee?

3.

What kinds of authority are reflected in this case?

4.

What kind of organizational structure does Sara Lee seem to have? .

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5.

What role has the informal organization played in Sara Lee’s various acquisitions and divestitures?

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Divide students into three- or four-person groups and assign one question to each of the groups. (10 minutes) After the groups have completed their respective answers, reassemble the class 3. and discuss each question. (Answers to the Questions for Discussion are as follows: (20 minutes) 1.

Describe the basic structural components at Sara Lee.

The fundamental components of an organization’s structure are: the degree of job specialization, the different jobs that are grouped together to create departments, and the assignment of decision-making authority.

At Sara Lee, the changes instituted by Steven McMillan expanded the product lines assigned to each sales force, creating customer-focused teams. This reduced the degree of job specialization. It appears that the departmentalization continues to be based on product lines and functions.

Growth has come through acquisitions of existing businesses. Since these continued as if they were independent companies, these entities are departmentalized on the basis of product (There is no indication that McMillan made any substantive change to this structure). At the same time, McMillan restructured so that the sales forces are selling product lines of different companies, which is a functional departmentalization.

McMillan arrived at Sara Lee to find a very decentralized decision-making structure. Although there are indications that McMillan created more centralized control, it is difficult to determine how far along the continuum McMillan moved the company. Given the diversity of product lines, it is unlikely that decisionmaking was fully centralized.

2.

What role does specialization play at Sara Lee?

From the information available, job specialization occurs on both functional and product lines. The firm is now organized into three broad product areas, food and beverage, intimates and underwear, and household products. As the firm seems to have retained the divisional structure based on the product lines, the production jobs are specialized by product. The sales force sells products produced by multiple divisions, indicating job specialization by function.

There isn’t enough specific information provided in the case to do a detailed evaluation of the job specialization. .

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3.

What kinds of authority are reflected in this case?

The case primarily describes line authority, as it refers to McMillan’s actions as CEO and to positions such as category manager.

4.

What kind of organizational structure does Sara Lee seem to have?

Sara Lee seems to have an organizational structure consisting of manufacturing and production activities departmentalized by product, the sales activities that are departmentalized by function, decision-making authority delegated to category managers, presumably some decision-making allocated to the product divisions, with fewer layers of management in the organizational chart than previously existed.

5.

What role has the informal organization played in Sara Lee’s various acquisitions and divestments?

There is no specific mention in the case of the informal organization, but we know that an informal organization exists within the confines of every formal organization. We also know that the informal organization influences the formal structure. So, to conclude that the informal organization (and organizational politics) has played no role in the acquisitions and divestments that are described in the case is not accurate. The fact is that each of the decision makers at Sara Lee likely have strong views about a variety of subjects, including organizational structure, and those views will influence the positions they take on things like acquisitions and divestments.

Don’t Forget: Remind students that this is an opportunity to tackle some problems that are being faced by a real company.

Wrap-Up: Wrap up the discussion by providing an overview of the types of structure and kinds of authority highlighted in the chapter.

Exercise #7: Improving an Organization Chart Activity Overview: This activity gives students the opportunity to work with a real organization chart and to try to improve it.

Time Limit: 30 minutes

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Chapter 7—Organizing the Business Enterprise What To Do: Divide your students into small groups and ask them to develop two organization 1. charts for your college or university: (a) the current structure, and (b) a structure that shows changes that they believe would improve the school.

2.

Ask each group to share chart (b), and to explain why it would represent an improvement.

Working as a class, develop an “ideal” organization chart that combines the best 3. elements of each group. Is the “ideal” chart realistic? What hurdles might stand in the way of implementation? If possible, you may want to invite a college administrator to join your class for the exercise and add input from an administrative perspective.

4. you have Web projection capability, consider taking your students on a tour of If the Walt Disney Company Web site. Based on the site, what conclusions can the class draw about the organization? Why? (Disney has a product-based divisional structure, but strong centralized brand management to ensure the integrity of the Disney brand, and a committee with representatives from each division to develop synergy strategies.)

TEACHING TIPS 1. very term "chain of command" suggests a military organization. We think of The military units (from an infantry platoon up to an armoured division) as being well organized, with its lines of authority very clearly delineated. There might be something to be gained by asking the students to consider whether or not military units are indeed better organized than civilian companies. If such is the case, then what can civilian organizations do to improve their situations? If such is NOT really the case, then why do we feel that better order exists in military units than in civilian units?

2. both military and civilian organizations, the phrase "observing the chain of In command" means to preserve the integrity of the organizational hierarchy and to report unusual happenings, first of all, to your own direct supervisor.

3.

Explore with the students the hazards of low echelon people going directly to the CEO with minor complaints.

Regardless of how many rules and regulations an organization (military or 4. civilian) may have, there will always be political considerations. Ask students to explain how political manoeuvres can be expedited by disregarding the chain of command.

5.

Students can engage in an exercise that will illustrate job specialization. Ask each

student to start with a sole proprietor operating his or her business alone. Have each student develop a narrative about how the business grows and the lone entrepreneur must add personnel to the firm to see that all the necessary tasks are performed. Some entrepreneurs that might be used are: owner of a small greeting card shop; owner of a .

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6. concepts of responsibility, authority, delegation and accountability are so The closely connected that it is difficult to separate them. Authority refers to the power that an individual has to make decisions. With that authority comes the responsibility to make appropriate decisions and to be held accountable for those decisions. Authority may be delegated to others, who will then have the responsibility for the decision and will be held accountable for those decisions. Students may be asked to consider if a manager can avoid responsibility for a difficult decision by delegating the task to a subordinate. If the subordinate does a poor job, who should be accountable for the decision? What factors have the students considered in forming their opinions? Are there other factors that should be considered? In a decentralized organization, for what is the CEO accountable?

7.

Adding a staff member is a major decision that is not made lightly. For example, an insurance agent has a secretary, and it is noticed that the secretary is grossly overworked. A second secretary is added, but that person is kept busy for only half of the working day. More work is getting done, but the company is paying for a half-day of secretarial time where work is not being done. A solution is for the insurance agent is to drum up more business so that both secretaries will be kept busy. Another solution may be flextime for the second secretary or for both secretaries.

8.

Regarding the previous teaching tip, it can be pointed out that this is the situation that may very well call for a "temp." Students may want to explain how such a move could be helpful in the situation above. What are the disadvantages of hiring a “temp”?

9. text describes departmentalization by function, customer, product, process, The and geographic region. Ask students to think of organizations they have known that were departmentalized along other lines. Identify some of these other bases for departmentalizing.

10.is natural for people who are low in a hierarchy (such as found in a business It firm, in the military, or at a university) to be extremely unhappy over the fact that they have no control over their own destiny. Put another way, such persons do not have decision-making authority. If, as sometimes happens, such a person is quickly promoted to a position requiring daily decision-making, that person soon discovers that being a decision-maker is not that much fun after all. Almost every decision made will make someone unhappy. Some persons do not want people to be unhappy with them. In short, students should be led to see that having decision-making authority is a mixed blessing.

With the foregoing in mind, we must be reminded that many people in responsible 11. positions may tend to leave final decisions to others. By so doing, when things go wrong, the person who has shunned decision-making can claim: "But that grave error was not MY decision." A capable administrator is willing to accept the decision-making responsibility. Such a mature attitude is reflected in the sign that rested on President Harry Truman's desk in the Oval Office: "The Buck Stops Here." .

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12.

Debate could rage on endlessly over which makes the most sense, centralization or decentralization. Discuss the implications regarding small, medium, and large companies. Are there differences? Does it matter whether the business is operating in one industry or multiple industries?

13. sure that students recognize that one person cannot know everything and Make does not have time to do everything, so as the business grows in size and complexity, firms tend to become more decentralized. Centralization and decentralization are on a continuum, it is really a question of to what extent decision-making is decentralized.

Decisions are often made by small groups that have been assembled for a 14. particular purpose. Some decisive leaders find themselves uncomfortable with the fact that decisions are being arrived at by committees. Ask the students which kinds of workers would be most comfortable working in an organization with a committee or team form of authority.

15.

Discuss the concept of a learning organization, and how this will impact their future.

16.

Ask students to defend the following assertion: "The functional organization is acceptable for a smaller firm, but when the firm gets beyond a certain size, it must abandon the functional organization and switch to either a divisional or a matrix structure."

17. an informal organization exist in place of, or in addition to, a formal Does organizational structure? Unless the organization is extremely small, a formal organization will exist, and it may be more influential than the formal structure in certain respects. Here is an example that will clarify this point. Shady Dell Elementary School has twenty teachers and their principal is Dr. Maisie Wilson. Dr. Wilson clearly is the formal executive in charge of what happens at Shady Dell. Teaching fourth grade is Mrs. Ellen Knight. Mrs. Knight is a highly respected professional who is well liked by her coworkers. Dr. Wilson has discovered over the past several years that if she has a new idea for the teachers to implement, that idea has a good chance of working if Mrs. Knight is in favour of it. Mrs. Knight, then, is the informal leader.

Ask the students to consider this question regarding the grapevine: "If a manager 18. of an organization constantly keeps employees informed as to the latest developments at the firm, will the grapevine become unnecessary and thus be eliminated?"

Here is an ethical consideration that might be raised with the students regarding 19. the grapevine. Is it ethical for the highest-ranking members of management to purposely drop teasing tidbits of information with persons who will immediately feed such information through the grapevine? Ethical or not, do the students feel that upper echelons of management will purposely place rumours on the grapevine? What purpose does such an executive hope to accomplish by such actions? .

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20. some organization charts of your educational institution with students.

Share Indicate how they demonstrate the basic ideas of organization structure. Discuss how the organizational chart can tell many characteristics of the firm (e.g., formal lines of communication, span of control, departmentalization, flat versus tall, line versus staff positions, etc.).

21.

Ask your students if, in any of their jobs, they had more than one boss at a time.

Was this a difficult situation? Why or why not?

A current trend is to try and retain the benefits of an entrepreneurial spirit through 22. intrapreneuring. Ask students to consider what decision-making style such a firm is likely to have, and the type of organizational structure that is likely to be in place.

Students can expand the discussion to consider whether there are combinations of structure and authority for decision-making that seem to be a better fit than others.

23. that more retirees and senior citizens are working part-time and are being Note supervised by younger managers. Moderate a class discussion on the possible problems of older more experienced people being managed by less experienced, younger managers.

Ask students what management style they would use in such a situation.

24.

Interview a manager as the class listens. Ask the manager a series of questions that are designed to convey to students the essence of the structure the firm is using.

Leave time for questions of clarification by students.

25. committee and team authority have decision-making powers, therefore Often decisions are developed by small groups that have been assembled for a particular purpose. Some decisive leaders find themselves uncomfortable with the fact that decisions are being arrived at by committees. Ask the students which kinds of workers would be most comfortable working in an organization with a committee or team form of authority.

In 26.both military and civilian organizations, the phrase "observing the chain of command" means to preserve the integrity of the organizational hierarchy and to report unusual happenings, first of all, to your own direct supervisor.

Students should recognize that the first step in developing the structure of any 27. business involves specialization, departmentalization, and the establishment of a decision-making hierarchy.

28.

An interesting point to make is that larger companies tend to adopt different types of departmentalization for various levels of the company.

Remind students that in a centralized organization, most decision-making 29. authority is held by upper-level managers; in a decentralized organization, decisionmaking authority is delegated to levels of management at various points below the top. .

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

31.

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

32.

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

33.

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

34.

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.

35.

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.

36.

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.

37.

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

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

38.

Have students discuss the concept of a learning organization, and how this will impact their future.

USING THE BOXED INSERTS Opening Case: Spotify: Breaking the Rules on Structure 1. What do you think of Spotify’s organizational approach? List advantages and disadvantages of this unique structure.

Spotify uses a non-traditional method of work teams based on knowledge, rather than strict accountability. This form of organizational structure is based on heterarchy rather

.

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Part 2—The Business of Managing than hierarchy. A heterarchy is an unranked system or a system in which the elements can be ranked in many ways.

Spotify uses an agile process that incorporates elements of iterative development (repeating a sequence of operations) and continuous feedback when creating an application. Rules and practices are kept to a minimum, and developers are empowered to collaborate and make decisions together as a group quickly and effectively. The resulting organizational framework groups employees first into “tribes,” which are composed of between 30 and 200 engineers each, with a clear mission, a set of principles, and a senior leader. Within each tribe are smaller groups called squads and chapters. Squads are mini start-ups that encourage creativity and include cross-functional roles. Chapters share the same manager and are meant to focus on personal growth and skills development by discussing shared challenges. Bridging these groups is a “guild” made up of employees with similar skills and interests who share their coding experiences and knowledge.

Spotify’s organizational structure is directly influenced by the music industry where creativity is at the core.

2. What are the unique challenges for workers in the Spotify system? What are the challenges for managers?

Chaos is a term used to describe the system. For any manager or worker that is accustomed to working in a traditional system with clear hierarchical roles and responsibilities this can be a real challenge (especially during the integration phase).

3. How does the Spotify approach encourage or demonstrate teamwork? Accountability?

The following phrase says it all: “We have no time for entitled egos.”

Spotify believes in a culture of ideas not bureaucracy and they expect everyone at the company to be on board. Characteristics such as maximizing cooperation and minimizing competition are the foundation of teamwork. By using the agile process, teams are at the center. They set of organizational design principles called “Agile à la Spotify” (aka “the skinny”), centering on autonomy as the core concept. The skinny was then printed on the walls of the head office and included inspirational guidelines that speak to accountability to the company and the team: • Continuous improvement • Iterative development • Simplicity • Trust: At Spotify we trust our people and teams to make informed decisions about the way they work and what they work on.

• Servant leadership: At Spotify managers are focused on coaching, mentorship, and solving impediments rather than telling people what to do. The team takes center stage.

4. 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 .

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Chapter 7—Organizing the Business Enterprise marketing department, an operations department, a finance department. The benefits include specialization within functional areas and smoother coordination among them. It fosters centralization.

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.

Entrepreneurship and New Ventures: Reinventing Structure: Is Holacracy the Answer?

1.What do you think of this revolutionary approach? What are the benefits and the challenges of this approach?

Many employees would love to have an organization without managers, in which every member of the team agrees to the structure, the roles within the structure, and the rules that govern it all. While others would find the lack of a traditional structure very unnerving; many would prefer to leave the management function to traditional managers.

This is indeed a very different approach.

2.How would this change the day-to-day work of a typical front-line employee? Does this concept appeal to you?

Workers quickly realize that they are no longer just employees following orders. They have real power and authority—and with that comes responsibility. They no longer have a parentlike manager to solve their problems.

Student answers will vary. This approach may appeal to some but not others. Ask them why they hold their position.

Social Responsibility & Social Justice: Beyond the Traditional Glass Ceiling Critical Thinking Questions 1.Which of the examples listed in this case inspired you (if any)? What specific measures can companies put in place to address inequity?

Student answers will vary. They may refer to the importance of Rania Llewellyn’s appointment AS CEO or may simply love the revolutionary empowering approach taken by Leena Yousefi the founder and owner of YLAw the Vancouver-based family law firm. They may also point to the Cannabis industry but beyond the case examples ask them to think of any other important examples that inspire them.

E-Business and Social Media Solutions: Simon Says “Alexa, What Have You Done”? .

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This insert provides a very interesting example of some of the problems that can develop in our modern high-tech society, and it asks students to think about both the pros and cons of using e-assistants, particularly in the workplace.

Critical Thinking Questions 1.

List all the positive ways that you can use such personal assistants. List all the ways a businessperson can use an e-assistant in their day-to-day job.

To get the most out of this question, the instructor can moderate an in-class discussion using the following procedure. First, ask students to work individually and develop two lists, one dealing with their personal use of e-assistants, and one dealing with the business use of e-assistants. Second, ask students to state their ideas for personal use (record these ideas for the class to see). Third, ask students to state their ideas for business use (record these ideas as well). Fourth, ask the class what kinds of unanticipated problems might be evident in their ideas for both personal and business use.

There are two key benefits associated with this approach. First, students will likely see a much wider range of applications for both personal and business use than they could have thought of by themselves. Second, it will be clear from the discussion that some unanticipated negative outcomes might occur on both the personal and business level. So, the more general point can then be made that almost every idea has both pros and cons associated with it.

2.

Conduct research to find information about this case and look for other similar stories. What did you find? How does this research impact your perception of eassistants? How does this impact your perception of the business applications of this technology today?

Answers will vary, but some students may come up with stories that are even more dramatic than the story in the boxed insert. The conclusions reached because of the in-class discussion in Question #1 can be extended and refined here based on additional insights about the pros and cons of e-assistants that are suggested by these examples.

QUESTIONS AND EXERCISES Questions for Analysis 1.

Explain the significance of organizational size as it relates to organizational structure. Describe the changes that are likely to occur as an organization grows.

In a small organization, the owner may perform every job. As the firm grows, so does the need to specialize jobs so that others can perform them. Job specialization is a natural part of organizational growth. After jobs are specialized, they must be grouped .

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Chapter 7—Organizing the Business Enterprise into logical units, a process called departmentalization, which may occur along customer, product, process, geographic, or functional lines or any combination of these. Managers then must decide which decisions they will continue to make, and which others will make by establishing a decision-making hierarchy. The structure needs to focus on stabilizing the organizational framework so that everyone works together to achieve common goals.

2.

Why do some managers have difficulties in delegating authority? Why do you think this problem might be more pronounced in small businesses?

Four reasons why managers have difficulty delegating authority are given in the textbook: --The managers feels that employees can’t do anything as well as the manager can.

--The manager wants control over everything --The manager doesn’t want subordinates to outperform the manager --The manager does not know how to delegate authority In smaller businesses, there tends to be less specialized jobs, less time for training, and efforts/outcomes are much more obvious than in larger organizations. Therefore, there is less trust in others, less time (i.e., “it will take less time for me to do it myself than to explain to someone else how to do the job”), and the manager knows what the outcome will be if the manager does the task, rather than delegating it.

3.

Do you think you would want to work in a matrix organization, where you were assigned simultaneously to multiple units or groups? Why or why not?

In a matrix organizational structure, team members report to two managers (their regular functional manager and the project manager). Students who desire a lot of structure and clarity in their work may be concerned about tensions that can arise when working for more than one boss at a time, so these students will probably not be comfortable working in a matrix structure because they may have to deal with conflicting orders from their functional boss and the project boss. While these students may like working on interesting projects, the authority uncertainties in the matrix structure may reduce their overall satisfaction. As well, the potential to have a variety of responsibilities might be seen as a disadvantage.

By contrast, students who are comfortable with ambiguity may be very happy working in a matrix structure and will be motivated by the various projects that they get to work on. They will expect some potential conflicts in orders they receive from their functional boss and the project manager, but that does not concern them. These students will also see various responsibilities as an advantage, not as a disadvantage.

When assessing student answers, be sure to determine whether they understand what is involved in the matrix structure and how the characteristics of the matrix structure interact with their own work personality to create satisfaction or dissatisfaction on their part. .

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4.

In your own words, explain how a functional structure differs from a divisional structure.

In a functional structure, departments are organized around the key functions that must be performed for the firm to be successful. In a manufacturing firm, for example, the key areas are production, finance, and marketing. The activities of each of these functional areas must be coordinated if the company is to be profitable. By contrast, in a divisional structure departments are organized the main lines of business (divisions) that the organization has. The level of coordination that is needed for these divisions is much lower because they each operate almost like independent businesses, and they each pursue their own strategies. In other words, each division operates as a profit centre. This approach will not work for a functional structure because none of the functional areas (production, marketing, or finance) can be profit centres by themselves. Rather, their activities must be coordinated so that the overall firm can make a profit. In the divisional structure, by contrast, each division can be assessed on whether or not it is profitable. The heads of each division are rather like CEOs. But in the functional structure, there is only one CEO. Why should managers pay attention to the informal organization?

5.

A company's informal organization may effectively alter a firm's formal structure.

The informal organization consists of everyday social interactions among company employees and is sometimes just as powerful, if not more powerful, than the formal structure.

The informal organization provides a communications network (the grapevine) by which information travels through the organization. It facilitates networking and mentoring, but it can cause problems through the operation of office politics and distorted or inaccurate information.

The argument has been made that, compared to the functional organization 6. structure, the divisional structure does a better job of training managers for top-level positions. Do you agree or disagree with this argument? Explain your reasoning.

Make sure that students understand why this argument has been made. (The argument goes something like this: in a divisional structure, the different divisions are semi-autonomous units and are profit centres. This means that they act pretty much like independent businesses, and that the manager who heads the division learns how to keep the “big picture” in mind when making decisions. In functional structures, by contrast, managers focus on their own functional specialty (marketing, finance, production, etc.) and may have too narrow a view of what the company is all about. They are therefore less well trained for top-level positions.)

Most students will probably agree with the argument because it does sound plausible (and maybe the argument is actually sound). Some students, however, will .

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Chapter 7—Organizing the Business Enterprise disagree and will argue that even within a divisional structure managers may tend to focus too narrowly on what they are good at because that is a natural human tendency.

Also, they may say that the argument only applies to division heads because they are the ones that must keep the “big picture” in mind. They may also argue that we shouldn’t just assume that a manager in a functional structure is unable to shift his or her focus from a functional specialty to the “big picture” if the person is promoted to a top-level management position.

Application Exercises 7.

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 the organizational structure is consistent with the organization’s mission? Do you think that the organizational structure is well-suited to your working style and preferences?

Students can find information that will be helpful in answering this question in the company’s annual report. As well, the company’s website will typically describe the company’s mission and vision, and that statement can be helpful when deciding whether the company’s structure is consistent with its mission and vision. Students should look at the information on mission and vision in Chapter 6 when answering this question.

When responding to the question about whether the company’s structure is wellsuited to their needs, student answers will vary depending on the extent to which they want a well-defined job or whether they want more flexibility (see the answer to Q. #3 above).

8.

Describe a hypothetical organizational structure for a start-up digital marketing firm. Describe changes that might be necessary as the business grows.

Student answers should begin by explaining in their own words what digital marketing is (promoting product and service awareness online). A digital marketing firm like Design Pickle—which focuses on marketing via email, search engines, and social media—produces creative and attention-grabbing promotional content (e.g., videos) for businesses that want potential customers to pay attention to their websites and their product and service offerings.

Student answers should also include some general recognition about the characteristics of start-up businesses that will influence their organizational structures.

For example, the organizational structure in start-up businesses will be quite loose when the business first begins operations, but the structure will gradually become more formalized as the business grows. The best student answers to this question will be those which (a) describe the work that the start-up digital marketing firm will be doing, and (b) works through the chapter material and explains how each topic is relevant for the issue of organizational structure.

.

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Part 2—The Business of Managing For example, the issue of specialization and growth is obviously relevant here. As noted in Chapter 7, in a very small organization, the owner may perform every job at the start. As the firm grows, increased specialization is required so that other employees can effectively contribute to the organization. Job specialization means that individual jobs can be performed more efficiently, the jobs are easier to learn, and it is easier to replace people who leave the organization.

The digital marketing firm will probably start with a functional structure, which means that the company will be organized around the key activities (marketing, finance, and production) that must be performed for the company to be successful. As time goes on and the scope of operations increases, the company may find that it needs to add additional departments to do specialized work. Departmentalization based on product, for example, may work best. Or, the company may use functional departmentalization at the top level of the firm and product departmentalization at the second level (e.g., there may be a vice-president of marketing at the top level, and three departments—email marketing, search engine marketing, and social media marketing—reporting to the vicepresident.

The issue of authority distribution (centralization vs. decentralization) will also arise. In the early stages of the business, authority is centralized in the owner, but as the firm grows and adds more employees and more activities, it is inevitable that some delegation of authority will take place because it is impossible for the owner to make all the decisions.

Various other topics in the chapter should be assessed in the same way.

Think about the organization where you currently work (or one where you previously worked). Which of the three basic structural types was it most consistent with What was the basis of (functional, divisional, project/matrix, international)? departmentalization in the organization? Why was that basis used?

9.

Answers will vary. When assessing student answers, make sure that they have properly categorized the organization (and departmental) structure, and that they have explained the structural (and departmental) characteristics that led them to their conclusion.

Interview the manager of a local service business (for example, a fast food 10. restaurant). What types of tasks does this manager typically delegate? Is the appropriate authority also delegated in each case? What problems occur when authority is not delegated appropriately?

Make sure that students have a good grasp of the concepts of authority and responsibility before they conduct the interview.

A manager in a service business (such as a fast-food restaurant) would typically delegate many of the true “service” functions, (i.e., cooking the food, serving customers, cleaning, etc.). Depending on the size of the business, however, the manager would likely .

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Chapter 7—Organizing the Business Enterprise retain ultimate responsibility for tasks such as food ordering, scheduling, and payroll.

Most managers would respond (rightly or wrongly) that they also delegate appropriate authority to those whom they delegate responsibility. However, in most fast-food restaurants, the amount of authority that needs to be delegated is often less than in other types of businesses because most employees’ duties do not involve supervision of other employees, just the completion of assigned tasks.

This should be an interesting exercise for students, especially since many have worked in the fast-food industry. Regarding the question of appropriate authority being delegated, if employees feel that they are held responsible for things for which they do not have any authority to act, they will be frustrated.

TEAM EXERCISES Building a Business: Continuing Exercise This exercise gives students an opportunity to analyze and reflect on the impact that organizational structure has on a company. Students should recognize that the organizational structure, the number of employees, and that the degree of centralization of decision-making will evolve and change as the business grows and as environmental factors change over time. Students should discuss the nuances of putting together an effective employee team and organization.

Building Your Business Skills: Getting with the Program Follow-Up Questions 1. the average computer programmer earning nearly $70,000, and with all With 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 satisfactory work environments.

2.

If you were a programmer, what organizational factors would make a difference to you? Why? Answers will vary. Students should be looking at issues like variety of job tasks (vs. a high degree of specialization) and decision-making authority (such as in product design) as well as work-life issues such as flex time.

3.

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, although many managers would be willing to make any necessary organizational changes to retain employees. .

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Exercising Your Ethics: Avoiding Confrontation 1. 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 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.

2. 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.

3. 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.

CASE ANALYSIS Heard It Through the Grapevine 1. 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.

2. 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, .

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Chapter 7—Organizing the Business Enterprise enhancing the overall quality of communication and openness about providing information.

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

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

4. 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 8 MANAGING HUMAN RESOURCES AND LABOUR RELATIONS CHAPTER SYNOPSIS This chapter describes the importance of effective human resource management. Specific human resource management activities that are discussed include planning activities (job analysis, job description, job specifications), forecasting, staffing (recruitment, selection, promotions), developing the workforce (orientation, training, performance appraisal), compensation (wages and salaries, incentive programs, comparable worth), providing human resource services (benefit programs, employee safety and health, retirement), the legal context of HRM, and challenges in the changing workplace. The chapter concludes with a discussion of the role of labour unions in business organizations. Topics that are covered include unionism today, the legal environment for unions in Canada, union organizing strategies, the collective bargaining process, and the use of independent third parties to help labour and management resolve their differences.

CHAPTER OUTLINE I.

FOUNDATIONS OF HUMAN RESOURCE MANAGEMENT (HRM) HRM is the set of activities that are directed at attracting, developing, and maintaining an effective workforce. HRM operates in a dynamic environment and is increasingly being recognized for its strategic importance.

A. Strategic Importance of HRM—Effective organizational functioning The requires human resources. The importance of HRM has grown dramatically in the last two decades. This is a direct result from the increased legal complexities, the recognition of the workforce as a valuable resource and the recognition of the costs associated with poor HRM. B. Human Resource Planning—This is the starting point for effective HRM and involves job analysis and forecasting the demand for the supply of labour.

Job analysis—This detailed study of the specific duties in a 1. particular job and the human qualities required for that job forms the basis of the job description and job specification. These, in turn, are the basis for further personnel activities.

2.

Forecasting HR demand and supply—Managers need to forecast

the demand for employees of different types and the likely supply in the short-, intermediate-, and long-term. Factors to be considered in doing so are discussed. Replacement charts list each important managerial position, .

Part 2—The Business of Managing who occupies it, how long the person will probably stay in it before moving on, and who is now qualified or soon will be qualified to move into it. More generally, to facilitate planning and to identify people for transfer or promotion, organizations may also use employee information systems, or skills inventories. These systems contain information on each employee’s education, skills, work experience, and career aspirations.

3.

Matching HR supply and demand—After comparing future demand and internal supply, managers can develop contingency plans to minimize the negative effects of a shortage of HR. II.

RECRUITING HUMAN RESOURCES The process of attracting qualified persons to apply for jobs that are open is the focus of this section. Internal recruiting means considering present employees as candidates for openings, while external recruiting means attracting people from outside the organization to apply for jobs.

A. Selecting Human Resources—Once the recruiting process has attracted a pool of applicants the next step is select someone to hire. This involves gathering information from the applicants that will predict their job success and then hire the candidate that is most likely to be successful. To reduce the element of uncertainty, managers use a variety of techniques (see Figure 8.1). Each organization develops its own mix of selection techniques and may use them in almost any order: 1.

Applications forms—An efficient method of gathering information that is needed.

2.

Tests—Tests of ability, aptitude, or knowledge that is relevant to a particular job are usually the best predictors of future job performance.

3.

Interviews—A popular selection device, but due to biases this method is sometimes a poor predictor of job success.

4.

Other techniques—Company or industry specific techniques are used (e.g., physical exams, polygraph tests, etc.)

III.

DEVELOPING HUMAN RESOURCES Employees must receive an orientation to their new job. They may also need additional training and development after being selected.

A.

New Employee Orientation—Orientation is the process of introducing

new employees to the company’s policies and programs, the co-workers and supervisors they will interact with, and the nature of their job. Orientation allows .

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Chapter 8—Managing Human Resources and Labour Relations new employees to feel like part of a team and to become effective contributors to the organization more rapidly.

B. Training and Development—Most organizations find it effective to conduct training and development on a regular basis. This continuous training and development can improve the quality of the contributions the employee makes to the organization. On-the-job training, vestibule training, systematic job rotation, and management development programs are discussed.

Management development programs, networking, and mentoring all help in training employees.

Team Building and Group-Based Training—More and more organizations C. are using teams as a basis for doing work. Outdoor training exercises like Outward Bound are popular training initiatives.

D. Evaluating Employee Performance—Performance appraisals are formal evaluations of how effectively employees are performing their jobs. They provide a benchmark to assess the extent that the recruiting and selection process is adequate, help in determining training and development requirements, and compensation issues. Most likely the immediate supervisor will conduct the appraisal.

1.

Providing performance feedback—Many managers are not effective when providing performance feedback, partly because they don’t understand how to do it properly and partly because they don’t enjoy it. As a result, managers may have a tendency to avoid giving negative feedback.

But if employees are not told about their shortcomings, they will have no concrete reason to try to improve and will receive no guidance as to how to improve.

2.

Methods for appraising performance—The nature of jobs today is such that we rely on judgements and ratings to appraise employee performance. In simple ranking, employees are ranked according to where they place compared to others (or groups of others). The forced distribution method involves grouping employees into predefined frequencies of performance ratings (e.g., top 20%, next 30%, etc.). The graphic rating scale asks appraisers to rate the individual’s job performance by answering specific questions with answers that best suit the employee. The critical incident method involves the rater recalling examples of especially good or poor performance by an employee and then describing what the employee did (or did not do) that led to success or failure.

IV.

COMPENSATION AND BENEFITS Compensation refers to the set of rewards that an organization provides to employees in exchange for their willingness to perform various jobs and tasks. .

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A. Determining Basic Compensation—Wages generally refers to an hourly compensation paid to operating employees while salaries usually refers to compensation stated in a monthly or yearly figure. Pay surveys (survey of compensation that others are paying), job evaluation (a job’s value added to the organization), and pay structure (compensation based on the organization’s assessment of the relative value to the organization of reach job class) are three methods for determining basic compensation.

The impact of education on compensation—Education has an 1. important influence on a person’s salary. Individuals with a postsecondary degree make more money than those without one; they are also less likely to be unemployed, and they are more likely to end up in the top 1 percent of income earners.

2. debate about executive compensation—The compensation The received by top managers can be extremely large (in the millions of dollars annually), especially when bonuses are included. Critics have frequently questioned the wisdom of paying executives such large amounts of money, but most attempts to rein in executive salaries have not been very successful.

Incentive Programs—To encourage employees to work harder, many

B. organizations offer rewards that are directly tied to higher levels of performance.

1.

Individual incentives—With a piece-rate system, an employee is paid a certain amount of money for every unit produced. With pay-forperformance, managers are rewarded for especially productive output.

Team and 2. group incentives—These apply to all employees in the firm. These include profit-sharing plans, gainsharing plans, and pay-forknowledge plans.

C. Benefits—Besides financial compensation, most organizations provide employees with an array of benefits. Some of these are mandated by law and others are optional for the organization.

Mandated protection plans—These include employment insurance 1. (which provides subsistence for workers who are unemployed), the Canada Pension Plan (which provides income to retired workers), and workers’ compensation (which covers individuals who suffer a job-related injury).

2.

Optional protection plans—These include health coverage such as vision care, mental health services, dental care, and prescription drugs.

.

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Chapter 8—Managing Human Resources and Labour Relations 3. time off—This includes vacations and sick leave.

Paid Other types of benefits—Organizations may also offer other types 4. of benefits including wellness programs (which concentrate on preventing illness), childcare benefits, eldercare, and cafeteria benefit plans (which allow employees to choose the benefits they really want).

V.

THE LEGAL CONTEXT OF HRM The important areas of HR regulation are discussed in this section.

A. Equal Employment Opportunity—Protects people from unfair or inappropriate discrimination in the workplace.

1.

Anti-discrimination laws—The goal of the Canadian Human Rights Act of 1977 is to ensure that any individual who wishes to obtain a job has an equal opportunity to compete for it. The Employment Equity Act of 1986 designates four groups as employment-disadvantaged: women, visible minorities, Aboriginal people, and people with disabilities.

B. Comparable Worth—This is the idea of paying equal wages for work of equal value.

C. Sexual Harassment—This includes requests for sexual favours, unwelcome sexual advances, or verbal/physical conduct of a sexual nature that creates an intimidating or hostile environment for a given employee.

D. Employee Health and Safety—These programs are intended to reduce absenteeism and turnover, raise productivity, and boost morale by making jobs safer and more healthful.

VI.

E. Retirement—Most Canadian provinces have now abolished mandatory retirement.

NEW CHALLENGES IN THE CHANGING WORKPLACE A. Managing Workforce Diversity—Opportunities and challenges are evident due to the wide range of workers attitudes, values, beliefs, and behaviours.

B.

Managing Knowledge Workers—As the importance of information-driven

jobs (versus experience-driven jobs) increases, management approaches must change.

Knowledge workers include occupations like computer scientists, engineers, and physical scientists. These workers prefer to work independently.

Organizations must pay knowledge workers enough to keep them from moving to another company.

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Part 2—The Business of Managing C. Managing Contingent Workers—Contingent employees are those who work on something other than a permanent or full-time basis. This type of employment is on the rise in Canada. This is true even for top management positions. When economic times are uncertain, companies usually make greater use of contingent workers; when the economy improves, companies hire more full-time workers. Careful planning must be done so that contingent workers are brought in only when they are really needed. The costs and benefits of using contingent workers must be clearly understood. Contingent workers should be integrated as much as possible into the mainstream activities of an organization.

VII.

DEALING WITH ORGANIZED LABOUR A labour union is a group of individuals working together to achieve share jobrelated goals such as higher pay and better working conditions. Collective bargaining is the process by which union leader and company management negotiate terms and condition of employment for workers who are represented by the union.

A. Development of Canadian Labour Unions— The labour movement The was born with the Industrial Revolution, which also gave birth to the factorybased production system that carried with it enormous economic benefits. But there was also a dark side, as some owners treated their workers as simply resources to be deployed, with little or no regard for the well-being of workers.

B. Unionism Today—Union membership as a proportion of the total Canadian workforce has stagnated during the last few decades. Slightly less than one-third of workers belong to unions.

Union-management relations have historically been very adversarial, but recently unions have been faced with many environmental threats and they have therefore often focused on maintaining what they have rather than trying to get more from management. Some unions are even cooperating with management to make the organizations they work for more competitive.

The Future of Unions—The big question is whether unions will be able to C. cope with the many challenges that are facing them. These include the decline of the so-called “smokestack industries” (where unions have traditionally been strong), employment growth in service industries (where unions have not traditionally been strong), the globalization of business (which means many jobs are outsourced to other countries), and technological change (which reduces the number of workers that are needed).

VIII.THE LEGAL ENVIRONMENT FOR UNIONS IN CANADA Political and legal barriers to unions existed well into the 20th century, but now various laws have been passed which protect unions and give workers the right to collectively bargain with their employers. The relevance of several pieces of .

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Chapter 8—Managing Human Resources and Labour Relations legislation for unions is discussed (Conciliation Act, Industrial Disputes Investigation Act, Privy Council Order 1003, and the Constitution Act).

A. Federal Legislation: The Canada Labour Code—This legislation applies to the labour practices of firms operating under the legislative authority of parliament.

1. employment practices—This section of the Canada Labour Fair Code prohibits an employer from refusing employment on the basis of a person’s race or religion.

Standard hours, wages, vacations, and holidays—This section 2. deals with a variety of issues such as standard hours of work, maximum hours of work per week, overtime pay, minimum wages, equal wages for men and women doing the same jobs, vacations, general holidays, and parental leave.

3.

Safety of employees—This section requires that every person running a federal work project do so in a way that will not endanger the health or safety of any employees.

4.

Canada industrial relations regulations—This sections deals with all matters related to collective bargaining.

Provincial Labour Legislation—Each province has also enacted legislation

B. dealing with the personnel practices covered in the Canada Labour Code.

C. Union Organizing Strategy—A union might try to organize workers when some workers in a firm are members and the union wants to represent other workers, or when it is attempting to outdo a rival union, or when it wants to increase the number of workers who belong to the union.

Union Security—The differences between the various levels of union D. security (closed shop, open shop, and agency shop) are discussed. In the U.S., right-to-work laws have been enacted in various states. These laws stipulate that workers cannot be forced to pay union dues.

Types of Unions— There are two basic types of unions: craft unions E. (which are organized by crafts or trades, like plumbers, barbers, airline pilots, and so forth), and industrial unions (which are organized according to industries, for example, steel, auto, and clothing). A national union has members across Canada, while an international union has members in more than one country.

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X.

COLLECTIVE BARGAINING A. Reaching Agreement on the Contract’s Terms—The collective bargaining process begins when the union is recognized as the bargaining agent for employees. Union leaders then meet with management to begin working on a new contract.

B. Contract Issues—Various issues are discussed during collective bargaining.

1.

Compensation—This is the most common issue during collective bargaining.

2.

Benefits—Common issues here are insurance, retirement benefits, paid holidays, working conditions, and supplementary health care.

3. security—Unions are increasingly concerned about this issue.

Job Other union issues—Unions may also bargain about overtime 4. policies, rest periods, differential pay plans for shift employees, and the use of temporary workers.

5.

Management rights—Management wants a much control as possible over hiring policies, work assignments, and so forth. Unions often try to limit management rights.

C. When Bargaining Fails—An impasse occurs when labour and management fail to reach an agreement on a new contract.

1.

Union tactics—The union’s major weapon is the strike, although unions are not permitted to strike in certain situations.

Management 2. tactics—Management can lock workers out of the business or it can hire strike-breakers to replace the striking workers. The can also appeal to workers to decertify the union that represents them.

D. Conciliation, Mediation, and Arbitration—In conciliation, the neutral third party helps the disputing parties to clarify the issues that are separating them. In mediation, a neutral third party tries to help the disputing parties reach agreement, while in arbitration a neutral third party imposes a settlement on the disputing parties.

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Chapter 8—Managing Human Resources and Labour Relations QUICK QUESTIONS 1.

2.

3.

4.

5.

6.

7.

8.

Why has the role of human resource management increased in importance over time?

How can an HR manager benefit from the use of a replacement chart?

How can an HR manager benefit from the use of an employee information system?

When do you think tests are useful in the selection process?

Why are interviews sometimes a poor predictor of job success? In what way(s) might an interview be an accurate predictor of job success? An inaccurate predictor?

What types of training are offered at your place of work?

What do you think would be the biggest challenge when doing an employee performance appraisal?

How can an organization benefit from offering incentive programs to its employees?

What is the purpose of an affirmative action plan?

9.

How can an organization benefit from welcoming a diverse workforce?

10.

How do knowledge workers add value to an organization?

11.

What are some advantages and disadvantages of hiring contingent workers?

12.

What trends are evident in union membership?

13.

What trends are evident in union-management relations?

14.

What trends are evident in bargaining perspectives?

15.

What factors will affect the future of labour unions?

16.

What is the significance of Privy Council Order 1003?

17.

What is the Canada Labour Code designed to do?

18.

What is the difference between a closed shop, an agency shop, and an open shop?

19.

How is mediation different from conciliation and arbitration?

20. .

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21.

22.

What issues are typically most important to union negotiators when collective bargaining with management?

When bargaining fails between labour and management, what are some union tactics that can be brought to the bargaining table? Management tactics?

IN-CLASS EXERCISES Exercise #1: Writing a Job Description Activity Overview: This activity asks students to write a job description for an instructor and for a student.

Time Limit: 50 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. (10 minutes) 2.

Divide the class into small groups, asking members of each group to share what they came up with in Step 1. (10 minutes) 3. each group to further discuss what should be included in their instructor’s job Ask description and in a student’s job description, considering any other factors that might come to mind that have not already been discussed, and to write a final job description for both instructor and student. (15 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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Chapter 8—Managing Human Resources and Labour Relations Exercise #2: Tallying Up the Costs of Discrimination Activity Overview: This activity highlights the high costs of employee discrimination in a national organization.

Time Limit: 30 minutes What to Do: 1.

Make copies of the following article and distribute to students in advance of the class where the exercise is to be conducted.

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Just how important is an understanding of the legal context of HR management?

Recent experiences at Rent-A-Center clearly show what can happen when a firm minimizes the importance of the HR function. Thorn Americas, a unit of London-based Thorn EMI, had prospered as a large player in the rent-to-own industry. The firm had a large professionally staffed HR department and was known for its progressive hiring and employment development practices.

Thorn recently merged with another large rent-to-own business, Renters Choice.

The new firm was renamed Rent-A-Center, and an outsider—J. Ernest Talley—was brought in to run the combined business. But Talley had some unusual views of the HR function. Specifically, he saw HR as an expense, bristled at the notion of government regulation, and allegedly had a strong bias against women. For example, he was quoted by one employee as saying “Get rid of women any way you can.” Another indicated that he said “Women should be home taking care of their husbands and children, chained to a stove, not working in my stores.”

Even though Rent-A-Center had 2,300 locations and 13,000 employees, Talley essentially eliminated the firm’s HR function. For example, he fired the firm’s top HR executive and dropped all training and employee relations activities. He kept only enough clerical support to handle payroll and benefits activities. But his stance on women and the culture he created proved to be costly. Thousands of talented women left the company, and thousands of potentially valuable new employees were systematically blackballed. Talented males also left in droves, at least in part because they wanted no part of what Talley was trying to do.

Talley’s stance soon prompted legal action. Several women charged that they had been demoted or forced to resign because of their gender. Others charged that he had created a hostile work environment, a key form of sexual harassment. For instance, at one national sales meeting in Las Vegas, Talley hired scantily clad dancers for entertainment. Many of the men in attendance got drunk, while the women felt humiliated.

The lawsuit against Rent-A-Center represented 5,300 current and former employees, as well as approximately 10,000 rejected job applicants. One attorney .

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Part 2—The Business of Managing involved in the case said, “I’ve never seen a case in which so many women and men tell the same kind of story all across the country. It’s remarkable.” Faced with overwhelming evidence, Rent-A-Center forced Talley to retire and settled the suit for $47 million in payments. The firm also agreed to reestablish an HR department, hire an HR vice president, and take numerous other steps to change its employment practices and culture.

Questions for Discussion 1.

How is hostile work environment sexual harassment evident in this scenario?

2.

Is workforce diversity necessary in an organization like this one? In what ways can such organizations benefit from workforce diversity?

-----------------------------------------------------------------------------------------------------------Divide the class into small groups and ask them to answer the questions for 2. discussion in their groups. (15 minutes): 3.

Regroup as a class and discuss each group’s responses. (15 minutes)

Don’t Forget: Remind students of the two types of sexual harassment: hostile environment and quid pro quo.

Wrap-Up: Briefly discuss how attracting a more diverse workforce and customer base can place an organization in a better market position than those organizations that do not make welcoming diversity a part of the strategic focus.

Exercise #3: Interview Practice Activity Overview: This activity is designed to help students experience a selection interview.

Time: 50 minutes What To Do: 1.

Arrange students in groups of three: a store manager, an applicant, and an observer.

One student should assume the role of a shoe store manager who wants to hire a 2. management trainee. The second student is applying for the job. The third student will observe whether the interviewer stayed with a plan and asked questions related to the job skills needed and if the applicant provided good information in a mature manner.

(Another job may be substituted if it is more familiar.)

3.

Interviewers should develop a list of criteria and questions to ask. .

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4.

Applicants should develop brief descriptions of their education and experience, strengths, and weaknesses.

5.

The students role-play the interview.

6.

The observer should report findings to the two role players.

Don’t Forget: You can vary the above process by having students exchange roles, videotaping the role play, and playing it back for discussion.

Wrap-Up: Ask the following questions: Were the situations realistic? Why or why not? Based on the role-play and your personal experience, what are the toughest questions you have ever been asked in an interview? How did you respond to them?

Exercise #4: Top-Down Sensitivity Activity Overview: This activity asks students to think about the employee issues toward which employers should be most sensitive.

Time Limit: 30 minutes What to Do: 1.

Make copies of the material below and hand it out to students in advance of the class where the exercise is to be conducted.

----------------------------------------------------------------------------------------------------By definition, global companies must communicate with employees in many different countries and cultures, and a firm’s success in communicating with local workers can mean success or failure in an overseas operation. The most successful global companies know how to talk to the people who work for them.

In some countries, the gap between managers and workers is quite wide, and managers are used to bridging it with orders that are simply to be followed. In many Asian cultures, for example, you simply don’t question the boss’s decisions or the policies of the company. In Canada, on the other hand, people are often encouraged to provide feedback and to say what they think. The gap is relatively narrow, and communication channels tend to be informal and wide open.

The same arrangements usually apply when it comes to dealing with workplace disputes. In some countries, such as Germany and Sweden, there’s a formal system for ensuring that everyone involved gets a say in resolving workplace disputes. In these countries, although communication channels are always open, they’re also highly structured. .

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But being culturally sensitive to local employees means much more than just knowing how to settle workplace disputes. As a rule, companies also need to convey a sense of good “citizenship” in the host country. This means respecting the social and cultural values of the employees and communicating to them the fact that it cares about these things.

-----------------------------------------------------------------------------------------------------------Divide the class into small groups and ask them to consider what they perceive to 2. be the top two employee issues about which employers should be especially sensitive. (15 minutes) 3.

Reassemble as a class and discuss each group’s conclusions. Is it possible for the class as a whole to come up with the “top two” issues from among the groups’ conclusions? (15 minutes) Don’t Forget: Groups will come up with many different responses; it will be difficult for the group to prioritize responses. Student answers will depend on the types of jobs being considered.

Wrap-Up: Bring the activity to a close by briefly discussing some of the top issues facing HR managers today, including pay gaps between males and females and discrimination of various sorts.

Exercise #5: 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: Ask students to think about what is important to them in a job, ranking the 1. 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 .

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Chapter 8—Managing Human Resources and Labour Relations • Job Security • Job Title Divide the class into four-person teams.

2.

Ask 3. each team to compare their rankings. What conclusions can they draw? While they are doing this, students can go to the board or an overhead and mark their rankings on a table you create; this will give the class an overview of the data. (10 minutes) 4.

Reassemble the class as a whole and have each group share their findings with the class. (10 minutes) 5. at the list of items that people ranked highest in general. Talk about how Look companies can actually satisfy these important items. For example, how would a company provide good working conditions for its employees? (10 minutes) Don’t Forget: Remind students that there are no right or wrong answers to this exercise.

Wrap-Up: Wrap up the discussion by noting that providing employees with what they want in a job can be very challenging for organization. But business owners and managers must find ways to address issues that are important to employees or they will have problems with employee motivation and satisfaction.

Exercise #6: The Pros and Cons of Unions Activity Overview: This activity is designed to help students see two sharply different perspectives with the regard to the issue of unions.

Time Limit: 25 minutes What to Do: Several days prior to class session in which this exercise is to be conducted, ask 1. for two student volunteers. One of them will play the role of Jack Callahan (the CEO of Arco Manufacturing), who vigorously opposes the idea of unions. The other student will play the role of Bernie Pearson (the president of the union at Arco), who thinks that unions are very valuable. The two men have run into each other at a social gathering and have gotten in a spirited debate about unions.

2.

Give them the following script as the basis for a role play in front of the class. (5 minutes) -------------------------------------------------------------------------------------------------------Callahan: The whole idea of unions really bothers me. Is it fair that workers in a unionized plant should be forced to belong to the union even if they don’t want to? .

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Part 2—The Business of Managing Workers should not be forced to join your union in order to hold a job in my company.

I’ll accept the argument that employees have a right to form a union, but an employee should have a right not to join, too. But now that your union is certified as the exclusive bargain agent for my production workers, even though not all of them voted to unionize, all of them have to join your union or be fired. They don’t have freedom of choice.

Pearson: Well, it is true that a worker in a union plant must belong to the union.

The majority rules, and the majority of your workers who voted wanted to join the union.

It would be unfair for a person who doesn’t pay union dues to enjoy the benefits won by a union supported by members’ dues. Freeloaders should have to pay their fair share.

Callahan: I’m against freeloaders as much as you are. But unions get all sorts of unfair advantages from the government. For example, I have to deduct union dues from my workers’ wages and then give that money to your union. That’s outrageous. The least you could do is collect your own dues. After all, it’s your union and you should look after it.

Pearson: If we had to chase after all the workers for union dues every month, we wouldn’t have time for anything else. This province has passed legislation requiring you to deduct union dues. Your responsibility is to obey the law.

Callahan: But why should unions get a break like that? They’ve got too much power already. You can bring my whole operation to a halt just by calling a strike.

Pearson: That’s an oversimplification of reality. Look what’s happened recently.

Unions are having a lot of trouble getting wage increases for their members. In fact, companies like yours are laying off a lot of workers and sending jobs overseas. If unions are so strong, why aren’t they able to just demand (and get) higher wages and benefits for their workers? I’ll tell you why—we aren’t that strong.

Callahan: Well, for being so weak, you can sure cause me a lot of grief. You know, I really don’t think that unions are necessary any more. I agree that unions did a lot for workers early in the last century when management treated workers badly, but in this enlightened era, they are no longer necessary. Social insurance, worker’s compensation, minimum wage laws, employment insurance, and job safety laws have eliminated the need for unions.

Pearson: To say that unions are unnecessary is hogwash. Do away with the union and you’ll see how employee-oriented most companies will be. Business firms exist to make a profit. The less they have to pay their workers, the more profit they make. Keep in mind also that there is no law that requires workers to form a union. They get involved in unions because they think the union will help them get a better deal from management.

Callahan: But what if, after joining a union, the workers find that the union isn’t doing anything for them? If customers don’t like Arco’s products, they can simply stop

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Chapter 8—Managing Human Resources and Labour Relations buying from us, but a dissatisfied union member has to keep paying union dues, even if the union isn’t doing the job the worker expects.

Pearson: That’s simply not true. If the employees don’t think their union is benefiting them, they can decertify the union.

Callahan: I’m tired of arguing with you. You have a glib answer for every point I make. You’re totally one-sided in your view. You think everything about unions is positive!

Pearson: You’re not exactly open-minded yourself. You think everything about unions is negative!

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At the end of the debate, ask the students to vote for the individual who had the stronger arguments. (10 minutes) Don’t Forget: Ask students who listened to the debate if they wish to make other points that were not raised during the debate.

Wrap-Up: Remind students the current rules and regulations regarding union and management rights are the result of a democratic process where elected officials develop legislation which governs how unions and management relate to each other.

TEACHING TIPS 1.

Students often confuse a job description with a job specification. One way to separate the two is through a simple set of statements similar to the following. A job description is a list of the activities required of the person who will fill that work position.

On the other hand, a job specification describes the kind of person the firm is looking for to fill the position.

2.

Remind students that HRM is the set of organizational activities directed at attracting, developing, and maintaining an effective workforce.

3.

Remind students that forecasting the supply of labour includes both an internal and external forecast.

4.

Remind students that new employees are found both internally and externally in the recruitment process.

5.

Interview a human resources manager regarding the recruitment and selection process while the class listens. Determine the manager's views on how to increase .

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Part 2—The Business of Managing the chance of choosing the right person for the job.

6. students may have been talking with friends who have recently graduated Your from college or university and have begun looking for work. The report back from the graduates may be that jobs are hard to find, and that good jobs are almost non-existent. In such a mood and with such knowledge that there is an overabundance of job applicants, it becomes hard to believe that some firms must aggressively go out and actively recruit workers. However, at some point these recent graduates will locate jobs and someday may be faced with a recruitment task. When this occurs, the graduates will understand that finding just the right person for the job can be very, very difficult and frustrating for human resource recruiters. As a result, too many times, a firm must seek the "least worst" worker rather than the best worker in filling a particular slot.

7. item above emphasizes the fact that from the point of view of a recruiter, The often there are too few qualified applicants. This would say to students: To be a more successful job seeker, provide yourself with as many skills as possible--degrees, work experience, computer packages mastered, foreign languages learned, etc.

8. a closed promotion system, managers decide (perhaps in a very closed and In secret fashion) which employees will be promoted. In an open system, available jobs are "posted." That is, notice of an opening is posted on numerous bulletin boards and published in various other ways. So far, so good. However, you should introduce your students to the real world by indicating that there may be instances in which a human resources office of a firm indicates that it is pursuing an open promotion procedure when it is actually pursuing by previously-determined design a CLOSED system. Here is an actual case, with anonymity protected, illustrating how the charade is played. The unveiling of the lie occurred because a clerk was not sufficiently in on the caper. A job applicant noticed a position announcement properly publicized. Upon applying to the appropriate office prior to the stated deadline, the applicant was told by a clerk: "Oh, we filled that job two weeks ago." The applicant countered with: "But the announcement says that the deadline hasn't even come yet." The clerk responded: "Oh, we just post these positions because that's what the law requires." Students who go into human-resources positions should be cautioned ahead of time that such an approach is totally inappropriate.

9.

Remind students that all applicant information gathered in the selection process can be used to predict job success.

Since so much could be riding on it, the performance appraisal is a very important 10. procedure in any firm. Although we all want to avoid subjective evaluations—judgments reflecting the personal bias of the rater—subjectivity can creep into almost all performance appraisals. Ask the students to identify some jobs in which thoroughly objective appraisals are possible.

11.

Some possibilities as answers to the question posed in the previous item can be

found in the world of sales. Travelling salesman Edgar Philpkin could be told by the sales .

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Chapter 8—Managing Human Resources and Labour Relations manager: "Edgar, ol' boy, we don't care what you do with your spare time or how you conduct yourself on the road. Company image is not your problem. We shall rate you on how many turbines you sell this year. That will be our only criterion." This is absolutely objective. The sales manager does not have to make judgements concerning Edgar's sense of ambition, his ability to efficiently make out sales orders, his speed at getting to a sales destination, his manner of dress, or the friends he makes for the firm. No, the sales manager very objectively counts the number of turbines sold by Edgar in a year's time.

Ask students if they think there are very many situations like this.

Thanks to the previous item, it can be seen that lacking a perfectly objective 12. measure of a person's contribution to the firm, any performance appraisal device must lean on a supervisor's judgment. Because of this, any such appraisal procedure will be open to criticism by those persons who do not score well.

13. textbook says that the appraisal process is completed when the manager and The employee meet to discuss the appraisal. And this is a very important part of the procedure, for it is in this conference that the employee picks up the best hints for improving his or her performance. However, some employees have reported that although they worked with firms—or in the military—where the follow-up conference was supposed to be required, in actual practice there were many supervisors who did not accomplish the step of having supervisor and subordinate meet to discuss the appraisal.

14. out to students that disciplinary action by a firm will often involve Point participation in the procedure by a union that has been elected to represent the workers of the firm. In such a case, the company's management may lose flexibility and freedom in disciplining employees. Union participation can be very helpful and may well reinforce a company's efforts to discipline in a fair and consistent manner. However, the atmosphere at a firm might be such that union interference in disciplinary matters can greatly weaken the effective implementation of company disciplinary policies.

15. is still much debate about the most important factor that motivates workers There to do a better job. Ask students what they think moves a pro football player in the Grey Cup to perform beyond his usual peak: being victorious for the sake of his football club and its loyal fans or earning the extra money that goes to members of the winning team?

When an employer can answer that question, the employer will know better how to administer compensation and benefits in such a way that each worker performs at his or her peak capacity.

16.

Here is an opportunity for students to make a "where-do-we-stand-today"

judgment after necessary discussion. The media have provided plenty of coverage of the phenomenon of sexual harassment. It has been clearly designated by firms, governmental bodies, and courts as not to be tolerated. And yet, can it be said that we have eliminated sexual harassment from the workplace? Here are some sub-questions on the subject that might get discussion started. Do most managers really take seriously allegations of sexual harassment raised by subordinates? How difficult is it to prove that sexual harassment has taken place? Do most employees take the matter seriously? What chance does a person .

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Part 2—The Business of Managing have of making a false harassment claim and seriously damaging the reputation of an innocent person?

17.

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 behaviour displayed by another employee is offensive.

Ask students or student teams to react to the following statement that might be 18. made by a CEO of a large manufacturing concern: "I have full respect for family life. I place my family very high on my scale of priorities. I am aware, however, that my value to this company does not come from my family loyalty but rather from what I can do for this firm. Accordingly, if I want to remain effective for this firm, I must make sure that I devote sufficient time, energy and interest to this firm. Accordingly, I expect my workers to display this same kind of devotion. When their family life gets in the way of what we are trying to do here, I am tempted to ask such employees to make a choice: your family or your job!"

19. students to describe a job orientation they have gone through in jobs they Ask have had. Most will indicate orientation has been poor or non-existent. Ask what they would have done to make the orientation better.

20.

Moderate a class discussion on the issue of the compensation of top managers.

Bring actual figures to class (and direct the students to those in the text) to show just how much some top managers earn. Is the large difference between the top managers in the firm and the production workers warranted?

21.

Point out that a compensation system includes more than just wages and salaries; it includes incentives and employee benefit programs.

22.

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 plans encourage workers to learn new skills.

Invite a human resources expert to class to describe the legal environment that 23. currently exists in Canada regarding anti-discrimination legislation. Ask the person to describe several specific incidents so that students can see how the legislation works in practice. Leave time for student questions.

24.

Make sure that students understand the implications of the equal employment opportunity regulation.

Reiterate that protected classes consist of individuals who share characteristics— 25. such as race, color, religion, gender, age, disability status, and national origin—as indicated by a given law.

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Chapter 8—Managing Human Resources and Labour Relations 26.

Remind students that workforce diversity is the range of workers’ attitudes, values, beliefs, and behaviours that differ by gender, race, age, ethnicity, physical ability, and so on.

27.

Describe a case to the class of a manager using electronic capabilities to "spy" on an employee (e.g., a manager reading an employee's e-mail). Then ask students how many of them have been spied on during working hours. Moderate a class discussion on the reasonableness of such behaviour by management.

28.

Ask how many of the students have had a formal performance appraisal. Then ask those that said yes, if they knew prior to the appraisal if they knew the criteria the rater was going to use. For those that say no, ask what they should do in the future to avoid this situation.

29.

Ask the students, what benefits they will expect when they graduate and start a career.

30.

Ask students to expand on the concept of comparable worth.

31.

Relate the legal issues (e.g., minimum wages) and ask the student if sole proprietors should be held to the same standards as larger corporations (e.g., McDonald’s).

32.

Have a discussion about how diversity is both an opportunity (especially in a dynamic environment) and a challenge at the same time.

33.

Labour unions have sometimes resorted to tactics that have been perceived in a negative light by the general public. When you ask people for their impression of labour unions, their impression may largely be determined by a remembrance of "harsh" union actions. However, students should be led to see that the formation of unions was in response to centuries of harsh treatment of workers by employers. And in the days when labour unions were just getting started, government officials and the courts were pretty much always on the side of management. Regardless of how ugly a strike can become, it must be kept in mind that prior to unions coming on the scene, grossly unfair treatment of workers was common.

At least in the relatively early days of Canadian labour history, there was a 34. difference between a craft union and an industrial union. Drawing a line between the two types is not quite so easy today. A member of a craft union is skilled and trained (e.g., a carpenter, brick mason, or electrician). On the other hand, a member of an industrial union was not recognized to be skilled and would typically work at a repetitive task within a large factory. Members of craft unions saw themselves as a breed apart from these industrial types.

35.

Although the textbook points out that overall union membership is stagnant (as a

percent of the total work force), unions seem to be gaining in two areas: white collar .

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Part 2—The Business of Managing employees and government workers. In time, can this surge compensate for losses in other areas?

36.

Develop some interesting narratives about what unions in other nations are doing.

In France, for example, key unions may strike for a few hours or just a day in order to make a point. French farmers have also been known to use strikers' tactics. On one occasion, a group of them assembled numerous units of farm machinery in a very busy metropolitan intersection, stopping traffic for a long period of time. French unions like to have management come to speak to them. When this happens, union members hoot and holler. German autoworkers recently went through a traumatic experience at Volkswagen. The firm announced it would have to cut many thousands of workers. The two sides relieved the situation a bit by cutting all workers back to limited workweeks.

Such a move cost each worker quite a bit of money, but jobs were saved in the process.

37.

People not familiar with unions and their leadership may see union leaders as strike-prone, ready to walk out at the drop of a hat. Such a picture may not be accurate. A union boss with many years of experience once told one of the authors that "no one gains from a strike." He went on to say, out of his vast experience, that if there must be a strike, it must be a short strike. Both sides become big losers after a long strike. He also claimed to be able to feel, through some highly developed sixth sense, when the management negotiators were getting mad enough to say at the bargaining table: "If that's the way you union guys feel about it, then take your workers out on strike!" When he had that feeling, the old union warrior would jump in quickly and say: "Fellows, we've been here at this bargaining table for a long time today. Let's break for lunch. We can meet again in a couple of hours." During the two-hour break, emotions could be defused. Something else about this old union boss: he was a basically friendly person who did his best to keep a pleasant relationship with the managers at the various firms where his union members were employed. This doesn't mean that he was soft or wishy-washy. The managers, however, respected him to such an extent that when he came in with a union "demand," the managers usually tended to treat it as legitimate. As a result, this old hand was able to be of tremendous service to the members of his union.

Contrast the economic, social, and cultural conditions at the time that early labour 38. unions were being established with the conditions in modern-day Canada. Ask the students to consider what the work environment might be like today if union organizers had not persevered until the political and legal barriers that existed were removed.

Some years ago, the employees of Canada Safeway went on strike. During the 39. next round of negotiations, employees were not keen on a strike, but the head of the national union was. Conflict developed between members of various locals and the union representatives, as the employees felt the union was not representing the employees’ interests and preferences. Union leaders, however, seemed to feel that the employees did not understand what was in their best interests. Ask the students to consider the role of the union. Is it simply to take the employees’ demands to management, or is it to get the most possible for the employees?

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Chapter 8—Managing Human Resources and Labour Relations 40. a union organizer as a guest speaker. If the person has many years of Invite experience as an organizer, ask how (or if) things have changed over the years in terms of the difficulty of organizing a union, and who the targets of organizing drives are now compared to in the past.

41. an arbitrator or mediator to come to class and tell students how the process Invite works. Ask the person whether an arbitrated settlement is better than, or worse than, a settlement reached by labour and management on their own.

42.

Moderate a class debate on the issue of whether individuals should be forced to join a union if the majority of their co-workers choose that option.

43. members of the class if they have ever been part of a union. What were the Ask advantages of union membership? The disadvantages? Overall, do the people who have been members of unions think it was a positive experience?

44.

Remind students that the official term describing the process of dealing with employees represented by a labour union is labour relations.

45.

In most sectors, unions are in a weakened position compared with many decades ago. How has this affected the way in which labour works with management?

46.

Remind students that collective bargaining is much like the negotiation process.

When involved with collective bargaining, both labour and management present demands and then focus on identifying the bargaining zone.

47.

Distinguish between the types of strikes: (a) the economic strike, which is triggered by stalemates in the bargaining process and (b) the sympathy strike, occurring when one union strikes in sympathy with another.

48.

Students may not be clear on the difference between mediation and arbitration.

Mediation involves a third party who makes recommendations to solve a dispute, while arbitration involves a third party who makes a legally binding decision to solve a dispute.

USING THE BOXED INSERTS Opening Case Great Places to Work in Canada 1. Based on the brief descriptions provided, select two or three of the highlighted organizations and explain why you think they stand out as places that might match your own values and needs. .

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Part 2—The Business of Managing Answers will vary, especially depending on the previous employment experience of the students. However, various hygiene and motivation factors should be considered.

2.Everyone deals with the pressures of work and school in their own way. What are some of the ways that you find a work-life balance? Provide a list of do’s and don’ts.

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. Encourage the students to look up the company sites for some of the companies (like SaskTel) to learn more about the practical elements of the respective work-life balance policies.

E-Business and Social Media Solutions: A Match Made by Artificial Intelligence Critical Thinking Questions 1.What are the main advantages and disadvantages of sites/services like ZipRecruiter?

ZipRecruiter, and other organizations like it, were created to address the slow work of hiring using the traditional process of sorting through applications and résumés. Job seekers also do not enjoy this experience either. ZipRecruiter can connect over 430 million job seekers with 1.8 million employers. ZipRecruiter relies on artificial intelligence (AI) to make an astonishing number of lightning-quick matches between job seekers and employers.

Disruptions in Business: Disrupting the Standard Minimum Wage Debate Critical Thinking Questions 1.

The two sides in the minimum wage debate hold very strong views. Explain the motivations of the two sides, and how this influences the position they hold.

Those who support the idea of raising the minimum wage are motivated by concerns for the lowest-paid workers in society. They feel that workers who earn the minimum wage have a difficult time getting along financially, and they want to do something to improve their lot. As noted in the case, labour unions and social activists are strong supporters of an increase in the minimum wage. Those who oppose the idea of raising the minimum wage are typically business owners who are motivated by concerns that their profits will decrease because their labour costs will go up. These two basic motivations (concern for the welfare of low-wage workers and concern for company profits) strongly influence the positions taken by opposing individuals and groups in the minimum wage debate.

Consider the following statement: “All things considered, raising the minimum 2. wage will result in good outcomes for workers and for Canada’s economic performance.” Do you agree or disagree with the statement? Explain your reasoning. .

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When considering student agreement or disagreement with the statement, it is important to consider the logic of their position. As noted in the case, there are strong ideological positions held by many people on this issue. Labour unions, for example, aggressively support raising the minimum wage, while business owners oppose it. (What a surprise!)

Students who agree with the statement and defend their answer by saying something like “the minimum wage should be raised because workers in a lot of jobs are not paid enough” are likely making an ideological judgment with no empirical support for their position. Likewise, students who disagree with the statement and defend their answer by saying something like “raising the minimum wage is a bad idea because it will hurt businesses” are also likely making an ideological judgment with no empirical support for their position. A reasonable defense of one’s position must at least mention some of the possible (unintended or counterintuitive) consequences of raising the minimum wage (e.g., it will raise the unemployment rate because employers will hire fewer people as labour costs rise, or it might generate economic growth because workers have more money to spend). Students should work through the case and mobilize the arguments (either for or against) that support their position. Several examples in the case lean toward the positive aspects of raising the minimum wage, but it should be noted that these are anecdotal and may or may not be representative of what will happen when an increase in the minimum wage is mandated society wide.

The idea of raising the minimum wage has generated heated debate and a variety of conflicting research findings. As a result, having an in-class debate about this issue is a good way to increase student interest and to show the complexity of the issue. The instructor can form two teams; one team will argue in favour of the statement, and the other will argue in opposition to it. The following process is suggested: First, before either team has presented its arguments, have the class vote (secret ballot) on whether they agree or disagree with the statement. Do not post the results at this point. Second, have the two teams present their arguments. Third, have the class vote again (secret ballot). Fourth, post both the “before” and “after” results and determine whether there is a clear consensus. Fifth, compare the “before” and “after” vote counts to determine how many students changed their opinion, the direction of the opinion change, and the reasons why students changed their opinion.

Social Responsibility and Social Justice: The Changing Faces of Employee Rights Critical Thinking Questions 1.

Other than the obvious human rights issues what other benefits are there in creating a

more diverse, inclusive, and safe workplace environment?

The changing nature of rights in the workplace is undeniable and the need for companies to have clear and fair workplace policies to protect their employees is more important than ever. If employees do not feel that their basic rights are protected, it is impossible to create a workplace culture that fosters good morale and improves productivity. Ensuring .

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Part 2—The Business of Managing that basic needs are respected internally also makes these companies more attractive to external clients that value basic equity principles.

QUESTIONS AND EXERCISES Questions for Analysis 1.

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?

Formal training is important to ensure employees have the necessary skills and knowledge to perform their jobs and to ensure consistency among employees. On-the-job training is inappropriate when mistakes are costly or dangerous, and when off-the-job training is cheaper, safer, and equally (or more) effective.

2.

Why is a good employee-job match important? Who benefits more, the organization or the employee? Explain your reasoning.

Both the organization and the employee benefit equally from a good employeejob match. A satisfied employee is more likely to work hard, be persistent, and come up with good ideas.

3.

How is it possible for unemployment to be high while at the same time companies are complaining that they are having trouble hiring people?

This situation is possible (and, in fact, common) because the skills that employers need in employees are not possessed by enough people in the population. Many people have skills that have become obsolete or less in demand, but they have not retrained to make their skills match what is needed in the marketplace. Part of this problem stems from the fact that individuals have certain innate interests, and these interests may not match with what the market wants. For example, many students take advanced degrees in subjects like English, Philosophy, and Sociology even though the market demand for people with these degrees is not strong. In the academic world, for example, many people have earned Ph.D. degrees in these areas, but it is very difficult for them to obtain employment as a tenure-track professor in a university because demand for such Ph.D.’s is low. By contrast, there is a chronic shortage of people with a Ph.D. in marketing accounting, or finance, so business schools compete with each other for such people. Not surprisingly, salaries paid to business professors are relatively high, and salaries paid to professors in English, Philosophy, and Sociology are relatively low. So, why don’t more people get a Ph.D. in business? That’s a good question. This situation has existed for decades, yet shortages continue in some areas and surpluses in others.

In the private sector, the same kinds of forces are at work. In recent years, two kinds of jobs have become very much in demand: (1) those that require advanced academic training in computer operations (e.g., computer engineering, computer design), .

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Chapter 8—Managing Human Resources and Labour Relations and (2) jobs that require apprenticeship training in the industrial trades (e.g., plumbers, carpenters, and electricians). But there are not enough people with skills in these three categories to fill the positions that are available. So, overall unemployment remains high at the same time that many jobs go unfilled.

4.

What advantages accrue to companies that have a diverse workforce? Are there disadvantages associated with diversity? Explain.

The textbook describes how a diverse workforce can benefit a company, and students should put these advantages in their own words. They can also add their own ideas about diversity that may have developed as a result of their work experience. But there are also disadvantages associated with diversity (e.g., conflicts between individuals with different backgrounds and different values), and the text notes that some of the most successful tech companies do not have diverse workforces. Because the notion that diversity may have some negative aspects is controversial, it is useful to moderate a class discussion on what these disadvantages are, and how they might be overcome.

5. do you think the unionization rate in the public sector is so much higher than Why in the private sector? Do you think this will change in the foreseeable future? Explain your reasoning.

To answer this question, students should do some reasoned speculation about both basic human nature and about the differences between work in the public-sector and work in the private-sector. But the question also presents an opportunity to comment on how student values influence their conclusions. For example, students who feel that publicsector organizations are inherently inefficient because they have no profit motive will likely argue that unionization rates are higher in the public sector because those organizations have no incentive to control costs. Managers in government organizations, for example, know that the entire society (i.e., taxpayers) will have to bear the cost of wage increases that are given to public-sector workers, so they may not resist union demands the way that private-sector managers do. Other students (who may have a more favourable view of public-sector organizations) might argue that managers in those organizations may have more sympathy for unions and want to treat their employees better than private-sector organizations do. They therefore have not resisted when publicsector employees want to form a union, or when they bargain with management about the terms of a collective agreement. Both of these explanations are influenced by student values.

As far as the issue of whether things will change in the foreseeable future, those who are unimpressed with public-sector organizations can point to the increasing unrest among the general population about the higher level of benefits that public-sector employees enjoy compared to private-sector workers. They might conclude that this unrest will be translated into tougher regulations about public-sector employee unions.

By contrast, students who favour public-sector organizations might argue that publicsector jobs will continue to mean better outcomes for workers because that is better for workers (i.e., it is the right thing to do), and because public-sector workers are wellorganized (and will therefore be able to resist reductions in benefit levels). .

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6.

Consider the following statement: In a union shop, newly hired employees must join the union within 30 days of starting work. Forcing workers to join a union in order to keep their job is unreasonable and violates their freedom of choice. Workers should be allowed to decide whether they want to join a union or not. Union shops should therefore not be allowed. Do you agree or disagree with this statement? Explain your reasoning.

Here again, student values will have a large influence on the conclusions they reach. Because of this, it is probably useful to moderate a formal debate on this very fundamental issue.

Application Exercises 7.

Interview a human resource manager at a local company. Select a position for which the firm is currently recruiting applicants and identify the steps in the selection process. Do the steps match those shown in Figure 8.1? Why or why not?

If local companies are not large enough to have a human resources manager, see if your school's human resource manager will come to the class and describe the same information.

8. online and find three companies that are reported as being “great places to Go work.” Describe the compensation, benefits, and perks that these companies provide for employees. Which of the three firms is most appealing to you? Explain your reasoning.

This is another instance where student answers will vary because each student will put a somewhat difference emphasis on the factors of compensation, benefits, and perks. Summarize the underlying importance each student put on the different factors and report that information for students. Then moderate a discussion about the significance of the differences that were evident and what it implies for HRM managers.

9.

Select a job currently held by you or a close friend. Draw up a job description and job specification for this position.

Answers will vary. In assessing student answers, make sure that they understand the difference between a job description (which lists the duties of a job, its working conditions, and the tools and equipment used to perform it), and a job specification (which lists the skills, abilities, and credentials a person needs to do a job).

Interview the managers of two local companies, one unionized and one non10. unionized. Compare the wage and salary levels, benefits, and working conditions of workers at the two firms.

Because the information that is being asked for is sensitive, students should inform the managers of the purpose of their visit when setting up an appointment. If the managers are willing, each manager could present this information independently and .

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Chapter 8—Managing Human Resources and Labour Relations then answer students’ questions. Students could then evaluate the differences between the two companies without the managers present.

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Part 2—The Business of Managing TEAM EXERCISES Building a Business: Continuing Exercise Answers will be determined by a variety of factors, including the type of business that is being contemplated (for example, bricks and mortar vs. e-commerce), the numbers and types of employees that will be needed, the competition the company will be facing, prevailing wages in the industry, projected company finances, normal industry practices, etc.

Building Your Business Skills: Starting from Scratch 1.

What is the most difficult part of developing a job description? Do you feel that you needed any additional information?

Answers will vary, but will likely focus on the skills required for the position.

Most students will probably feel that they need additional information, but they must state specifically what additional information they need in order to develop the job description.

2.

When developing the job specification, how did your group determine the education and experience necessary for the job?

Again, answers will vary based on the students’ job experiences and familiarity with job descriptions. Poll the various groups and develop a list of factors (separate lists for education and experience) that groups considered when developing the job specification. Determine if there is any consensus on these factors. Debate will probably occur around the issue of how much, and what kind of, education is really necessary to perform the job in question. This can lead to a larger discussion about whether the education requirements that are stated for jobs are really necessary to perform the job.

3.

Because this is an entry-level position, it is likely that you will receive a large number of applications. How will you screen the applications and decide who to interview? What knowledge, skills, or abilities will be most important in the person that you hire?

Again, answers will vary widely based on students’ interview and work experiences, but a common factor that will be listed is “people skills.” As in Question #2, it is useful to poll the various groups and develop a list of the knowledge, skills, and abilities that they feel are necessary to perform the job. Determine if a consensus can be reached on the three or four key skills and abilities that are needed.

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Chapter 8—Managing Human Resources and Labour Relations Exercising Your Ethics: Team Exercise Handling the Layoffs Activity Overview: This activity asks students to examine the task of laying off workers.

Time Limit: 45 minutes What to Do: 1.

Divide the class into four-member groups and ask them to read the instructions for the Exercising Your Ethics: Team Exercise found at the end of Chapter 8. Based on the dilemma and the background information provided for each employee, ask each group to complete the Action Steps listed for the exercise. (20 minutes) 2.

Reassemble the class and discuss each group’s decisions, asking each group to provide a rationale for their decisions. (15 minutes) 3.

Based on the input from each group, can the class as a whole come up with a ranking of each employee and a final decision regarding who should be laid off? (10 minutes) Don’t Forget: Remind students that they should be able to justify their hiring and firing decisions.

Wrap-Up: Review the groups’ reasoning for making the decisions they made; remind students that such decisions are often subjective; in the real world, individuals should be prepared to back up any such decisions they have made.

CASE ANALYSIS Closing Case #MeToo: A New Day of Reckoning This closing case provides details on several sexual harassment incidents that have been given a great deal of publicity in the press.

Questions for Discussion 1.

Why do you think there has been such a dramatic increase in the number of sexual harassment allegations lately?

One of the reasons for the dramatic increase is the influence of social media, which has legitimized publicity on all sorts of activity (good, bad, or simply inane). More and more bad behaviour that was formerly kept hidden has now become public, partly because individuals have the capability to easily capture the bad behaviour and then .

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Part 2—The Business of Managing transmit it to a vast audience (think of the video of police forcibly removing a passenger from a flight simply because the airline had overbooked the flight). A norm of publicizing bad behaviour has now become established. Once a few individuals have the courage to come forward, it motivates others to do the same.

Another reason is the progress (albeit slow at times) that women have made in recent decades in the business world and elsewhere. Having said that, the large number of allegations of abuse demonstrates that the goal of a positive work environment for women is still elusive. This is true for the entertainment industry, for politics, and for business (and probably for most other areas of endeavor as well).

The instructor can moderate an in-class discussion to develop a more comprehensive list of specific reasons why so many sexual harassment allegations have recently surfaced. The discussion can also be directed to focus on developing solutions to this continuing problem, and to identifying difficulties that may be encountered along the way, especially the potential difficulty identified in the following question.

2. CEO of Facebook, Sheryl Sandberg, warned that the recent spate of sexual The harassment allegations could lead to a backlash against women. She urged companies to develop clear policies and procedures indicating how sexual harassment allegations will be handled. Do you think Sandberg’s concerns about a backlash are accurate, or do you think that all the publicity about sexual harassment will lead to a reduction in this bad behaviour? Explain your reasoning.

One way to approach this question is to assign Sandberg’s Facebook post as required reading. In her post, Sandberg says (among other things) that men are increasingly fearful about being alone with a woman at work because they might be accused of sexual harassment. She also thinks that men may now be more likely to be biased against women (for example, by inviting men to a business dinner but not women) because they fear that male-female interactions may lead to claims of sexual harassment.

Once all students have read Sandberg’s comments, the instructor can moderate an in-class discussion. When students agree or disagree with Sandberg’s view, it is important that they have a coherent reason for their position. If a student agrees that a backlash against women is likely, there must be some analysis of why such a backlash would occur (for example, men fear a loss of power over women, or men will avoid hiring women because they don’t want to deal with possible sexual harassment allegations).

Sandberg’s post also contains suggestions for creating a workplace where men and women can work well together. In the discussion, ask students to comment on the strengths and weaknesses of Sandberg’s suggestions. One of the questions that will probably arise during this discussion is this: Is the usual presumption of “innocent until proven guilty” going to operate when sexual harassment allegations are made, or is there a tendency to conclude that the allegation is sufficient to conclude that the accused person is guilty? In several of the incidents described in the opening case, the man being accused .

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Chapter 8—Managing Human Resources and Labour Relations vigorously denied the allegations. How should these denials be dealt with? How do we get to a resolution that is fair? What level of evidence is necessary to draw a conclusion one way or the other? Sandberg’s suggestions can be assessed considering these important questions. She suggests, for example, that any investigation of sexual harassment allegations must ensure that those accused are not stigmatized simply by the accusation, but she does not indicate how this can be done. Ask students what human resource departments can do to ensure a fair investigation of the allegations and an outcome that will be seen as fair.

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CHAPTER 9 MOTIVATING, SATISFYING, AND LEADING EMPLOYEES CHAPTER SYNOPSIS This chapter discusses the basic forms of behaviour 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. Time-tested models and concepts of employee motivation are presented, and the strategies and techniques used by organizations to improve employee motivation are discussed. The chapter also includes information about leadership and its role in motivation. The various approaches to leadership—trait, behavioural, and situational—are discussed, and recent trends in leadership are noted.

CHAPTER OUTLINE I. FORMS OF EMPLOYEE BEHAVIOUR

II.

Employee behaviour refers to the pattern of actions by members of an organization that directly or indirectly influences the organization’s effectiveness.

Performance behaviours directly influence how a job is performed, while citizenship behaviours provide positive benefits to the organization in more indirect ways. Counterproductive behaviours (like absenteeism, turnover, theft, sabotage) are those that work against organizational interests.

INDIVIDUAL DIFFERENCES AMONG EMPLOYEES A. Personality—This refers to the relatively stable set of psychological attributes that distinguish one person from another. The “big five” personality traits are shown in Figure 9.1 and briefly described in the text.

Emotional intelligence—Refers to the extent to which people are 1. self-aware, can manage their emotions, can motivate themselves, can express empathy for others, and possess social skills.

2.

Other personality traits—Locus of control is the extent to which a

person believes that their behaviour has a real effect on what happens to them. Self-efficacy is a person’s belief about his or her capabilities to perform a task. People with high self-efficacy believe that they can perform well on a specific task, but people with low self-efficacy have doubts about their ability to perform a specific task. Authoritarianism is the extent to which a person believes that power and status differences are appropriate within social systems such as organizations. Machiavellianism .

Chapter 9—Motivating, Satisfying, and Leading Employees refers to behaviour which is designed to gain power and control for a person. 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.

Attitudes at Work—Attitudes reflect our beliefs and feelings about B. specific ideas, situations, and other people. Attitudes have three components: cognition (the knowledge a person has about someone or something), affect (feelings toward someone or something), and intention (which guides a person’s behaviour).

1. satisfaction—The extent to which people have positive Job attitudes toward their job. A related concept—morale—refers to the overall attitude people have toward their workplace. Satisfied employees tend to be absent less often, to be good organizational citizens, and to stay with the organization.

2.

Organizational commitment (also called job commitment)— Reflects an individual’s identification with the organization and its mission. Highly committed employees see themselves as true members of the firm, overlook minor sources of dissatisfaction, and see themselves remaining members of the organization.

III.

MATCHING PEOPLE AND JOBS A. Psychological Contracts—The psychological contract is the set of expectations held by the employee concerning what the employee will contribute to the organization (contributions) and what the organization will provide the employee (inducements) in return. It is likely that if the psychological contract is created, maintained, and managed effectively, the result will be a satisfied and motivated employee.

IV.

B. The Person-Job Fit—This refers to the extent to which a person’s contributions and the organization’s inducements match one another.

MOTIVATION IN THE WORKPLACE Motivation refers to the set of forces that cause people to behave in certain ways.

Many theories attempting to explain motivation and job satisfaction have evolved over the years.

Classical Theory—Assumes that workers are motivated primarily by A. money. Taylor's scientific management techniques, including time-and-motion studies, proposed ways for companies and workers to benefit from this motivation.

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Part 2—The Business of Managing B. Behavioural Theory—Studies at Western Electric on the relationship Early between productivity and the physical environment led to the unexpected finding that working conditions were not as important as other factors in enhancing employee productivity. The Hawthorne effect describes the tendency for productivity to increase when workers feel they are receiving special attention from management.

Behavioural Theory in the Mid-20th Century—Several popular motivation C. theories were developed in the mid-20th century.

Theory X and Theory Y—Douglas McGregor concluded that 1. managers made one of two basic assumptions about workers: either workers were naturally lazy and uncooperative (Theory X) or workers are naturally energetic and interested in being productive (Theory Y).

McGregor generally favoured Theory Y beliefs, and argued that Theory Y managers are more likely to have satisfied, motivated employees.

2.

Maslow's Hierarchy of Human Needs—See Figure 9.3. Five levels of needs exist, including physiological, security, social, esteem and selfactualization. Unfulfilled needs can be met by one's work but must be satisfied in order of primacy (satisfaction – progression model). Filled needs are no longer motivating.

3.

Herzberg’s Two-Factor (Motivator-Hygiene) theory—Herzberg found that job dissatisfaction is the result of a lack of appropriate hygiene factors and job satisfaction is the result of appropriate motivating factors.

See Figure 9.4. This theory suggests that managers must first ensure that hygiene factors are acceptable (to avoid worker dissatisfaction) and then offer motivating factors (to improve satisfaction and motivation).

4.

McClelland’s Acquired Needs Theory—There are three needs in McClelland’s acquired needs theory: achievement, affiliation, and power.

People who are high in need for achievement have a strong desire to accomplish a goal or task as effectively as possible. Individuals with a high need for affiliation focus on human companionship. They want reassurance and approval from others, and are genuinely concerned about others’ feelings. Individuals with a high need for power are driven by the desire to control their environment (including the financial, material, information, and human resource aspects).

D. Contemporary Motivation Theory—Recently, more complex models of employee motivation have been developed.

Expectancy theory—This theory says that people are motivated to 1. work toward rewards that they value and believe they have a reasonable chance of attaining. See Figure 9.5. .

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2.

Equity theory—This theory of motivation says that people will be motivated to engage in certain behaviours if they feel they are being inequitably treated compared to others (comparison other) when considering the inputs and the outcomes (as long as the ratio of inputs to outcomes for each is an equal ratio, then the employee feels that they are being treated equally).

V.

STRATEGIES FOR ENHANCING MOTIVATION Applying theory is challenging. Five common strategies are described.

A. Reinforcement//Behaviour Modification Theory—Reinforcement means applying (or withholding) positive (or negative) consequences in order to motivate employees to exhibit behaviours the manager wants. Examples of specific reinforcement strategies (e.g., positive reinforcement, punishment, omission, and negative reinforcement) are provided. When using reinforcement, managers must keep in mind the idea of regression to the mean (the principle that, from one performance measure to the next, the change in employee performance will be toward the average level of that employee’s performance).

B. Setting Theory—SMART goals (goals that are specific, measurable, Goal achievable, relevant, and time-framed) are most likely to result in increased employee performance. A popular method of goal setting is management by objectives, which is a system of collaborative goal setting that extends form the top of an organization to its bottom.

C. Participative Management and Empowerment—Giving employees a voice in how they do their jobs and how the company is managed tends to increase employee satisfaction and their commitment to company goals. One way of doing this is through quality circles.

Team Management—Companies benefit from using teams of workers D. because increased motivation and job satisfaction usually occurs. Various kinds of teams are described (e.g., problem-solving, self-managed, project, transnational, and virtual).

Job Enrichment and Redesign—These approaches can increase E. satisfaction if a job lacks motivating factors. Job enrichment means adding motivating factors to a job in order to increase satisfaction. An example is described. Job enrichment is accomplished by job redesign, which involves combining tasks to increase job variety, forming natural work groups, and establishing client relationships.

1.

Combining tasks—Enlarging jobs and increasing their variety to make employees feel that their work is more meaningful. .

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2.

Forming natural workgroups—People who different specific jobs on the same project are good candidates for natural workgroups.

3.

Establishing client relationships—This involves letting employees interact with customers.

Modified Work Schedules—Different approaches to working hours and

F. the work week as a motivating strategy include:

1.

Flextime—Employees are allowed some choice in the hours they work. Flextime may allow choice of hours within a day or days within a week.

Compressed workweeks—Under this system, employees work 2. fewer days per week, but more hours per day on the days they work.

3.

Telecommuting—This system allows people to do all or part of their work away from the traditional office. It allows people to avoid wasting time driving to and from work, but some people miss the interaction with others at the workplace. The advantages and disadvantages of telecommuting (for the employees and the organization) are shown in Table 9.1.

4.

Workshare programs—Also called job-sharing, work-sharing allows two people to share one job either on a short-run basis or for the long-run. Both employees and employers typically benefit.

VI.

LEADERSHIP AND MOTIVATION Leadership is the processes and behaviours used by managers to motivate, inspire, and influence others to meet organizational objectives.

Leadership and management are not synonymous terms.

Leadership and Power—To fully understand leadership, it is also A. necessary to understand power, which is the ability to affect the behaviour of others. There are several different types of power: legitimate power (resulting from the specific position the manager occupies in the formal hierarchy of the organization); reward power (the power to give or withhold rewards like salary increases, bonuses, promotions, praise, and interesting job assignments); coercive power (the power to force another person to comply by means of psychological, emotional, or physical threat); expert power (which is derived from information or expertise that the manager possess); and referent power (which is based on subordinates’ identification with the leader and their urge to imitate the leader).

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Chapter 9—Motivating, Satisfying, and Leading Employees B. Approaches to Leadership—There are several different approaches that have been evident over the years—the trait approach, the behavioural approach, and the situational approach.

The trait approach—This approach focused on identifying the traits 1. that distinguished leaders from non-leaders. Many traits were identified, but the list became so long that it was of no practical value.

The behavioural approach—The goal of this approach was to 2. determine how the behaviour of effective leaders differed from the behaviour of ineffective leaders. Task-focused and employee-focused behaviours were the key behaviours that were identified. Researchers also identified three main leadership styles (autocratic, democratic, and freerein).

3.

The situational approach to leadership—The basic assumption in this approach is that leadership situations are complex, so different situations will require different kinds of leader behaviours (see Figure 9.7). Several different contingency theories are discussed, including the path-goal theory, the decision tree approach, and the leader-member exchange (LMX) model.

Recent Trends in Leadership—During the past few decades, several new

C. ideas about leadership have emerged. These include the following:

1.

Transformational leadership—Transformational leadership refers to the abilities that allow a leader to recognize the need for change, to crate a vision to guide that change, and to execute the change effectively.

Transactional leadership, by contrast, deals with routine matters.

2.

Charismatic leadership—This is a type of influence based on the leader’s personal charisma. Charismatic leaders envision likely future trends, energize others by demonstrating personal excitement, and empathize with others. Some potential problems with charismatic leadership are also noted. See Figure 9.8.

3.

Leaders as coaches—As organizations become less hierarchical, leaders become more like coaches than commanders.

Gender and leadership—Research shows that female leaders are 4. not necessarily more nurturing or supportive than male leaders. As well, male leaders are not necessarily harsher, controlling, or task focused than female leaders.

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Cross-cultural leadership—Increased diversity in workforces around the world means that leaders must be able to deal with many different kinds of subordinates.

Strategic leadership—This refers to a leader’s ability to understand 6. the complexities of both the organization and its environment in order to lead change in the organization which will improve its competitiveness.

Ethical leadership—Business leaders are increasingly being called 7. upon to maintain high ethical standards in their own conduct, and to hold others in the organization to the same high standard.

8.

Virtual leadership—Formerly, leaders and subordinates worked in close proximity to one another, but now leaders and subordinates may be physically separated (e.g., telecommuting). Therefore, leaders have to work at creating and maintaining relationships with their employees that go beyond words on a computer screen.

QUICK QUESTIONS 1.

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What are some typical performance behaviours expected of employees in the workplace?

What are some examples of employee behaviours that exemplify organizational citizenship?

What is your personality configuration with respect to the “big five” personality traits?

How might a company benefit from high degrees of job satisfaction and organizational commitment among its employees?

What is the theory behind scientific management?

5.

Does the Hawthorne effect still apply to people in the workplace?

6.

Why are Theory Y managers more likely to have satisfied and motivated

7.

8.

employees?

Based on Maslow’s hierarchy of needs, what is an example of how physiological needs take precedence over safety 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?

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Chapter 9—Motivating, Satisfying, and Leading Employees 10.

How is the comparison of employee inputs relative to outputs similar to the “psychological contract”?

11.

Give some examples of positive reinforcement and punishment in the workplace from your own experience.

What contributions and inducements are typically found in the psychological contract?

With management by objectives, managers and subordinates set goals and evaluate progress over time. What are some advantages and disadvantages of MBO? Participative management programs are not for everyone. What are some drawbacks of such programs?

What are some advantages and disadvantages of using teams in organizations?

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15.

16.

What qualities would you look for in a mentor? What kind of mentor do you think you would make?

17.

In what types of situations might employees benefit from work-share programs and flextime programs?

What are the advantages and disadvantages of telecommuting?

18.

What distinguishes leadership from management? Can someone be a manager and not a leader, or a leader and not a manager?

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20.

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The trait approach was all but abandoned several decades ago. Why? What is the difference between task-focused leader behaviour and employeefocused leader behaviour?

What attributes make a leader charismatic?

22.

“A new role for a leader is to become a coach rather than an overseer.” Explain this statement. What has brought about this change in leadership focus?

Do men and women tend to lead differently? If so, how?

23.

Is Canada a collectivist culture or an individualist culture?

24.

What contemporary issues might have increased the attention placed on ethical leadership in recent years?

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Part 2—The Business of Managing 27.

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?

IN-CLASS EXERCISES Exercise #1: Balancing Inducements and Contributions Activity Overview: This activity asks students to think about the psychological contract between themselves and their jobs.

Time Limit: 30 minutes What to Do: 1.

Divide students into three-person groups. Remind students what it means to have a psychological contract, and what person-job fit refers to. (5 minutes) 2. each student to interview his or her partners, asking the partners to assess the Tell 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 summarize 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 disguise the company name.

Wrap-Up: Close with a recap of the psychological contract and highlight how a good person-job fit occurs when employee contributions and company inducements line up. Ultimately, this results in higher performance and more positive attitudes.

Exercise #2: What Motivates Employees?

Activity Overview: This activity asks students to consider what companywide incentives might motivate workers who work in various jobs.

Time Limit: 30 minutes What to Do:

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Divide the class into small groups and assign each group to one of the jobs below.

(5 minutes) • A cook at a fast-food restaurant • A waitress at a local diner • A groundskeeper • A computer technician at a small firm • A janitor • A college professor Ask each group to brainstorm what incentives would be especially motivating for 2. a worker performing the assigned job; remind students to consider both tangible and intangible incentives. (10 minutes) 3.

Reassemble the class and ask each group to share their results, allowing all students to share input. (15 minutes) 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.

Exercise #3: 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 compared with a domestic company. (10 minutes) 2.

Reassemble the class and discuss group comments. (15 minutes)

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Part 2—The Business of Managing 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.

Exercise #4: Setting Standards for Patient Care Activity Overview: This activity asks students to read a supplemental article and to apply strategies and techniques for enhancing motivation in a health-care facility.

Time Limit: 30 minutes What to Do: 1.

In advance, make copies of the article below and distribute them to students prior to the day on which this exercise is to be conducted.

----------------------------------------------------------------------------------------------------------Setting Standard for Patient Care Personnel working on the firing line are a valuable, yet sometimes untapped, source for improving service delivery. Nowhere is this more evident than in hospitals where staffing needs are at an all-time high. Faced with increasing patient loads and patient information scattered in various departments, nurses too often find themselves searching for information— sometimes up to 30 percent of their time—instead of treating patients.

Nurse managers at Southern Tennessee Medical Center in Winchester, Tennessee, recognized information gaps and other inadequacies that, if overcome, could improve patient care for which they are accountable. Revamping into a new care-delivery system would require participation and teamwork of nursing staff at all levels.

Preparation for improvement began by identifying deficiencies in the current process.

Nurses were observed trying to clarify patients’ care plans from physicians’ diagnoses, with only general directions for treatment. Even nurses with top-level education and experience were struggling to translate plans into nursing actions. Even worse, plans weren’t located at bedside where nurses needed direction most. Also missing were care standards for treating each health condition, causing inconsistencies in treatments by different nurses from shift to shift for the same patient. Furthermore, outcome measurements for individual patients were nonexistent so outcomes-based evaluations of nursing performance and accountability were impossible.

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Chapter 9—Motivating, Satisfying, and Leading Employees A new care system was developed to overcome inadequacies and improve performance.

Some highlights of the new process include the following:

 Care standards are explained in nursing documents, at each patient’s bedside, for care categories, such as respiratory, nutrition, elimination, mobility, communication, and circulatory.  For each category’s care standards, desired patient outcomes were developed (e.g., the “respiratory” category lists seven desired outcomes including “no wheezing sound in breathing,” “at least 28 respirations per minute” to avoid shortness of breath, and “difficulty in clearing own secretions”).

Nurses record “yes/no” bedside responses for patient outcomes, thereby tracking  patient progress using consistent treatments across shifts.

Response sheets provide data for measuring individual patient outcomes, nursing  unit outcomes, and staff performance outcomes for every health-care problem on every work shift.

The new system delivered immediate improvement results on specific care standards for which nurses are held accountable, such as the following:

 Infection-control actions were properly implemented 95 percent of the time by staff without direction from the infection-control specialist.

Number of patient falls was reduced by 60 percent.  

For patients over 65 years old, hospital-acquired constipation fell from 25 percent to less than 3 percent.

In addition, orientation time for new nurses was reduced—at a cost savings of $500 per nurse—because performance expectations and treatment standards are explained in the bedside nursing documentation.

Receiving a 100-percent compliance score from the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), the new system reinforces comments by JCAHO President Dennis O’Leary: “Measures and measurement systems that are truly going to be usable and helpful for people in the trenches will need to be simple, frugal, and focused.”

Questions for Discussion 1.

How can reinforcement/behavior modification be used to enhance employee motivation in this scenario?

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How might managers apply management by objectives in this scenario in an attempt to enhance motivation?

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Divide students into three-member groups and ask them to develop responses to the case questions (15 minutes): 3.

Reassemble the class and discuss the groups’ comments. (15 minutes)

Don’t Forget: Students may also want to tie in employee empowerment and participative management techniques when considering the previously mentioned options.

Wrap-Up: Close the discussion with a recap of reinforcement/behavior modification and a discussion of the pros and cons of management by objectives.

Exercise #5: Learning to Lead Activity Overview: This activity encourages students to think about applying motivation theories to actual situations.

Time Limit: 50 minutes What to Do: 1.

Divide the class into four-person groups and ask each group to complete Steps 1 and 2 of the Building Your Business Skills exercise found at the end of Chapter 9. (30 minutes) 2.

Reassemble the class as a whole and ask the groups to discuss their recommendations. (10 minutes) Don’t Forget: Students should review the motivation theories presented in the textbook prior to completing this exercise. This activity can also be assigned as homework.

Wrap-Up: Bring the activity to a close by reiterating the importance of being able to apply motivation theories in actual work situations.

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Chapter 9—Motivating, Satisfying, and Leading Employees Exercise #6: 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 the classmate.

Time Limit: 20 minutes What to Do: After reviewing the differences between “managers” and “leaders,” ask students 1. 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 can share any information about their own personal assessments and/or introduce their interviewee and discuss some of the topics discussed in the interview. (10 minutes) Don’t Forget: Some students will already have some managerial/leadership experience upon which to draw. 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 or a circle of friends, for example) or characteristics and behaviours in their own bosses that they admire, and then assess whether they could emulate those behaviours and characteristics; that 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.

Exercise #7: Transformational Versus 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: Divide the class into small groups and ask each group to think of a business or 1. political leader they are familiar with. 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).

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Part 2—The Business of Managing 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 to further define the two types.

Exercise #8: Was Steve Jobs 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: 20 minutes What to Do: 1. to the day when this exercise is to be conducted, ask students to read several Prior articles that provide information about the traits and behaviour of the late Steve Jobs, former CEO of Apple.

2. the day of the exercise, moderate a class discussion about the traits and On behaviour that students discovered in their reading. Then determine whether the traits and behaviour of Steve Jobs suggest a high or low level of charisma. Determine if there is a consensus among the class members. (20 minutes) Don’t Forget: Make sure that students support their claims by noting the characteristics of charismatic leaders that are presented in the text, and how Steve Jobs did, or did not, exhibit traits and behaviour that is consistent with those characteristics.

Wrap-Up: Bring the activity to a close by reminding students that what one person views as charismatic may not be viewed as charismatic by another person.

Exercise #9: Great Leaders Activity Overview: This activity gives students an opportunity to think about what makes a great leader.

Time Limit: 30 minutes What To Do: 1.

Ask your students to work as a class to brainstorm a list of great leaders (the leaders can be from any walk of life, contemporary or historical). Encourage them to .

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Chapter 9—Motivating, Satisfying, and Leading Employees consider women and visible minorities. Record the list on the board so that it can be seen by everyone. (10 minutes) 2.

Divide the class into groups of 5-7 students. Challenge each group to develop a consensus on what they believe is the one most important leadership trait. (10 minutes) 3.

Invite each group to report their findings to the class. Ask about not only the top trait, but also about runner-up traits. (10 minutes) Don’t Forget: Record the results on the board next to the list of leaders. Also ask the group to describe how they reached consensus. Who was the leader in the group, and why?

Wrap-Up: Compare the finished list of leadership traits to the list of leaders. Would the class make any changes? Why? How do these traits apply to business leaders? Do your students know people with these traits? How can these traits be developed?

TEACHING TIPS 1. satisfaction and morale are not issues that are important only in large Job corporations. Small firms with only a few workers should also be concerned about the attitudes their employees have toward the employers. For this reason, every student in the class who has ever held a job is qualified to "rate" the job satisfaction and morale encountered at a particular place of their employment. You might ask a student to tell of a firm (where the student has worked) that had abysmal morale and nonexistent job satisfaction. Another student could be asked to tell about a firm where both of these phenomena were extremely high.

2.

Related to the previous item, you might ask the two students referred to above to explain what elements at the firm in question contributed to high or low morale and/or job satisfaction.

Ask students to discuss just how much of job satisfaction and high morale will 3. depend on the individual personality of the CEO of the firm. If a student says that it all depends on the manager's personality, then we would have to conclude that some firms will never achieve a high state of morale or of job satisfaction simply because they may never be inspired by a charismatic leader.

4.

Is a good manager born that way or can anyone learn to be an effective and inspiring manager?

5.

The text notes that money is one of several factors that contribute to job

satisfaction. You could have a "brainstorming" session in which students develop a list of factors that lead to job satisfaction. At the top of the list should go the most important

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Part 2—The Business of Managing factor, with the bottom spot belonging to the least significant factor. interesting to see where the students place money in such a list.

It will be

6.

Following the exercise recommended in the previous item, students should be asked if they could recall some kind of job in which money would not even be listed as a factor.

Hint: some volunteer organizations count heavily upon capable people performing tasks for rewards that are other than monetary.

7.

Equity theory says that an employee will be happier at work if he or she feels there is fair, equitable, consistent treatment than if such is not the case. When that feeling of equity is not present, then an employee can be very unhappy. In many organizations of the past--and perhaps numerous institutions of the present--there is a supreme effort to deal with this problem while still allowing inequity to prevail. Have students identify some good ways to preserve the fantasy that the firm's payroll derives from a sense of equity when indeed such is not the case.

8. possibility that the students should develop is that of classifying all wage and One salary information as secret. That way, an employee will never know that he or she is being treated unfairly. How probable is it that such an approach will work today?

9.

Although seniority is looked down upon as a device for determining compensation, seniority can be a solution to problems of equity. Quite simply: "If you've worked here longer than I have, then you will receive more pay than I will. I can understand that. And those who have worked here for shorter durations than I will receive less than I do." Admittedly, this is not a perfect solution to the problem.

10. is a very serious question that students and professor might be asking one Here another: "In all this effort to keep employees happy, is there a frontier beyond which management forgets what is best for the corporation and rather panders to the individual whims of the employees in order to keep them happy?" The answer to the question is "Yes!" However, there may be disagreement as to precisely where that frontier is located in the motivation landscape. Allowing some people to work at home; allowing people to pick their own work schedules; allowing people to bring young children to day-care centres at the place of business; allowing people to pick how they will be compensated or rewarded. Which of these can quickly get out of hand? Each company will have to answer for itself.

For those professors who wish to pursue this further, it could be said that a firm 11. engaging in this maximum flexibility for the purpose of happy employees is like a classroom of students that a professor wants to please. If the professor goes too far with such "buddy-buddy" tactics, he or she may promise a grade of A to all enrolled, no compulsory attendance, no reading assignments, and no tests.

12.

There is a lot of emphasis in management textbooks about developing yourself

into an effective manager whose commands are graciously received by your subordinates.

The need for such emphasis can easily be seen if we go back to this basic fact: In a .

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Chapter 9—Motivating, Satisfying, and Leading Employees democracy, no one likes to be told what to do! If there must be such giving of orders from one person to another, then the good manager, so the textbooks say, will learn to issue commands in such a way that subordinates are not offended or angered. A part of this is the "charm school" approach to managing of being kind and gentle and perhaps even apologetic in issuing orders (or "requests") to subordinates. Another part is for the manager to be so well organized that his or her commands always make sense to subordinates and appeal to their logical sense. Another approach is to share this leadership with employees by giving them a broad scope when making their own decisions. The contingency approach to leadership maintains that each situation will dictate which of the aforementioned aspects of managing should prevail.

Traditionally, there has been an attempt in textbooks to criticize the autocratic 13. style. Ask students to come up with some specific situations in which the autocratic managerial style really makes more sense than the other two.

14.

Give an overview lecture explaining how the view of human relations has changed over time.

15. a film that demonstrates how time-and-motion studies are conducted. Point Show out the focus on details that characterized these studies. Ask students to think about the implications of time-and- motion studies in the now-dominant service sector. Are timeand-motion studies still relevant? If so, how?

16. an employee feels that the organization has created inequities, according to When equity theory there are 5 actions that the employee can undertake (i.e., decrease inputs, negotiate an increase in outcomes, act on the comparison other, compare to another person, or leave the job). Ask the students to think of a situation where they felt that they did not feel that they were being treated equitably and discuss what they could have done using all of the 5 possible actions.

17.

Ask the students what would motivate them to study harder to get better grades.

18.

Ask the students what will motivate them when they graduate from College or University. Do they think that these motivators will change over their career?

19.

Ask students how each need in Maslow's hierarchy is satisfied by business firms.

Are there any needs that cannot be satisfied?

Interview the manager of a local manufacturing plant while the class listens. Ask 20. the manager to identify all the things that his or her company does to motivate workers.

Leave time for student questions.

Ask students to think about their motivation levels in their coursework. What 21. motivates them to expend a lot of effort vs. a little effort? What changes can they suggest to professors to increase student motivation?

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Part 2—The Business of Managing 22. students to identify the leadership styles that have existed in their Ask employment situations, and the types of duties they performed. Would different leadership styles have been more or less effective?

23.

Ask students to describe their own interest in participating in decision-making in jobs they have held.

Under what circumstances are students not interested in participating? Under what circumstances would students like to participate? Are there common factors?

24.sometimes occurs that an employee is passed over for a promotion, but is then It expected to train the new employee who is hired to fill the vacant position. Students may be asked what their reaction would be if they were the employee who was passed over for the promotion. Students may also be asked to consider this from management’s perspective. What are the trade-offs that management should consider in such as circumstance?

25.

Students should be able to identify employee behaviour as the pattern of actions by members of an organization that directly or indirectly influences the organization’s effectiveness.

26.

Reinforce that counterproductive behaviours include absenteeism, turnover, theft and sabotage, and sexual and racial harassment. You might ask students what counterproductive behaviours they have observed at their jobs.

27.

Remind students that individual differences may be physical, psychological, or emotional.

28.

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 work of others.

29.

Students often have trouble understanding the concept of the psychological contract. Make sure they understand it is the set of employee expectations about the contributions that they will make to the organization, and the inducements it will provide in return.

Reinforce that a good person-job fit is one in which the employee’s contributions 30. match the inducements the organization offers.

31.

Job satisfaction and morale are important in all organizations, not only in large

ones. Small firms with only a few workers should also be concerned about the attitudes their employees have toward the employers. For this reason, every student in the class who has ever held a job is qualified to "rate" the job satisfaction and morale encountered at a particular place of their employment. You might ask a student to tell of a firm (where the student has worked) that had abysmal morale and non-existent job satisfaction.

Another student could be asked to tell about a firm where both of these phenomena were .

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32.

Related to the previous item, you might ask the two students referred to above to explain what elements at the firm in question contributed to high or low morale and/or job satisfaction.

33.

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 34. lazy) and Theory Y (workers want to do a good job).

35.

Students often forget that equity theory focuses on social comparisons—people evaluating their treatment by the organization relative to the treatment of others.

36. the point that job enrichment is designed to add one or more motivating Clarify factors to job activities, while job redesign acknowledges that different people want different things from their jobs.

37.

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.

38.

Remind students to keep the behavioural approach to leadership separate from the trait approach. The behavioural approach focuses on behaviours used by effective leaders.

Remind students that some leaders are able to adopt either transformational or 39. transactional perspectives, depending on their circumstances; others are able to do one or the other but not both.

40.

Point out to students that someone with charisma is more likely to influence others than someone without charisma.

Students often remember that culture refers to international differences among 41. people, but they often forget that culture also includes diversity-based differences within one culture.

Students often confuse the types of leadership; strategic leadership is the ability to 42. understand the complexities of the organization and its environment and to lead change in the organization to enhance its competitiveness.

Make sure that students understand the point that employee behaviour is the 43. pattern of actions by members of an organization that directly or indirectly influences the organization’s effectiveness.

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Part 2—The Business of Managing 44.

Reinforce that counterproductive behaviours include absenteeism, turnover, theft and sabotage, and sexual and racial harassment. You might ask students what counterproductive behaviours they have observed at their jobs.

Students often have trouble understanding the concept of the psychological 45. 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.

Students often confuse the various approaches to leadership. Remind them that 46. the trait approach focuses on identifying traits that indicate leadership ability, including intelligence, dominance, self-confidence, energy, activity, and knowledge.

47.

Remind students to keep the behavioural approach to leadership separate from the trait approach. The behavioural approach focuses on behaviours used by effective leaders It 48.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.

49.

Remind students that when they have a “hunch,” it is intuition, which is an innate belief about something, often without conscious consideration.

50.

Point out that every individual has a different level of risk propensity, which is the extent to which a person is willing to gamble when making a decision.

USING THE BOXED INSERTS Opening Case Glassdoor: Searching for A Great Place to Work Questions for Discussion 1.What criteria do you consider in selecting 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.

2.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. .

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3.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.

E-Business and Social Media Solutions: Your Online Posts Can Damage Your Future!

This insert raises a question that is becoming increasingly important in our technology-based society: How much power should companies have to discipline employees who use Twitter and Facebook to complain about something? The insert provides interesting examples of employees who were fired based on comments they posted on social media.

Critical Thinking Question 1.

Do you believe that employers should have the right to terminate an employee based on Tweets and Facebook posts?

This question will generate some lively debate. Before getting into that debate, however, poll the class to see what proportion of the class favours the employer’s right to terminate and the proportion that is opposed. Note the results of the poll. Then moderate an in-class debate on this issue. The focus in the debate should be on the reasons for granting (or not granting) employers the right to terminate employees based on their Tweets and Facebook posts. During the debate, various situations will be discussed, and the answers may be different for those different situations. For example, should Tweets and Facebook posts on an employee’s own time be treated the same way as those done on company time? Should negative comments on a private post be treated in the same way as negative posts done while at work? A 2 x 2 matrix should be constructed and the four resulting situations analyzed (at work, positive; at work, negative; private, positive; and private, negative). Student views on each of the four situations should be determined.

Once the in-class debate has concluded, take another poll of students (ask students to give their view on each of the four situations). What changes have occurred? Did students change from one position to another? If so, why did they change?

Entrepreneurship and New Ventures: Motivation and Teamwork at Cirque Du Soleil .

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Critical Thinking Question 1.What do you think of Cirque du Soleil’s approach to employee management communications? What are the main advantages and disadvantages?

Cirque du Soleil has taken a radical approach which is strongly based on empowerment of employees. It shifted towards open and honest conversations, asking for constant feedback, and promoting shared responsibilities among all members of the company.

Cirque created programs like Cirque Jams, encouraging employees to get together to practice their favorite sports and outside activities, and Parade and Panache, peer recognition programs that allow employees to celebrate their accomplishments. Instead of traditional performance management systems with ratings and criteria, every 4 months, employees meet with their managers for an open discussion. Of course, not all employees would necessarily embrace an open approach with some preferring a more traditional one.

Social Responsibility & Social Justice: Starbucks: Leadership Beyond the Bottom Line Critical Thinking Question 1.Examine the actions taken by Starbucks leadership team listed in this insert and look at recent news about the company. Evaluate and compare the efforts taken by Starbucks in 2015 with the actions and more recent goals and results today?

In 2015, Starbucks launched the “Race Together” campaign, in which baristas were encouraged to write the phrase on customers’ cups and have conversations about race.

The campaign failed spectacularly, resulting in swift and brutal social media backlash.

Starbucks ended the campaign 6 days later, facing criticism not only for the campaign but also for its “tone-deaf” response to the backlash. Starbucks then created a mandatory 4hour racial bias training developed by a highly qualified team of 30 experts, including neuroscientists and community outreach leaders. By no means did the CEO see this training as a cure-all. "We realize that four hours of training is not going to solve racial inequity," he told CNN. In late 2020, Starbucks made further commitments and announced that leadership compensation would be tied to diversity goals. The company went further and defined a goal of making sure that at least 30% of its corporate employees and 40% of retail and manufacturing jobs are held by black, indigenous and people of colour (BIPOC) by 2025.

This announcement was also accompanied by a donation of $1.5 million in grants by the Starbucks Foundation to provide help to organizations that support black communities financially and through mentoring.

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QUESTIONS AND EXERCISES Questions for Analysis 1.

Describe the psychological contract you currently have or have had in the past with an employer. If you have never worked, describe the psychological contract that you have with the instructor in this class.

Students should be encouraged to discuss what they expected from their employer in return for what they brought to the company. For those students who have not worked some of the contract items for the class could include: expectation of preparation prior to class, attentive in class, ask questions when not sure of an issue, to be treated with respect, and receive the grade that I perceive I have earned. In return expect: not to be picked on, open to questions, knowledgeable in field, fair expectations, and fair exams.

2.

What is the difference between “leadership” and “management”? Give an example of each in practice.

Perhaps the most fundamental difference is that leaders are concerned with innovation, change, and inspirational motivation of employees, while managers are primarily concerned with planning, organizing, and controlling employee activities in times of stability. The differences between “leadership” and “management” are described in some detail in Table 9.2, and an example of the difference between leadership and management is provided in the text. Students should explain the difference in their own words to demonstrate that they really understand the practical dynamics of leadership and management.

How is the job enrichment/job design approach to motivation different from the 3. modified work schedules (flextime, compressed workweek) approach to motivation? Are there similarities between the two approaches? Explain.

Job enrichment is a method of increasing employee’s job satisfaction by extending or adding motivating factors such as responsibility or growth. Modified work schedules are methods of increasing employee’s job satisfaction by allowing them some choice in the hours they work. Both approaches are ways of increasing job satisfaction.

How can participative management programs enhance employee satisfaction and 4. motivation? Why do some employees not want to get involved in participative management?

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Part 2—The Business of Managing They can do so by making employees feel wanted, appreciated and respected, by adding a new and interesting dimension to their job, by increasing social interaction, and by giving opportunities for greater feelings of commitment and accomplishment.

Some employees do not want to get involved in participative management because of fear of job loss. They feel that if they share their knowledge management will use that knowledge to increase output. The increased output will mean that management can get by with fewer workers, so some people will lose their jobs. Another reason for workers not getting involved is because they feel that management doesn’t think they have anything to offer.

5.

What is the relationship between performance behaviours and organizational citizenship behaviours? Which are more important to an organization?

Performance behaviours are those that directly affect the performance of a job.

Assembly line workers have relatively simple performance behaviours, while upper level managers have much more complex performance behaviours. Organizational citizenship behaviours—such as helping other workers learn a new job, or agreeing to work overtime on short notice—have a more indirect effect on performance. These two types of behaviours complement each other, and both have a positive influence on performance.

But it may be much more difficult to observe the effects of citizenship behaviours because they have an indirect effect on performance.

6.

What are the pros and cons of charismatic leadership? Demonstrate these pros and cons by describing several specific behaviours of a charismatic leader of your choice.

On the positive side, a highly charismatic leader will generally be more successful in influencing followers’ behaviour than a leader who lacks charisma. Charismatic leaders can deliver success in businesses that are rapidly changing, are highly technical, and are very demanding to work in. On the negative side, charismatic leaders can be intimidating, power-hungry, and egotistical. There are also concerns that some charismatic leaders will inspire such blind faith in their followers that the followers may engage in inappropriate, unethical, or even illegal behaviours simply because the leader instructs them to do so.

Application Exercises 7.

Interview your employer or an administrator at your college. Ask the person what they believe motivates their employees. Determine whether the person’s beliefs about motivation are consistent or inconsistent with each of the motivation theories discussed in this chapter.

This question is designed to help students bridge the gap from motivation theories to the practical application of those theories. Student answers will vary here, so their answers must be assessed in terms of how well what they say matches with interviewee opinions on what they think motivates employees. For example, if the interviewee says .

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Chapter 9—Motivating, Satisfying, and Leading Employees that employee needs must be satisfied before employees will be motivated, the motivational theories that would be most obviously consistent with that would be the needs theories (Maslow, Herzberg, and McClelland). But if the interviewee says that it is important that employees are treated fairly and equitably, it is likely that equity theory would be more applicable. The key here is to analyze some key words that interviewees use to explain what they think motivates their employees, and then identify the motivation theories that are most consistent with those key words.

Ask a manager what traits he or she thinks are necessary for success. How does 8. the manger’s list compare with the “big five” list in this chapter? How many differences are there? Why would these differences exist?

Student answers will vary, depending on the particular manager they interview. In assessing student responses, make sure that they have properly understood the essence of each of the “big five” personality characteristics when concluding how well each manager’s list compares. For some managers, there may be very little mention of the “big five” characteristics, but for others there may be considerable mention.

One of the obvious reasons for differences is that the manager simply didn’t think of that particular characteristic. But if the manager thought of the characteristic and dismissed its importance, that is much more interesting. In that case, the student should provide information as to why the manager thought the characteristic was not important.

9.

Interview the human resources manager of a local company and ask what strategies the company uses to enhance employee job satisfaction. Also determine why the company does not use certain strategies that are described in this chapter.

To increase student interest in this issue, the instructor should develop a list of the different strategies that interviewees said they used for enhancing job satisfaction, and then categorize the strategies according to the motivation theories cited in the chapter.

Then determine whether the strategies focus on just a few motivation theories, or whether the strategies are spread over a wide range of theories. Also assess student responses and list the reasons why companies did not use certain strategies. Which reasons are most common?

10.

Think of the job you now have or a job you had in the past. How many of the five kinds of power did your boss use? Give specific examples.

This question is also designed to help students bridge the gap from theory to practice by requiring them to give specific practical examples which show how each of the types of power are used. Student answers will vary, so it is important to consider each example that is given and then determine whether it actually is an example of the kind of power the student thinks it is. Some examples will be relatively straightforward, such as when the boss rewards or punishes the student (reward and coercive power, respectively).

But other examples may not be so clear. For example, if a student says that he or she behaved in a certain way because they thought highly of the boss, and they conclude that .

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Part 2—The Business of Managing this is an example of expert power, that may or may not be correct. If the compliant behaviour was driven by the idea that “the boss is really competent,” it may indeed be an example of expert power. But if the compliant behaviour was driven by the idea that “the boss is a really good role model,” it may instead be an example of referent power. The details that students provide when describing examples must therefore be assessed to determine if the correct kind of power has been recognized.

11. Sir Richard Branson is the sixth wealthiest citizen of the United Kingdom. In 2020, he had an estimated net worth of $4.4 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 decisionmaking 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.

TEAM EXERCISES Building a Business: Continuing Exercise Answers will vary, but students should note that regardless of the type of business, every business will have employees, and that setting expectations and managing and motivating those employees will be instrumental in determining the success of the business venture.

Choosing employees that best fit with the mission and the culture of the firm is challenging, but will result in higher levels of employee satisfaction. The many dimensions of motivation and leadership that are discussed in the chapter will help students understand that each employee has individual motivations that are different in scope and intensity from other employees. Finding the right rewards and methods of motivation is the key.

Students need to consider how flexible they will 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 the structure of these inducements and their management practices?

Attention must also be given to the role of leadership in the new venture. This will be at least partly determined by the type of business (for example, bricks and mortar vs. e-commerce) the group is planning. Factors such as each team member’s preferred leadership style, the number and type of employees, the skills and experience levels of the employees, etc. are all issues that should be dealt with. The traits and skills the leader might need to possess should also be addressed.

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Chapter 9—Motivating, Satisfying, and Leading Employees Building Your Business Skills: Too Much of a Good Thing Follow-Up Questions 1.

Develop your recommendations for change. What is your group’s most important recommendation?

Explain why you think your most important recommendation is likely to succeed.

2.

Student answers for both these questions will vary, but the best answers will focus on actually applying some of the theoretical ideas and concepts that are presented in the chapter, particularly regarding motivation strategies and individual behaviours, as well as performance behaviours, organizational citizenship, and the psychological contract with each employee. Cultural changes to the company’s operation will be required and 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.

Exercising Your Ethics: Painted into a Corner 1. 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.

2. 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.

3. 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.

CLOSING CASE Creating a Culture of Hospitality at Hilton Students’ perspective will frame their answer to these questions based on their personalities and past experiences. Every person in an organization is fundamentally .

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1.How could Maslow’s Hierarchy of Needs theory help to 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 9.3. 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.

2. 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. There is no detailed account of inputs versus outputs in the case.

3.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.

4.The true test of corporate values is the actions taken by management in good times and bad. Analyze Hilton’s employee support programs during the COVID-19 pandemic. Using motivational theories from this chapter, explain how these actions help meet the needs for their employees?

Answers will vary but students should note the primary programs and actions that Hilton implemented. The industry had never faced a global crisis that brought international travel to a standstill in Hilton’s century of existence. With operations essentially shutdown, Hilton, eventually reduced its corporate (head-office) workforce by 22% and furloughed (temporary leave of absence without pay) others. But Hilton did not abandon its principles.  Hilton helped directly place furloughed workers in temporary jobs by partnering with over 60 major companies like Amazon.  Provided all furloughed employees with full health coverage benefits during the  pandemic.  Provided outplacement services to alumni members.

Created a program to provide all former Hilton workers with first rights and access to jobs once conditions returned to normal. .

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Part 2—The Business of Managing CRAFTING A BUSINESS PLAN PART 2(a): THE BUSINESS OF MANAGING Assignment Overview: The second part of the business plan project asks students to think about the goals of their business, some internal and external factors affecting the business, and the organizational structure of the business. As part of this assignment, students are asked to complete a simple SWOT analysis and develop an organizational chart. These two items will vary, depending on the scope of the business they are developing. Encourage as much detail as possible so students can get a clear picture of the activities that must be completed in order to successfully run a business. Make sure your expectations are clear as to what format (for example, handwritten or electronic) you would like to see used for the organizational chart.

Files to Provide Students: • For this part of the project, students will be asked to complete Part 2(a): 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. The Microsoft Word Student Business Plan Project Template is located on MyLab Intro to Business at https://www.pearsonmylabandmastering.com/northamerica/mybizlab/.

Part 2(a) 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, based on the size of the business. You should expect at least 3 to 5 pages in this section.

CRAFTING A BUSINESS PLAN PART 2(b): THE BUSINESS OF MANAGING Assignment Overview: This part of the business plan project asks students to describe their thoughts on corporate culture and philosophy on leadership and create a job description and job specification for each position in the company. They’ll also discuss their employees—what they must bring to the business, what training they’ll need, and how they’ll empower and motivate their employees once they’ve been hired. Note that because some companies will have more job descriptions and job specifications than others, you may want to limit the number of those you ask students to complete.

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Part 2(b) 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 of those 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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CHAPTER 10 OPERATIONS MANAGEMENT, PRODUCTIVITY, AND QUALITY CHAPTER SYNOPSIS This chapter focuses on operations management, productivity, and quality in both the manufacturing and service sectors. It is organized into two major parts. The first part explains the meaning of the term “operations” and describes the various kinds of utility that operations processes provide. It describes how companies with different business strategies are best served by having different operations capabilities and identifies the major factors that are considered in operations planning. The activities that are necessary for effective operations scheduling and controlling are also noted. The second part of the chapter focuses on the management of productivity and quality, and the activities that are necessary to achieve high levels in both these areas. The importance of a supply chain strategy is also noted, and how it differs from traditional strategies for coordinating operations among companies.

CHAPTER OUTLINE I.

PROVIDING GOODS AND SERVICES TO CUSTOMERS Businesses exist to provide goods and services to their customers. Companies that make tangible products such as radios, iPhones, newspapers, automobiles, and textbooks are engaged in goods production, while organizations that provide intangible services such as consulting, accounting services, transportation, investment advice, and entertainment are engaged in service operations.

A. Changes in Canadian Manufacturing Over Time— Prior to the Industrial Revolution in the 19th century, production work was carried out in homes and small shops. By the early 20th century, the idea of Scientific Management had revolutionized production. By the middle of the 20th century, mass production and the factory culture had reached their peak. The term “operations” includes all of the activities involved in making goods and services for customers. In recent decades, tremendous growth has occurred in the service sector. By 2021, the service sector 80 percent of the total jobs in Canada, while the goods-producing sector provided just 20 percent.

Industrial Revolutions—Over the last 300 years, there have been several B. industrial revolutions. The first occurred in Britain in the 1800’s, and the second in the U.S. in the early 1900’s. Now, a third industrial revolution is underway which is based on new technologies, software, robots, and miniaturization.

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II.

CREATING VALUE THROUGH OPERATIONS Production makes possible four types of utility: time, place, ownership, and form utility. Production managers are responsible for creating utility through production (operations) management. There are many different types of production management.

A. Differences between Service and Manufacturing Operations—Different raw materials are needed when producing a tangible good versus providing an intangible service. Services are performed, goods are produced.

1.

Interacting with customers—Manufacturing operations emphasize the production of physical goods, but service operations are really combinations of goods and services. Manufacturing operations focus on the outcome, while services must focus on both the transformation process and its outcome. (e.g., making and delivering a pizza).

2.

Intangibility and unstorability—These two features set services apart from physical goods.

3. customer’s presence in the operations process—The customer The is often present in the operations process of service organizations (e.g., getting a haircut).

Service 4. quality considerations—Customers use different measures to judge services and goods because services include intangibles, not just physical products.

B. Operations Processes—A set of methods and technologies used in the production of a good or a service. We can describe goods according to the kind of transformation technology they require or services according to the extent of customer contact required.

Goods-producing processes—Operations processes in 1. manufacturing can be classified based on the kind of transformation technology that is used, or whether the operations process combines resources or breaks them down. a.

Types of transformation technologies—These can be chemical, fabrication, assembly, transport or clerical.

Analytic versus synthetic processes—An analytic process b. breaks down basic resources into components, while a synthetic process combines raw materials to produce a finished product.

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Part 3—Managing Operations and Information Service-producing 2. processes—Services are classified according to the extent of customer contact. In high-contact processes, the customer must be physically in the system (e.g., transit systems). In low-contact processes, services can be provided to the customer without the customer being physically present (e.g., lawn care service).

C. Business Strategy as the Driver of Operations—There is no one standard

III.

way of doing production. Rather, the strategy of the business influences the way production is done. Examples are given (see Table 10.1). Successful firms design their operations to support the company’s business strategy (see Table 10.2). Over time, excellent firms achieve more than just one competence (e.g., FedEx is noted for dependability, world-class service, and cost containment).

OPERATIONS PLANNING Figure 10.2 shows the steps in an operations planning and control system.

Managers develop the firm's long-range production plan by forecasting future demand. The long-range production plan details plants, technology, labour, machinery, and transportation and storage facilities that will be needed in the upcoming two to five years.

A. Capacity Planning—This involves planning the amount of a good that a firm can produce under normal working conditions. Capacity planning for producing goods means making sure the firm's capacity slightly exceeds the normal demand for its product. Capacity planning for producing services: in lowcontact processes, managers can set capacity at the level of average demand, but in high-contact processes, manager must plan capacity to meet peak demand.

B. Location Planning—Facility location and layout are crucial decisions.

Factors to be considered in choosing a location are noted. Location planning for producing goods: many factors must be taken into consideration, including: proximity to raw materials and markets, availability of labour, energy and transportation cost, etc. Location planning for producing services: low-contact service companies have some options, but high-contact companies must be close to the customer.

C. Layout Planning—Once a location has been selected, managers must decide on plant layout.

Process layouts—In process layouts equipment and people 1. are grouped together according to function—for example, a job shop or custom manufacturing operation.

Product layouts—In this type, resources move through a 2. fixed sequence of steps to become finished goods—for example, mass production operations where an assembly line is used. .

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Fixed position layout—In fixed-position layouts, the product or customer remains at one location and equipment, materials, and human skills are moved to that location as needed.

4.

Recent developments in layout planning—In flexible manufacturing systems (FMSs), a single factory can produce a wide variety of products. Soft manufacturing means reducing huge FMS operations to smaller, more manageable groups of machines.

The movable factory is popular in developing countries; used equipment from industrialized countries is purchased that is still relatively modern and then used to produce new and untested products in their own country.

D. Quality Planning—This affects all other aspects of planning and has become of great importance to Canadian businesses.

E. Methods Planning—This involves the identification of every step in the production process and the specific methods that are used at each step.

1.

Improving process flows— The process flowchart identifies the sequence of production activities, movement of materials, and work performed at each stage of the process. Similar procedures are useful in designing both high- and low-contact services.

IV.

OPERATIONS SCHEDULING Managers must develop a timetable for acquiring the resources that are necessary to produce the good or service.

A. Master Production Schedule—A master production schedule shows The what will be produced, when, using what resources over coming months; shortterm detailed schedules specify the same things on weekly and daily bases. In low-contact service operations, work is scheduled based on either the desired completion date or on the time of order arrival. In high-contact systems, precise scheduling of services may not be possible.

Detailed Schedules—Additional information comes from detailed B. schedules which show daily work assignments with start and stop times for assigned jobs at each workstation.

Staff Scheduling and Computer-Based Schedules— Staff schedules C. specify assigned working times in upcoming days, perhaps for as many as 30 days or more, for each employee on each work shift. Staff schedules consider employees’ needs and the company’s efficiency and costs, including the ebbs and flows of demand for production. .

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D. Project Scheduling— Special projects, such as plant renovations or relocations, often require close coordination and precise timing. In these cases, special tools, such as Gantt and PERT charts, facilitate scheduling.

1.

Gantt charts—A Gantt chart diagrams steps to be performed and specifies the time required to complete each step. See Figure 10.9.

PERT charts—The Program Evaluation and Review Technique 2.

(PERT) is useful for customized projects in which numerous activities must be coordinated. See Figure 10.10.

V.

OPERATIONS CONTROL This requires the monitoring of production activities and taking corrective action when actual performance doesn't correspond with planned performance.

A.

Materials Management— Involves planning, organizing, and controlling the flow of materials.

1.

Materials management for physical products—The five major areas in materials management for physical goods are transportation (getting resources to the company and finished goods to the buyers), warehousing (storage of incoming materials and finished goods), inventory control (the receiving, storing, handling, and counting of all raw materials, partly finished goods, and finished goods), supplier selection (locating and choosing suppliers of services and materials to purchase from), and purchasing (the acquisition of all the materials and services that a company needs to produce its products).

2.

Materials management for services— Material management is also important for service providers. The most important “inventory” for many high-contact services is not physical goods, but information about service product offerings, clients, their interests, needs, activities, and even their plans for interactions with other clients.

Production Process Control—Tools for production process control include B. the following: 1.

Worker training—Customer service is closely linked to the employees who provide the service. This does not happen by chance.

2.

Material requirements planning—A computerized bill of materials is used to estimate production needs so that materials are put into production only as needed.

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Quality control—This involves the management of the production process to manufacture goods or services that meet specific quality standards.

VI.

THE PRODUCTIVITY-QUALITY CONNECTION By producing more of the right things with fewer resources, everyone—the economy, businesses, and workers—benefits. Productivity is a measure of economic performance that compares how much is produced relative to the resources used to produce it. Quality means the product’s fitness for use through offering features that customers want.

A. Meeting the Productivity Challenge—The standard of living in a country will decrease in relation to other countries when its level of productivity is lower.

1.

Measuring productivity—Most countries use consider productivity to be labour productivity. One reason is that accurate labour records are available.

2.

Productivity among global competitors—Examples of varying rates of productivity growth in different countries are provided. See Figure 10.11 for an international productivity comparison.

Factors affecting productivity include: technologies, human skills, economic policies, natural resources and traditions.

3.

Manufacturing versus service productivity—Manufacturing productivity is higher than service productivity. Although is was once believed that there was very limited potential for productivity improvements in the service sector, technological innovations are occurring which have automated many services and resulted in significant increases in service productivity. An example is provided.

4.

Industry productivity—Specific industries vary widely in their productivity. Examples are given of technological improvements that have increased the productivity of the computer, steel manufacturing and forestry industries in Canada. Unions, suppliers, investors and communities all have their own reasons, which are described, for concern over productivity levels in specific industries.

Company productivity—High productivity reduces the costs of 5. production and can lead to lower prices, greater profit, higher wages, and greater competitiveness, making the level of productivity important to investors, workers and managers.

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VII.

MEETING THE QUALITY CHALLENGE Following the Second World War, Edward Deming, an American, failed to convince American businesses that they needed to improve quality as much as quantity, but he did convince the Japanese. The success of the Japanese created such stiff competition that the American industry had to respond. To facilitate quality improvements, tools have been developed to help identify problems. See Figure 10.12 for a “Fishbone,” or cause-and-effect diagram identifying possible reasons for delayed departures.

Managing for Quality—Total quality management (TQM) (sometimes A. known as quality assurance) is a concept that emphasizes that no defects are tolerable and makes all employees responsible for maintaining quality. Leadership must support and promote the concept of TQM for it to succeed. The customer is the starting point by focusing on providing the customer with utility, but the process of improving quality extends into all facets of the business.

1.

Planning for quality—Quality level and quality reliability must be part of the planning process before products are designed or redesigned.

Performance quality is the overall degree of quality, how well the features of a product meet consumers’ needs, and how well the product performs.

Quality reliability is the consistency of quality from unit to unit of a product.

Organizing 2. for quality—Firms have moved from having a separate quality control department to inspect completed products to the expectation that every employee is responsible for the quality of the units produced, and that every product should be produced correctly rather than catching defective units just before they are sold. The role of a quality control department has evolved to a support function: assisting departments when problems arise and providing information on new processes and other advancements.

Leading for quality—Leaders need to inspire and motivate 3. employees to achieve quality goals, through training, encouragement and tying wages to meeting quality goals. Quality ownership is the concept that quality belongs to each employee, who creates or destroys it in producing a good or service.

Controlling for quality—Specific quality standards and 4. measurements must be established, so that monitoring can take place to ensure mistakes can be detected and corrected.

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B.

Tools For Quality Assurance—The following tools are widely used: 1.

Competitive product analysis— Ideas for improving both the product and the production process may come from competitive product analysis. For example, Toshiba will take apart a Xerox photocopier and test each component to see how it compares with Toshiba’s competing product.

Value added analysis—The evaluation of all work activities, 2. material flows, and paperwork to determine the value they add for customers. Wasteful or unnecessary activities can then be eliminated.

3.

Statistical process control—Techniques that allow managers to analyze variations in production data to detect when adjustments are needed. Process variation examines how changes in inputs (e.g., employees, materials) affect output quality. a.

Process variation—A certain amount of process variation is tolerable. A process capability study using upper and lower specification limits can yield information about process variation.

(See Figure 10.13) Controlb. charts—Help managers monitor the production process by identifying when a process is beginning to depart from normal operating conditions.

4.

Quality/cost studies for quality improvement—A method of improving product quality by assessing the firm’s current quality costs and identifying areas with the biggest cost-saving potential. Internal failures are units that do not meet quality standards, but which are identified before the product leaves the plant. Costs of internal failures include the costs to identify, fix or dispose of the defective units. External failures are units that do not meet quality standards that are identified by the customer.

Costs of external failure include the costs to replace or repair the defective items.

Quality improvement teams—Groups of employees who work in 5. teams to improve their work methods and the products they produce. An example of how a quality team functions in Motorola is described.

Benchmarking—This involves comparison of a company’s current 6. performance against its own past performance (internal benchmarking), or comparing the quality or efficiency of a firm's output with the quality or efficiency of units produced by the industry leaders (external benchmarking). .

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7.

Getting closer to the customer—Successful business keep close to their customers and know what they want and expect.

The ISO series—ISO 9000 is a certification program attesting to 8. the fact that a factory, a laboratory, or an office has met the rigorous quality management requirements set by the International Organization for Standardization. The ISO 14000 program certifies improvements in environmental performance by requiring a firm to develop an environmental management system, which is a plan documenting how the company has acted to improve its performance in using resources (such as raw materials) and in managing pollution.

Business 9. process re-engineering—This involves redesigning business processes in order to achieve dramatic improvements in performance, productivity, and quality.

C. Adding Value Through Supply Chains—The supply chain is the flow of information, materials, and services that starts with raw-materials suppliers and continues through other stages in the operations process until the product reaches the end customer (see Figure 10.14 for an example of the activities in the supply chain). Although each company looks out for its own interests, when a supply chain strategy is followed, each also focuses on the entire chain of relationships, to gain a competitive advantage through working as a coordinated team. Supply chain management is the principle of looking at the supply chain as a whole to improve the overall flow through the system of companies working together. The objectives are to reduce unwanted inventories, avoid delays, cut supply times and get product to the customer more quickly.

1.

Supply chain disruptions—Supply chains can be disrupted by a variety of factors, including bad weather, natural disasters, and problems with the quality of supplies.

Outsourcing and Global Supply Chains - Outsourcing is the 2. 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 1.

What are examples of form, time, and place utility?

2.

What is the intangible and unstorable nature of services?

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

4.

What are some examples of low-contact and high-contact services?

5.

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?

6.

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?

7.

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?

8.

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

9.

product or service?

Who is responsible for ensuring TQM within an organization?

10.

What do companies try to achieve with value-added analysis?

11.

12.

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?

13.

Who are the supply chain members for a manufacturer of baked goods?

14.

How can the reengineering of supply chains add value?

15.

IN-CLASS EXERCISES Exercise #1: 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: .

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Divide the class into groups of two to four persons and ask each group to think of three services, such as cell phone service, restaurants, a barber shop 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 have each group 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, and so on.

Exercise #2: 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-person teams. Ask each team to discuss some real-life situations that require them to be on time. Who benefits from punctuality? (5 minutes) Ask the groups to discuss certain job fields that are time-clock driven. Why are 2. they time-clock driven? Are there any situations discussed in Step 1 that require punctuality but in which punctuality is really not necessary? (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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Exercise #3: Round Up the Usual Inspectors Activity Overview: This activity asks students to read a supplemental article and think about the implementation of quality in a manufacturing facility.

Time Limit: 30 minutes What to Do: 1.

Make copies of the following material and distribute to students in advance of the class when the exercise is to be conducted.

-------------------------------------------------------------------------------------------------------Self-inspection is gaining popularity because, by increasing the accountability of workers, it also increases the quality of workmanship, reduces costs, and provides better value for customers. Formal programs for self-inspection aren’t new; the American Society for Quality’s (ASQ) designation of Certified Mechanical Inspector (CMI), established in 1984, is one of ASQ’s older certifications. What is new, however, is its growing acceptance by industries that are facing tougher quality demands from customers. An example is its adoption at Smith Tool Company, a Ponca City, Oklahoma, oil equipment manufacturer.

To improve product quality, the company’s operations management wanted to eliminate traditional inspections by quality specialists who examine the work of production personnel who sometimes view their goal as “getting things done and past inspection” rather than “getting things done right.” Independent inspection—even 100 percent inspection of production output—doesn’t prevent poor quality. Instead, it promotes poor quality attitudes and raises production costs by using extra people that don’t add value for customers: You can’t inspect quality into a product after it is made; you must build quality into the product in the first place—when the work is performed.

Commenting on the wastefulness of examining the work of others, quality expert David Hutchins said, “It does not matter how much you inspect a bad product, it will not make it any better; and all inspection does to a good product is add to its cost.”

Smith Tool’s goal for self-inspection was a reorientation making the producing workers accountable for ensuring their own work is “done right the first time.” Each worker’s attitude and training are geared toward “ownership of the process”—and improving it—so workers can do their own work properly, without outside inspection. To get started, the company recognized its workforce needed competence in concepts and practices of quality excellence, so it launched the CMI program. The CMI designation requires passing ASQ’s rigorous four-hour exam after at least two years on-the-job experience in mechanical inspection. Certification recognizes the individual for achieving a high level of proficiency in such topics as technical math, measurement tools, statistical techniques, and quality improvement. A training partnership was formed with Southwestern College of Professional Studies in Wichita and Winfield, Kansas, for a .

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Part 3—Managing Operations and Information three credit-hour CMI exam preparation course in which employees were strongly encouraged to enroll, at Smith Tool Company’s expense.

To date, more than 100 of Smith Tool Company’s 300 employees hold the title of CMI. Results in the plant have been impressive: Inspection costs have been reduced, inventory costs and scrap rates are lower because fewer defectives are produced, product quality is higher, and the company can respond faster to customer demands. In facing greater accountability for quality, Smith Tool Company’s highly trained workers are improving their own work processes and providing higher-value service to customers.

Questions for Discussion 1.

Is Smith Tool Company’s goal for self-inspection the best way to make workers accountable for quality? Are there any other options that might work?

2.

In what way(s) is this organization implementing TQM?

3.

How did Smith Tool Company benefit in the end by using self-inspection?

---------------------------------------------------------------------------------------------------------2.

Divide students into three-member groups and ask them to discuss the questions for discussion within their groups. (15 minutes) 3.

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

Don’t Forget: Students should familiarize themselves with TQM principles prior to completing this exercise.

Wrap-Up: Bring the activity to a close by reminding students that Smith Tool Company did experience reduced inspection costs and lower scrap rates and has been able to respond faster to customer demands as a result of implementing the quality change. Because workers have faced greater accountability at work, the workers improved their own work processes and were able to provide higher-value service to customers.

Exercise #4: The Impact of Efficiency Activity Overview: This exercise is designed to get students thinking critically about the idea of productivity and its effect on individuals, business firms, and society.

Time Limit: 40 minutes What To Do:

.

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Before the day on which the exercise is to be conducted, ask students to read several short chapters from the book by David Owen entitled The Conundrum (suggested chapters are noted in the “Building Your Business Skills” exercise at the end of Chapter 10 of the text).

2.

On the day of the exercise, form 4-person groups and ask them to follow the instructions in the “Building Your Business Skills” exercise. (20 minutes) Reassemble the class as a whole and discuss the Follow-Up Questions. Each 3. group should briefly share its input. (20 minutes) (Possible answers to the Follow-Up Questions are provided later in this chapter in the section “Team Exercises.”

Don’t Forget: List the examples that each group came up with during the discussion, and note whether the examples support or refute Owen’s contention about the effect of efficiency.

Wrap-Up: Conclude the exercise by reminding students that counterintuitive outcomes often occur, and that these outcomes can have a significant (and unexpected) impact.

TEACHING TIPS 1.

Remind students that operations refers to all the activities involved in making products—goods and services—for customers.

2.

Working conditions for employees in factories have improved a great deal since the beginning of the Industrial Revolution. Ask students to explain just how committed to worker welfare and happiness Frederick W. Taylor was.

3. the class through a brainstorming session over what manufacturing will be Lead like in the year 2045. Will there still be the boring drudgery for assembly-line workers?

Or will all such manufacturing be completely automated? Will the trend toward robotics cause a backlash in which customers want their products "handmade by humans," and will some firms advertise that they actually still employ human workers? During this discussion, ask students to recall predictions about production that were made in the 1950's. How accurate were these predictions?

Ethical questions can be raised at numerous points in each and every chapter of 4. the textbook. For example, some people feel there is something wrong with going too far with automation. You may want to have students debate the "morality" or "ethics" of consistently replacing humans with robots. Now that we are in the new millennium, are our robotic capabilities going to force inordinate numbers of skilled workers out of their jobs? Should the government do something to halt this trend, or does the free enterprise concept dictate that a firm has the right to operate as cheaply as possible? If not a classroom debate, this topic is worthy of a term paper. .

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Part 3—Managing Operations and Information 5. student in the class (or several student teams) could be assigned to visit a Each small manufacturing operation somewhere not too far from the campus. The idea would be for the student or the team to become familiar with just how that small firm goes about manufacturing and shipping out its product. It must be kept in mind that such small firms are really too busy being a success to have a group of students hanging around for too long. On the other hand, the persons running the operation may be happy and proud to show just how well the firm is doing. This might be one way for members of the class to see how a small business enterprise handles its production problems. An alternate way to achieve somewhat the same result would be for you to invite a small businessperson to address the class concerning his or her manufacturing operation.

6.

Develop some examples of the four types of utility presented in this chapter.

Here's an example of how it could be done. Let's create a new product such as a particularly lively softball that leagues all over the country can't wait to get their hands on. Time utility involves getting the new softball in sporting goods stores by the end of February--plenty of time for softball teams to purchase a supply before the new season starts. Place utility dictates that the softballs be made available at sporting goods stores all over the country rather than asking that customers come to pick them up at the softball plant in Saskatoon. Ownership utility enters the picture when a customer can acquire a ball in an extremely attractive box with colourful paper padding and walks out of the sporting goods store with a new skip in his or her step because of the joy engendered by this new possession. Form utility is provided by the manufacturer by bringing an assortment of raw materials together in such a way as to create a very attractive shiny white brand-new softball.

7.

Someone has said that "80 percent of a typical BMW model is recyclable." If recycling becomes an even more serious environmental necessity in the years to come, what are some ways that we can exceed that 80 percent figure and move all the way to 100 percent recyclable with our automobiles?

8.

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 value by providing utility.

9.

Reinforce that goods are produced, while services are performed.

10.

When we look at the unique characteristics of service operations (customization, unstorability, and customer involvement, we face some unique challenges. Discuss.

11.

Discuss the importance of customer service in service operations.

12.

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

13.

Each instructor brings his or her particular set of skills and past experiences to the

course. Some will have no background whatsoever in production of products, but others, .

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Chapter 10—Operations Management, Productivity, and Quality because of their life experiences, may find this chapter to be very comfortable and will want to give it heavy emphasis. In the latter case, it will contribute greatly to student understanding if the production-wise instructor furnishes examples of process, product, cellular, and fixed-position layouts. The text gives a custom-cake bakery as an example of process. Assembly lines are offered as illustrations of product. Work on clothing lends itself to cellular layout, and shipbuilding serves to illustrate fixed-position. If you have a strong background in production, you can furnish other meaningful examples for your students as well.

14.

Have a discussion of how does the layout of producing services (in high-contact scenarios) can create utility.

15.

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.

16.

Remind students that operations capabilities are activities production must do especially well; top-priority operations capabilities include quality, low price, flexibility, and dependability.

17.

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

18. the students do some research locally about costs of building new facilities.

Have If a new McDonald's or a new classroom building on campus or a new manufacturing plant has been built, get dollar figures. Students will be very surprised at the cost.

19.

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

20.

Students may forget that the best location for a manufacturer depends on proximity to supplies and customers, wage rates, labor availability, and the area’s infrastructure; the best location for a service provider depends largely on nearness to customers.

Reinforce that the master production schedule shows which products will be 21. produced and when as well as how much labour, material, and equipment resources are needed.

22.

There has been a lot written over the past few years about the just-in-time (JIT)

production system. Ideally, if JIT is working properly, a firm running an assembly line, for example, will not have to store inventory in a warehouse. Rather, at the beginning of each workday, suppliers will bring to the firm's assembly line all of the raw materials needed for that day's production. When the day of work is done, ideally, all raw materials have been used up and the firm is ready for a new supply early the next morning. It would seem reasonable to assume that somewhere along the line some firm is stockpiling .

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Part 3—Managing Operations and Information inventory so as to keep a smooth flow of raw materials to the assembly line. But JIT supporters say there is no stockpiling. Rather, there is some fine-tuning by way of computer control of production by the various suppliers that would service the assembly line operation. Just-in-time has many supporters and many detractors. Each firm must decide for itself if JIT is for them.

23.

If there is a manufacturing facility in your community that is using JIT, ask someone to come in and talk about it. Or, try to schedule a plant tour.

24. out that operations control requires managers to monitor performance by Point comparing results with detailed plans and schedules and then making any necessary changes.

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

26.

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

27.

Students can certainly identify with this statement: "When I'm really in a hurry, I'm just not as careful about what I am doing." This would seem to indicate that if there is a push for greater productivity, then the quality of what is produced might suffer.

However, a firm that wishes to successfully market a product must maintain quality standards. Otherwise, the buying public will not consistently accept the product produced, regardless of how great its supply.

28.

A student discussion might be generated along the lines of productivity and quality working against each other. Try the example of the watchmaker who makes one watch at a time (at a speed of one per week) and maintains the highest quality standards.

What will happen to quality if we order that watchmaker to produce 15 watches per day?

Can quality and productivity actually support one another?

Although they are very busy with numerous other activities, some students do get 29. to read world news now and then. Ask them to express their views on whether or not Canada is truly falling behind the other major industrialized nations. Will Canada someday have big problems because of slow productivity growth? If so, when will that point be reached?

30.

While Canadian agriculture may use more sophisticated technology than in some

other parts of the world, students may find the following real-life example interesting.

Several English families have immigrated to Canada to farm, purchasing farmland at prices that were noticeably high (much to the delight of the retiring farmer!). Many of these immigrant family farms subsequently went bankrupt, when it turned out that the crops planted in England were planted more densely than on the Canadian prairies.

While the land is very fertile, it is not as productive per acre. The overpayments for the .

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Chapter 10—Operations Management, Productivity, and Quality land were based on the expected yield per acre that could be achieved in England, not on the Canadian prairies.

31.

Deming tried to convince American manufacturers that the quality of their products was inadequate, and the methods used for allocating costs to different products was inaccurate. Since these problems existed throughout the industries, there was really no impact on the competitive position of any one firm. When the Japanese embraced his philosophy, however, it created a more efficient competitor that essentially forced American industry to pay attention to quality and accurate costing.

32.

Elsewhere in the textbook, we have encountered labour-management relations. It is mentioned that traditionally, especially under Taylor's Scientific Management, managers wanted to get more and more work out of fewer and fewer workers.

Accordingly, tell students that when management tries to improve labour productivity, it may be opening up the possibility of a labour-management dispute.

33. are many examples of successful companies that have succeeded in getting There employees to not only accept productivity improvements, but to assist management by identifying opportunities to increase productivity. One way is through gain sharing, another is through profit sharing. If employees have the opportunity to share in productivity gains, the motivation may be there. Ask students to consider which of the two compensation alternatives, gain sharing or profit sharing, is likely to have a greater impact on productivity, and why. Students should realize that there are other factors besides productivity that affect net income, and therefore profit sharing. Gain sharing only occurs when costs are reduced.

34.

Stress that a figure for gross domestic product or gross national product will have virtually no meaning by itself. Such figures gain meaning only when they are compared to other years for the same nation or are compared to comparable figures of other nations.

35.

“As labour intensive industries become less important, a figure for labour productivity will have less meaning and be less relevant.” Ask students whether they agree or disagree with this statement, and why. This should encourage students to consider why we are calculating productivity. What effect should the increasing use of robotics have on productivity measures? Should the work of robots be included in "labour" productivity calculations?

Measures exist for evaluating the productivity of equipment and other capital 36. investments. Return on Assets (ROA) can be calculated, where revenues are calculated for every dollar invested in assets. Measures of Return on Investment and Return on Equity are routinely used in business to evaluate the performance of the firm.

37.

Students should consider the following: One of the advantages of a labour-

intensive industry is flexibility. If demand and therefore production increases, additional workers can be hired. If demand and production decrease, workers can be laid off. There are costs involved, of course, in hiring, training, and laying off employees, but the .

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Part 3—Managing Operations and Information flexibility is there. Automation, on the other hand, significantly increases fixed costs, and reduces flexibility. Factories are not sold and purchased or constructed in response to short term fluctuations in volume. Ask students to consider what types of industries will benefit from automation, and in which automation may prove to be less productive.

38.

Measures like sales per square foot of space and sales per employee as productivity measures. Ask students to devise other "sales per ___" measures. Later in this chapter, there is emphasis on employees making a good impression on the customer.

Is it possible that too close attention to "sales per" measures can hamper good relations with the customers? How? 39.

Immediately after World War II, Japan was not known as a place where high quality goods were made. But Japan succeeded in completely changing its manufacturing image around the world by the 1970's. It is important to stress that this change did not happen overnight. There is also merit in emphasizing that Japanese manufacturers were rebuilding after the devastation of the war and started from scratch in order to achieve this new "hallmark of reliability." A willingness to make radical changes is a key to success in business, as well as in other aspects of life.

40. situation in Japan has changed somewhat, with an extended economic slump The putting pressure on companies to reduce their payrolls. Hiring and firing now occurs in a culture where employment used to be for life, and significant amounts were expended on research and development with the understanding that it may be years for those expenditures to translate into profit on the income statement.

41. section “Leading for Quality” in this chapter could very well have been The placed in any of the management chapters of the textbook. The idea here is that a good manager will convince all of his or her workers that each one of them has an important role to play in the firm's overall maintenance of quality. No employee is left out of this quest for quality.

42. may want to do some problem solving with the students. Here's the You proposition. Our firm's employees are poorly motivated and do not feel that they are appreciated. As a consequence, their conduct around customers is less than ideal. What steps can a good manager take to convince each and every employee that each has a stake in quality?

In statistical process control, the emphasis is on sampling rather than testing every 43. item. If the process is set up properly, such spot checks can be just as effective as testing 100 percent of the products produced. To revive an old quality control legend, you may want to remind students that this statistical sampling is the only way to test certain products. For example, what would be the end result if an ammunition plant tested all of its products? Ask the student to identify other products where sampling is the only acceptable method.

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Chapter 10—Operations Management, Productivity, and Quality 44. costs that a firm incurs when external failures are identified can be The significant. Repairing or replacing a product that is in the consumer’s home is far more expensive than if the product is still in the factory. Another important cost, however, is an opportunity cost. An unhappy customer may never return, but even more serious is the possibility that negative word-of-mouth advertising will reach other customers and affect their purchase decisions. Ask students if they have ever purchased a product they were totally dissatisfied with, and if so, what action they took. In a typical group of consumers, few would actually complain to the company, but many would complain to friends and family. What proportion of the class would not buy from the company again, but did not let the company know?

45.excellent example of participative management is the quality improvement An team, or quality circle. Here, management says to workers involved with quality maintenance: "You will be working with this in the days and months to come; what do you think would be a better way to keep quality standards high?"

46.

Consider this scenario: It's 1940, and by mistake a sleek new state-of-the-art enemy fighter aircraft crashes in rural England. Ask the students to relate this incident to benchmarking. When the enemy pilot attempts to destroy his own plane, do we try to stop him?

47.

The concept of return on quality emphasizes that a firm must keep cost and benefit considerations in mind when establishing quality standards. With that in mind, ask students to react to this idea: We refer to quality control. This means controlling quality but also controlling what we will spend on quality. Both must be controlled.

48. the following statement be an accurate expression of return on quality?

Would "Our goal is to make the most perfect product that has ever been manufactured in the history of mankind." Why or why not?

49.

Although the term is used here in relation to quality and productivity, it must be recognized that "reengineering" can be a frightening word for some employees. And that is because reengineering often means layoffs of personnel who will not fit into the reengineered scheme of things. But such a situation is fast becoming a part of the North American business scene.

The text talks about quality of the product or service and concludes by talking of 50. the quality of work life for the employees. You may want to expand upon the relationship between these two "qualities." Is the connection expressed by the slogan "happy workers make happy customers"?

Although we hear that company loyalty toward workers is fading from the North 51.

American scene, it is worth noting that IBM, General Electric, and Hewlett-Packard are restoring such a notion by the care and concern they are showing for their employees.

Nucor is also an excellent example of how a firm can achieve significant profits and high productivity with a loyal workforce. .

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52. a local plant manager in to talk to your class about TQM and how his or her Invite company went about implementing the process. Then have a manager of a local service company come in and talk about how TQM is used in the service industry.

Break the class into small groups and have them brainstorm ways to make the 53. service sector more productive. Then have a spokesperson from each group share their ideas with the rest of the class.

54. way to increase productivity is to push employees in high-contact jobs to One pressure customers into specific purchases. Moderate a class debate on the pros and cons of such a strategy.

55.

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

56.

Remind students that ISO 14000 guarantees that a company has an environmental management system, a plan documenting improved use of resources and pollution management.

57.

Some have said that to quality, something must be given up (e.g., less money for shareholders). Ask the students if they agree with this statement.

58.

Maintaining a quality-control program costs money. Failure to establish such a program can also be costly in terms of lost sales. The degree of "perfection" a firm may demand of its products could well depend upon just how high the quality standards of competitors are in the same industry. So, the degree of quality control exercised by a given firm over its products can sometimes be determined by the costs involved and by the level of quality control being implemented by competitors.

USING THE BOXED INSERTS OPENING CASE Who’s Afraid of The Ghost Kitchen?

Questions For Discussion 1.How does this case demonstrate the concepts of capacity planning and efficiency in the restaurant industry?

Capacity planning refers to calculating how much of a product can be produced in each time frame. Restaurants carry large, fixed expenses like rent and insurance costs. Your typical mom and pop breakfast place might be open from 5am until 3pm. Is there the possibility of using that kitchen capacity and running a different concept from 4 until midnight out of that very same kitchen? The app-based delivery world offers flexibility. Therefore, space can be rented out, or second concepts can be added and a different delivery-only concepts can be built. During the pandemic, many restaurants turned to this solution since they lost part (or all) of their in-house dining business and because not all products are .

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Chapter 10—Operations Management, Productivity, and Quality perfectly suited for delivery.

2. How does this case highlight the differences between goods producing and servicebased operations?

Both service and manufacturing operations transform raw materials into finished products. But service operations are more complicated than goods production in four ways: (1) the interaction with consumers (in this case the transaction is virtual, and the preparation is a back scenes operation which allows for a ghost kitchen innovation since it does not impact the end user’s experience).

(2) the intangible and unstorable nature of some services (these services rely on quick delivery of goods for a good experience. Some items work better in this environment (cooking and delivering) the food preparation loop. Clearly Pizza makes sense, but breakfast (delivering sunny side up eggs) is not quite as effective.

(3) the customer’s presence in the process, and (4) service quality considerations.

The growth of e-commerce has introduced a “virtual presence,” as opposed to a physical presence, of the customer in the operations process. Consumers interact electronically and in real time with sellers, collecting information about product features, delivery availability, and after-sales service.

3. Consider the following statement: “The participation and engagement of small restaurants with the major app-based delivery services is simply eating away at their margins and handing these companies the data needed to hurt their long-term prospects.” Do you agree or disagree with the statement? Explain your reasoning.

Student answers will vary but make sure they consider and understand the key facts that are highlighted in the case. Their perspective is most likely from a purely end-consumer view. However, make sure to highlight that Uber Eats, Door Dash and Skip the Dishes paid up to a 30% commission. That is not a small price in an industry that typically does not have high margins. According to the Independent Restaurant Coalition, 71% of restaurants report profit margins of less than 10%. This process has also given Uber Eats and their competitors a huge database of personal information and a record of people’s eating habits. With this new reality the concept of ghost kitchens is likely to grow further in the future with many of these App based companies using that data to steal customers from traditional outlets.

E-Business and Social Media Solutions: Renewed Debate: Does Telecommuting Boost Quality and Productivity?

Critical Thinking Questions 1. 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?

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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.

2. How do you feel about telecommuting? Would you rather have a job, 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-to-face 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.

In light of the COVID-19 pandemic, students may note that there are some professions that have adapted well to contactless delivery (like grocery stores and banks) and some that are simply unable to do so (like massage therapy and construction work).

Social Responsibility & Social Justice: Social Responsibility in the Supply Chain Critical Thinking Question 1. Patagonia believes that companies are responsible for all levels of the supply chain not just the ones that they own. Provide examples from this case and then contrast them to Apple which comparatively has a poor record in the area of social responsibility in their supply chain (Research HINT: start by looking up news stories about Foxconn, a company that makes some of your favorite Apple devices.)

1) Patagonia’s website has a detailed description of how the company monitors all direct manufacturers and subcontractors for social responsibility (labor practices, safe working conditions, and environmental responsibility). 2) Patagonia monitors the supply chain and works to maintain or improve its commitment to its “4-fold approach.” 3) They screen potential suppliers to ensure they meet Patagonia’s standards in sourcing, quality, social responsibility, and environmental practices. 4) Patagonia’s leadership is committed to social responsibility. 5) Patagonia partnered with Verité, a company specializing in promoting fair, safe, and legal working conditions worldwide, government agencies and other nongovernmental agencies. 6) Patagonia donates 1% of sales to environmental causes but goes far beyond that. 7) Patagonia believes in transparency and provides details about their supply chain, offering Footprint Chronicles, where customers and stakeholders can learn about their global supply chain by clicking on an interactive map, and providing a reference library to further educate their customers.

QUESTIONS AND EXERCISES .

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Questions for Analysis 1.

What are the resources needed and the finished “products” that are produced in the following services: real estate firm, childcare facility, bank, city water and electric department, and hotel?

Real estate firm—knowledgeable sales force, information regarding potential homes and market value, property for sale, sales service.

Child-care facility—trained staff, premises, furnishings; child-care services are produced.

Bank—trained staff, technology, information, premises, furnishings; banking services are produced.

City water and electric department—trained personnel, utilities, water, facilities, transportation systems, information, technology; water and utilities provided.

Hotel—trained staff, building, information, technology; hotel services provided.

Apply the five major categories of operations planning to your college or to a 2. local business.

The five major categories are (1) capacity planning, (2) location planning, (3 layout planning, (4) quality planning, and (5) methods planning. Students need to think about how each of these activities are carried out in a college. For example, capacity planning requires the scheduling of classes in rooms that are appropriate for the number of students that are enrolled in the various courses that are offered by the college (seminar rooms vs. large lecture halls). Layout planning requires that the arrangement of furniture and projection equipment at the front of the classroom be appropriate for the classes that are being taught in the room. For example, in a course which focuses on experiential learning, it is necessary to have movable tables and chairs so that student groups can effectively meet to do the experiential exercises. Methods planning is important in developing systems that are used to register students for their various classes. These are just some of the examples that students will probably think of when answering this question. The general applicability of the categories of operations planning to a college can be demonstrated by compiling a list of all the examples that students thought of when answering this question, and then posting the list.

Pick three physical products (not services) that you regularly use. Then do some 3. research to determine which of the basic production processes are used to produce these products (chemical, fabrication, assembly, transport, or clerical processes). To what extent are multiple processes used in the production of the product?

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Part 3—Managing Operations and Information Answers will vary. Make sure that students understand the difference between the various production processes and that they have properly categorized their examples.

Note that there are opportunities here to ask further questions about production processes.

For if a student describes a dresser in a bedroom, there is a possibility that the product is a custom product or was mass produced. Further research will be necessary to determine which category the dresser fits into.

Pick three services (not physical products) that you regularly use. Explain what 4. customization, unstorability, and intangibility mean for each of the services. How do these factors influence the way the service is delivered to customers?

Answers will vary here, but transportation examples may, however, be common because students often use the bus to get to school, or they travel with their families by air. This familiarity should allow them to get insights into customization, unstorability, and intangibility. For example, while they may appreciate an empty seat next to them when flying, unstorability means that the seat cannot be stored in inventory and used later. That, in turn, means that the airline has lost the revenue from that empty seat.

5.

Develop a service flow analysis for some service that you use frequently, such as buying lunch at a cafeteria, having your hair cut, or riding a bus. Identify areas of potential quality or productivity failures in the process.

A service flow analysis helps managers decide whether all the processes that are used in providing a service are really necessary. Student answers will vary here, but students who continue with a transportation example will get additional insights into the importance of carefully examining how services are provided. They will also have a better understanding of the sorts of things that can go wrong. For example, when their bus is late, whose fault is it? Is the driver competent? Was their street construction that delayed the bus on its rounds? Was there a disturbance on the bus that forced the driver to eject passengers? Various processes are necessary for a bus company to effectively provide bus service to those who want it, yet many things can go wrong.

Answering this question requires students to think carefully about the services they use, rather than simply taking them for granted.

Describe three high-contact service operations and three low-contact service 6. operations. Do the concepts of intangibility and unstorability have different implications for low- and high-contact service operations?

Student answers will vary, so the answers will have to be assessed in terms of (a) whether the student properly identified high- and low-contact services, and (b) whether they have properly identified the implications of intangibility and unstorability for highand low-contact services. With respect to (a), high-contact services (where the customer is physically part of the process) that are likely to be mentioned are public transportation, hairstyling, dental services, medical services, and guided tours. Low-contact services (where the customer is not physically part of the process) that are likely to be mentioned .

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Chapter 10—Operations Management, Productivity, and Quality are garbage collection, package sorting at a company like FedEx, auto repair, lawn services, electric utilities, and cheque processing at a bank.

With respect to (b), students will have to explain how the concepts of intangibility and unstorability have different implications for high- and low-contact services. This is a little more difficult. By definition, intangibility is evident in all services. But it may be perceived differently by customers. For example, in the high-contact service of hairstyling, even though the service is essentially intangible, the customer may perceive more substance to the service because the customer is physically present and can see the work being done. But in a low-contact service like auto repair, the customer does not see the repair being done, and may therefore see it as more intangible. But this is a fairly subjective judgment, since intangibility is evident in both cases. The same sort of uncertainty is evident with respect to unstorability. Services are typically unstorable (i.e., they cannot be produced and stored for future high-demand periods), but the practical implications of unstorability may differ for high- and low-contact services. For example, an empty seat on a high-contact service like a commercial airline flight means lost revenue for an airline. But in a low-contact operation like garbage collection, unstorability has different implications (i.e., if the garbage is not collected at the expected time, people can simply leave their garbage can at the curb until the truck does come).

Application Exercises 7.

Interview the manager of a local service business, such as a restaurant or hair salon. Identify the major decisions that are involved in planning the business’s service operations. Determine how the factors of intangibility and unstorability affect the business.

Answers will vary, depending on the individual interviewees, but most will say the major decisions that need to be made must keep in mind important criteria such as “providing timely service,” “giving the customers what they want,” and “delivering the desired services in a cost-efficient manner.” Student answers should be assessed on the basis of how well they explain how these criteria drive specific managerial decisions. For example, how did the manager decide what staffing levels were necessary in order to provide timely service?

The factors of intangibility and unstorability affect the business in the same general way that these factors affect all service businesses. For both restaurants and hair styling shops, intangibility means that there is some level of subjectivity that must be coped with. Satisfaction with a restaurant meal, for example, will be a subjective thing for customers, and it can be difficult to deal with a customer who thinks the meal was not satisfactory. As far as unstorability is concerned, if long waiting lines develop at a restaurant, some customers simply will not wait and their business will be lost.

8.

Choose a product that you regularly use and trace its supply chain. Can you see areas where improvements might be made?

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Part 3—Managing Operations and Information Answers will vary, but students should recognize the processes involved in the supply chain and attempt to identify some inefficiencies along the way. Answering this question will require a fair bit of work, so it is perhaps best to make it a team assignment.

Interview a production manager in a local firm and determine which of the tools 9. for total quality management the company is using. Also determine why the company has chosen not to use some other tools.

Responses will depend on the specific firm that is contacted. An alternative way of obtaining information on the application of quality management tools would be to have a production manager come and address the class and answer the students’ questions. In either event, the questions should be prepared in advance in order to effectively use the limited time available.

10. of an everyday activity—either personal or professional—that you would Think like to do more efficiently (for example, going to work or school, enrolling in classes, or filling up your car at the gas station). Describe how you would use methods planning to achieve increased efficiency in that activity. Draw a process flowchart that shows the stages in the activity you chose, and then explain how you would use it.

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.

TEAM EXERCISES Building a Business: Continuing Exercise Answers will vary, but students should note that regardless of the type of business, every business will have a service component. There must be recognition of the importance of perceived service quality on the part of customers, since service quality includes both tangible and intangible aspects. When analyzing the key operational characteristics of their business, 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 their business, how the layout of a facility affects its operations, how products offer different forms of utility to customers, and how their company’s activities will impact the triple bottom line.

When looking at supply chain management, the students should focus on supply chain as a whole in order to improve the overall flow of supplies within their business.

Building Your Business Skills: Testing Operational Efficiency in Dealing with New Competitors

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Follow-Up Questions 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.

1. 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 domestic 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.

2.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.

3.

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.

4.What course of action does your team advise, and why? What are both the short- and long-term 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: Calculating the Cost Of Conscience Activity Overview: This activity exposes students to some ethical considerations that pertain to certain cost and service decisions that must be made by operations managers.

Time Limit: 45 minutes What to Do: .

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Divide the students into four-member teams and ask them to turn to the Exercising Your Ethics: Team Exercise at the end of Chapter 10. Have the teams read and follow the instructions. Each group member should choose one of the different roles in the exercise. (30 minutes) 2.

Reassemble the class and compare the groups’ comments and conclusions. (15 minutes) Don’t Forget: It’s important for team members to stay within their assigned roles since comments and conclusions from each of the roles will be different.

Wrap-Up: Many ethical dilemmas, such as this one, affect all parties involved differently. In this scenario, Ruth’s perception of quality improvement may have been different from her boss’s perception. Nonetheless, Ruth followed the policy she felt was best. The lesson in this scenario is that Ruth’s role was probably not as well defined as it should have been.

CLOSING CASE Industrial Robots: Past, Evolving Present and…AI-Inspired Future?

This case provides information about industrial robots and the expanding number of situations where they are useful. But there are concerns about robotic automation, because when robots do the work of humans, jobs are lost.

1.

Consider the following statement: “The use of robots is not a good idea. While they do increase efficiency, they depersonalize the work environment and the positive aspects of human interaction, and this will be lost when robots are introduced.” Do you agree or disagree with the statement? Explain your reasoning.

Students who agree with the statement will probably do so because both elements in the statement (robots increase efficiency and they depersonalize the work environment) seem to be true. But are they? There is strong evidence that robots do increase efficiency; if they didn’t, they wouldn’t be used by so many businesses. But the issue of whether robots depersonalize the work environment is subject to debate. If “depersonalizing the work environment” is defined as “robots taking specific jobs away from humans,” then the use of robots will obviously depersonalize the work environment. Or if “depersonalizing the work environment” is defined to mean that humans have to interact with computers, that may also (almost by definition) mean that depersonalization has occurred. But it can reasonably be argued that neither of those definitions really get at the basic issue, which is this: “How do workers interact with each other while they are on the job?” The quality of human interaction is key to a business’s success. If the introduction of computers increases the efficiency of a business, and the human interactions in that business are “good,” the business would likely do well. But what about a business where human interaction was “poor” before automation was introduced? What would the .

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Chapter 10—Operations Management, Productivity, and Quality outcome be then? Or are computers even part of the depersonalization discussion? The question of the relationship might be very complicated, i.e., the introduction of robots may or may not depersonalize the workplace. The best student answers will address this important issue.

Consider a specific example: Suppose that an assembly line that used to have 50 semi-skilled workers is automated, and now the line needs only 5 computer technicians.

These 5 technicians ensure that the computers are working properly so that they manage other, more traditional machines like arc welders and drill presses. What will the human interactions be like for these 5 computer technicians? Will their interactions be “better” or “worse” than the human interactions that used to exist when there were 50 workers on the assembly line? When the question is asked in this way, it becomes clear that the relationship between robots and the quality of human interaction is difficult to predict.

That would involve first defining what constitutes “good” human interactions, and then developing data to determine whether computer technicians have “better” human interactions than the 50 semi-skilled assembly line workers used to have. And even if that is done, one might ask whether highly skilled computer technicians have different kinds of interactions than semi-skilled workers. They probably do.

2.

Describe the chain of events that is likely to occur after a robot starts doing a job that a human used to do. In your description, consider issues like the overall effect of robots on employment levels, the effect of robots on individual employees, the types of jobs that are negatively (and positively) affected by robotics, the impact on efficiency, the type of job skills that are necessary in an era of robotics, and any other issues you think are important. What is your overall conclusion about the impact of robotics on companies and the people who work in them?

This case provides an opportunity to address one of the most debated issues about technology: will automation lead to higher unemployment levels because people will be displaced by machines? At an intuitive level, the fear seems well-founded because when machines start doing work that humans used to do, there will be, by definition, less work for people to do (at least in the area where automation is applied).

But this is a rather simplistic and narrow view of what happens when automation is introduced. A simple fact demonstrates this: today there are far more people employed than there were, say, 100 years ago (when automation was much less prevalent). How can this be? How can there be more people employed if automation takes people’s jobs away? The most general answer is that while automation certainly does take away certain jobs, it also creates many other jobs that formerly didn’t even exist (including jobs that are created to make the automated equipment).

The following reasoning elaborates on this basic idea. When automation is introduced, it increases the efficiency of an organization (otherwise the organization wouldn’t make the investment in automation). The increased efficiency that results leads to lower production costs which, in turn, allow the company to sell its products at lower prices (or simply make higher profits). Lower prices increase demand for the company’s .

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Part 3—Managing Operations and Information goods and services, so it expands its operations to capitalize on the increased demand for its products or services. In doing so, it will likely hire more workers to meet the increased demand. Because automation is continually being introduced in so many different sectors of society, the effect on employment overall is very positive (even though workers in specific situations are losing their jobs because of automation).

So, a reasonable answer to the question is that automation will cause employment in various types of work to decline, but it will cause employment in various other (and often totally new) types of work to increase. The overall effect will be that employment levels will increase as the population increases. This is not to say that employment levels will always go up; there can be, for example, significant unemployment when the business cycle is in a downturn.

3. Conduct research and find articles that indicate examples of how artificial intelligence (AI) powered robots are being used in particular Canadian and international companies.

Student answers will vary based on the available research.

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CHAPTER 11 UNDERSTANDING ACCOUNTING CHAPTER SYNOPSIS We begin our overview of accounting by defining accounting and the role of accountants, including the types of accountants, the services they offer and the tools they use. The accounting equation is explained, and the three basic financial statements are discussed in terms of their importance in showing financial activities and the condition of a business. The importance of budgets is discussed regarding internal planning and control. The chapter concludes with a discussion of several important financial ratios. A supplement at the end of Chapter 11 provides material on information technology (IT). CHAPTER OUTLINE

I.

WHO ARE ACCOUNTANTS AND WHAT DO THEY DO? Accounting is a comprehensive information system for collecting, analyzing, and communicating financial information. It is a system for measuring business performance, and for translating those measures into information for management There are numerous users of accounting information, including business managers, employees, unions, investors, decisions. creditors, taxing authorities, and government regulatory agencies.

Accountants have the responsibility to ensure that the accounting system collects and analyzes data. The two main fields of accounting—financial and managerial— are explained and their purposes described.

A.

Financial Versus Managerial Accounting 1.

Financial accounting—The firm's financial accounting system is concerned with external users of information (e.g., consumer groups, unions, shareholders, etc.).

2.

Managerial accounting—In contrast, managerial accounting serves internal users (managers at all levels).

B. Professional Accountants—Historically, there were three professional accounting organizations in Canada (as described below). But these three organizations recently united under the Chartered Professional Accountant (CPA) designation.

1.

Chartered Accountants—CA firms provided audit, tax, and management services.

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Chapter 11—Understanding Accounting 2.

Certified General Accountants—CGAs also provided auditing services in most provinces, but most CGAs worked in private companies.

3.

Certified Management Accountants—CMAs focused on strategic management, and synthesized financial and non-financial information to help organizations maintain a competitive advantage.

4.The New Rules: Transition from CA, CGA, and CMA to CPA— All of the accounting professionals currently in the workforce (as well as individuals who complete their studies during the transition period) will refer to themselves as either “CPA, CA,” or “CPA, CMA,” or “CPA, CGA” until November 2022. After that, only the “CPA” designation will be used.

C. Accounting Services—Accountants provide several services for their clients.

1.

Auditing—This involves examining a firm's financial records to ensure that they adhere to generally accepted accounting principles (GAAP). Forensic accounting is used to track down hidden assets in a business and to counteract increasing white-collar crime. a.

International accounting standards—In our globalized economy, users of financial information want assurances that accounting procedures are comparable from country to country. Therefore, the International Accounting Standards Board (IASB) has developed a “global GAAP” that is being used by companies in more than 100 countries. b.

Detecting fraud—In recent years, there has been much publicity about the failure of auditors to detect fraud. Therefore, when audits are being conducted, forensic accountants may be used to track down hidden funds in business firms. Tax services—Assisting with tax planning and tax returns. Management consulting services— Some accountants and

2 .

3 . firms provide a wide range of services, including personal accounting financial planning and planning for corporate mergers.

Private Accountants—Unlike CPAs who operate independently of the firm they audit, private accountants are salaried employees of the firm. However, they D. perform a great diversity of tasks in a firm, probably specialized in a large firm (e.g., financial planning or payroll or taxation) and across the board in a small firm.

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The accounting cycle—Private accountants use a six-step process to develop and analyze a company’s financial reports (see Figure 11.1).

II.

THE ACCOUNTING EQUATION Accountants use the following equation to balance the data pertaining to financial transactions: Assets = Liabilities + Owner's equity. These terms are defined and the importance of the equation is described.

Assets and Liabilities—An asset is any resource that is expected to benefit A. a firm or an individual that owns it. A liability is a debt that the firm owes to an outside party.

III.

B. Owners’ Equity—The amount of money that owners would receive if they sold all of a company’s assets and paid all of its liabilities.

FINANCIAL STATEMENTS The most important financial statements discussed in this section are balance sheets, income statements, and statements of cash flow.

A. Balance Sheets—These show the financial position of a firm on a particular date in terms of its assets, liabilities, and owner's equity. It is helpful to explain to the students that it is like a picture in that it reflects the position at that moment. Figure 11.2 shows an example.

1.

Assets— Assets are what the company owns. Three types of assets are listed on the balance sheet, usually in order of decreasing liquidity (the ease with which they can be converted into cash). a.

Current assets—These include cash, money in the bank, and assets that can be converted into cash within a year.

Fixed assets—These include land and buildings. b.

Intangible assets—These include the cost of obtaining c. rights or privileges such as patents, trademarks, copyrights, franchise fees, and goodwill.

Liabilities—Current and long-term liabilities are explained.

2.

Accounts payable is defined. Liabilities are what the company owes.

3.

Owners' equity—The common stock, paid-in capital and retained earnings sections are explained. OE is what the owners of the company own.

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Chapter 11—Understanding Accounting B. Income Statements—These are also called profit-and-loss statements because they describe financial position in terms of the equation: Revenues minus Expenses = Profit (or Loss). The income statement, unlike the balance sheet, covers a period of time (see Figure 11.3) 1.

Revenues—Monies received by a firm because of selling a good or service or form other sources (e.g., interest, rent, etc.). a.

Revenue recognition and matching—Revenues are recorded for the accounting period in which sales are completed and collectible. The matching principle states that expenses will be matched with revenues to determine net income for an accounting period.

2.

Cost of goods sold—Any expense directly involved in producing or selling a good or service during a given period. a.

Gross profit (gross margin)—This is calculated by subtracting the cost of goods sold (COGS) from revenue.

Operating expenses—Costs that are incurred by a firm other than

3. those included in the COGS. As well as defining these three terms, the concepts of operating income and net income are described. a.

Operating income and net income—Operating income compares the gross profit from business operations against operating expenses. Net income is calculated by subtracting income taxes from operating income.

C. Statements of Cash Flows—These describe a company's cash receipts and cash payments for the year. It is particularly useful to investors and creditors as a summary of the firm's ability to generate and use cash. A statement of cash flows shows the effects on cash of the business's operations, investing, and financing.

Three areas are cash flows from operations (cash transactions in buying and selling goods and services), cash flows from investing (cash used in or provided by investing), and cash flows from financing (the net cash from all financing activities including inflows—from borrowing, issuing stock—and outflows— payments of dividends, repayment of borrowings.

The Budget: An Internal Financial Statement—This detailed statement of D. estimated receipts and expenditures for a period of time in the future, usually a year, is an important planning device. Its preparation is technical and timeconsuming, requiring input from many.

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IV.

ANALYZING FINANCIAL STATEMENTS Using the information provided in financial statements to make decisions (e.g., extending credit, investing) is aided by using statistics and ratios to compare financial statements across companies and in time (past versus current). The key ratios and their uses are described.

A. Solvency Ratios: Borrower’s Ability To Repay Debt—Lenders want to know the likelihood that a borrower will be able to repay a loan and the interest that is due.

1.

Short-term solvency ratios—These ratios measure a company’s liquidity and its ability to pay immediate debts. The current ratio measures the ability of the firm to meet its current obligations out of its current assets.

2.

Long-term solvency ratios—These ratios include the debt-toowners’ equity ratio, which describes the extent to which a firm is financed through borrowing. The concept of leverage is discussed.

Profitability Ratios: Earning Power For Owners—Investors are B. particularly interested in what returns they can expect from their investment.

1.

Return on equity—This ratio shows how much net income a business earns from each dollar that was invested. It is computed by dividing net income by total owners’ equity.

2.

Return on sales—This ratio shows how much profit each dollar of sales generates. It is computed by dividing net income by sales revenue.

Earnings 3.per share—This ratio shows how large a dividend a company can pay its shareholders and indicates how much a company can reinvest in itself instead of paying dividends. It is computed by dividing net income by the number of shares of common stock that are outstanding.

Activity Ratios: How Efficiently Is The Firm Using Its Resources?—The C.

most widely used activity ratio is the inventory turnover ratio, which indicates the number of times inventory is sold and re-stocked during the year. High ratios indicate greater efficiency.

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Chapter 11—Understanding Accounting V.

BRINGING ETHICS INTO THE ACCOUNTING EQUATION The ultimate purpose of strong ethical standards in accounting is to maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession. Without ethics, all accounting tools and methods would be meaningless because their usefulness depends, ultimately, on their honest application.

A. Accounting Ethics?—Many managers have demonstrated poor Why judgment and have experienced ethical lapses with regard to accounting issues. In some cases, this led to the demise of the company they worked for. Ethics remains an area where one person who is willing to “do the right thing” can make a difference.

B. Evolving Role of the Modern Accountant—Lessons from the global The recession, along with evolving information technologies are among the prominent forces shaping the future for accounting professionals. The expectations for modern CPAs call for the more intimate role of leadership in demonstrating financial implications for many additional facets of the business, including its overall operations, strategy, data management, human resources, and technical resources.

QUICK QUESTIONS 1.

Who uses accounting information and for what do they use it?

2.

Outside of the company, who might have an interest in a company’s financial situation?

What types of services do CPAs perform?

3.

4.

5.

6.

Why did the three accounting groups in Canada experience difficulties as they tried to create one accounting organization?

What has occurred in the business environment that has increased the demand for forensic accountants?

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?

In what way(s) do businesses benefit from intangible assets?

7.

What are some examples of operating expenses?

8.

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10.

Who might be interested in the information revealed in a statement of cash flows?

Why? What might be included in a budget for a typical household in Canada?

11.

What do solvency ratios measure?

12.

How can high debt be desirable for a company?

13.

Why might managers in an organization be interested in the firm’s activity ratios?

IN-CLASS EXERCISES Exercise #1: 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: 25 minutes What to Do: Ask students to make a list of ways in which they use accounting in their personal 1. 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 flowing out?

(c)

How do you budget your money?

(d)

How do you plan for unexpected expenditures?

(e) What types of “tools” do they use to keep track of their financial information?

2.

(f) At later points in your life, do you think you will account for your money differently? If so, how?

Ask students to share any relevant information that might benefit other students in the class. (10 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. .

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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.

Exercise #2: Choose an Investment Activity Overview: This activity gives students an opportunity to use financial ratios to evaluate a company.

Time: 50 minutes What To Do: Arrange students in pairs.

1.

2.

Bring in annual reports from several different companies or ask each student to bring one to class. Have each pair of students calculate each of the ratios that are described in Chapter 11.

3.

Students should list the ratios for each company on a chalkboard or newsprint.

Tell students they have each inherited $10,000 from an aunt. Then have students 4. go to the board and write how much they will invest under each company name. Each may choose a maximum of two companies.

Don’t Forget: Ask students the following questions: 1.

Is the company you analyzed profitable?

2.

Can the company pay its short-term bills?

3.

Is the company in debt?

4.

Is it using its assets well?

5.

Which companies received the most votes? Why?

Exercise #3: A Canadian Legend Activity Overview: This activity encourages students to research, analyze, and evaluate financial statements from a historical and a current basis.

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Part 3—Managing Operations and Information Time Limit: 30–45 minutes What to Do: Divide the class into four-person groups and ask them to read the Building Your 1.

Business Skills exercise at the end of Chapter 11. (5 minutes) Ask each group to complete Steps 1 and 2. (15–30 minutes) 2.

After 3. each group has discussed and answered the Follow-Up Questions, reassemble the class as a whole to compare each group’s conclusions. (10 minutes) (Answers to the Questions for Discussion are found near the end of this chapter under the heading “Team Exercises”.)

Don’t Forget: If class time is limited, the research portion of this exercise can be assigned as homework.

Wrap-Up: Bring the activity to a close by reviewing the overall findings of the various groups.

Exercise #4: 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.

2.

In advance, make a list of revenues, expenses, assets, debts, etc.

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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Chapter 11—Understanding Accounting Exercise #5: Technically Speaking Activity Overview: This activity asks students to consider the confusion that may develop when individuals use their own jargon when communicating.

Time Limit: 30 minutes What to Do: 1.

Divide the class into three- or four-person groups and ask them to read the following scenario.

------------------------------------------------------------------------------------------------------The meeting for department heads began when the general manager asked, “Well, how did we do last month compared to the budget?” “On a static-budget basis,” replied the head of accounting, “unfavourable variances were realized for variable expenses and total expenses. Favorable budget variances were realized for units sold, sales revenues, and operating income.” She paused and then continued: “On a flexible-budget basis, unfavorable variances were realized on variable expenses, fixed expenses, total expenses, and operating income.” After a moment of silence, the general manger said, “What does all that mean?”

Questions for Discussion 1.

In this scenario, how could the head of accounting have avoided all of the confusion?

2.

Is the head of accounting to blame for the confusion?

3.

In what way(s) could the general manager have avoided the confusion left by the accountant’s obscure explanations?

--------------------------------------------------------------------------------------------------------2.

Ask groups to answer the questions for discussion within their groups. (15 minutes) 3.

Reassemble the class to see whether the group can come up with a consensus regarding these questions. Possible answers to the questions are as follows: (15 minutes) 1.

The key element (and the problem) is specialization. Specialists tend to

develop their own language so that they can communicate with one another efficiently and clearly. Communicating with outsiders, however, presents problems. In our sample meeting, the general manager asked for information from a specialist (an accountant) in front of non-accountants. The presentation, though technically accurate, didn’t inform anyone who didn’t understand the special language of accounting. The technical detail just side-tracked everyone. The purpose of the meeting was lost in a flurry of jargon. People in specialized areas .

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Part 3—Managing Operations and Information need to recognize the existence of specialized language and work to foster communications across specialty areas. Good accountants develop skills for communicating with non-accountants. It is also important to recognize that a given question can be answered in a variety of ways and in various levels of technical detail, depending on the audience.

2. head of accounting obviously shares some of the blame for the The confusion at the meeting because she did not consider the points in (a) above. But the general manager must share some blame as well, as indicated in (c) below.

The general manager, beforehand, should have clarified the purposed of 3. the budget discussion so that accounting would be better prepared to deliver understandable and useful information for his audience.

Don’t Forget: The head of accounting and the general manager may both be to blame for the confusion in this scenario.

Wrap-Up: Wrap up the activity by reminding students that many demographic groups speak with their own jargon; teenagers are a good example. Explain how the accounting function presents a somewhat standardized method of communicating; managers and accountants may explain the “numbers” in their own language, but when another individual actually sees the balance sheet or income statement, it all becomes clear.

Exercise #6: 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. students to bring a copy of a company’s recent annual report to class. Make it Ask 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.

Form groups of two students and ask each group to review one of the annual 2. 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) .

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Chapter 11—Understanding Accounting 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.

TEACHING TIPS 1. this chapter in with the appendix on information systems by pointing out that Tie just as the management information system (MIS) allows managers to make good decisions, the financial figures that are developed by the firm's accounting department also allow good decisions. Although financial statements are drawn up every year or every accounting period for external users, a good manager wants to see such information much more frequently. Even a daily report may be helpful. With some computerized accounting systems, minute-by-minute reports are possible.

2.

Draw an analogy between flying a plane and managing a company. Pilots have instruments that enable them to fly their craft through dense fog and still reach a destination. But put an experienced pilot in a plane with no instruments and in the midst of heavy fog and the pilot can be said to be "flying blind"--an extremely dangerous undertaking. Trying to manage a firm without frequent updates of accounting information is like flying blind. If a controller ever wanted to ruin a manager's efforts, the only thing that the controller would have to do would be to supply incorrect accounting information to the manager. A "crash" could result.

3. results of financial accounting are helpful inside as well as outside the firm.

The Managerial accounting, on the other hand, is strictly for internal consumption. You will want to stress that one department of a firm may be seeking managerial information that is far different from that desired by another department.

Financial statements are highly summarized to avoid data overload. Managerial 4. reports, however, must be sufficiently detailed to allow managers to provide the information they need to make the decision at hand. While the information that must be included in external financial statements is standardized and determined by GAAP, the only limitations on information provided to managers are the relevance to the decision they need to make, and the cost of obtaining the data. If the cost outweighs the expected benefits, the manager will make the decision without the extra information.

5.

While different departments may want to see different figures, the general

manager needs to see all of it. But keep the previous chapter in mind with its warning that too much information can overwhelm a manager. The top manager of the firm needs to see a condensed and distilled version of the firm's figures. In addition to having access to a summary of managerial accounting information, the general manager should rely

.

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Part 3—Managing Operations and Information somewhat on the opinions of subordinates, each of whom will have a more detailed summary of what is happening in their specific departments.

6.

Remind students that there is a degree of risk for accountants who audit the books of a major firm. Here's why. When a major firm finds itself in difficulty with some government regulatory agency because of alleged fraudulent record keeping, such a firm always states: "Our auditors--a major accounting firm--have always given us a clean bill of health." The result is that as news stories in the financial and general press cover the alleged fraud, the name of the auditing firm is always a part of the narrative.

Remind students that although external users of the financial statements would 7. like to receive a guarantee from the auditors that the financial statements are correct, it is not possible for auditors to do so, and even if they could, the firm being audited could not afford to have such an audit carried out each year. The auditor’s function is to provide an opinion on the financial statements.

8.

Students often believe that the financial statements are exact, not realizing that judgment is required to determine the appropriate way in which transactions should be reported in the financial statements. A simple example that can help them understand the uncertainty involved is when a dealership sells a car with a five-year warranty and has to decide when the revenue should be recorded. The car is delivered immediately, but the warranty work will be provided over a five-year period. When has the dealership fulfilled its obligations? The normal practice is to record the sale on delivery of the vehicle and accrue a liability for the expected warranty costs in order to match the expense with the revenue. If it is a new company, however, and the cost of satisfying the warranty obligation cannot be reasonably estimated but is expected to be reasonably high, the business should wait to record the revenue.

9. the judgment required in preparing the financial statements, the auditor can With only provide an opinion on the reasonableness of the financial statements. Do the statements accurately reflect the business activities the firm has undertaken? For example, if three accountants review the aged list of accounts receivable to determine the amount that is likely to be uncollectible, they may each determine a different amount. If the three estimates are quite similar in amount, it doesn’t matter which number is selected and then deducted from the total accounts receivable, users will still have a reasonable idea of the amount the firm expects to collect from its customers.

To illustrate the way in which the accounting equation is used, write the equation 10. on the blackboard, and then work through some basic transactions on the board showing how the adjustments must be the same on both sides of the equal sign. It is helpful to show a capital contribution in a proprietorship, a loan from the bank, and then an entry that affects only one side of the equation, such as the purchase of equipment or inventory for cash. Understanding the accounting equation is very important, and this exercise also helps students understand what constitutes an asset, liability, and equity account. More examples are better than fewer.

.

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Chapter 11—Understanding Accounting 11.

Students often have difficulty understanding that the balance sheet and income statement are linked together. It is helpful to use the accounting equation to illustrate the relationship as follows: Assets = Liabilities + Equity Equity = Share Capital + Retained Earnings Retained Earnings = Opening retained earnings + Net income - Dividends Net income = Revenues - Expenses Not every student in an introduction to business course will have had 12. bookkeeping in high school and some will not yet have had accounting in college or university. As a result, many will look upon accounting as largely a mathematical exercise.

For students who do not like mathematics, it is helpful to point out that bookkeeping is a very structured task, and that only basic addition, subtraction, multiplication and division are required.

At the other extreme are students who liked high school accounting because of the structure and the math. Students should be made aware that an accountant does much more than bookkeeping. Accountants must analyze, evaluate and exercise judgement continually, and must have strong interpersonal skills, as the communication function of accounting is as important as the accumulation of financial data.

13.

Remind students that double-entry accounting is not a new development. Luca di Pacioli wrote a mathematics book at about the time Columbus was discovering the New World. In one section of the book, he described what merchants in Italian cities were doing in the way of record keeping to control their businesses. Part of their technique was double-entry bookkeeping.

14.exercise that is very useful for introducing the concept of double entry An accounting is to prepare a transparency or power point slide with a cheque register on it.

Few students seem to use these, so it is necessary to explain how deposits, cheques, debit card purchases and cash withdrawals are recorded. Explain that this is a single-entry system - the entries are all for one bank account. To move from a single-entry system to a double entry system would require more registers, one for each type of transaction. Ask students to identify the types of transactions they have personally and use one of those.

For grocery purchases, for example, a separate register or account would be needed.

When a debit card is used to buy groceries, the cheque register would show a reduction in the account balance. In the grocery expense register, however, we would record the purchase, and the register would accumulate the total grocery purchases for the year.

15.

Point out to students that businesses may try to avoid too many uncollectible

accounts by instituting stricter payment requirements. This is a dilemma that is faced by every business that grants credit to customers. On the one hand, if you have tough creditgranting standards, you can avoid most uncollectible accounts, but in the process, you .

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Part 3—Managing Operations and Information may have scared away some good business. On the other hand, having very loose credit standards can mean a jump in sales, but the number of uncollectible accounts will go up.

Credit and sales managers must arrive at the ideal balancing point in this matter. The objective is to come up with a credit policy that will increase both sales and profits, even after deducting bad debt expense resulting from uncollectible accounts.

16. sure that students understand that a financial ratio has little meaning all by Make itself. Even a current ratio of 2:1 tells us little in isolation. Such a figure takes on significant meaning in at least two ways. First, a firm's current ratio, for example, has meaning when it is compared to the average current ratio for similar firms in the same industry. Comparing a small local grocery store to the ratios published for the retail grocery chains may not be at all helpful, however. The current ratio gains even more meaning when it can be compared to a current ratio for the same firm for the previous year, or the last four years. In the latter case, we can see a trend.

17. are useful for identifying potential problem areas, although follow up to Ratios find out what specifically is causing the ratio to differ from expectations is necessary.

Also, a ratio can be too high as well as too low. Using inventory as an example, too low a ratio will indicate that the firm is likely to be incurring significant carrying costs (some of which could be avoided by carrying less inventory) and may be unable to sell all of the inventory in the future due to damage and obsolescence. If, however, the ratio is too high, there may be excessive ordering costs that could be avoided, but the company may be losing business because customers cannot find the products they want and go elsewhere. If it happens too frequently, customers will go directly to the competition rather than wasting time.

18. the students that after all these years in which Canadian firms have done Tell business with foreign firms, there are still some inconsistencies in how companies in different nations keep their "books." Generally accepted accounting principles are different in different countries, with some countries requiring companies to follow the same rules set out for income tax purposes. This is not a problem so long as Canadian accountants learn to accurately interpret what financial statements from foreign firms are saying. For example, when a French income statement says "chiffre d'affaires," it means "turnover" in Britain, but "sales revenues" in the U.S. Obtain some actual business journals and ledgers to share with the class.

19.

Although manual systems are becoming quite rare in use, they can help the students understand the flow of information. Computer printouts can also be shared and compared to the manual system, if presented.

Obtain annual reports from several companies. Have students find the accounting 20. statement information. Then have them identify the assets, liabilities, and equities for each of the companies.

21.

Using the annual reports, you have obtained, have the students compute several of the key financial ratios. .

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Chapter 11—Understanding Accounting

22.

Emphasize that different types of businesses will have different rates of inventory turnover. For example, a grocery store may have an inventory turnover of 24 times, but a jewellery store, because of its expensive inventory, may turn it over only .25 times.

If possible, obtain a copy of your school's budget and share it with students. Ask 23. them why they think budgeting is important. Have them think about why they personally need a budget.

24. mysteries of cash flow have confused many entrepreneurs. After a week of The great sales, for example, one entrepreneur was heard to say "Even with all of this business coming our way, why are we so low on cash?" Ask students to explain how this could happen.

25.

Encourage students to develop reasonable inventory turnover figures for various industries. For example, turnover in a dairy case in a supermarket might be somewhere between 180 and 360. How about a fresh bakery or bagel shop? What about a furniture store or car dealer?

26.

Distribute a balance sheet and an income statement of a company that students will be familiar with. Have them discuss “what they can tell you about the statements” (e.g., balance sheet: at a particular date, order of assets and liabilities, liquidity, accounting equation, depreciation, accumulated depreciation, etc.).

27.

Distribute a balance sheet and an income statement of a company that student’s will be familiar with. Have the students in a group of two to four do the ratio calculations and have a discussion of them.

28.

Distribute a balance sheet and income statement of a company (keep the cash flow statement to distribute later in the exercise). Start with the balance sheet and have the students determine the amount by which the cash balance of the business changed during the year. Have the students examine both the balance sheet and income statement and then evaluate whether the change in cash is good or bad and try to draw a conclusion about whether the business is using its cash wisely. The cash flow statement can then be distributed, and the specific items listed in the financing and investing activities discussed. The operating activities section can be discussed in total or in detail. If students have not taken an accounting course, it is probably most useful to simplify the discussion to explain that the cash flow from operating activities is what the income statement would report if revenues were recorded when the cash was received, and the only expenses recorded were those that were paid in cash during the period. (Trying to explain an indirect method cash flow statement may create data overload!) When the students have walked through the cash flow statement, ask if they have a better understanding of how the company generates and spends its cash.

29.

Have students access a public company’s financial statements (electronically) and

have a discussion of the statement by the accounting firm and notes to the statements. .

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Part 3—Managing Operations and Information Explain to the students that the use of notes has increased considerably over the years so that they can protect the company’s interests.

30.

Point out that the controller manages a firm’s accounting activities.

31.

Make sure students keep these two points separate: Financial accounting is concerned with external information users; managerial accounting serves internal users.

32.

Make sure students understand the roles of CPAs.

33.

Reinforce that generally accepted accounting principles (GAAP) are accounting guidelines governing the content and form of financial reports.

34.

In contrast to CPAs, private accountants are management accountants who support managers in the organization.

35.

Make sure students understand that owners’ equity is the money owners would receive if they sold all a company’s assets and paid all its liabilities.

36.

Reinforce the point 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.

37.

Make sure that students understand the distinction between current assets and fixed assets and that they can provide examples of each.

38.

Make sure students understand the difference between current liabilities and longterm liabilities.

39.

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 40. statement (or profit-and-loss statement). Revenues minus Expenses equal Profit (or Loss).

Also point out the main areas of the income statement: revenues, cost of revenues, and operating expenses.

Reinforce that revenues are the funds that flow into a business from the sale of 41. 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.

42.

Reinforce that Gross Profit = Revenues minus the Cost of Goods Sold.

An income statement for a large corporation can be very complicated. Imagine the 43. income statement for the federal government if it listed all expenses and all revenues. .

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Chapter 11—Understanding Accounting Wouldn't that be something to see? Regardless of how many items and how great the dollar magnitude, an income statement has only three parts— revenues, expenses, and net profit (or loss).

44.

Most ratios mentioned in this chapter of the textbook are subject to the "happy

medium" concept. For example, a current ratio of 1:1 is generally too low. But a current ratio of 9:1 is too large. It probably means that inventory is too large, and that accounts receivable are bulging because no one is paying their bills. So, the happy medium is best.

It is important that students really understand the accounting equation. Give them 45. different examples so they can see clearly how it works.

46.

Point out that a statement of cash flows describes yearly cash receipts and cash payments; it includes cash flows from operations, investing, and financing.

47.

Remind students that full disclosure requires that financial statements include both the “numbers” and management’s interpretations/explanations of those numbers.

48.

Reinforce that the current ratio measures a company’s ability to meet current obligations out of current assets. The formula is Current Assets divided by Current Liabilities.

Reinforce that long-term solvency indicates a company’s ability to repay debts in 49. future years; the formula is Total Liabilities/Owners’ Equity.

50.

Point out that earnings per share determines the size of the dividend a firm can pay shareholders; this can be determined using the formula Net Income/Share of Stock.

USING THE BOXED INSERTS OPENING CASE COVID-19 Hits the Bottom Line: Solvency and Bankruptcy Issues in Corporate Canada QUESTIONS FOR DISCUSSION 1.After reading this case, summarize some of the key reasons why each company had problems or failed during the COVID-19 pandemic. In your opinion, to what extent did the COVID-19 pandemic contribute to the hard times for these companies? To what extent did other factors contribute?

Cineplex already had lower revenues due to streaming services even before the pandemic, but COVID restrictions led to a decline in sales of 80.3 percent overall in 2020 and a 95.3 percent decline in the last quarter of the year. The fixed costs to operate their large locations are hard to pay with such a historic fall in revenues. Le Chateau had run into .

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Part 3—Managing Operations and Information financial difficulty well before the COVID-19 pandemic struck. The cancellation of proms, weddings, and basic social events in 2020 along with the closure of bars and restaurants was simply the final straw. The Aldo Group filed for bankruptcy protection to help provide some financial breathing room to restructure. Aldo lost $74.8 million at Canadian stores and an additional $52.8 million from their U.S. locations in 2020. All the airlines suffered as borders were shut and air travel was greatly restricted. There is only so many ways Air Canada can cut expenses to make things balance out when your passenger volume drops by 73 percent and your revenues fall by $13.3 billion in one year!

2.Conduct some research on the companies that are named here such as Aldo, Air Canada, and Cineplex. How are they doing today? For the public companies you can visit SEDAR and look at their Income Statements. Have they recovered? Compare their 2019 pre-pandemic revenues to their current figures. What other figures stick out?

Answers will vary based on the timeframe but in Mid 2022 the picture had changed tremendously despite the pandemic. For example, airlines were facing very different challenges as overbookings were the norm with people desperate to travel and airports were struggling to meet all the demand from airlines. The government was also facing a backlash for their inability to process passport requests in a timely fashion with many people missing flights and camping out in front of government offices for the chance to get their passports.

3.Government programs were vital for the survival of many large companies. How much money did the federal government spend in 2020 and 2021 to support businesses with grants and low interest loans?

Answers will vary based on the latest research. However, the Canadian government spent approximately $240 billion in 2020 on its various Covid 19 responses. By early 2022 the total cost of the COVID response had reached more than $570 billion.1 Disruptions in Business: Analytics and the Future of Auditing Critical Thinking Question 1.Discuss some of the changes that new technology is bringing to accounting practices.

Identify potential advantages and disadvantages for accountants and for the firms that ultimately will be impacted by the new approaches.

The audit function is changing rapidly as audit firms are integrating data analytics, machine learning, in audit work, changing the breadth and depth of audits and clients’ expectations. Data analytics enables auditors to examine 100 percent of a client’s transactions; track and analyze trends, as well as inconsistencies and risks, to identify problematic areas or transactions; and benchmark a company’s financial information against that of other companies, based on industry, geography, size, or other factors.

Using NLP to extract information and a human-in-the-loop to validate the results, an AI system is three times more consistent and twice as efficient as previous human-only .

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Chapter 11—Understanding Accounting teams. A team of a dozen accountants might spend 6 months combing through hundreds of thousands of legal documents looking for a change of control provisions during a client’s sale of a business unit. Now, a team of six to eight members can use an AI system to complete the same task in less than a month. Of course, this requires a new level of learning to interact with tech and means that less human labour us needed which is good for the company but not necessarily the accountants.

Entrepreneurship and New Ventures: Working with the Accounting Equation This insert provides a detailed example which shows the how the accounting equation (Assets = Liabilities + Owners’ Equity) works in practice.

Critical Thinking Question 1.

In what ways do such standardized accounting rules keep companies honest and help stakeholders analyze and value companies?

The accounting equation prevents companies from overstating revenues or understating costs because a balance is required between assets and the total of liabilities and owners’ equity (i.e., assets = liabilities + owners’ equity). For example, when a business owner takes out a loan to buy an asset, the owner must record both an increase in the value of assets and an increase in liabilities. If the owner tried to record an increase in assets with no corresponding increase in liabilities, this would be immediately apparent because the accounting equation would not balance. The accounting equation also establishes some fundamental standards for the way businesses report assets, liabilities, and owners’ equity, and this helps investors compare one company with another.

Investors must also go beyond the simple accounting equation and look at other factors (e.g., ratio analysis, market growth prospects, the quality of company management, etc.).

Student answers should also recognize the possibility that the accounting equation does not guarantee that fraud will not occur. All sorts of clever schemes have been devised over the years to prevent auditors from detecting fraud. Some of those schemes were successful (for a while at least) because they were so complicated that it was difficult for auditors to tell what was going on. Some public accounting firms have gone out of business after they certified that a firm was adhering to generally accepted principles of accounting when, in fact, fraudulent activities were occurring, but the accounting firm failed to detect them.

QUESTIONS AND EXERCISES Questions for Analysis Balance sheets and income statements are supposed to be objective assessments of 1. the financial conditions of a company. But the accounting scandals of the last few years show that certain pressures may be put on accountants as they audit a company’s financial statements. Describe these pressures. To what extent do these pressures make the audit more subjective? .

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There is pressure on the owners to show a profit to creditors/financial institutions, and shareholders. There is pressure on employees of the units to also do well because incentive programs are often based on doing well. The audit is subjective because of the possibility of distorted figures to ensure that all are doing well financially.

2.

If you were planning to invest in a company, which of the three types of financial statements would you want most to see? Why? The most important of the financial statements for a potential investor to see would be the balance sheet. This shows the long-term financial picture and the overall stability of the firm. It notes long- and short-term debt, as well as owners' equity.

3.

A business hires a professional accountant to assess the financial condition of the company. Why would the business also employ a private accountant?

If a public accountant is hired to carry out an audit, his or her job is to provide an opinion on the reasonableness of the financial statements the company has prepared. The public accountant does not prepare the financial statements.

The business would employ its own accountant in order to have a staff person who would be able to ensure that the company has an accounting system that is well designed, to monitor the effectiveness of the company’s internal controls, to provide information to support managers’ decision-making, and in general ensure that the transactions the business undertakes are properly accounted for and that the financial statements he or she prepares is accurate.

4.

How do financial ratios help managers to monitor their own efficiency and effectiveness?

The ratios can be used to evaluate the short- and long-term liquidity of the firm, the profitability of the firm, and the effectiveness of the controls over assets. Ratios are only meaningful when compared to something. If the firm is typical of firms within the industry, industry ratios may be used for comparison purposes.

Current period ratios are also compared to the ratios for the previous year, and possibly two or three additional years’ ratios. This provides a way for managers to evaluate whether their performance is improving or deteriorating.

Explain the difference between financial and managerial accounting. In your 5. answer, describe the different audiences for the two types of accounting and the various individuals involved in the process.

Financial accounting involves the preparation and publication of income statements and balance sheets for external users of information (consumer groups, unions, stockholders, and government agencies). Companies also generate other financial .

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Chapter 11—Understanding Accounting reports that are useful for stockholders and the general public. All of these documents focus on the activities of the company as a whole, rather than on individual departments or divisions. External auditors are involved in the process because they certify that the income statement and balance sheet fairly represent the financial condition of the company.

In contrast, managerial accounting serves internal users. Managers at all levels in a company need information to make decisions for their departments, to monitor current projects, and to plan for future activities. Engineers, for instance, want to know the costs for materials and production so they can make product operation improvements. To set performance goals, salespeople need data on past sales by geographic region. Purchasing agents use information on material costs to negotiate terms with suppliers and to set performance goals.

6.

Use the accounting equation to determine your net worth. Identify your assets and liabilities. With this information, how would you increase your net worth in the future?

Student answers will obviously vary here, depending on their economic circumstances. Net worth is determined by subtracting liabilities (debt) from assets.

Students who have received financial help from parents will likely show lower levels of debt than those who have not received such help (these latter individuals may have significant student loans, which will reduce their net worth). Some students may not have much in the way of either assets or liabilities. Some will have positive net worth and some will have negative net worth. When assessing student answers to this question, make sure that they their lists are complete for their situation, and that they have properly categorized each of the items on their list.

There are two obvious ways to increase your net worth: increase your assets or decrease your debt. Increasing your assets (e.g., the amount of money you have in savings and chequing accounts, stocks, bonds, personal property, etc.) requires financial planning (see Supplement #4 at the end of Chapter 14). Reducing your debt (student loans, car loans, credit card debt, etc.) also requires development of a financial plan and sticking to it over a period of time.

Application Exercises 7. 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.

8.

Suppose that Inflatables Inc., makers of air mattresses for swimming pools, has the following transactions in one week: .

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Part 3—Managing Operations and Information ■ sold three deluxe mattresses to Al Wett (paid cash $50, remaining $25 on credit) on 7/16 ■ received cheque from Ima Flotein payment for mattresses bought on credit ($120) on 7/13 ■ received new shipment of 200 mattresses from Airheads Mfg. (total cost $3000, paying 50 percent cash on delivery) on 7/17 Construct a journal for Inflatables Inc. 7/13 DR Cash 7/13 CR Accounts Receivable 7/16 DR Cash 7/16 CR Sales 7/17 DR Inventory 7/17 CR Accounts Payable

$90 $90 $75 $75 $2,000 $2,000

9.

Flynn Plastics Company reports the following data in its September 30, 2018 financial statements: Gross sales Current assets Long-term assets Current liabilities Long-term liabilities Net income Number of common shares

$225,000 50,000 130,000 33,000 52,000 11,250 5,000

a.

Compute the owners’ equity. (Owners’ equity = assets minus liabilities.

Assets total $180,000 and liabilities total $85,000, so owners’ equity = $95,000 ($180,000 - $85,000). b.

Compute the current ratio. (Current ratio = current assets divided by current liabilities ($50,000 divided by $33,000 = 1.51) c.

Compute the debt-to-equity ratio. (Debt to equity ratio = total debt divided by owners’ equity. Debt = ($33,000 plus $52,000 divided by $95,000 = 0.89) Compute the return on sales. (Return on sales = net income divided by d. sales revenue. Net income is $11,250 and sales revenue = $225,000. So, $11,250 divided by $225,000 = .05, or 5 percent.)

Compute the return on owners’ equity. (Return on owners’ equity = net e. income divided by owners’ equity. Net income is $11,250 and owners’ equity is $95,000. So, $11,250 divided by $95,000 = 0.118, 11.8 percent.)

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Interview the manager of a local business and ask about the role of ethics in the company’s accounting practices. How important is ethics in accounting? What measures does the firm take to ensure that its internal reporting is ethical? What steps does the company take to maintain ethical relationships in its dealing with external accounting firms?

Student answers will vary. Most managers will say that ethics in accounting is very important, and that the company has strict procedures in place to ensure that accounting data are reported accurately. They are less likely to say that sometimes company accountants are pressured to “massage” the numbers so that targeted sales and profits are met.

TEAM EXERCISES Building a Business: Continuing Exercise 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.

Building Your Business Skills: A Canadian Legend The year when students take the introduction to business course will obviously affect their answers because HBC’s financial fortunes vary over time. When assessing student answers to the questions below, make sure that students accurately identify the relevant accounting categories when doing their calculations. Developing answers for questions 2-4 also requires students to go beyond simple calculations and actually interpret the data they are looking at. For example, in Q. #3, students are asked to state the significance of the current ratio for HBC. Their answers should capture the fundamental idea that the current ratio reflects a company’s ability to meet its current obligations. The company does this by selling goods and services and actually collecting sales revenues from customers. The higher the current ratio, the less risky the company is likely to be for investors. Another example: in Q. #4, students are asked to explain what the earnings per share (EPS) number means to investors. Their answer should include the fundamental idea that as the earnings per share figure gets higher, investors become more interested in buying the company’s stock, other things being equal. EPS also influences the size of the dividend the company will pay to stockholders.

1.

Looking at HBC’s income statement, what has been the trend in sales (total revenue) as well as net income over the past three years?

2.

As you have learned, gross profit is the difference between sales (or total

revenues) and the cost of sales (the cost incurred in obtaining the revenues). Gross profit percentage is calculated by dividing gross profit by sales (or total revenues). What is .

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Part 3—Managing Operations and Information HBC’s gross profit percentage for the last three years? What does this data tell you about HBC’s overall pricing strategy and costs?

3.

Looking at the balance sheet, what is HBC’s current ratio for the three most recent years? What is the significance of these numbers? Have they been improving or getting worse?

What is the relationship between the price of HBC’s stock and earnings? What are 4. the earnings per share for each of the past three years, and what does that number mean to investors?

Exercising Your Ethics: Team Exercise: Give and Take with Accounting Clients Activity Overview: This activity asks students to think about ethical considerations that might arise when an accountant’s career choices come up against a professional obligation to follow accounting guidelines.

Time Limit: 40 minutes What to Do: 1.

Divide the class into groups of four or five students and ask them to read the Exercising Your Ethics: Team Exercise at the end of Chapter 11. (5 minutes) 2.

Ask each group to discuss the dilemma and reach a consensus on what they would suggest. (20 minutes) 3.

Bring the class together as a whole to discuss the various groups’ solutions. (15 minutes) Possible answers to the Follow-Up questions: 1.

What are the ethical issues in this situation?

For Katrina, the ethical issue is clear: She has adhered to accounting standards, but by doing so, she may lose a major client. For Ault, he must decide if he wants to ignore accounting ethics, given that it might create legal difficulties for him.

2.

What are the basic arguments for and against Aaron Ault’s position in this situation? For and against Katrina Belinski’s position?

Some students might argue that what Ault wants to do is a minor thing, i.e., he wants to record the revenue from a big job early in 2016 rather than in late 2015 when the job was completed. In other words, he is willing to pay his taxes (just not right now), and is trying to improve his cash situation in the short run. It is not .

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Chapter 11—Understanding Accounting clear whether Ault actually received payment for the job in 2015 or 2016. If he didn’t receive payment until 2016, he could argue that his request is perfectly reasonable. Other students will say that the issue is very clear and that Ault must record the revenue as being earned in 2015 because the job has been completed.

Katrina’s position can be stated much more simply: as a licensed professional, she cannot simply change the rules of accounting that she must abide by.

3.

What do you think that Ault and Belinski should do in this situation?

Answers will vary, but most students will probably argue that since Katrina completed the work correctly, Ault should not ask her to change the returns. If she explains the ethical requirements for accountants, Ault may be more willing to accept her argument. But if he is determined to proceed with his plan, she may lose a client. It is unclear whether Ault will be able to convince another accountant to do what he wants to do.

Don’t Forget: Remind students to look at the section in Chapter 11 dealing with revenue recognition, matching, and the earning cycle.

Wrap-Up: Wrap up the exercise by briefly discussing the group’s conclusions.

CLOSING CASE Business Case 11: Big Pharma, Big Business, and Accounting Foundations This case study describes several accounting- and ethics-related problems that Valeant Pharmaceuticals encountered that led to a dramatic drop in the price of its stock and large losses for its investors. The company is now called Bausch Health Companies, Inc. Questions for Discussion 1.

Describe some of the fundamental accounting metrics described in this case and explain their importance as they relate to the company’s market valuation.

The case describes several basic accounting and ethical issues. First, major acquisitions were made (which did increase short-term revenues and profits), but those acquisitions resulted in a significant increase in the debt levels for the company and caused the company to spend less on R &D (which had long-term negative implications for the development of new products). Second, the company restated its corporate earnings target by $600 million. This led to suspicions about the appropriateness of the firm’s accounting practices. Third, the company received much negative publicity when it dramatically raised the prices of some of its drug products. Fourth, a questionable relationship that Valeant had with Philidor, an online pharmacy, resulted in a conviction .

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Part 3—Managing Operations and Information for a former Valeant executive and the CEO of Philidor for being involved in a kickback scheme.

All of these activities resulted in a very large drop in the company’s stock price and therefore a reduction in its market evaluation. This caused investors to lose much of their investment. Valeant will now have to rebuild trust and try to regain the trust of all stakeholders. To do that, Valeant will have to follow proper accounting procedures, respect ethical guidelines, and demonstrate consistent profitability, which will require careful cost management and successful new product development.

2.

How did some of the questionable practices impact the company’s bottom line and the strategic direction of the company in the past few years?

Each of the four problems discussed in Q. #1 above affected the company’s bottom line and/or strategic direction. The company’s acquisitions increased its debt levels, which reduced its profits because of the cost of carrying the debt load. The acquisitions also meant that less was spent on R & D, and that means that there will be fewer new products to sell to the market in the next few years (that will also reduce future profits). The acquisitions also affected the strategic direction of the company because it had to sell off some off its companies in order to generate cash to reduce the debt load.

The other three problems—restatement of the company’s earnings target, negative publicity for dramatically raising the prices of some drugs, and a questionable relationship with an online pharmacy—all reduced investor confidence in Valeant and caused the company’s stock price and market valuation to fall dramatically.

3. the company’s most recent annual report (SEDAR.com). Compare the Find results for the last three years and analyze the trends. Are they positive or negative?

Explain.

Student answers will vary depending on the year they take the introduction to business course. Their answers should clearly show the financial trends and whether they are consistent with the strategic plans the company has made.

Conduct some research and find articles discussing Valeant/Bausch Health 4.

Companies Inc. Has the company bought or sold any additional product assets (acquisition or divestment)?

Again, student answers will vary depending on when they take the introduction to business course, but they should (a) provide information on any new acquisitions or divestments the company has made, and (b) determine whether these acquisitions or divestments are consistent with the plan to improve the company’s financial situation.

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Chapter 11—Understanding Accounting CRAFTING A BUSINESS PLAN PART 3: MANAGING OPERATIONS AND INFORMATION Assignment Overview: Part 3 of the business plan project asks students to think about their business in terms of operations, accounting concepts, and information technology (IT) needs and costs.

Specifically, students are asked to determine their IT needs and resources, to complete a balance sheet and an income statement for their business, and to complete a floor plan.

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: • For this part of the project, students will be asked to complete Part 3: Managing Operations and Information. 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, 2(a), and 2(b). The Microsoft Word Business Plan Project Student Template is located on MyLab Intro to Business at https://www.pearsonmylabandmastering.com/northamerica/mybizlab/.

If you would like students to complete a balance sheet and an income statement • for their businesses, a separate spreadsheet file is available for them to use. The Microsoft Excel file (called Business Plan Part 3 Spreadsheets) is located on MyLab Intro to Business at https://www.pearsonmylabandmastering.com/northamerica/mybizlab/.

Part 3 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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Jonathan Gatehouse, Ottawa has spent $240B fighting COVID-19 in just 8 months. A CBC investigation follows the money, CBC News, December 7, 2020, https://www.cbc.ca/news/canada/tracking-unprecedented-federal-coronavirus-spending-1.5827045, [June 28 2022]; Catherine Lévesque, “Federal Government Has Spent $576B In New Measures Since Start Of COVID Pandemic: PBO Report,” Apr 22, 2022, National Post, https://nationalpost.com/news/ politics/federal-government-has-spent-576b-in-new-measures-since-start-of-covid-pandemic-pboreport, [accessed June 28, 2022] 1

CHAPTER 12 UNDERSTANDING MARKETING PRINCIPLES AND DEVELOPING PRODUCTS CHAPTER SYNOPSIS Many students think that marketing is merely sales or advertising, but 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 the purpose of a marketing plan. It also discusses the four components of the marketing mix, the necessity of identifying market segments, and the importance of marketing research. The chapter also identifies the differences between consumer buying behaviour and organizational (industrial) buying behaviour. The chapter concludes with a discussion of the important element of products, including the classification of products, the product mix, the new product development process, the product life cycle concept, and the branding, packaging and labeling of products.

CHAPTER OUTLINE I.

WHAT IS MARKETING? Planning and executing the development, pricing, promotion, and the distribution of ideas, goods, and services to create exchanges that satisfy both buyers’ and sellers’ objectives. The marketing concept means that the whole firm is coordinated to achieve one goal—to serve its present and potential customers and to do so at a profit.

A. Delivering Value—Customers buy products that offer the best value when it comes to meeting their needs and wants.

Value and benefits—Value compares a product’s benefits (features 1. of the product and the emotional satisfaction associated with owning it) with its costs (including the price and the buyer’s time).

Value and utility—The ability of a product to satisfy a human want 2. or need is called utility. Marketing strives to provide four kinds of utility: form, place, possession, and time utility.

B. Goods, Services, and Ideas—Consumer marketing, industrial marketing, service marketing and the marketing of ideas are discussed.

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Chapter 12—Understanding Marketing Principles and Developing Products C. Relationship Marketing and Customer Relationship Management—The term relationship marketing emphasizes building lasting relationships with customers and suppliers.

Customer 1. relationship management (CRM)—An organized method that an enterprise uses to build better information connections with clients, so that stronger enterprise-client relationships are developed.

D. The Marketing Environment— Marketing strategies are not determined unilaterally by any business; rather, they are strongly influenced by powerful environmental forces.

1.

Political-legal environment—Political activities, both global and domestic, have a major influence on marketing. For example, environmental legislation has influenced entire industries.

2.

Sociocultural environment—Changing social values force companies to develop and promote new products.

3.

Technological environment—New technologies create new goods and services. New products make existing products obsolete, and many products change our values and lifestyles. In turn, lifestyle changes often stimulate new products not directly related to the new technologies themselves.

4.

Economic environment—Because they determine spending patterns by consumers, businesses, and governments, economic conditions influence marketing plans for product offerings, pricing, and promotional strategies. Marketers are concerned with such economic variables as inflation, interest rates, and recession.

5.

Competitive environment—In a competitive environment, marketers must convince buyers that they should purchase one company’s products rather than those of some other seller. Because both consumers and commercial buyers have limited resources, every dollar spent on one product is no longer available for other purchases.

II.

DEVELOPING THE MARKETING PLAN The marketing plan identifies the marketing objectives that are to be achieved and the strategy that will be used to achieve them.

A.

Strategy: The Marketing Mix—A company’s marketing managers are

responsible for planning and implementing all the marketing activities. Marketing manager may use market research to identify consumer needs. The marketing plan is a detailed and focused strategy for gearing marketing activities to meet .

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Part 4—Principles of Marketing consumer needs. Planning takes time, often began years before the product is available. Implementation of the marketing plan involves setting goals and establishing ways to evaluate performance. Marketing managers rely on the socalled 4 P’s of marketing to implement their strategies—product, price, place (distribution), and promotion 1.

Product—The product must satisfy buyers' needs and demands.

This may mean modifying existing products or creating new ones. Product differentiation is meant to attract consumers through creating a product or product image significantly different from existing products.

2.

Pricing—Determining an appropriate price will depend on the costs that need to be covered and the firm's sales strategy.

3.

Place (Distribution)—Marketing also includes getting products from the producer to the buyer. Concerns include physical transportation and choice of sales outlets.

4.

Promotion—The techniques designed to sell a product to consumers include advertising, personal selling, sales promotions and public relations. These activities are described and illustrated.

III.

MARKETING STRATEGY: MARKET SEGMENTATION, TARGET MARKETING, AND POSITIONING Since consumers have varying needs, marketing uses market segmentation to divide a market into target markets.

A. Identifying Market Segments—The members of a market segment must share some common traits or behaviours that will affect their purchasing decisions.

1.

Demographic segmentation—Includes factors like age, income, gender, ethnic background, marital status, race, religion, and social class.

2.

Geographic segmentation—Where one lives can affect buying decisions.

Geo-demographic segmentation— Geo-demographic segmentation 3. combines geographic and demographic traits. An example would be Young Urban Professionals—well educated, 25- to 34-year-olds with high paying professional jobs living in the “downtown” core of major cities.

This type of segmentation is more effective because the greater number of variables defines the market more precisely.

Psychographic segmentation—A market can also be segmented 4. according to factors like lifestyles, opinions, interests, and attitudes. .

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Behavioural segmentation—This refers to dividing a market into groups based on consumer knowledge, product use, or response to a product. Behavioural variables include: benefits sought (e.g., Head and Shoulders shampoo addresses dandruff control); user status (e.g., ex-users, current users, non-users etc.); usage rate (e.g., heavy users vs. light users); loyalty status (e.g., highly brand loyal vs. brand promiscuous); and occasion for use (e.g., time of day, special occasion etc.).

IV.

MARKETING RESEARCH Marketing research refers to the systematic study of what buyers need and how best to meet those needs. It can greatly improve the accuracy and effectiveness of market segmentation. This research can address any element in the marketing mix and may be done by a company itself or a company can use research results generated by others.

A. Research Process—The steps include studying the current situation, The selecting a research method, collecting data (either primary or secondary), analyzing the data, and preparing a report.

B. Research Methods—The four basic types are observation, survey, focus groups, and experimentation. Each one is described in turn, including pros and cons.

1.

Observation—This means observing what consumers are doing.

Included in this approach is video mining, which involves the use of hidden cameras to determine which shoppers are buying and which are only browsing.

2.

Survey—Companies often use surveys to find out what customers want. The heart of any survey is the questionnaire.

Focus groups—These are groups of 6 to 15 people who are brought 3. together to talk about a product or service. The comments of the people are taped and then summarized.

Experimentation—This approach systematically compares the 4. responses of the same or similar individuals under different circumstances.

An example is given.

V.

UNDERSTANDING CONSUMER BEHAVIOUR Consumer behaviour is the study of the decision process customers use to decide which product or service to buy and consume.

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Part 4—Principles of Marketing A. Influences on Consumer Behaviour—Four major influences are psychological (individual motivations, perceptions, ability to learn, and attitudes), personal (lifestyle, personality, economic status, and life-cycle stage), social (family, opinion leaders, and reference groups such as friends), and cultural (the “way of living” that distinguishes one large group from another, subcultures, and social class).

B. The Consumer Buying Process—A number of decision models have been generated. It involves a number of steps.

1.

Problem need/recognition—The buying process begins with the consumer's awareness of a problem or need.

2.

Information seeking—Recognition of a need leads to a search for information on how to fulfil it. The search can be extensive or very superficial.

3.

Evaluation of alternatives—Based on perceived product attributes, a consumer will decide which product best meets the requirements.

4.

Purchase decision—Buy decisions are based on both rational and emotional motives.

5.

Post-purchase evaluation—Marketers want to ensure that consumers are satisfied with their purchases and minimize experiences of purchase anxiety.

VI.

ORGANIZATIONAL MARKETING AND BUYING BEHAVIOUR Buying behaviour in consumer markets is very visible, but buying behaviour in organizational or industrial markets is not so visible, and there are some significant differences between consumer and industrial markets.

Business Marketing— Business marketing involves organizational or A. commercial markets that fall into three B2B categories: industrial, reseller, and government/institutional markets. Taken together, B2B markets account for more than twice the activity in the consumer market.

Industrial market—The industrial market includes businesses that 1. buy goods to be converted into other products or that are used up during production. It includes farmers, manufacturers, and some retailers.

2.

Reseller market—Before products reach consumers, they pass through a reseller market consisting of intermediaries, including wholesalers and retailers, that buy and resell finished goods.

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Chapter 12—Understanding Marketing Principles and Developing Products Government 3. and institutional market—Federal, provincial, and municipal governments are very important not only for the laws they create and maintain but for their economic spending power.

B. B2B Buying Behaviour—Differences in organizational buying behaviour and consumer buying practices include the buyers’ purchasing skills, and an emphasis on buyer-seller relationships. Unlike most consumers, organizational buyers purchase in large quantities, and are professional, specialized, and well informed. Consumer-seller relationships are often impersonal, short-lived, onetime interactions. In contrast, B2B situations often involve frequent and long-term buyer-seller relationships.

VII.

WHAT IS A PRODUCT? A. Value Package— Whether it is a physical good, a service, or some The combination of the two, customers get value from the various benefits, features, and even intangible aspects of a product. Marketers must base their approach on providing customers with products that do what customers want done. To sell, a product must offer the right combination of features and benefits. Products are marketed as a bundle of attributes that marketers call the value package.

B. Classifying Goods and Services—A product can be classified in terms of its expected buyers: buyers of consumer products and buyers of industrial products. These, in turn, have further subdivisions.

1.

Classifying consumer products—Convenience goods and services are relatively inexpensive and purchased frequently (for example, fast food). Shopping goods and services are more expensive and purchased infrequently (for example, furniture). Specialty goods and services are important and expensive purchases (for example, wedding gowns).

2.

Classifying organizational products—These include expense items (such as supplies, support materials, and services) and capital items (such as offices and factories).

C.

The Product Mix—This refers to the group of products a company has available for sale. Companies may develop product lines, which are similarproducts intended for use by a similar group of buyers.

VIII. DEVELOPING NEW PRODUCTS AND BRANDING Product lines must be expanded or diversified to sustain a firm. Tastes change, products advance, and even basic products need attention.

A. The New Product Development Process—Companies face multi-year time horizons and high risks when developing new products. .

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The Seven-Step 1.

Development Process—The process used to develop new products includes (a) searching for ideas for new products, (b) eliminating product ideas which don't fit the firm's abilities, expertise, objectives, (c) using market research to solicit consumers' input to identify necessary product benefits and appropriate price level, (d) doing a cost/benefit analysis for the proposed product to see whether it can meet minimum profitability goals, (e) producing a preliminary version of the product and identifying potential production problems, (f) product testing and test marketing, and (g) full-scale production and marketing.

Product Life Cycle—The product life cycle concept suggests each product B. has a limited profit-producing life for a company and this cycle has a series of stages.

1.

Stages in the product life cycle—The stages are introduction (begins with product commercialization, focuses on increasing customer awareness, profits are non-existent); growth (sales climb rapidly, profits begin, and competitors introduce their versions); maturity (sales growth stabilizes and begins to decrease); and decline (sales and profits fall, promotional support is removed). As the product moves through the stages in the life cycle, marketing strategy must change. Each aspect of the marketing mix is re-examined for each stage of the life cycle.

Extending 2. product life: An alternative to new products— Companies try to keep products in the maturity stage as long as they can.

Sales of TV sets, for example, have been revitalized by such feature changes as colour, portability, miniaturization, stereo capability, high definition, and 3D. Identifying Products: Branding and Strategy—Marketers must identify C. products so that consumers recognize them. Two important tools for this task are branding and packaging.

1.

Branding products—Branding means the use of symbols to communicate the qualities of a particular product made by a particular producer. Brand names are important and should be short and consistent with current lifestyles.

Translations for international sales must be carefully considered.

Adding value through brand equity—Brand equity is an important 2. company asset that is defined as the degree of consumer loyalty to and awareness of a brand and its resulting increased market share.

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Gaining brand awareness—The expensive, sometimes fierce struggle for brand recognition is a growing concern in most industries.

Recent successes have been found with several methods.

Product placement is a promotional tactic for brand a. exposure in which characters in television, film, music, magazines, or video games use a real product so the brand is visible to viewers. b.

Buzz marketing relies on word-of-mouth to spread “buzz” about a particular product or idea.

Viral marketingc.and social networking is buzz marketing that relies on social networking on the Internet to spread information like a “virus” from person to person.

Types of4.brand names—The various types are explained and examples are given (national brands, licensed brands, private brands, and generic brands).

Packaging Products—Packaging reduces the risk of damage, breakage, or D. spoilage and makes it more difficult for shoplifters to steal smaller products, but it is also a form of advertising. Tamper-resistant package designs were created as a response to the Tylenol tragedy.

E. Labelling Products—Label information is regulated by the federal government's Consumer Packaging and Labelling Act. More and more labels include the Universal Product Code bar code.

QUICK QUESTIONS 1.

2.

3.

4.

5.

6.

7.

How does a marketer create form utility, time utility, place utility, and ownership utility?

What are some examples of consumer goods? What about industrial goods?

Relationship marketing emphasizes building lasting relationships with customers and suppliers. What do organizations hope to gain from relationship marketing?

What are some common political-legal factors that affect marketing?

What are some common economic factors that affect marketing?

What are some common socio-cultural factors that affect marketing?

What are some common technological factors that affect marketing?

Why do marketers attempt to differentiate their products?

8. .

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9.

What demographic variables would affect your purchase of a cell phone?

10.

How can psychographic variables—unlike geographic and demographic variables — be changed by marketing efforts?

What is product positioning, and why is it important?

11.

12.

13.

14.

15.

16.

17.

What are the main steps in the market research process?

What are the basic methods used by market researchers to gather data?

What are the key steps in the consumer buying process?

What factors might consumers consider when evaluating alternatives in the consumer buying process?

How are farmers and manufacturers, for example, included in the industrial market?

How are convenience goods different from shopping goods? How are shopping goods different from specialty goods?

What types of industrial products are considered expense items?

18.

What happens in the decline stage of the product life cycle?

19.

How does successful branding lead to brand awareness?

20.

What is the difference between national, licensed, and private brands?

21.

What are some purposes of packaging?

22.

IN-CLASS EXERCISES Exercise #1: The Effect of Marketing on Our Daily Life Activity Overview: This exercise is designed to help students understand how marketing processes impact their daily lives.

Time Limit: 30 minutes What To Do:

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Chapter 12—Understanding Marketing Principles and Developing Products 1. your students what they had for breakfast. Answers will vary, but focus on a Ask few products that everyone in the class is familiar with (e.g., a cup of Starbucks coffee, cold cereal, etc.).

Ask students to consider why they stopped at Starbucks (or ate Fruit Loops, or 2. grabbed some Entenmann’s coffee cake). Guide your class into a discussion of the marketing mix by asking the following questions: a.

Product: Why Starbucks instead of Coffee Bean, or Taster’s Choice that you make at home? Was it the flavour? The freshness? The packaging? The specialty flavours? How is Starbucks different from other coffees? Are those differences important? b.

Price: Was price a factor in your decision? Does it matter that Starbucks is more expensive than the competition? Would a Starbucks coupon change your perception of Starbucks? c.

Promotion: What is the Starbucks marketing message? Is the message appealing?

Does word-of-mouth play any role in your decision to go to Starbucks? Why? d.

Place: Where did you buy that Starbucks coffee? Did convenience play a role in your decision? Or did you go out of your way for an ambiance that you like? You may want to discuss the emergence of Starbucks kiosks (e.g. on campus) to increase convenience for customers, and the appearance of Starbucks in grocery stores. Does the increased availability change the image of the product? If so, how?

Exercise #2: Assessing the Marketing Environment Activity Overview: This activity asks students to consider various elements from the marketing environment that affect specific industries.

Time Limit: 40 minutes What to Do: Divide the class into five-person groups and assign an industry to each group (for 1. example, automotive, fast-food, apparel, airlines, and banking). Then have students briefly review the material in Chapter 12 on the external marketing environment and how it affects marketing activity. (10 minutes) 2.

Ask each group to explain how events in the external marketing environment have affected their industry. (15 minutes) 3.

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

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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 environments presented in Chapter 12 and some of the variables that are important in each one. Remind students that a given variable from one environment may affect different industries differently.

Exercise #3: Data Mining Activity Overview: This activity asks students to think about all the valuable information they give to others about themselves. Have students read the section on data warehousing and data mining in the IT Appendix at the end of the text before doing this exercise.

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.

Exercise #4: When Smoke Gets in Your Eyes Activity Overview: This activity asks students to consider marketing in the tobacco industry and the resulting controversy over the level of accountability facing the industry in light of health dangers from the use of tobacco.

Time Limit: 30 minutes What to Do:

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Make copies of the following material and distribute to students in advance of the class in which this exercise will be conducted.

-------------------------------------------------------------------------------------------------------In Canada, government restriction on the advertising of cigarettes has a long history. Television advertising of cigarettes has been prohibited since 1971, and various other restrictions (including some rather dramatic label requirements) have come into force since then. Recent legislation discourages tobacco companies from sponsoring sports and cultural events so that they can get their brands prominently displayed to consumers. At a charity dinner in Toronto, for example, the Rothmans Benson & Hedges table simply said “anonymous” in spite of the fact that the company had paid thousands of dollars to sponsor the table. Tobacco companies are still allowed to advertise in magazines and newspapers, but the rules are so restrictive they generally don’t try anymore. Yves-Thomas Dorval, a spokesman for Imperial Tobacco Canada Ltd., says that since “promotion” is essentially prohibited by law, tobacco companies are focusing on the three other “P’s” of marketing (price, place, and product).

Clashes between stop-smoking groups and tobacco companies are common, particularly when tobacco companies appear to be ignoring the spirit of the restrictions that have been placed on them. For example, as part of the TD Canada Downtown Jazz Festival, Imperial Tobacco set up an outdoor smoking lounge in Toronto’s Nathan Phillips Square. The lounge was criticized by the Ontario Free-Tobacco Network, which called on the mayor of Toronto to stop Imperial from using “scantily clad girls” to promote cigarettes on city property.

All of these situations are interesting, but an important question remains: Who is accountable for the negative effects of tobacco use? Government agencies in both Canada and the United States (Health Canada and the American Public Health Association, respectively) seem to take the position that it is the companies who sell cigarettes that bear most of the responsibility. Not surprisingly, cigarette companies argue that because tobacco use is an individual behaviour choice for which potential health risks are well known, accountability falls to the consumer instead of the producer of the product.

Coalitions of health advocacy groups—including the World Health Organization and other grassroots public health organizations—are insisting that corporate accountability be formally acknowledged. In the United States, the $39 billion in settlement revenues that was given to states during a recent five-year period is cited as tangible recognition of the industry’s accountability, but only for after-effects. Not far enough, insist the health advocates, arguing that the more than 400 000 tobacco-related deaths each year in North America are preventable: Companies should also be accountable for effective preventive measures that are absent now and are likely to remain so until more regulation is imposed on them. Tobacco firms, in response, point to several recent court rulings in the United States that denied more than $50 billion in claims brought by HMOs and insurance companies for reimbursement of tobacco-related health expenses. They point to these cases as supportive of the industry’s argument that it is not accountable. .

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While the issue of accountability simmers, marketing finds itself on both sides of the controversy. Advertising expenditures by Canadian and U.S. tobacco companies have soared to more than $11 billion each year. Health advocates cite “predatory marketing practices” as the industry advertises in youth magazines and develops advertising campaigns targeted at Hispanic, Asian, and other population groups that as yet may not be fully aware of health risks from smoking. Young adults with low incomes and lower education levels are representative of the target-market demographics of smoking.

Consider the following statistics: ■ The rate of smoking among people who did not complete high school is three times the rate for those with an undergraduate university degree.

■ Smoking among pregnant women is 15 times greater for those who did not graduate from high school than it is for those with a university education.

■ About one-third of people living below the poverty line are smokers, compared with only one-quarter of those above the poverty line.

Low-wage workers smoke more than those with high wages.

■ Health advocates say that tobacco companies have increasingly paid retailers to display tobacco advertising, have used “buy one, get one free” promotions, and have set up promotional racks and giveaways that make cigarettes easier to buy among these targeted smokers.

Marketing by health advocacy groups has embraced “idea-and-information” messages to promote the stop-smoking idea and to appeal for more corporate accountability. The American Legacy Foundation’s award-winning TV “truth” campaign, debunks the idea that smoking is glamorous, and features information about the social costs and health consequences of tobacco. A report by the U.S. National Cancer Institute publicized the idea that “light” cigarettes don’t reduce health risks and often simply lead to brand switching rather than quitting. Community-based and grassroots efforts include counter-marketing campaigns to educate higher risk groups— targeted by the tobacco industry—about tobacco’s harmful effects. Media ads and promotional materials targeted at legislators and regulators are appealing for more regulation and explicit acknowledgement of industry’s accountability for reducing the ill effects from tobacco. Meanwhile, both sides know that each day brings with it hundreds of new smokers, quitters, and tobacco-related deaths.

Questions for Discussion 1. is more accountable for the health risks associated with smoking: the Who tobacco companies or the people who decide to smoke cigarettes? Explain your reasoning.

Should tobacco companies be held more accountable for the health problems of 2. low-income, low-education smokers than for the health problems of high-income, higheducation smokers? .

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3.

Consider the following statement: “There is overwhelming evidence that cigarettes cause a variety of serious health problems. The Canadian government, in its role of protecting consumers, should therefore ban the sale of cigarettes.” Do you agree or disagree with this statement? Explain your reasoning.

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Divide the class into small groups and ask them to answer the questions for discussion in their small groups. (15 minutes): 3.

Regroup and discuss each group’s suggested answers. Answers to these questions are provided below. (15 minutes) (1)Canada, restrictions on advertising tobacco products include a ban on In television ads, and restrictive rules essentially prohibit magazine ads and sponsorship activities. Government health agencies in Canada and the U.S. take the position that the tobacco industry is responsible for the negative effects of tobacco use; the industry takes the position that the consumer is responsible, since the negative effects on health are well known. Court decisions have gone both ways. As promotion expenses by tobacco firms escalate, health advocates accuse the industry of targeting youth and population groups that may not be fully aware of the negative health effects. Critics charge that the tobacco industry has tried to get around the intent of the restrictions on advertising.

For many years now, social marketing initiatives have been pointing out the dangers of smoking. But the issue of cigarette smoking is a controversial one, so student answers will not only vary, they may also be strongly held. Therefore, the most important goal in this discussion is to make sure that arguments on both sides of the issue are systematically raised and examined. For example, some students will argue that in a democratic society people should be free to decide what products or services they will buy (as long as they are legal). Other students will take the position that business firms are accountable if they produce and sell products that endanger peoples’ health. Still other students will point out that companies are playing within the rules because selling cigarettes is legal.

This question is a good one to use as the basis for an in-class debate that should be moderated by the instructor.

Here again there will be strongly stated views and a spirited debate. Some (2) students will argue that low-income, low-education people need to be protected more than high-education, high-income people. But others will disagree and argue that in a free society people should be allowed to purchase whatever products they want, and that making different rules for people of different education and income levels is unreasonable.

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Part 4—Principles of Marketing Regardless of the position they hold on this issue, students should note the rights of the consumers, particularly the right to be made aware of health and safety concerns regarding the use of a product.

It is the responsibility of the manufacturer to disclose any and all information that could have an impact on the consumers’ health and safety as well as their decision making steps.

(3) question is a great opportunity to discuss the pros and cons of This government regulation of consumer behaviour. Some students may see the parallel with Prohibition in the U.S. during the 1920s. In that case, the banning of alcohol led to all sorts of unanticipated negative consequences like the rise of gangster-run illegal booze distribution. The argument can be made that these same problems would arise if cigarettes were banned because a demand exists for cigarettes and someone would likely try to supply that demand.

Students should visit the websites of social marketing initiatives of both private and public efforts to gain a deeper understanding of the social and economic impact that smoking and cigarette manufacturing has on consumers and on the economy. One approach is to give students an opportunity to first explain their position, then review the website material, and then return with their final position. Their perspective may change as a result of hearing both sides of the argument.

Additional questions that might be asked are as follows: 1.

Is the sale of tobacco products different than the sale of alcohol?

2.

Are the restrictions on advertising that the tobacco industry faces reasonable?

3. it ethical for tobacco companies to be targeting segments of the Is population that are younger, less educated, and less affluent? What characteristics of this segment might contribute to the willingness to smoke?

Don’t Forget: This topic is controversial. Student opinions will vary on both questions.

Wrap-Up: Bring the activity to a close by reminding students of the role that promotion plays in the marketing mix. Also remind students that social responsibility comes into play quite often as the marketing mix is developed.

Exercise #5: Never Give a German a Yellow Rose Activity Overview: This activity asks students to consider what a foreign visitor might notice about the Canadian marketplace.

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Time Limit: 30 minutes What to Do: Divide students into small groups and ask them to assume that they will be 1. receiving a foreign visitor. Groups should decide what the home country of their visitor will be.

2. each group to assume that the visitor wants to know what he or she might be Tell able to observe about the Canadian marketplace. In general, the visitor is curious about the various elements of the marketing mix. For example, in considering product, 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.

Reassemble 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.

TEACHING TIPS 1. due consideration of social and cultural environments, ask the students to With explain why marketers must be continually reassessing their methods for reaching consumers. Why are the "old tried and true" methods likely to fail?

Having been exposed to what the textbook says about product development and 2. differentiation, ask students to evaluate the validity of this statement: "Build a better mousetrap, and the world will beat a path to your door." Ask the students to feel free to tailor and edit that traditional statement to make it reflect current thinking.

Relationship marketing can focus on establishing long-term relationship with 3. customer and with suppliers. What are the benefits to the business of establishing these sorts of relationships? Are there costs that the business should consider? Students should consider that customer loyalty provides benefits through positive word of mouth advertising, but also has economic benefits, as it is expensive to attract new customers. .

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4. is always good to stress that publicity can have a negative as well as positive It effect. Refer to the examples in the text as a starting point and ask students to come up with other examples. Ask students to weigh the effects of negative publicity on the business firm that is unfortunate enough to receive it.

5.

Review the utilities mentioned in the chapter: form, time, place, and possession.

Students should be encouraged to give an example of each.

6. the concept of market segmentation in mind, ask students to react to this With commercial slogan: "We serve every man, woman and child in Canada." Ask students to identify products that might select this group as their target market. What difficulties might be encountered in trying to use one marketing strategy to reach this group?

7. students to consider whether a firm might define a market segment that is too Ask small. You might use this extreme example to get them thinking: A radio station in Toronto might play Swiss yodelling songs 24 hours a day. The station would carry commercials aimed at fans of Swiss yodelling. The station would discover that its listeners would be indeed loyal and would be more than willing to buy products advertised on the station. How large is this market segment?

8.

Chances are that students haven't seen many TV commercials for Rolls-Royce automobiles. Nevertheless, after reading what the text says of Rolls-Royce marketing practices, you can ask some student teams to write a script for a Rolls-Royce TV commercial. The script should keep in mind the market segment Rolls is attempting to reach.

For the Rolls commercial referred to above, what sort of music should be used as 9. background? If a person has the money to buy a Rolls Royce, can we assume that such a person is “cultured and refined”? How will your answer affect how you design your Rolls Royce commercial?

Make use of the following scenario in relation to market segmentation: A woman 10. opened a cafeteria that would serve sturdy, no-frills meals in a lower middle-class neighbourhood. She wanted to do some advertising in the local newspaper. An ad man from the paper came to help her develop an advertisement. He had a slogan in mind that he had heard some years ago and had always wanted to use if he opened a cafeteria. It said: “For those who desire, and can afford, the very best.” Ask your students to comment on the wisdom of such a statement at the bottom of an advertisement for this cafeteria.

11.

The text material on market segmentation cautions that a group of consumers

segmented according to a particular variable may not share common spending habits. To emphasize the importance of the marketer determining the relevant market segmentation for their product or service, present several examples of products or services and an inappropriate market segment variable.

The students can then discuss why this segmentation is inappropriate and identify a more appropriate variable. Examples that .

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Chapter 12—Understanding Marketing Principles and Developing Products could be used include: segmenting the market by family size when selling an SUV when income or lifestyle may be more appropriate; or segmenting the market by religion when selling family vacation packages, when family size, income or family life cycle may be more appropriate.

12.relation to market research, ask students to react to this statement and evaluate In its wisdom: “Our firm has developed an exciting new product. Several experts in our laboratories have tested it extensively and we find it has all the qualities it should have.

We know it will be a hit the very minute we introduce it to the general public.”

13.

Moderate a discussion regarding the role that intuition and hunches play in the development of a new product. It is said that Walt Disney often would stick with a hunch when all of his financial advisors urged him to drop it; usually Walt was right. How big a factor is luck?

14.

A key part of the market research process is studying the current situation. Such a study can provide hints as to timing. Here's an example. In the late 1960s, several prominent people in Frankfurt, Germany wanted to do something to honour Oskar Schindler. No one wanted to grab the idea and run with it. In 1984, a German moviemaker wanted to make a film about Schindler, but he could not find a financial backer who was interested. Why were we all so ripe for Schindler's List in 1994? Clearly the timing was better, but what factors in the environment led to the interest in 1994?

Students may want to explore this phenomenon.

15.

Advertising is a powerful force in our daily lives. Ask the students to consider this: Does advertising have the power to persuade a consumer to purchase a product they would never have considered prior to being exposed to the advertising? If the answer is yes, then do we need research into consumer behaviour?

16.

Marketers count on a certain number of "irrational" purchase decisions. Ask some students to describe a time when they made an irrational purchase decision. Then ask them to categorize such decisions as (a) irrational decisions that they regret, or (b) irrational decisions they are grateful for having made. Are sales promotion efforts aimed at causing the irrational purchase?

Discuss the concept of planned obsolescence from the point of view of the 17. marketer creating a need or want, rather than the consumer developing the need or want independently. Anything fashion related works as an example. The trends in the colour of kitchen appliances can be used. Harvest gold and avocado green from the late 60s and 70s gave way to almond, white, black, stainless and the new colour - bisque. Does the change in fashionable colour result in consumers replacing functional appliances with more fashionable ones? If so, how much influence did the marketer have on creating the need? This topic can be expanded into a discussion on ethics as well.

18.

Consumers may carry out an extensive or superficial search for information on a

product or service prior to making a purchase. Have students identify the factors that .

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Part 4—Principles of Marketing may influence the consumer’s decision as to the amount of effort to put into the search process.

19.

Unhappy consumers are far more likely to complain to friends and family than to the business that provided the unsatisfactory product or service. A discussion with students regarding their own experiences should be consistent with this. Asking students to explain why they chose not to complain to the business could lead into a discussion of what the business could do to encourage unhappy customers to complain to the business instead of other potential customers.

Two good discussion questions to be offered the class are: (a) "Why does it seem 20. that the organizational markets are pretty much invisible to most consumers?" and (b) "At a party, why would it take someone in organizational marketing such a long time to explain what he or she does?"

21.

Drivers in Japan drive on the left side of a road. It has been reported that American carmakers have shipped automobiles to Japan with the steering wheel appropriate for American driving. Have students discuss whether such American cars are then considered to be "international products" (like Coca-Cola) as treated by the textbook, and thus not requiring adaptation.

22.

Encourage the students in the class to indicate how large corporations may differ from small businesses in the way they make use of the marketing mix.

23. the observation that while consumers seem to always be searching for the Make lowest price possible, there are many firms (e.g., Rolex, Rolls Royce) that have been very successful selling products at very high prices. It seems that some consumers think they are getting something of great value if they pay a high price for it, even if cheaper alternatives exist. Moderate a class discussion on the strategy of high vs. low prices for products.

24. students about their "pet peeves" when it comes to marketing techniques.

Ask Develop a list of such techniques. Are these techniques more likely to be evident in mass selling or in personal selling? Or is there any pattern?

25. have discount airlines (e.g., WestJet) been so popular and profitable?

Why There is a wave of nostalgia sweeping through society. Some old brand names 26. are even being reintroduced. To get a discussion started, have students bring in products that are using a nostalgia theme, or simply identify such products. Students can then talk about the use of nostalgia to sell products. Moderate a class discussion on the advantages and disadvantages to both consumers and companies of "cashing in" on memories.

Students often forget that marketing is more than just advertising and sales. It is a 27. set of processes for creating, communicating, and delivering value to customers and for managing customer relationships. .

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28.

Make sure that students grasp the concept of utility—the ability of a product to satisfy a human want or need—as it is a difficult concept for some students.

Consumer marketing involves the sale of consumer goods and services to 29. consumers; industrial marketing involves the sale of industrial goods and services to other companies.

Remind students that the marketing mix consists of product, price, promotion, and 30. placement. It is affected by variables such as consumer characteristics, consumer needs, emerging marketing, and competition.

31.

Reinforce that although price may be the easiest of the 4 P’s to change, a price that is too high fails to attract buyers, and a price that is too low yields little profit.

32.

Make sure students understand that “place” is concerned with all of the activities involved in getting products from producers to consumers.

33.

Reinforce that promotion refers to techniques— advertising, personal selling, sales promotions, publicity, and PR—for communicating information about products.

34.

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.

35.

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.

36. consumer buying process begins with recognition of a need or a problem.

The Normally, this assumes that it is the consumer who recognizes the need on his or her own. Now, related to the item above, it could be asked whether or not a marketer has the power to plant the seed of this need recognition. Sales personnel have done it for centuries. As Professor Harold Hill told the people of River City in The Music Man: "What you need is a boys' band!" Door-to-door sales personnel have often said: "What your family needs most of all is an encyclopedia." What power does the marketer possess to plant that seed?

The consumer buying process consists of a series of steps taken by consumers 37. when making purchases: problem/need recognition, information Seeking, evaluation of alternatives, purchase decision, and post-purchase evaluation.

38.

Here's a point that student experience will support. Items in a convenience store

are inexpensive but also expensive. How can that be? Basically, the items featured at a convenience store are low in price compared to other products. For example, a quart of milk is far less expensive than a washer-dryer combination. However, a quart of milk at the typical convenience store will cost more than a quart of milk at the typical full-service grocery store. What we gather from this is that you pay a little extra at a convenience .

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Part 4—Principles of Marketing store for the privilege of being able to get a quart of milk at 3:00 A.M. when other stores are closed.

39.relation to the previous tip, should we be more cost conscious and turn a quart In of milk into a shopping good? This would mean that we would sample milk prices and freshness labels all over town before deciding on where to buy milk. We will not do that because the difference of a few pennies is not worth the trouble of shopping. However, a difference of several hundred dollars--maybe even a thousand--on a new stereo is obviously worth the trouble of shopping around.

Some people argue that, compared to men, women tend to do more shopping 40. before making a purchase decision and to be harder to please in the area of specialty goods. The observation is that men make such decisions quickly. Is there any validity to this argument? What might cause a difference in the effort expended? Can students identify products where the reverse would be true?

41.the computer industry, coming out with an exciting new product that In competitors cannot duplicate can capture a larger share of the market. Ask students to comment upon just how long a computer firm can count on such a breakthrough to keep them on top of the stiff competition. In short, is the field so dynamic that being the innovation leader one month may not mean you are the innovation leader the next month, or is the industry changing that rapidly?

42.the students consider the seven-step product development process, ask them As why there must be so many steps. Would it be possible for a firm to skip a few of these steps in order to race to market with a futuristic innovation? Could the time allocated to each step be shortened?

43. years, advertisers have used the descriptive phrase "new and improved." Point For out to the class that this phrase is a classic example of a firm attempting to extend the life of one of its products. Notice how toothpastes are constantly adding new features.

A piece of chewing gum is just a piece of chewing gum. Nevertheless, 44. manufacturers of chewing gums emphasize new features. Far beyond chewing satisfaction, gum is a means to keep your breath sweet, as a substitute for tobacco products, or for keeping you calm when you want to smoke a cigarette but can't. Is this a case of extending product life or will chewing gum always be with us, thus defying the decline phase of the product life cycle?

Emphasize brand loyalty by the following example: Arthur Jones has made it a 45. point to purchase at his corner grocery store each week a gallon of milk from Murchison's Happy-Cow Dairy, Ltd. According to Arthur, "No milk on earth tastes as good as Murchison's." Arthur's son-in-law is a chemist and has heard Arthur's endorsement of Murchison's milk time and time again. The son-in-law does a chemical analysis of the milk of Murchison's and three other dairies, then reports to Arthur that all chemical samples are identical. Arthur still maintains, "No, young fella, Murchison's tastes best!" .

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46.is sometimes claimed that in some cases the packaging of a product can cost the It manufacturer more than the product that is inside the packaging. Students might be asked to explore this possibility. An example that quickly comes to mind is perfume. Ask students to provide some other examples.

47.

Consumers sometimes complain that small items are only available in large packages. An example would be an MP3 player, which is not much bigger than a large eraser. Why would consumers be concerned about large packaging? Why might manufacturers not respond by reducing the size of the packaging?

Some marketing experts think that a brand can only be "hot" for so long; then 48. consumers start losing interest in it. Is this true? Why or why not? Have students think up examples to support their position. What overall conclusion can you reach on this issue after hearing the various examples?

49. student opinions on the advisability of always going with the generic or Solicit "no-name" brand. Is there always really a difference between generic and the major advertised brands?

50. importance of protecting a company’s trademarks can be illustrated to the The students through a discussion of brand names that have lapsed into common usage.

Examples such as Kleenex (instead of facial tissue), Xerox (instead of photocopying this one is interesting as asking someone to Xerox a document was more common a decade ago than it is right now), Band-Aid (instead of bandage), Q-tip (instead of cotton swab) and Aspirin (American example - instead of ASA) could start the discussion. Can students think of others? The problem arises when a new product is introduced, and the name of the new product becomes identified by the brand name. For example, students may use the term “Rollerblade” instead of in-line skates. Rollerblade is a brand name for the product, which is an in-line skate. Many students do not realize this. Have students think about whether there are any other new products that are at risk of losing their trademark protection (I-Pods, for example)?

Ask students if they are aware of any changes in packaging used by companies 51. that occurred in response to consumer concerns? Have the students look for common themes. Some examples that may be mentioned: Environmental concerns motivated McDonald’s to switch from Styrofoam to cardboard for their sandwiches; Fear of tampering motivated changes to many products - Tylenol being the most obvious, but the sealed mouths on soft drink bottles are also examples; convenience motivated microwavable individual serving containers for Campbell’s soups, pop-top tins, and others.

52.

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.

53.

Make sure that students understand the distinction between a product mix (the .

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Part 4—Principles of Marketing 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).

54.

Stress that high mortality rates indicate that out of many new ideas, only a few products reach the market.

55.

Ask students to think of recent examples of products that benefited from speed to market.

56.

Reinforce the idea 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.

57.

Make sure that students understand that branding is the process of using symbols to communicate the qualities of a particular product made by a particular producer.

USING THE BOXED INSERTS OPENING CASE E-Business and Social Media Solutions E-Sports in Canada: Twitch, YouTube, and the High-Stakes Field of Gaming Critical Thinking Question 1.For many years e-sports and gaming was dismissed by many traditionalists as a hobby or fad but the numbers speak for themselves. Clearly, the audience gets engaging value from attending an esports event. Describe the value provided to the audience by an influencer like VanossGaming on his channel or by attending a live event.

The value of a product compares its benefits with its costs. Benefits include not only the functions of the product, but also the emotional satisfaction associated with owning, experiencing, or possessing it. But every product has costs, including sales price, the expenditure of the buyer’s time, and even the emotional costs of making a purchase decision. A satisfied customer perceives the benefits gained from the purchase to be greater than its costs. Thus, the simple but important ratio for value is derived as follows: Value = Benefits/Costs.

Influencers provide gaming content tips, a forum for sharing knowledge, information about events and new release dates. It can also serve as an outlet for discussion through chats and the feeling of belonging to a community; the emotional connection is also core to this value equation.

Entrepreneurship and New Ventures: Copper Branch: Promoting Plant-Based Power Food in Disruptive Times This insert describes the activities of Copper Branch, a Quebec-based company that is at the forefront of the plant-based food movement. It aspires to be the market .

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Chapter 12—Understanding Marketing Principles and Developing Products leader in the healthy, fast-casual food segment. The company is using several high-profile Olympic athletes to help promote it products.

Critical Thinking Question 1.

Consider the product development process and identify all the steps that top management at Copper Branch had to take at each of the stages.

This question requires students to systematically work through the steps in the new product development process and understand how those steps are operationalized while a real new product is being developed. For example, step #1 involves finding new product ideas. Copper Branch clearly did this by developing the product idea of highquality fast food, which is designed to capitalize on the increased awareness among consumers of the importance of eating healthy foods.

When assessing student answers, it is important to determine how much agreement they see between the steps listed in the text and the actual activities that were evident at Copper Branch. The best answers are those that identify differences between the text description and the actual company activities, and why those differences were evident. In most student answers, there will likely be evidence of activity on some steps and not on others. The more enterprising students will do some research of their own to determine in more detail exactly what the company did while developing this new product. They may find that the apparent lack of agreement is resolved when they discover more details about the company than what is presented in the brief boxed insert.

QUESTIONS AND EXERCISES Questions for Analysis 1.

What does brand equity mean and how do companies like Apple take advantage of their strong brand equity?

Brand equity refers to the strength and acceptance of a brand in the minds of consumers. Products with high brand equity generate greater brand awareness and loyalty on the part of consumers, have larger market shares than competing brands, and are perceived to have greater quality. Companies like Apple take advantage of their strong brand equity to create a lot of “buzz” whenever a new product is launched. The lineups outside Apple stores each time a new iPhone comes on the market illustrates the positive impact of strong brand equity.

Select a good or service that you have purchased recently. Try to retrace the 2. relevant steps in the buyer decision process as you experienced it. Which steps were most important to you?

Students should use the consumer buying process (described in Chapter 12) as their guide in answering this question. Responses will obviously vary, but it will be .

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Part 4—Principles of Marketing interesting to see how different students attached differing levels of significance to the various phases in the process. If responses from multiple students are summarized, it may be possible to detect trends, i.e., for some types of products one phase is given more importance, but for other types of products, another phase may be given the most attention. For example, for more complex and expensive products, there is likely to be much more post-purchase evaluation than for simpler, less expensive products.

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 this text.

The various classifications of consumer and industrial products include: Consumer products Convenience goods and services—candy, ATM services Shopping goods and services—clothing, car repair Specialty goods and services—houses, interior design, industrial products Industrial products Expense items—inventory, repair bills Capital items—computer servers, long-term maintenance contracts How is the concept of the value package useful in marketing to consumers and 4. industrial customers?

Student answers should focus on the benefits versus costs, since a value package is a combination of all the product features and benefits—all bundled together—that are attractive to the consumer. Benefits include not only the functions of the product, but also the emotional satisfaction, but these must be compared to the costs of the product. “Cost” isn’t just the out-of-pocket expenditure but includes the emotional cost and buyer’s time in making the purchase. A satisfied customer perceives the benefits derived from the purchase to be greater than its costs.

5.

Why has the in-store use of hidden cameras become so popular? Is this “video mining” ethical? If not, how could it be made more acceptable?

In the most general sense, the use of in-store hidden cameras has become popular because retailers are trying to get an edge as they try to cope with the intense competition that is so obvious in retailing. The boxed insert entitled “Retailers Are Tracking Your Every Move” provides additional information on this trend. The question of whether such video mining is ethical provides the basis for an interesting class discussion, which will likely reveal a lack of consensus, but which will get students thinking about the fact that new technologies always seem to have both advantages and disadvantages. One suggestion for making video mining more acceptable would be to require stores to post signs saying that video surveillance is being conducted. Customers can then decide whether they wish to shop at that store.

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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, and the company can appeal to multiple target markets.

Application Exercises 7.

Identify a company with a product that interests you. Consider ways the company could use customer relationship management (CRM) to strengthen relationships with its target market. Specifically, explain your recommendations on how the company can use each of the four basic components of the marketing mix in its CRM efforts.

Student answers should focus on meeting customers’ needs and wants and ensuring that the product meets customers’ expectations to create an ongoing relationship. The product and pricing strategies should reinforce the customer’s perceptions. The place and promotion strategies should reinforce the product and customer connection.

8.

Select a product made by a foreign company and sold in Canada. What is the product’s target market? What is the basis on which the target market is segmented? Do you think that this basis is appropriate? How might another approach, if any, be beneficial? Why? Answers will vary depending on the product and target market. When assessing student answers be sure that they have correctly identified the product’s target market and the basis on which the target market is being segmented. Their opinions on the appropriateness of the segmentation should be consistent with information provided in the chapter. If it is not consistent, the student must make a clear argument as to why.

9.

Choose a product that could benefit from word-of-mouth buzz marketing. Then create a marketing campaign kit for participants to spread the word about this product.

Students will select a wide variety of goods and services so the marketing campaign kits will vary. However, the kits should contain information on why the product is “cool” and its value proposition so that the buzz can begin.

10.

Interview the manager of a local manufacturing firm. Identify the company’s different products according to their positions in the product life cycle.

Make sure that students are familiar with the product life cycle concept and the characteristics of each stage in the product life cycle before they conduct the interview.

They will then be able to formulate proper questions to get the desired information. For example, profit levels across the various products will indicate which stage of the product life cycle they are in. Assess student answers on the basis of the criteria they use to categorize products into the various phases of the life cycle. .

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TEAM EXERCISES Building a Business: Continuing Exercise 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.

Depending on the type of business venture, teams’ product mixes 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.

Building Your Business Skills: The Great Outdoors Follow-Up Questions 1.

How do you think that the market for camping equipment has changed over the last 50 years? How did this influence your decision making?

Answers will vary, but most teams will recognize that camping for most consumers is not a necessity, but a leisure option for individuals who have disposable income.

Many of today’s campers want “frills” and the ability to extend the conveniences of their homes to the “great outdoors.”

2.

As you developed your list of new products, which wants and needs of the target market were most important?

Many groups will mention items like ease of use, durability, “frills,” and convenience.

3.

What pricing strategy should the company use for their existing products?

Given the durability of the products and the nature of the target market, a prestige pricing strategy will likely be effective.

4.

What pricing strategy should the company use for their new products? Is skimming or penetration more appropriate?

A skimming pricing strategy would be more appropriate for their new products.

Exercising Your Ethics: .

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Team Exercise: THE 480 MILLION DOLLAR Question 1. 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.

2. 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.

3. As the marketing manager, what recommendation would you argue for in this situation and how would you attempt to persuade your peers?

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 Students should beethics) and logic (business decisions). emotion (personal encouraged to explore what might happen if the company decision was at odds with their own personal ethics.

CLOSING CASE

Capitalizing on the Meatless Meat Movement This case describes how Maple Leaf Foods is getting into the business of “meatless” meat (i.e., food which tastes like meat, but which isn’t actually meat). To produce this type of food requires far less water and generates far fewer harmful emissions than the raising of cattle. It also provides consumers with much healthier products to consume.

Questions for Discussion 1.

How are the elements of the external marketing environment influencing Maple Leaf’s marketing strategy? Explain your reasoning.

Each of the elements of the external marketing environment (political-legal, socio-cultural, technological, economic, and competitive) are having an influence on Maple Leaf’s marketing strategy. The effect of the political-legal environment is evident in the concerns being expressed by both the U.S. Cattlemen’s Association (who are trying to prohibit the use of the word “meat” by companies that are producing the new product), and by the Friends of the Earth (who claim that the new “meatless” meat is being rushed to market without the proper testing to determine its effect on consumers). The sociocultural environment is important because Maple Leaf will have to convince consumers that their new product is actually desirable. At this point in time, cautious optimism is in .

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Part 4—Principles of Marketing order because society continues to move (albeit slowly) toward acceptance of new ideas which will reduce damage to the environment. The new product should be very interesting to consumers because, compared to real meat, far less land and water are used in the production of meatless meat. It also produces just one-eighth of the greenhouse gas emissions of an equivalent amount of regular meat, and it allows consumers to replace unhealthy saturated animal fats with healthy fats (like the ones found in flax seed). The technological environment has obviously been important here since technology facilitated creation of this new product. The economic environment is of great importance generally; when times are good, consumers spend more and new products entering the market can benefit from these spending patterns. When economic times are not so good, there is less consumer spending and new products may have a harder time gaining a foothold. In the competitive environment, the most relevant idea here is that of substitute products.

Meatless meat is a substitute product for traditional meat, so Maple Leaf and other producers of this new product can expect strong competition from traditional meat companies, who are threatened by this new product.

2.

After reading this chapter, examine the product development process and link it to the evolution of the meatless meat category.

The first step in the new product development process involves the search for ideas for new products. In the case of meatless meat, concerns about damage to the environment caused by the production of traditional meat motivated various people to emphasize plant-based farming rather than meat-based farming. As well, scientific advances have created the potential for eliminating the use of animals for meat production altogether. These developments have led companies like Maple Leaf to think about a new product that could replace traditional meat.

The second step in the new product development process is screening ideas to determine which ones fit with the company’s current activities. Meatless meat is in some respects a big departure from Maple Leaf’s traditional business, but in other respects it is an appropriate extension of Maple Leaf’s activities in terms of marketing new food products to consumers.

The case study does not provide any information on the remaining steps in the new product development process, but students should be encouraged think about what those activities would look like. For example, for step 3 (concept testing), market research is necessary that focuses on consumer acceptance of the new product. Such market research might involve experimentation where the new product is comparisontested by consumers alongside traditional meat. Other market research might involve surveys of consumers or focus groups where consumers are brought together to talk about a product. Students answers should contain the same sort of analysis for the other steps in the new product development process.

3.

Explain the roles of target marketing and market segmentation as they apply to this case.

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However, it is not clear whether the best approach is to actively promote this new product to meat lovers and try to convert them, or to focus on traditional vegetarians because they are more likely to be interested in a new product like this. The new product can be promoted to both markets, but it may be best to start with vegetarians. If they like the product, that will at least show that it is competitive in some market segments. Promotion activities can then be expanded over time and directed at other market segments.

4.

Describe how you and your group might try to target “meat eaters” to help convert them to a plant-based burger.

Student answers will vary, but one of the strategies that will likely be proposed will be based on the personal experiences of students who have already tried the new product. The attempt to convert “meat eaters” would consist of influence attempts directed at friends or relatives, where the positive aspects of the new product (for both personal health and environmental protection) could be emphasized.

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CHAPTER 13 PRICING, PROMOTING, AND DISTRIBUTING PRODUCTS CHAPTER SYNOPSIS The marketing decisions around pricing, promotion, and distribution of goods and services are addressed in this chapter. Pricing objectives and the tools for determining price are discussed first, followed by a consideration of pricing strategies and tactics.

Promotion (and the promotional mix) is identified and advertising strategies and the key advertising media are discussed. There is also a discussion of personal selling and the various types of sales promotions. The coverage of distribution includes a look at the distribution mix, distribution channels, vertical marketing systems, distribution strategies, wholesaling, retailing, and physical distribution.

CHAPTER OUTLINE I.

DETERMINING PRICES A. Pricing to Meet Business Objectives—Several different objectives may be considered in pricing a product.

1.

Profit-maximizing objectives—This requires a tricky judgment because if price is set too high, sales volume is less than optimal whereas if price is set too low, sales volume is high but the firm "leaves money on the table."

2.

Market-share (market penetration) objectives—Low prices (and low profits) may be set to encourage purchase of a new product or as a strategy to increase market share and dominate the market.

Pricing for e-business objectives—E-businesses reduce both costs 3. and prices because of the Internet’s unique marketing capabilities.

Because the Web provides a more direct link between producer and customer, buyers can often avoid the added costs of wholesalers and retailers.

B. Price-Setting Tools—Prices cannot be set before determining the potential business impact. Two basic tools that are often used are: Cost-oriented pricing—This approach takes into account the firm’s 1. desire to make a profit and takes into consideration the need to cover production costs .

Part 4—Principles of Marketing 2.

Break-even analysis: Cost-volume-profit relationships—Breakeven analysis assesses exactly how many units must be sold before all fixed costs are covered and the company begins to make a profit. Breakeven points are typically calculated for each of several different price levels (see Figure 13.1).

II.

PRICING STRATEGIES AND TACTICS A. Pricing Strategies—Prices for a product range drastically, reflecting brand image as much as differing costs. These images reflect very different pricing strategies.

1.

Pricing existing products—A firm can set a price above prevailing market prices for similar products, below market, or at or near market price. The reasons for doing so are discussed, as is the concept of price leadership.

2.

Pricing new products—A new product can be introduced with a very high price (price-skimming strategy) or a very low price (penetrationpricing strategy). The suitable situations for each strategy are addressed.

Fixed versus 3. dynamic pricing for online business—The electronic marketplace has introduced a highly variable pricing system as an alternative to the more conventional pricing structures.

B. Pricing Tactics—These include price lining (a firm selling multiple items in a product category may predetermine three or four price points—each aimed at a specific type of customer—into which all the products must fall), psychological pricing (exploiting the irrational elements of purchase decisions by using oddeven psychological pricing—not stating prices in even dollar amounts), and discounting (reducing prices to stimulate sales—the most common forms are cash discounts, seasonal discounts and quantity discounts).

III.

PROMOTING PRODUCTS AND SERVICES Promotion is used to make consumers aware of products, to make them knowledgeable about products, to persuade them to like products, and to persuade them to buy products.

A. Promotional Strategies—Push and pull strategies are described.

The Promotional Mix—This refers to the combination of promotional B. tools that are used—advertising, personal selling, sales promotions, and publicity/ public relations. In establishing a promotional mix, marketers match promotional tools with the five stages in the buyer decision process. Need recognition (make buyers aware); search for information (educate consumers); consumers compare products (use personal selling); buyers are ready to purchase (use sales .

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IV.

promotions); after consumers make purchase (advertising and personal selling to remind customers that they made a wise choice).

ADVERTISING PROMOTIONS AND MEDIA Consumers ignore most of the many messages they receive. Reaching them through advertising has become more difficult.

A. Advertising Media—Specific communication media are selected based on suitability to the audience. Advertising media such as newspapers, television, radio, magazines, outdoor advertising, word-of-mouth advertising, and online advertising are described. Table 13.1 lists the advantages and disadvantages of each medium.

B. Traditional Media: Changing times—The advertising industry is dynamic, and it is changing to meet the interests and preferences of both customers and advertisers. For example, although newspaper ads are rated as more informative and useful than some other media, advertisers continue to shift away because the audience for newsprint is shrinking. Radio stations are feeling the heat from subscriber-based satellite radio.

V.

C. Online: The Power of Consumer Engagement—Online advertising takes various forms, including search, display, classifieds, email, and video. Online communications have changed how companies interact with customers. Many online interactions are occurring on mobile phones. Engagement is now more likely to be two-way as more companies ask consumers to get involved with the brand and actually influence marketing decisions.

PERSONAL SELLING, SALES PROMOTIONS, DIRECT (OR INTERACTIVE) MARKETING, PUBLICITY, AND PUBLIC RELATIONS Selling by personal interaction provides a personal link that adds credibility and depends on a level of trust. Sales promotions are short-term promotional activities designed to stimulate consumer buying or cooperation from distributors, sales agents, or other members of the trade. Since publicity is free and is seen as believable, it is important in the promotional mix. Its drawback, however, is the lack of control that marketers have over it. Public relations refers to companyinfluenced publicity which focuses directly on enhancing a company’s image.

Personal Selling—Provides the personal link between seller and buyer. It A. adds to a firm’s credibility because it gives buyers a contact person who will answer their questions. Because it involves personal interaction, personal selling requires a level of trust between the buyer and the seller.

B.

Sales Promotions— Sales promotions are short-term promotional activities

designed to stimulate consumer buying or cooperation from distributors, sales .

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Types of1.sales promotions—The best-known forms are described.

These include coupons, point-of-purchase displays, purchasing incentives (e.g., free samples, trading stamps, and premiums), trade shows, contests, and sweepstakes, and direct (interactive) marketing.

Publicity and Public Relations—Publicity is free, and because it is C.

VI.

presented in a news format, consumers see publicity as objective and believable.

However, marketers may have little control over bad publicity, and that can have a very negative impact. In contrast, public relations refers to company-influenced publicity. It attempts to create goodwill between the company and its customers through public-service announcements that enhance the company’s image.

THE DISTRIBUTION MIX The choice of an appropriate distribution mix depends on many factors, including the need for intermediaries and the nature of the target audience.

A. Intermediaries and Distribution Channels—Intermediaries are firms that help to distribute a producer’s goods. They include wholesalers and retailers.

1.

Distribution of goods and services—A distribution channel is the path that a product follows from producer to end user (Figure 13.3 shows four popular distribution channels—direct distribution, retail distribution, wholesale distribution, and distribution by agents or brokers). a.

Channel 1: Direct distribution—In a direct channel, the product travels from the producer to the consumer or organizational buyer without intermediaries. b.

Channel 2: Retail Distribution—In Channel 2, producers distribute consumer products through retailers.

Channel 3: Wholesale distribution—Channel 2 requires a c. large and costly amount of floor space for storing and displaying merchandise. Wholesalers relieve the space problem by storing merchandise and restocking store displays frequently.

Channeld.4: Distribution by Agents or Brokers—Sales agents or brokers represent producers and receive commissions on the goods they sell to consumer or industrial users.

2.

The pros and cons of non-direct distribution—Non-direct distribution means higher prices because each link in the chain makes a .

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Chapter 13—Pricing, Promoting, and Distributing Products profit by charging a mark-up. But intermediaries also add value by saving consumers both time and money. Examples are given.

Distribution Strategies—The choice of strategy determines market B. exposure for the product and the cost of that exposure and depends on the product class. Intensive distribution is normally used for low-cost consumer goods, exclusive distribution for high-cost prestige products, and selective distribution has been applied to every type of consumer product.

C. Channel Conflict and Channel Leadership—Conflict may arise between These conflicts members of a distribution can be resolved channel. by coordinating the work of the various channel members, either through channel leadership or through vertical marketing systems. Conflict in the distribution channel occurs when members disagree over the roles they should play or the rewards they should receive. One channel member is usually the most powerful in determining the roles and rewards of other channel members. That member is called the channel captain. Vertical marketing systems occur when separate businesses join to form a unified distribution channel, with one member coordinating the activities of the whole channel. There are several kinds of VMSs: corporate, contractual, and administered. Most franchises are contractual VMSs. VII.

THE ROLE OF INTERMEDIARIES A. Wholesaling—Wholesalers may provide a variety of functions for customers: storage, delivery, credit, and providing information. Merchant wholesalers take title to the merchandise they carry. Agents and brokers (including internet e-agents) are independent of any one producer. They serve as the sales force for various manufacturers, are paid by commission, do not take title to merchandise, and provide a wide range of services to retailers.

B. Retailing—Most of the goods and services that consumers buy are purchased at retail stores. Many retailers are small operations, often consisting of just the owners and part-time help, but some, like Walmart, are very large.

Types of brick-and-mortar retail outlets—Canadian retail 1. operations vary widely by type as well as size. They can be classified by their pricing strategies, location, range of services, or range of product lines. See Table 13.2.

2.

Non-Store Retailing—This category includes direct-response retailing and mail order. See Table 13.3.

E-Intermediaries—E-intermediaries are Internet-based channel 3. members who perform one or both of two functions: (1) They collect information about sellers and present it to consumers, or (2) they help deliver internet products to buyers. .

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VIII. PHYSICAL DISTRIBUTION Moving a product efficiently from the manufacturer to the end consumer involves a number of activities, all aimed at keeping customers satisfied, making goods available where and when customers want them, and keeping costs low.

A. Warehousing Operations—The physical distribution operation concerned with the storage of goods is a major part of distribution management.

Transportation Operations—Physical movement of products is the highest B. cost faced by many manufacturers. Cost, therefore, is an important consideration.

We must also consider the nature of the products, the distance to travel, expected speed of delivery, and customers' needs. The major modes of transportation are trucks, planes, railroads, water carriers, pipelines, and intermodal transportation.

See Table 13.4.

Distribution Through Supply Chains as a Marketing Strategy—Instead of C. 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 1.

2.

3.

4.

5.

6.

7.

8.

9.

How do marketers achieve profit-maximizing objectives and market-share objectives?

How has dynamic pricing benefited web users over traditional fixed pricing strategies?

When might sellers resort to using discounts?

What are some of the objectives of promotion?

What elements make up the media mix?

What are the advantages and disadvantages of internet advertising and selling?

What are the different types of sales promotions?

How is publicity different than public relations?

What are some of the activities that are needed between the manufacturing stage and the retail stage? How is value added in these activities? .

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10.

11.

12.

13.

14.

15.

16.

17.

18.

No intermediaries are involved in a direct channel. What are some products that flow through this channel?

Retailers are used in Channel 2. What are some products that 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?

How can intermediaries provide value-added features to customers?

How do online shoppers benefit from shopping agents?

How do online retailers and consumers benefit from electronic retailing?

What are some of the disadvantages of electronic retailing?

How can consumers benefit from interactive and video marketing?

What are the advantages and disadvantages of the following modes of transportation: trucks, planes, water carriers, railroads, and pipelines?

Why are supply chains important in marketing strategy?

19.

IN-CLASS EXERCISES Exercise #1: 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: Divide the class into four-member groups and ask each group to consider 1. marketing a solar-powered 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? .

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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 market segments.

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.

Exercise #2: P lanning a Media Strategy Activity Overview: To help students experience the planning of a media strategy.

Time: 50 minutes What To Do: Organize students into marketing management teams.

1.

2. each team select a product to market. (5 minutes) Have Each team should develop a media strategy for marketing the product, including 3. an image and position to be developed, types of promotion to be used, and media to be used. Teams should specify the advantages of the chosen media, frequency, and continuity to be used. (25 minutes) 4.

Have students present their plans to the class for critique. (20 minutes)

Don’t Forget: Ask students the following questions: 1.

Which step was most difficult?

2.

Why do some campaigns appear to have more of a chance for success than others?

3.

Did some campaigns catch your attention more than others?

Wrap-Up: Remind students that organizations exist which specialize in developing media strategies, and they might want to talk to someone who works in such a firm. Some students would find a career in media very interesting.

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Chapter 13—Pricing, Promoting, and Distributing Products Exercise #3: Developing an Advertising Campaign Activity Overview: Most students love developing their own advertising campaigns—and they are often very good at it! The process helps them gain a better understanding of how to effectively communicate product features and benefits, in order to meet the needs of their target audience.

Time Limit: 40 minutes What To Do: 1.

Divide the class into groups of four or five. This exercise tends to work best when students have the option of working with their friends.

2. each group to choose a product—real or imaginary, good or service—and to Ask develop two different print ads to promote that product. Each ad must take a different approach. Possibilities include comparative advertising, demonstration, testimonial, slice-of-life, fear appeal, sex appeal, and humour. The ads must include a headline, graphics, and body copy. (25 minutes) 3. each group presents their ads (via either descriptions or sketched layouts), After have the rest of the class guess the target audience, and comment on the effectiveness.

To enhance the competitive spirit, you may want to offer a prize or extra credit points to the group that develops the best ads. (15 minutes) Don’t Forget: Point out that developing an advertising campaign is a more specific activity than developing a overall media strategy (see exercise #3).

Wrap-Up: Make sure that the “target audience” idea is prominently discussed. Developing advertisements which are not focused on a target audience are not likely to be very effective.

Exercise #4: A Big Push For Publicity Activity Overview: This activity asks students to work in teams to develop a promotional campaign aimed at the specific needs of an organization.

Time Limit: 45 minutes What to Do: 1.

Divide the class into four-member groups and ask them to read the Building Your Business Skills exercise at the end of Chapter 13. (5 minutes)

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Within their assigned groups, ask students to complete Step 1 of the exercise. (15 minutes) 3. the groups to complete Step 2 of the exercise. (15 minutes) Ask Bring the class together and discuss each group’s decisions, using the Follow-Up 4.

Questions as a basis for discussion (see the Building Your Business Skills exercise at the end of this chapter for possible answers to the Follow-Up Questions). (10 minutes) Don’t Forget: In selecting marketing promotions, many factors—including the type of industry, the type of business, the types of products being marketed, competitor actions, and available resources—play a role.

Wrap-Up: Bring the activity to a close with a brief overview of what elements compose the promotional mix and what roles direct selling and personal selling, in particular, play in the promotional mix.

Exercise #5: 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 very similar, but carry a different brand name, such as Ford vs. Chrysler, or Apple vs.

Samsung. (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 onenight stay at the Holiday Inn Express is less costly than a stay at the Ritz-Carlton because the Ritz-Carlton offers more amenities. But price differences between Del Monte spinach and Jolly Green Giant spinach might be more difficult to explain.

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Chapter 13—Pricing, Promoting, and Distributing Products 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 that are typically seen in the marketplace.

Exercise #6 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: Divide the class into small groups and ask each group to come up with four sets of 1. competing products or services; in most cases, students will select products that are similar, but carry a different brand name. These should be products that are similar to each other but that are found in different types of places. (10 minutes) 2. students to discuss the place each product is sold and be able to explain the Ask reasoning for one brand being sold in one kind of place rather than a different place (a convenience store vs. a gourmet food store, 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, a product purchased at Walmart is likely to cost less than the same product at Sobey’s. But students may not understand why that is the case when the product appears to be the same.

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.

TEACHING TIPS 1.

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.

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Make sure students understand that cost-oriented pricing considers profit and a firm’s need to cover production costs; a product’s markup is needed to determine costoriented pricing.

3. you like sending your students on a field trip, here's an idea. We've always been If led to believe that the "large economy size" is the most economical to purchase. Ask students to take along a notebook and gather data to determine if this is really true. They will discover that in some cases, the 8-ounce size sells for $1.87, while the 16-ounce "economy size" sells for $3.80. In other words, a consumer will save 6 cents by buying two of the smaller size rather than one of the economy size.

Breakeven analysis can be a tough concept for students so you may want to 4. reinforce the concept and the formula: Breakeven Point (in units) = Total Fixed Cost/Price minus Variable Cost.

5.

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.

6.

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 $0.99 and $1.99.

7.

Here's a proposition to place before the students. A firm manufactures product X. In pricing the product, the firm has engaged in all of the most modern techniques for determining what it costs the firm to make the product, and it arrives at a sale price of $7.50. Shortly after marketing the $7.50 product, the firm discovers that a competing firm is marketing the very same product for $6.33. Now, what will the firm do? Students may quickly identify a strategy of matching the competitor’s price, but they should also be encouraged to consider alternative strategies. Is it possible to differentiate product X from the competition? Is product X produced by a well-known company while its competition is a generic brand?

The textbook describes fixed costs and variable costs. Make it clear that for firms 8. with very high fixed costs and low variable costs, once the break-even point has been passed, the profit per item sold will be far greater than is the case with a firm having low fixed costs.

9.

Let each student team assume that they are the board of directors of a major

motion picture studio. The studio has just produced one of the most expensive films in cinema history. To win back their heavy investment, it is necessary to have as many people worldwide as possible come out to see the film. Ask the "board of directors" whether they would use penetration pricing or price skimming. Whichever the "board" chooses, you will want them to justify that choice. It might be kept in mind that low-

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Chapter 13—Pricing, Promoting, and Distributing Products priced theatre tickets could lead to many moviegoers seeing the film on more than one occasion.

10. students to look at pricing tactics from the consumers' point of view and Ask answer this question: "To what degree is it possible to manipulate the public's behaviour through pricing tactics?" Can we agree with the remark attributed to P. T. Barnum about a sucker being born every minute?

11. stores are very successful at using discounting. And in recent years factory Some outlet stores offering extremely low prices have sprung up everywhere. As a rule, at malls that incorporate several such outlet stores, consumers can find some real bargains.

However, in some "tourist trap" areas, such outlet stores may be found to be offering merchandise at the same prices as ordinary retailers. Ask students to editorialize on the advantages and disadvantages of discounting.

12.

Students should be warned that at some of the many retailers who promote themselves as discount operations, a consumer may find some prices higher than at regular retailers' establishments. This emphasizes the point that the use of discounts should be consistent and should generate trust.

13. students practice "selling" to each other. Pair them off and have them pick a Have product and sell it to the other student. For a variation, videotape their exchanges and critique them.

14. students assume that they are employed by a highly successful advertising Have agency. They have been assigned to develop some promotional copy that they know is a gross distortion of the truth. How will they handle this situation? Moderate a class discussion on this issue.

15. students to choose between making the "cold calls" of a door-to-door Ask salesperson and being a clerk in a retail store. In the face of so much rejection, what are the personal qualities necessary to pursue personal selling as a career?

Typically, someone will be passing out free samples near an attractive point-of16. purchase display. Have them think of their own experiences with point-of-purchase displays and then ask them to evaluate the effectiveness of such sales promotions.

From previous chapters, students will be familiar with the marketing mix17. products, pricing, promotion, and place (distribution). Challenge the students to prove persuasively that promotion is the most important element in the mix. A starting point might be to indicate that if consumers don't know about the product, then why produce it, why price it, and why try to distribute it?

18.

There are a number of advertisements on various television channels that illustrate

the use of a pull strategy. The most common currently promote prescription drugs directly to the potential patient, and instruct patients who are dissatisfied with the way .

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Part 4—Principles of Marketing their conditions are being managed to see their doctors and ask for the specific drug being advertised. In addition to clearly demonstrating a pull strategy, students can be asked to explore the ethical issues involved, specifically the issue of advertising these products to an audience that does not have the knowledge base to evaluate the product claims that are made.

Brand 19. advertising is far more common than product advertising, but the latter does occur. At what stages of the product life cycle is product advertising likely to occur?

Students should consider why product advertising takes place, and how the company can benefit if it is successful. Students should recognize that product advertising seeks to increase the market size, which can occur at the introductory stage when a new product is introduced. The chapter example, however, is for milk, which is in the maturity stage.

Expanding the market size may be the only opportunity for growth in sales, if the existing market is saturated and the costs of luring customers away from competitors are very high.

20.

The text mentions four types of promotional tools: advertising, personal selling, sales promotions, and publicity/public relations. It would be well for the students to see that having all of these hit at predetermined times is extremely important. Each tool tends to reinforce each of the other tools. It's somewhat like a military operation. Heavy artillery fire begins at 4:00 A.M. Air bombardment commences at 5:15 A.M. Armoured units roll at 5:30 A.M., followed by the infantry in armoured personnel carriers. As a class project, student teams could develop a "promotional plan of attack." Just as in a military operation, if one aspect does not function, then the mission may well be doomed to failure. There must be superb coordination.

21.comparative advertising, the goal is to make the competition look as bad as In possible. Long distance telephone services engage heavily in such a strategy in their television commercials. Among your students, are there some who feel that comparative advertising is "unsportsmanlike"? If so, are these students turned off by a firm that uses comparative advertising? On the other hand, how many students find this approach very effective? As you watch comparative advertising on TV, there is a temptation to comment: "One of these firms just has to be lying!"

An advertisement on television, by a company selling water filtration systems, 22. begins with the sound of a toilet flushing, with the picture showing the water level in a glass of drinking water dropping and then slowly refilling. Have students identify the type of advertising that is taking place. Do students find this advertising effective? Are there students who are turned off by the advertising?

23.

Advertising is classified as a discretionary fixed cost, as there is no “right”

amount to spend on advertising. Firms decide how much they want to invest, and that becomes the amount spent during the year. In a year of severe financial difficulties, a firm can decide to spend less than budget and reduce its operating losses or increases its income. Have students consider the effect this is likely to have on sales in the short-term.

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Chapter 13—Pricing, Promoting, and Distributing Products If the students believe that the effect should be minimal, have them consider why the firm doesn’t permanently reduce its advertising budget.

24.

Although the textbook makes it clear that television does not receive the lion's share of advertising dollars, it must be admitted that TV is quite effective. But here's a statement to savour in the supermarket industry: "Television doesn't give out coupons for special purchases at my store." In addition, "Television doesn't leave me a printed record of some special sale going on at the mall."

Very much a part of the promotional scene is the industry we call telemarketing.

25.

Said another way, we're referring to those solicitors who call while you're eating supper.

Students may want to react to this statement about telemarketing: "As disruptive as it might be at times in a quiet and peaceful household, telemarketing must be getting results. If such were not the case, then telemarketing would cease."

26.

Institutional advertising promotes a firm's long-term image. Depending upon the nature of the student body at your institution, the following might stir up some controversy or might lead to a unanimous conclusion: Several breweries with national (even international) distribution are campaigning for responsible use of alcohol and for eliminating underage drinking. Does this strike your students as good, solid institutional advertising or is it hypocrisy of the highest order? Could the Exxon Corporation have used some institutional advertising following the oil spill by the Exxon Valdez?

27.

Conduct a survey in your class. An attractive point of purchase (POP) display at which a human representative of the firm gives out free samples could be considered a very effective inducement toward impulse buying. Ask students how many times they have purchased something at a supermarket because free samples were given out at a POP display. When the votes are tallied, can the class provide an explanation for the survey result?

28.personal selling, the sale does not conclude with the “closing” phase.

In Following up is also important. Depending on the nature of the good or service being sold, there can be many methods for following up. Have the class provide as many follow-up techniques and practices as possible.

Here is a public relations challenge recently faced by a university. The university 29. wished to put up a parking garage on a site where a popular restaurant was located. The university's first step was to negotiate with the reluctant restaurant owner and reach a mutually satisfying arrangement so that the restaurant could relocate and the parking garage could go up. Ask the students to outline steps for resolving implementing this change in such a way that the university's public relations will not suffer.

Ask for a show of hands from students who have played on a sports team 30. sponsored by a business firm. What kind of impression did the sponsoring firm make on the students who raised their hands? Such sponsorship, it should be pointed out, is an aspect of public relations. .

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31.

Clearly, advertising for some products will require more adapting than for others when it is time to go international. For example, a large picture of a bottle of Coca-Cola could probably be used almost anywhere in any country in the world. Ask your students to designate products that will require lots of international adaptation.

KFC wants to create "a single message that can be used around the world."

32.

Students may want to discuss whether such a goal is feasible. Regardless of how students react to the idea, ask them to design such a TV commercial. Could it consist of just pictures and music--no voice or words on the screen?

Ask students to think of things that companies could do to minimize promotion 33. problems when marketing in foreign countries. First ask them to develop a list of potential promotion problems, and then have them propose some solutions.

34.

Advertising is a powerful force in our daily lives. Ask the students to consider this: Does advertising have the power to persuade a consumer to purchase a product they would never have considered prior to being exposed to the advertising? If the answer is yes, then do we need research into consumer behaviour?

35. the information standpoint, the textbook says, promotions seek to From accomplish four things: awareness, consumer knowledge of the product, consumers liking the product, and consumers purchasing the product. Do your students think we can go so far as to say that if consumers don't purchase the product, then the accomplishment of the other three will mean nothing whatsoever?

36.illustrate the implementation of a pull strategy, let us assume that a To manufacturer of a new bath oil is meeting with comparative indifference in potential distribution channels, and the manufacturer is not willing to provide any special favours for the intermediaries on this product. Ask the students to write commercials that contain lines like this: "Go to your grocery, department, or drug store and tell them you want several jars of the excitingly new exhilarating Lotus Leaf Lotion with new Xenofryll."

It could be said that advertising agency personnel are the professionals of the 37. trade. On the other hand, it is the firm making the product that will be paying the bills for advertising. When it is time to give final approval to a large magazine advertisement or a nationally aired television commercial, who do your students think should have the final say or the responsibility for final approval?

Publicity can have a negative as well as positive effect. Refer to the examples in 38. the text as a starting point and ask students to come up with other examples. Ask students to weigh the effects of negative publicity on the business firm that is unfortunate enough to receive it.

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Chapter 13—Pricing, Promoting, and Distributing Products 39.

Ask your students if they have ever purchased any products through the channel of video marketing. What are the advantages and disadvantages of video shopping?

40.

Emphasize to students the importance of physical distribution activities by asking them to name one product or service that they purchased that was not at some point physically distributed. They will have some difficulty doing so.

41. students to identify some of the major differences between distributing Ask consumer goods and distributing industrial goods. Can they name some cases in which an identical product is distributed through both types of channels?

Point out to students that in the past house-to-house distribution and sale of goods 42. was common for many products--milk, cosmetics, brushes, bread, fruits, and vegetables, and so forth. Now, many consumers hear about new products through video marketing.

Ask students to indicate how things have changed over the years--or have they?

43. was a time in the past, and perhaps it is still occurring, when an advertiser There would announce to consumers: "In order to save you money, we have completely eliminated the middleman and the costs associated with the middleman." Considering the information provided in this chapter, ask students to comment on the validity and accuracy of such a statement. To be kept in mind is the old marketing adage: You can eliminate intermediaries, but you cannot eliminate their function.

44.

Remind students of the various benefits that intermediaries provide in the distribution process.

45.

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.

46.

Students often confuse the various types of bargain retailers. It may help to review the functions of each type: discount houses, catalog showrooms, factory outlets, and wholesale clubs.

47.

Review the functions of non-store retailing, including direct-response retailing, mail order, telemarketing, and direct selling.

48.

Discuss the impact of costs when traditional intermediaries are excluded in the distribution of products (e.g., sales via the Internet).

The direct channel of distribution sounds old fashioned. The textbook, 49. nevertheless, has established that many very successful firms use it. Students should be encouraged to make a list of such firms--in addition to those provided by the textbook.

50.

Changes in the world of business have affected distribution just like any other aspect. One could maintain that there is a trend toward more products reaching .

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Part 4—Principles of Marketing consumers via direct distribution. One could also maintain that there is a trend away from direct distribution. Have two debate teams in the class espousing these two conflicting premises.

51.illustrating intensive distribution, the textbook says that “Caramilk bars flood In the market through all suitable outlets”. Equally universal is a bottle of Coke, Pepsi, 7-Up or Dr. Pepper. Ask students to make a list of the various establishments where they have been able to purchase a bottle of pop. When the list is complete, you will have an elaborate illustration of the concept of intensive distribution.

52. has the Internet changed the way that we purchase travel? Is there a How difference between leisure and business travel? (leisure usually requires more planning and information about the destination).

53.Chapter 10, the textbook refers to the Japanese concept of Just-in-Time. Under In ideal conditions, Just-in-Time can pretty well eliminate the need for storing inventory of raw materials by a manufacturing firm. Students could be asked if the Just-in-Time concept relates in any way to the levels of inventory that merchant wholesalers seem to be maintaining? Would Just-in-Time allow a major wholesaler to empty its warehouse?

Why or why not?

54. industry has its own peculiar language. Two exotic and arcane terms from Every distribution are "drop shipper" and "rack jobber." Do a little extra research into the roles played by these two characters in the distribution drama. Each student should be encouraged next time in a supermarket to look for a rack jobber. Here's how to do it: If you see someone rather nicely dressed who is setting up a non-food display or rearranging items on a shelf, go up and ask them if they are a rack jobber. If the person is, then ask what a rack jobber does.

55. we look at the newest developments in retailing, we may tend to ask the old When question: "Does history repeat itself"? Close to a hundred years ago, each rural area had its "general store." If the general store didn't have a product on hand, then the proprietor would order it for you. In the cities in those days, we had sprawling department stores.

The latter soon were handling just about everything but groceries. After sketching these two traditional stores with their broad span of products available at retail, you may want students to contrast—if they can—the hypermarts and super centres of today with the old general store and the traditional department store. From some angles, they look pretty much alike.

The interior decorating of some department stores—whether in the heart of 56. downtown or in an upscale shopping mall—differs widely from the huge airplane-hangar atmosphere of a hypermarket or super centre. What does this tell us, if anything, about the kind of clientele each is going after?

57.

With video marketing and electronic shopping and all the similar wonders that we

are likely to see in the next few decades, we are likely to hear: "In just a few years, .

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Chapter 13—Pricing, Promoting, and Distributing Products people will never have to leave their homes in order to shop!" Here's an opportunity for students to challenge such thinking. You can counter with: "But what is so great about never having to leave your home?" The fact is that people like to leave their homes, to get out in traffic, to mix with others at a crowded mall, and to interact with clerks in stores.

The truly forward-thinking retailer is going to operate on the assumption that people like to get out."

58.

As a rule, successful marketers have managed to see into a crystal ball and find

distribution methods that will be relevant at some point in the future. Hard as it may be to believe right now, there is a time coming in which Canadians will no longer be interested in going to the gargantuan suburban shopping malls. That's right, some other distribution concept will replace these malls. Accordingly, you may want to lead the students-perhaps in a special project--to sketch the future of retailing. Call the topic "Retailing in Fiscal Year 2025." Point out to the students that some signs of shifts away from the malls can already be seen: small strip malls being erected, video marketing, catalogue sales, etc.

Amazing strides have been made in recent years in the movement of products.

59.

But, on a small scale, amazing feats were accomplished many years ago. For example, a chain of Eastern restaurants bragged that "the delicious fish we are serving you right now got a good night's sleep on the ocean floor last night." Such a claim in St. John's or Vancouver then was nothing special. But today, a restaurant half a continent away from the ocean can make a similar claim--thanks to extremely efficient transport arrangements.

When forward advances are in the making, there will always be naysayers 60. standing by to scoff. When Federal Express first proposed to build a large distribution hub in Memphis, Tennessee, imagine the remarks. “There's no way in the world that they can deliver items overnight. And then doing it in Memphis of all places. Chicago's O'Hare would be the ideal spot." But Federal Express has made it work.

61.

If possible, take a field trip to a warehouse. Note all the activities that take place.

If possible, draw a diagram of the layout of the warehouse.

USING THE BOXED INSERTS OPENING CASE The Thirty-Thousand Dollar Handbag 1. 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.

2.What is Louis Vuitton’s target market? Do you think it is evolving or is it static?

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Part 4—Principles of Marketing Answers will vary. Students should note the high price of the product, which places it out of reach for 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.

3. 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.

4. 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.

5. Do you think the economic crisis in the early months of the COVID-19 pandemic affected the price of Louis Vuitton 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.

Disruptions in Business: The High Cost of Price Wars Critical Thinking Questions 1.Ride sharing has been around for many years now. What are the advantages and disadvantages (for consumers and for businesses) of the type of business disruption that they bring?

Student answers will vary but for consumers the convenience and the availability of an alternative to traditional taxis at the tip of their app-loving fingertips is key. However, there is a structural unfairness identified in the case that they should note. Many cab drivers were forced to pay huge fees for licenses and now new Uber drivers are walking in and taking their business without paying a dime. It is great for the consumer, but these cab drivers (who did not build the system) are now victims. For example, in 2018, Sam Eisenberg and three other plaintiffs filed a $1.7-billion class action lawsuit suit against the city of Toronto. They claim that the city did not respect and enforce bylaws to control Uber, thus causing them serious economic damage.

Uber, Lyft, and other ride-share companies have created an entirely new product, increasing competition for a needed service, therefore lowering the overall market .

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Chapter 13—Pricing, Promoting, and Distributing Products equilibrium price. However, as with any company, profitability is not just a function of being the lowest cost provider. For long-term success, Uber may need to look deeper into its own culture so that it can grow into more than just a cheap ride.

Entrepreneurship and New Ventures Influencer Marketing: The New Age Entrepreneurs CRITICAL THINKING QUESTIONS How 1. much time do you spend watching social media influencers? Describe the advantages and disadvantages of influencer marketing compared with traditional advertising by a paid endorser like and athlete or famous actor?

Influencer marketing is rooted in the technology of our times with tools like Instagram, Tic Tok used to communicate, captivate, entertain, and inform their communities. We can say it is a very democratic form since consumers are the ones that choose who to follow, however, these influencers may not always be acting in the best interests of their followers. As popularity increases sponsor dollars impact exactly what they are promoting (in many if not most cases). However, in fairness, traditional ads have always featured famous celebrities pushing products for huge sponsorship delas. So as much as the times have changed, some elements remain very familiar.

E-Business and Social Media Solutions Music Revenues: The Growing Freemium Distribution Model Critical Thinking Questions

1.

In terms of degrees of competition, how would you describe the market for music streaming? Do you think this will change in the next five years? If so, how?

Students should re-read two other parts of the text as preparation for answering this question: the “degrees of competition” section in Chapter 1, and the “competitive environment” section in Chapter 12. In terms of the former, the case mentions that Spotify is the market leader, but four other competitors must be reckoned with. Since this market has been changing rapidly and there are many new entrants, it most closely represents the situation of pure competition at the moment, but it may evolve through monopolistic competition and finally to oligopoly as time passes and the market matures.

In terms of the latter, the most likely situation is brand competition because the streaming services are providing very similar products, and they are trying to convince consumers that their particular brand offers specific benefits.

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Part 4—Principles of Marketing 2. can relatively unknown music artists promote themselves and their new How music to help them gain traction on streaming sites? Provide concrete examples of promotional strategies that they can use.

To increase both student interest and the number of promotional strategy ideas, moderate an in-class discussion where students describe strategies that relatively unknown music artists could use to help them gain traction on streaming sites. For example, some students might suggest using their Facebook site to increase visibility, which will in turn attract more attention on streaming sites. Each suggestion should be examined by the class to determine its effectiveness.

QUESTIONS AND EXERCISES Questions for Analysis 1.

Describe the types of distribution channels that may be used to get products from manufacturers to end users and give an example of each.

Some of the information that students will need for answering this question is presented in Figure 13.3. When assessing students’ answers, make sure that their examples of each distribution channel are accurate. Some examples of products that are distributed through certain channels are provided in the text, but ideally students should provide other examples based on their own experience with buying products and services.

Discuss the goal of price skimming and penetration pricing.

2.

The basic goal of price skimming (setting a relatively high price) is to cover product development costs and to make a large profit on each item sold. This strategy may be feasible when there is initially little competition. In contrast, penetration pricing (setting a relatively low price) is designed to create customer interest and stimulate trial purchases of the product. This strategy is best when there is immediate competition or when the company wants a large market share.

How do cost-oriented pricing and break-even analysis help managers measure the 3. potential impact of prices? What general factors motivate marketing managers to price their products at, above, or below prevailing marketing prices?

With cost-oriented pricing, the firm will cover its variable costs and make some money toward paying its fixed costs. The break-even analysis will determine how many units must the company sell before all its fixed costs are paid for and it starts to make a profit.

Pricing above prevailing market prices may be done to take advantage of the perception that higher prices mean higher quality has been built into the product. Pricing below prevailing market prices may be done in an attempt to increase market share. .

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Chapter 13—Pricing, Promoting, and Distributing Products Pricing at prevailing market prices is likely if the industry is an oligopoly and price leadership is practiced. Decisions about where to price a product (at, above, or below the market) are also affected by whether the product is new or has been around for a while.

New products are often priced above or below the market (see answer to question #1 above).

4.

Why are advertising dollars increasingly shifting from traditional media like newspapers and magazines to online and mobile media? Link your answer to the definition of advertising.

Advertising is defined as “paid, non-personal communication by which an identified sponsor informs an audience about a product.” Advertising dollars follow viewers and listeners, and the result is a movement away from traditional media like newspapers, television, and radio, and toward newer media like subscriber-based satellite radio and subscription-based services like Netflix and Crave TV (which enable commercial-free “binge watching”). Many younger Canadians are already watching TV exclusively online. In the text (see the heading “Traditional Media: Changing Times”), the point is clearly made that the advertising industry is dynamic, and it is constantly changing to satisfy the interests and preferences of both customers and advertisers.

Important measures—such as the relative number of listeners, viewers, and “eye-balls” attracted by each medium—are driving the changes in advertising spending.

5.

Select four advertising media and compare the advantages and disadvantages of each.

Table 13.1 contains information (in summary form) about the various media and the advantages and disadvantages of each.

6. three examples (other than those provided in the chapter) of products that Give use intensive distribution. Do the same for products that use exclusive distribution and selective distribution. What are the characteristics of the products in each category? For which category was it easiest to find examples? Why? Student answers will vary. Some examples include: Intensive distribution: newspapers, frozen food, beer, cigarettes, chewing gum, potato chips Exclusive distribution: McDonald's food products (because of the terms of the franchise agreement; but the geographic area is very small), helicopters, Broadway show tickets, John Deere tractors, storage for prestige automobiles Selective distribution: Black & Decker power tools, IBM personal computers, Tim Hortons coffee

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Part 4—Principles of Marketing Examples are probably easiest to find for intensive distribution products because these products are regularly encountered by students.

Application Exercises 7.

Search for some of the best viral marketing videos of all time and choose 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 video was effective?

Student answers will vary widely for this question, so it will be helpful if the instructor provides as summary of the products that appeared in the marketing videos. An in-class discussion can then be moderated by the instructor; that discussion should focus on reaching a consensus on (a) why the advertisements appealed to the target market, and (b) the characteristics of effective marketing videos.

8.

Select a product and analyze pricing objectives for it. What information would you want to have if you were to adopt a profit-maximizing objective? A market share objective?

Student answers will differ depending on the products selected. objectives should include:

Pricing

Profit maximizing objective (prices of competing products, our costs to produce, stage in the product life cycle, growth in market size, etc.)

Market-share objective (prices of competing products, our costs to produce, stage in the product life cycle, growth in market size, etc.)

Image objective (attributes that add value in the opinion of the target market, public impression of company, products, etc.)

9. addition to being a major online retailer, Amazon.com acts as an eIn intermediary for many small- and 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?

This question will require students to spend time familiarizing themselves with some of the details of online selling. Therefore, it is probably best to form 3- or 4-person teams to do the work. After reading the teams’ papers, the instructor can choose one that effectively summarizes the findings with respect to (a) becoming a seller on Amazon, (b) the costs of being a seller on Amazon, and (c) the pros and cons of individuals selling on Amazon vs. setting up their own website. The team that developed the answers to these questions can then make a presentation to the class.

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Chapter 13—Pricing, Promoting, and Distributing Products 10.

Choose two advertising campaigns that have recently been conducted by similar businesses in your area. Choose one that you think is effective and one that you think is ineffective. What differences in the campaigns make one better than the other? Why would a business use a push strategy rather than a pull strategy?

Developing a good answer to this question will require considerable effort, so it may be best to form 4-person teams to tackle it. Two of the members can research one campaign and the other two a second campaign. They can then analyze the data they gathered (for example, a survey of other students) and develop their conclusions about which campaign was most effective and why. Students will likely mention differences in the quality of advertisements as part of their assessment of effectiveness.

TEAM EXERCISES Building a Business: Continuing Exercise In this exercise students continue to develop their marketing plan by adding an appropriate distribution and pricing plan to their marketing mix. 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. The pricing plan is crucial. If the new venture will be selling a totally new product, competition may not be evident, but determining what constitutes a reasonable price may be difficult. On the other hand, if the product is not new, competition may be fierce, but pricing levels will be more obvious.

Building Your Business Skills: A Big Push For Publicity Questions for Discussion 1.

Do you think that the promotional mix will change over time? How might it be different in three years?

The initial objectives of the campaign are to create awareness and interest for the new theme park. The campaign will definitely have to evolve. Immediately before the opening, the theme park will have to create desire and action. Once the park is open, there will have to be a campaign to sustain continued desire and action. Most students will agree that the promotional mix will change over time once the theme park establishes a strong customer base. There will probably be less of an emphasis on publicity and more of a focus on the rest of the promotional mix.

2.

What role will online communications play for this theme park: a) before the launch, b) during the launch, and c) on an ongoing basis?

Both before and during the launch, online communications and viral marketing can play a big role in creating “buzz” about the park. During the actual launch, more traditional publicity activities will also be effective. Once the park is operating on an .

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Part 4—Principles of Marketing ongoing basis, online communications will take the form of a continuously updated website which tells potential customers about the park’s diverse activities. Particular emphasis will be placed on new attractions that have recently been added to the park.

Exercising Your Ethics: The Chain of Responsibility Activity Overview: This activity asks students to think about some ethical and practical issues that can arise when there is a problem in distribution.

Time Limit: 45 minutes What to Do: 1.

Divide students into four-person teams and ask them to turn to the Exercising Your Ethics: Team Exercise found at the end of Chapter 13.

2.

Ask each group to develop answers to the four Questions for Discussion at the end of the exercise. (30 minutes) 3.

Reassemble the class and discuss each group’s position. (15 minutes) Don’t Forget: Provide students with the following points: 1.

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 2.

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.

Wrap-Up: Remind students that customers typically broadcast a bad experience to many of their friends and colleagues, thereby magnifying the impact of a dissatisfying experience.

CLOSING CASE Amazon vs. The Bay: Past, Present, and Future of Canadian Retailing

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Chapter 13—Pricing, Promoting, and Distributing Products This opening case describes the significant differences between The Bay (a company with a very long history), and Amazon (a much younger company that has disrupted the retail trade).

Questions for Discussion 1.

Why are online retailers taking so much market share from the traditional brickand-mortar stores?

The primary reason that online retailers are taking market share from traditional brick-and-mortar stores is consumer convenience. Consumers do not have to spend a lot of time, energy, and money visiting a variety of retail outlets to get the products they want. Instead, they can order a diverse array of products from a company like Amazon and get next-day delivery of their order. The trend of increasing market share for online retailers like Amazon will continue as more and more consumers become comfortable with online shopping. As with many other trends, consumers in the 18-35 age bracket have embraced online shopping more quickly than older members of society. This means that traditional bricks-and-mortar stores like The Bay face significant challenges as they attempt to adapt to the rapid changes that are occurring in retailing.

Another important reason is that online retailers can offer a much wider variety of goods than traditional retailers can because the online retailers do not have limits on storage space. Traditional retail economics dictates that stores only stock the most popular items, because shelf space is expensive, but online retailers, like Amazon, can stock virtually anything (see the boxed insert in Chapter 13 entitled “The Long Tail” for details).

2.

Do you think that legacy stores such as The Bay will be able to compete with online stores in the future? How do they have to change to be more competitive?

To date, the track record of traditional stores like The Bay has not been encouraging, and many traditional retailers have already gone out of business. While the total dollar value of sales at traditional retail outlets still exceeds the total dollar value of sales at online retailers, the proportion is steadily increasing for online retailers. If present trends continue, online retailers will one day dominate the retail scene.

Certain changes will be necessary if traditional retail outlets are to remain competitive with online stores. Some bricks-and-mortar retailers (e.g., Canadian Tire) have instituted product delivery services. This addresses one of the big issues for consumers who do not want to spend time traveling to retail outlets to do their shopping.

Another issue is customer service. Online retailers offer convenience, a wide array of products, and quick delivery of products, but this is not enough for many consumers.

They also want to have face-to-face interactions with retail salespeople as they make their purchasing choices. As well, after-the-sale interactions with the retailer are also important, particularly if the customer is dissatisfied with the product that was purchased.

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Part 4—Principles of Marketing 3. all goods were available to purchase online, would there still be products and If 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?

Even if all goods were available online, there will still be products and services that consumers will want to buy in person. In the most general terms, these products and services will be specialty goods where consumers have deep knowledge (and strong preferences) about what they are buying.

To get more insights into this issue and to increase student interest, ask them to identify specific products and services that they would not want to buy online. Also determine why they would not want to buy them online, and what traditional bricks-andmortar stores could do to be more competitive against online retailers for these products and services (this is also addressed in Q. #2 above).

4.

Consider the following statement: There is a need for stricter government regulation of Amazon because its strategy of bypassing retailers is going to eventually result in the loss of millions of retail jobs, and this will dramatically increase the unemployment rate. Do you agree or disagree with the statement? Explain your reasoning.

This question presents an opportunity for the instructor to engage students in a debate about how much regulation should be evident in retail trade. The instructor can form two teams, one which will present its reasons for agreeing with the statement, and one which will present its reasons for disagreeing with the statement. As usual in these types of debates, a four-step process will be helpful. First, poll the entire class (without discussion) to determine what proportion agrees with the statement and what proportion disagrees with the statement. Second, have the two teams make their presentations. Third, moderate an in-class discussion which focuses on examining the merits of the key arguments that have been presented in favour of, and opposed to the statement. Third, poll the entire class again (without discussion) to determine the proportions of agreement and disagreement. Fourth, determine if the proportions have changed, and if they have, what the most compelling arguments were. Also determine how many individuals moved from agreement to disagreement (and vice versa), and why they moved.

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Chapter 13—Pricing, Promoting, and Distributing Products

CRAFTING A BUSINESS PLAN PART 4: PRINCIPLES OF MARKETING Assignment Overview: The fourth part of the business plan project asks students to think about marketing’s Four Ps—product, price, place (distribution), and promotion— and how they apply to their business. Students also examine how they might target their marketing toward a certain group of consumers.

Files to Provide Students: • or this part of the project, students will be asked to complete Part 4: Managing F 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. The Microsoft Word Student Business Plan Project Template is located on MyLab Intro to Business at https://www.pearsonmylabandmastering.com/northamerica/mybizlab/.

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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CHAPTER 14 MONEY AND BANKING CHAPTER SYNOPSIS 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 one topic with which we are all familiar. This chapter describes the different forms that money takes in the nation’s money supply and discusses the different types of financial institutions that make up the Canadian financial system. It also looks at how financial institutions create money and describes how they are regulated. The functions of the Bank of Canada are discussed, as are the tools that it uses to control the money supply. An appendix at the end of the text provides useful information on how to manage your personal finances.

CHAPTER OUTLINE I.

WHAT IS MONEY? A. Characteristics of Money—Although usually thought of as paper or The coinage issued and authorized by a government, money is actually any object generally accepted by people as payment for goods and services. Desirable characteristics of money include portability (should be lightweight and easy to handle), divisibility (should be easily divisible into smaller parts with fixed value for each unit), durability (should not spoil, and even when it eventually wears out, it can be replaced), and stability (the value does not fluctuate drastically).

B. The Functions of Money—Money serves three functions: as a medium of exchange, as a store of value, and as a unit of account.

The Spendable Money Supply: M-1—Measuring the supply of money is C. difficult and there is little agreement on how it should be measured. M-1 is the "narrow" definition of the money supply and includes only the most liquid forms of money (i.e., currency, and demand deposits).

M-1 Plus the Convertible Money Supply: M-2—This broader definition D. of the money supply includes everything in M-1 plus items that cannot be spent directly but that are easily converted to spendable forms: time deposits, money market mutual funds, and savings deposits.

E.

Credit Cards and Debit Cards: Plastic Money? —Spending with a credit

card creates a debt but does not move money until later when the debt is paid by cash or cheque. Credit cards are a money substitute; they serve as a temporary medium of exchange but are not a store of value. Debit card transactions, in .

Chapter 14—Money and Banking contrast, transfer money immediately from the consumer’s bank account, so they affect the money supply the same way as spending with a cheque or cash.

II.

THE CANADIAN FINANCIAL SYSTEM A. Financial Institutions—The main function is to facilitate the flow of money from sectors with surpluses to those with deficits. Until recently, the financial community in Canada was divided rather clearing into four distinct legal areas. The legal barriers between them have been eroding; permitting previously disallowed activities.

III.

FINANCIAL PILLAR #1—CHARTERED BANKS These privately owned profit-seeking firms serve individuals, businesses and nonbusiness organizations as a financial intermediary offering a variety of services.

There are only a few banks in Canada, but each one has many branches. Both Schedule A and B banks are regulated by the Bank Act. A. Services Offered by Banks—Banking is highly competitive, so banks do much more than simply accept deposits and make loans.

1.

Pension services—Most banks help customers establish savings plans for retirement.

2.

Trust services—These involve management of funds left in the bank’s trust (for example, the trust department will manage customers’ investment portfolios).

3.

International services—Three common services are currency exchange, letters of credit, and bankers’ acceptances.

4.

Financial advice—The bank recommends different investment opportunities.

Electronic funds transfer—Combines computer technology to 5. transfer funds or information into, from, within, and among financial institutions. This includes features such as automating banking machines (which allow customers to bank at almost any time of the day or night), pay-by-phone (allows customers to authorize specific regular deposits and withdrawals), direct deposits and withdrawals, point-of-sale transfers (customers can pay for retail purchases with a debit card), smart cards (which can be programmed with “electronic money”), and mobile digital wallets (credit and debit card information embedded in smartphones allows consumers to pay for groceries and shop for clothes using their mobile devices).

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Part 5—Managing Financial Issues B. Bank Loans—Banks are the major source of short-term loans for business.

Secured and unsecured loans, interest and the prime rate of interest are discussed.

C. Banks as Creators of Money—Banks use money deposited with them to loan to others who, in turn, deposit it in banks where it is used further (see Figure 14.2 for an illustration).

D. Other Changes in Banking—In addition to the technological changes described above, banks are also dealing with deregulation, changes in customer preferences, and international banking.

Deregulation— Banks are moving away from their historical role 1. as intermediaries between depositors and borrows and are diversifying to provide a wider array of financial products for their customers.

2.

Changes in consumer demands—Because consumers are no longer content to simply bank money when they can earn more with it elsewhere, banks are responding by selling a variety of corporate and government securities. These changes are leading to changes in the profit base of banks which previously was the spread between interest charged on loans and interest paid to depositors and now is increasingly fee-based. Banks are increasingly involved in selling insurance.

3.

Changes in international banking—Canadian banks are experiencing more competition because foreign banks are now allowed to do business in Canada.

E. The Bank of Canada— The structure and role of Canada's central bank are described.

1. money supply and the Bank of Canada—The Bank of Canada The plays an important role in managing the money supply in Canada, taking action to increase and decrease the money supply as it sees fit (see Figure 14.3). The Bank of Canada is the lender of last resort for chartered banks, charging them the bank rate. This rate, in turn, serves as the basis for establishing their prime interest rates.

IV.

FINANCIAL PILLAR #2—ALTERNATE BANKS A. Companies—These organizations safeguard funds and estates Trust entrusted to them and may also serve as trustee, transfer agent, and registrar for corporations. Examples are used to illustrate these activities.

Credit Unions/Caisses Populaires—These are cooperative savings and B. lending associations that are formed by groups with common interests. Their activities are described, and the largest credit unions are listed. .

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V.

FINANCIAL PILLAR #3—SPECIALIZED LENDING AND SAVINGS INTERMEDIARIES A. Insurance Companies—The largest financial intermediaries in Canada Life next to chartered banks, they are mutual or stock companies that share risk with their policyholders for payment of premiums.

B. Factoring Companies—By buying accounts receivable from a firm at less than the face value of the accounts, factoring companies take on the risk of credit loss and are a source of short-term funds.

C. Financial Corporations—Sales finance companies (e.g., General Motors Acceptance Corporation) specialize in financing instalment purchases by individuals or firms. Consumer finance companies (e.g., Household Finance Corporation) make personal loans to consumers.

D. Venture Capital Firms—Acquiring their own funds from a variety of sources, they then provide funds for new or expanding firms thought to have significant potential.

VI.

E. Pension Funds—A pension plan accumulates funds that will be paid out to subscribers in the future, investing those funds in the interim.

FINANCIAL PILLAR #4—INVESTMENT DEALERS These are stockbrokers or underwriters perform two important financial functions: underwriting and brokerage. More detail on investment dealers is provided in Chapter 15.

VII.

OTHER SOURCES OF FUNDS A. Government Financial Institutions and Granting Agencies—A variety of these are discussed, including the Business Development Bank of Canada, the Export Development Corporation, and the Canada Mortgage and Housing Corporation.

International Sources of Funds—Canadian corporations and provinces B. have borrowed in foreign markets and been facilitated by Canadian financial institutions.

VIII. INTERNATIONAL BANKING AND FINANCE A. Currency Values and Exchange Rates—The value of a currency like the Canadian dollar reflects the overall supply and demand for Canadian dollars at home and abroad. .

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1.

Strong currency or weak: Which is better? —A strong currency makes exporting more difficult, while a weak currency facilitates exporting.

The law2.of one price—This is the principle that identical products should sell for the same price in all countries. Since they don't, this implies that certain currencies are overvalued, and others are undervalued.

Examples are given using the "Big Mac Index (see Figure 14.4).

The B. International Payments Process—Banks facilitate the exporting and importing of goods and services by converting foreign currency into local currency.

C. International Bank Structure—Worldwide banking stability relies on a The loose structure of agreements among individual countries. The World Bank funds national improvements by making loans to build roads, schools, power plants, and hospitals. The International Monetary Fund promotes stability of exchange rates, provides temporary loans to member countries, encourages members to cooperate on international monetary issues, and encourages development of a system for international payments.

QUICK QUESTIONS 1.

2.

3.

4.

5.

6.

7.

Explain each of the following characteristics of money: portability, divisibility, durability, and stability.

Why are chequing accounts counted as part of M-1?

Why are credit cards not a part of M-1 or M-2?

What are ways in which financial institutions have diversified in recent years?

Who are considered the owners of credit unions?

How do consumers benefit from electronic funds transfer?

How do chartered banks create money?

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Chapter 14—Money and Banking 8.

How does the Bank of Canada control the money supply through open-market operations?

9.

For what purpose might an individual use a smart card?

10.

When does money have to flow between two countries during the international payments process?

11.

For what purposes has the International Monetary Fund been designed?

IN-CLASS EXERCISES Exercise #1: 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 hours of overtime foraXcell number days’ of vacation number of of days without the use of phoneofforextra X number days per X year (c) having the use of a car Ask 3. 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 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 to class and share some of the groups’ responses. (10 minutes)

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Part 5—Managing Financial Issues Don’t Forget: Students’ perceived values in each of the above transactions will vary greatly; for example, a person without a cell phone might (or might not) miss it if the person had the use of a car. Ask students what the implications of such differences in values are for the value of money or its substitute.

Wrap Up: Bring the activity to a close by providing a brief overview of the characteristics of money, relating them to the previous transactions.

Exercise #2: Your Cheque Is Not in the Mail Activity Overview: This activity asks students to consider the advantages and disadvantages of replacing traditional cheque 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 cheque 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. Note: Using debit cards might allow for an easier comparison since many students are more likely to use debit cards than cheques.

Wrap Up: Bring the debate to a close by highlighting some of the advantages and disadvantages mentioned for each option; remind students that cheque writing is expected to be completely replaced by electronic payments.

Exercise #3: Accountability Goes Professional Activity Overview: This activity asks students to consider the importance of professional designations among financial advisors.

Time Limit: 30 minutes

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Chapter 14—Money and Banking What to Do: 1.

Make copies of the following material and distribute to students in advance of the class when this exercise is to be conducted.

-------------------------------------------------------------------------------------------------------Investment recommendations by financial advisors offer clients possibilities of both dire losses and hoped-for financial gains. As professionals, advisors should be, but sometimes haven’t been, trustworthy stewards of clients’ private information. That’s why the financial industry, as early as 1947, began establishing societies that later merged to become the Association for Investment Management and Research (AIMR). Today, its members include more than 60,000 investment practitioners—securities analysts, portfolio managers, financial strategists—and educators in more than 100 countries.

AIMR serves three broad areas for which members are accountable—continuing education, conduct and ethics, and standards of practice—to maintain high standards of professionalism in their field.

The association’s flagship activity is the Chartered Financial Analyst (CFA) program. Regarded as the industry’s premier certification, the CFA designation has been earned by more than 55,000 investment professionals, from among some 480,000 CFA exam-takers, since 1963. Commenting on the value of the CFA designation, Charles Ruifrok, Jr., CFA and portfolio management associate at Bank of America says, “Since becoming a CFA charterholder, I have become a resource to others I work with and a mentor to younger associates. The charter has expanded my visibility in my firm. Clients have taken notice, too.” Industry giants, such as Citigroup, Prudential Financial, Morgan Stanley, and Deutsche Bank, encourage and compete for CFA professionals in banking, investments, mutual funds, insurance, and consulting.

Earning a charter involves a progression of postgraduate tests and three years of professional experience. The program’s three levels of study each requires 250 hours of preparation and an examination covering a broad-based “Body of Knowledge” for the investment community. Level 1 includes tools and concepts for determining the value of investments, portfolio management, and AIMR’s code of ethics and professional conduct.

Level 2 applies the tools from Level I in analyzing investments and applies the code of ethics and conduct in practical situations. Level 3 explores the portfolio management process, including ethics and conduct, in thorough detail. After meeting these requirements and signing a professional conduct statement, the AIMR member has the right to use the CFA designation.

While the testing hurdle is a one-time requirement, professional accountability is a never-ending obligation. Every year, members must disclose any customer complaints or disciplinary procedures about their professional conduct. The public, too, may file complaints against an AIMR member for unethical behavior, misconduct, or incompetence. Officials review each disclosure or complaint and conduct inquiries that could lead to disciplinary actions. Punishments range from letters of caution to public censure, and even removal from membership or revocation of the CFA charter.

Continuous accountability is a cornerstone for maintaining ethical and professional standards. .

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Questions for Discussion 1.

What might the CFA designation indicate to clients?

2.

How might a financial advisor benefit from having the CFA designation?

--------------------------------------------------------------------------------------------------------2.

Divide the class into groups of three and ask them to answer the questions for discussion in their small groups. (20 minutes) 3.

After groups have had a chance to discuss their answers among themselves, reassemble the class and compare each group’s input. (10 minutes) Don’t Forget: This activity can also be assigned as homework.

Wrap-Up: Wrap up the exercise by highlighting the purpose of the CFA designation and how a financial advisor might benefit from having it.

Exercise #4: Electronic Devices Activity Overview: This activity asks students to come up with a list of electronic devices that reflect the many ways in which the class creates, stores, exchanges, and uses information.

Time Limit: 20 minutes What to Do: 1. the class to brainstorm, coming up with a list of technological devices that Ask 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?

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Chapter 14—Money and Banking 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.

TEACHING TIPS 1.

Point out that just about any object that can serve as money if it is portable, divisible, durable, and stable.

2.

Students often confuse the characteristics of money with the functions of money.

At this point, a quick review of both may be helpful.

3.

Prior to the discussion of M-1 and M-2, it may be helpful to point out that the value of money depends on its supply— meaning how much is in circulation; the value of money drops when supply is high, for example.

4.

Students should keep M-2 separate from M-1. M-2 includes M-1 plus other forms of money that are not quite as liquid, such as time deposits, money market mutual funds, and savings accounts.

5. the average citizen, interest in making money has so fascinated us that we find For it hard to look upon money as anything other than a means toward wealth and prosperity.

Wealth itself is measured by the size of money one has accumulated. Given this, you may want to moderate a discussion that helps students see that money is nothing more than another commodity, such as corn, cocoa, pork, or wheat. When a banker lends money, that banker is really saying: "I have some of the money commodity available for you to rent from us, and the rent we charge is 11 percent." And, as the textbook says, this commodity must be portable, divisible, durable, and stable.

Down through all the years of recorded history—and perhaps during many years 6. that we have no record of—money has taken various shapes. There were times when it was not portable, divisible, durable, or stable. Maybe things were better in a previous time. Suppose that money was not portable. This would mean that one would not have to fear that someone would steal your money. Is money in our modern era really stable? Use the fluctuations in the Canadian dollar in the last year or so to make this point. On a more extreme scale, you can describe the hyperinflation that occurred in Germany after World War I.

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Part 5—Managing Financial Issues 7. the future, something will probably come along to replace the credit card, but In for now, if is very much a part of our lives. It might be interesting to have a discussion of the students’ thoughts on the role of credit cards in our economy and are the credit card companies ethical in charging the interest rates that they do?

8.

Ask students why there are less than ten major banks in Canada, while there are over 11,000 in the U.S. 9. textbook lists some of the many, many services offered by chartered banks.

The Here's a list: bank-issued credit cards; safe-deposit boxes; pensions; trusts; international brokerage; financial advice; automated teller machines (ATMs); and electronic money transfer. Can the students identify other services that a bank can perform for its clients?

10.

There's an old German saying which translates roughly as: "Money is always there. The only thing that changes is the possessor." This is like the scientific adage: "Matter can neither be created nor destroyed." So, when your boss says he or she doesn't have the money to give you a raise, that is a false statement. What the boss means is: "Yes, there is money here, but we have decided that we do not want to designate any of it for augmenting your salary."

11.

Economists differ on the matter of gold's relationship to a nation's currency. If the question is asked whether Canada is still on the Gold Standard, the official answer is no!

If you have knowledge of our nation's historical relationship to the Gold Standard, you may want to tell students about it. And here is a provocative question: Can a return to the Gold Standard insulate us from inflation?

12.old saying in finance is: "Pay slowly and collect quickly." The saying An recognizes the “time value of money.” If every consumer had this in mind, how would such a philosophy affect the acceptance of the debit card? There's another old saying about “an idea whose time has come.” Could it be that the debit card is an idea whose time has not yet come?

As the students read through the section on the rapid changes that are occurring in 13. the banking system, it seems reasonable to ask again this year: “Are we headed toward a cashless society?” This chapter opened with the four characteristics of money: portability, divisibility, durability, and stability. Can all four of these features apply to smart cards, debit cards, credit cards, and ATM innovations? If so, who needs cash?

Occasionally there is talk in Canada regarding accepting the U.S. dollar as our 14. legal tender. This has happened in some countries already (e.g., Ecuador). Not considering the moral or patriotic issues, have a discussion of how this would affect our economy and financial institutions. Also ask students what impact the recent increase in the value of the Canadian dollar has had on this idea.

15.

Talking about money piques student interest. Help them clear up any misconceptions they may have about money—what it is, what it's used for, etc. .

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16.

Ask students who would want to know what the money supply is. Also ask them why these people would want to know.

17.

Ask students to write down how much currency they have with them. Add it up (including yours). Discuss what the results might mean.

18.

Collect literature from several different financial institutions about the different types of accounts they have. Try to categorize the types and compare them. This will be good practice for students as consumers.

Ask your students why they think regular chequing accounts still exist if newer 19. types of accounts offer the same features and higher returns. (Hint: convenience, habit, and fear are just a few of the possible reasons.)

20.

Find out how many of your students or their families deal with a credit union. Ask why they think dealing with a credit union is advantageous to them.

21. students to do a survey of local finance companies to find out the services Ask they offer and the rates they charge. This is also a good exercise for students as consumers.

22.

Bring in a bank examiner to speak to the class. Be sure that students are prepared with appropriate questions.

23.

Before lecturing on this chapter, check the Globe and Mail's Report on Business section to determine up-to-date information on exchange rates of various currencies.

USING THE BOXED INSERTS OPENING CASE CANADIAN BANKS (AND VCS): A DIVERSITY AND INCLUSION REBOOT

Questions For Discussion 1.As you read this case what thoughts came to your mind? How do these initiatives serve the functions of banks and their role within society?

Answers will vary but it’s important to note that the banking and financial services systems are the backbone of any well-functioning economy. Any mismanagement can hurt that trust and lead to panic and even economic collapse. Society benefits when all members feel valued and have equal access to growth opportunities., Canadian banks are finally leading the way forward in promoting equity initiatives.

2. How do these initiatives improve customer service efforts at chartered banks?

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Part 5—Managing Financial Issues Diversity initiatives help companies ensure that they get the best possible candidates and as barriers to hiring are removed. Domestically it also helps to serve customers when the banks themselves are truly representative of the population as a whole. There are some practical advantages like having staff that speak extra languages to support communities.

This is especially important for serving the needs of new immigrants. This experience domestically only strengthens their ability to thrive in the global market and as we have seen in this chapter Canadian banks are making moves around the world.

3.All the major banks in Canada conduct some or a large part of their business internationally through partnerships and ownership in assets and banks around the world. How do these initiatives strengthen their position as global financial services players?

Answers will vary but here are some key points that students should address. Having a greater international presence helps to diversify the bank’s assets. Therefore, a recession or financial shock in one region may be supported by strong results in another region.

Being global citizens allows them better access to strong candidates from all corners of the globe that can also be transferred/promoted to other countries and locations. In today’s competitive landscape, attracting quality employees is a priority.

4.After reading the chapter, explain the role of chartered banks and venture capital firms in the Canadian economy.

There are several types of financial institutions in Canada, but the main function of all of them is to facilitate the flow of money from sectors with surpluses to those with deficits by attracting funds into chequing and savings accounts.

Incoming funds are loaned to individuals and businesses and, perhaps, are invested in government securities.

Disruptions in Business Microlending Solutions: Operating Outside the Traditional Global System Critical Thinking Questions 1.How does the microfinance industry serve its clients beyond the traditional system of finance? What are the advantages and disadvantages of microlending?

They provide very small loans to individuals to start a new business. The need for this service is particularly high in developing nations. Shivani Siroya founded Tala, a tech company that leverages mobile technology to create credit scores for unbanked individuals. With a proprietary algorithm, Tala evaluates over 10,000 indicators of responsibility. For example, applicants whose average phone calls were longer than 4 minutes were thought to have stronger relationships, making them a better credit risk.

E-Business and Social Media Solutions Do You Listen to TikTok Advice? Is SIRI Your Mortgage Assistant?

Critical Thinking Questions 1.List all the advantages of the growth in popularity of financial influencers? Provide at least one potential downside risk from this growing trend.

Major high-involvement decisions, like the choice of a mortgage requires serious thought .

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Chapter 14—Money and Banking and consideration of the advantages and disadvantages of each element: (1) issuer (big banks, credit unions, e-mortgage), (2) amortization period (20, 25, 30 years), and (3) structure (fixed vs. variable rate). Financial influencers should not be your only source of advice (especially since some lack any qualifications) but they can help spur more research. If you are going to use this medium seek out experts. There are some highly knowledgeable Tik Tok influencers like Humphrey Yang, who has 1.5 million followers and 22.2 million likes that has worked professionally as a financial adviser for Merrill Lynch!

Social Responsibility & Social Justice: Bitcoin’s Environmental Footprint The bitcoin phenomenon has been much in the news during the last few years, so this boxed insert should be of interest to students who want to learn about different forms of money. One particularly surprising issue is that the work that is done to create bitcoins may be a threat to the environment. The critical thinking questions give students an opportunity to apply some theoretical ideas about money to the actual practice that has developed with respect to bitcoin.

Critical Thinking Questions 1.

What are the four basic characteristics of money? How well does bitcoin fit these characteristics?

The four basic characteristics of money are portability (money should be light and easy to handle), divisibility (money should be divisible into smaller parts, for example, 10 dimes are worth one dollar), durability (money should not easily wear out), and stability (the value of money should not fluctuate widely).

Bitcoin fits some of these characteristics, but not others. For example, bitcoin meets the portability and divisibility requirements, but not the stability requirement (the value of a bitcoin changes frequently). It could be argued that bitcoin meets the durability requirement even better than traditional money because it is a virtual currency and therefore doesn’t wear out. Beyond these four traditional characteristics, there are other issues about both paper money and a virtual currency like bitcoin that students may also address in their answers to this question. The issue of security, for example, may cause students to conclude that bitcoin is too risky because of the widely-publicized thefts of bitcoins. But traditional money can also be stolen by criminals. Another issue is tangibility (real money can be held in your hand, but a virtual currency like bitcoin cannot be).

2.

What are the three functions of money? How does bitcoin rate in terms of each of these functions?

The three functions of money are: as a medium of exchange (money can be used to buy things), as a store of value (money can be used for future purchases because it .

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Part 5—Managing Financial Issues “stores” value), and as a unit of account (money allows us to measure the relative values of goods and services).

Bitcoin satisfies (at least to some extent) the “medium of exchange” function because it can be used to buy things. But since many businesses do not yet accept bitcoin in payment for goods and services, that reduces the extent of the “medium of exchange” function. Bitcoin is gradually being more widely accepted as payment for goods and services, so its performance on the “medium of exchange” function may improve in the future. As a “store of value,” bitcoin also leaves a great deal to be desired because the value of bitcoin fluctuates much more than traditional money does. Therefore, holders of bitcoin cannot be sure of just how much value their holdings have because it can change from day to day. As a “unit of account,” bitcoin is much like traditional money because it allows measurement of the relative value of goods and services.

QUESTIONS AND EXERCISES Questions for Analysis 1.

Explain the roles of chartered banks, credit unions (caisses populaires), and nondeposit institutions in the Canadian financial system.

Overall, the role of these financial institutions is to facilitate the flow of money from sectors with surpluses to those with deficits. Chartered banks don’t simply accept deposits and make loans; they now offer pension services, trust services, international services, and financial advice. Banks are also the major source of short-term loans for business. Banks also create money. They don’t mint bills and coins, but by taking in deposits and making loans, they expand the money supply. Credit unions are cooperative savings and lending associations formed by a group of people with common interests.

They are important because they lend money to businesses and to consumers who use the money to buy durable goods such as cars and furniture. Credit unions are gaining in popularity because they offer many of the same services as banks, but credit unions also pay dividends to members when they make profits.

2.

As a consumer, when would you favour a strong dollar? What about a weak dollar? Would you consider these factors differently as an employee or employer?

Because of their proximity to the U.S., most consumers would favour a strong dollar because they could go shopping in the U.S. and gain the benefit of the lower prices there. A weak dollar would discourage such shopping because any gains that would be achieved because of lower prices would be reduced or lost after the exchange rate is taken into account. One group of Canadians (snowbirds) would particularly favour a strong Canadian dollar because their 3-month winter vacation cost would be much lower than if the Canadian dollar was weak (i.e., was less than par with the U.S. dollar).

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Chapter 14—Money and Banking Business owners have varying preferences about whether a strong or weak Canadian dollar is best. A Canadian company that exports its products to the U.S. would favour a weak Canadian dollar because the products they are exporting will be cheaper for U.S. buyers, and that will increase demand. But Canadian business owners who import products from the U.S. would favour a strong Canadian dollar because their costs would be lower than if the Canadian dollar was weak.

3.

Should credit cards be counted in the money supply? Why or why not? Support your definition by using the definition of money.

The volatility of credit card debt is quite high. Adding this to M1 would tend to inflate the economy beyond all standards. The definition of money as a medium of exchange would tend to support the addition of credit cards to M1, but the card is not a measure of account, nor is it really a store of value. This question can provide a lively debate in class. If credit cards are replacing currency and cheques, then we have to ask the question “Are we up to date in our treatment and classification of credit cards?”

4.

Should banks be regulated, or should market forces be allowed to determine the money supply? Defend your answer.

The existence of market forces is one of the most powerful ways of regulating any industry. However, the banking community, especially the chartered banking community is so important to the overall economy and survival of Canada that most people think it must be regulated to guide the activities of the banks and to protect the public. While consumers are sometimes annoyed at these regulations, the financial meltdown of 2008 showed the importance of banking regulations. Canada’s banking system performed far better than the banking systems of most countries in the aftermath of the financial meltdown.

5.

Customers who deposit their money in online-only chequing and savings accounts can often get higher interest rates than at brick-and-mortar banks. Why do you think that online banks can offer these rates? What might be some drawbacks to online-only banking?

Online banks can offer higher returns because they do not have the same fixed assets required by bricks-and-mortar banks. They also can 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.

6.

What is the logic behind the “law of one price” concept? Give an example using Switzerland and China.

The “law of one price” states that the selling price of a specific product, when converted into a common currency, should be the same amount, regardless of the country in which it is sold. The logic behind this is that when prices are different between countries, an enterprising businessperson should be able to make a profit just by .

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Part 5—Managing Financial Issues purchasing the product in the country with the low selling price, transporting it to the country in which the product sells for a high price, and selling it there. This logic ignores transportation costs and assumes that there are no barriers to trade such as tariff protection.

Students will provide a variety of different products in the two countries to demonstrate the concept.

Application Exercises 7.

Start with a $1,000 deposit and assume a reserve requirement of 15 percent. Now trace the amount of money created by the banking system after five lending cycles.

Students should use Figure 14.2 to work through this problem. This will require some simple calculations based on a 15 percent reserve requirement, not the 10 percent requirement that is assumed in Figure 14.2. After the first cycle, the total supply with a 15 percent requirement is $185.00, after the second $257.25, and so on. A 15 percent requirement clearly means that the total supply after five cycles will be less than it was with a 10 percent reserve requirement.

8.

Interview several consumers to determine which banking services and products they use (debit cards, ATMs, smart cards, etc.). If interviewees are using these services, determine the reasons. If they are not, find out why not.

Answers will vary. The prime reason that is likely to be cited for use of these services is convenience (i.e., not having to go to the bank so often). The main reason for lack of use is security fears. Students may find that younger consumers are more comfortable with these services than older consumers are. Summarize student findings in order to get an overview of how these services are received by consumers and where improvements may be needed.

9.

Interview the manager of a local chartered bank branch. Identify the ways in which the Bank of Canada helps the bank and the ways in which it limits the bank.

Have questions written up in advance of the interview. It may be necessary to probe to elicit specific complaints about the Bank of Canada from the bank manager.

Another approach is to invite a bank manager to speak to your class. Make sure the class has a variety of questions ready to ask the bank manager.

Consider historical currency exchange rates for the Canadian dollar versus the 10.

U.S. dollar and the euro. If you had bought those currencies with Canadian dollars five years ago, what would be their dollar values today?

Student answers will obviously vary, depending on when they take the course.

When assessing student answers, make sure that they clearly state the value of the .

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Chapter 14—Money and Banking Canadian dollar vs. the U.S. dollar (or euro) for the time frame they are using for their comparison. As a practical matter, also keep in mind that there are costs to convert one currency into another (typically around 2.5 percent). That amount must therefore be subtracted from any values that they compute. For example, assume that you purchased one U.S. dollar five years ago and had to give up only $0.98 Canadian dollars to get it.

Now suppose that at present you would have to give up $1.02 Canadian dollars to get one U.S. dollar. Your earlier investment in a U.S. dollar would have increased in value (before considering the cost of converting the U.S. dollar to Canadian funds).

TEAM EXERCISES Building A Business: Continuing Exercise This exercise helps students to 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.

Building Your Business Skills: A Virtual Credit Union: An Idea Whose Time Has Come?

Follow-Up Questions 1.

Do you think that going virtual would attract new members? What types of members would be most interested in a virtual credit union?

2.

What are the potential risks of a virtual credit union for both Key Credit West and the members? How can each stakeholder protect themselves?

What new services might Key Credit West be able to offer if it goes virtual?

3.

Answers to each of the three questions above will vary among the different groups that consider the issue. In order to gain the benefit of ideas that came up in the various groups, have each group briefly report its answer to each question. (Note: When these answers are being reported for each group, it will likely become clear that the different roles the group members were playing led to at least some conflict within the group about the viability of the idea of a virtual credit union.) Then moderate an in-class discussion, the goal of which is to get a consensus on student opinions for the three questions. This could be a really interesting discussion. On the positive side, some students will argue that a virtual credit union will better serve customers and will therefore permit it to continue operations (and to continue providing employment for at least some employees). It will also allow the credit union to introduce new services that might attract new members. A virtual credit union is also likely to appeal to younger customers. On the negative side, other students will argue that a virtual credit union will not appeal to the older generation and this will reduce overall demand for the credit .

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Part 5—Managing Financial Issues union’s services. They will also express the concern that most employees will likely lose their jobs. There may also be concerns about cybersecurity threats.

Exercising Your Ethics: Telling the Ethical from the Strictly Legal Activity Overview: This activity presents some ethical issues that can arise when banks upgrade services for customers.

Time Limit: 45 minutes What to Do: 1.

Divide the students into four-member teams and ask them to read the Exercising Your Ethics exercise at the end of Chapter 14. After each group has assigned the four roles outlined in the activity, have them develop answers to the four questions at the end of the exercise. (30 minutes) 2.

Reassemble the class and discuss the groups’ answers. For each of the ethical issues identified, determine if a consensus exists regarding the most important issue to resolve. Then determine what each group proposes as a resolution of that issue. (15 minutes) Don’t Forget: Role differences might result in dissimilar priorities on ethical issues, so remind students to stay in their assigned roles when considering these issues.

Wrap-Up: Bring the activity to a close by highlighting some of the ethical issues identified in the exercise and how their importance is dictated by the perspective each individual took.

CLOSING CASE

RBC: A Symbol of Canadian Banking Strength This case study provides information about the growth strategy that is being employed at the Royal Bank of Canada, which is Canada’s largest bank.

Questions for Discussion 1. you have read, RBC’s primary services are broken up into various divisions As including: personal banking, wealth management, commercial banking, capital market products and services, and insurance. Find recent financial articles or look at the most recent RBC Annual Report from the RBC website or from Sedar.ca. How did each division perform?

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Chapter 14—Money and Banking Student answers will vary depending on when they take the introduction to business course. When assessing student answers, make sure that financial information is provided for each division so that division performance can be observed. The best student answers will be those that go beyond simply reporting the numbers and also address the consonance between RBC’s strategy and how it has affected performance in the various divisions. For example, the case study mentions that RBC’s new strategy de-emphasizes the retail banking market and instead puts more emphasis on the wealth management market. In light of that, students should analyze the data to see if RBCs wealth management area is growing at a more rapid rate than its retail banking area, and if the wealth management area has higher profit margins than the retail banking area.

2.

Search for articles and press releases about RBC from the last two years. Have they made any new acquisitions in Canada, the U.S. or abroad? How well do you think these acquisitions fit into the plans outlined in this case?

Student answers will vary depending on when they take the introduction to business course. When assessing student answers, make sure they have correctly identified any new acquisitions in Canada, the U.S., and other countries. As in the previous question, it is also necessary to determine whether the acquisitions are consistent with RBC’s corporate strategy. For example, were RBC’s acquisitions more pronounced in the wealth management area or not? If not, what was the rationale for the acquisition?

3. at the new RBC Ventures platform that goes by the acronym “ownr.” How Look well do you think it meets the basic needs of today’s entrepreneurs? What are the strengths and weaknesses?

Student answers to this question will be somewhat subjective; they will also be influenced by their level of interest in entrepreneurship. Students who have strong entrepreneurial tendencies will likely tend to be more critical of the platform than students who are not much interested in entrepreneurship.

Some students who look at the platform will say that it was embedded in the middle of several other RBC initiatives in a long document and was too hard to find.

Others may feel that the description of “ownr” was too brief and they were therefore not able to make a judgment of the platform.

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CHAPTER 15 FINANCIAL DECISIONS AND RISK MANAGEMENT CHAPTER SYNOPSIS This chapter begins with a discussion of the objectives and responsibilities of the financial manager. Then, reasons are given why businesses need funds (short- and longterm expenditures). The sources of short-term funds are noted (trade credit, secured shortterm (debt loans, and unsecured short-term loans), as are the long-term sources of funds and equity financing). Securities markets are also described. Topics covered include the operation of stock markets and stock exchanges, buying and selling securities, financing securities purchases, short selling, mutual funds, and stock options. Financial management in small businesses is also examined. The chapter concludes with a discussion of risk management and describes the five steps in the risk-management process. Information on insurance as a method of risk management is presented in an Appendix at the end of the text.

CHAPTER I. THEOUTLINE ROLE OF THE FINANCIAL MANAGER Financial managers plan and control the acquisition and dispersal of a company's financial assets.

A. Objectives of the Financial Manager—The overall objective is to increase the value of the firm, thereby increasing shareholder wealth.

B. Responsibilities of the Financial Manager—These fall into three general categories: Cash flow management—Financial managers must ensure that the 1. firm has enough funds on hand to purchase the materials and human resources it needs to produce goods and services.

2.

Financial control—This is the process of checking actual performance against plans to ensure that the desired financial status occurs.

Financial planning—A financial plan, describing how a firm will 3. reach a desired financial position, requires knowledge of what immediate funds are needed, when more will be needed, and what are the sources of these funds. Financial managers must know why their firm needs funds and be able to assess the pros and cons of potential sources of funds.

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II.

WHY BUSINESSES NEED FUNDS A.

following

Short-Term (Operating) Expenditures—These are incurred through everyday business activities and handled through careful attention to the three areas.

1.

Accounts payable—This is the largest part of short-term debt for most companies. Good management means purchasing sufficient supplies in a timely manner but withholding payment as long as it can without jeopardizing its credit rating.

2.

Accounts receivable—Financial managers need to project both how much buyers will order and when they will pay. Credit policies are set to set payment terms and make payment times more predictable. a.

Credit policies—These contain the regulations governing a firm’s extension of credit to customers.

Inventories—Raw materials inventory, work-in-process inventory,

3. and finished goods inventory are described. All must be kept at appropriate levels.

III.

Long-Term (Capital) Expenditures—These are used for fixed assets. They B. differ from short-term expenditures in that they are not normally sold or converted into cash, their acquisition requires a large investment of funds, and they represent an ongoing tie-up of company funds.

SOURCES OF SHORT-TERM FUNDS A. Trade Credit—Essentially a short-term loan, it describes the granting of credit by a seller to a buyer. The types discussed include open-book credit, a promissory note, a trade draft, and a trade acceptance. The problems with trade credit are noted.

B. Secured Short-Term Loans—These require the borrower to put up collateral. The pros and cons of the various types of loans are discussed.

1.

Inventory as collateral—A firm's inventory is used as the collateral to secure a loan.

Accounts receivable as collateral—They can be used as collateral 2. by pledging accounts receivable. Service companies in particular depend upon this source of funds.

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Part 5—Managing Financial Issues a.

Factoring accounts receivable—A firm can raise funds by factoring (i.e., selling) its accounts receivable.

C. Unsecured Short-Term Loans—Although no collateral is required, the borrower must maintain a compensating balance. This type of loan usually occurs within an established relationship with a bank and often takes the form of lines of credit or revolving credit agreements.

1.

Lines of credit—This is a standing agreement with a bank to lend a firm a maximum amount of funds on request.

2.

Revolving credit agreements—This guaranteed line of credit from a bank requires the firm to pay a commitment fee as well as interest on funds borrowed.

3.

Commercial paper—A company can raise short-term funds by selling unsecured notes for less than face value and then re-purchasing them at face value up to 270 days later.

IV.

SOURCES OF LONG-TERM FUNDS These may be from outside the firm (debt financing) or within the firm (equity financing).

A. Debt Financing—The two primary sources are described, and their usefulness and drawbacks noted.

1.

Long-term loans—Usually a loan from a bank extending for three to ten years. They are also available from credit companies, insurance companies, and pension funds.

2.

Bonds—A corporate bond promises the holder a certain payment on a certain date with stated interest payments in the interim. This is the major source of long-term debt financing for most corporations. The bond indenture spells out the terms of a bond, including the amount to be paid, the interest rate, and the maturity date.

Callable bonds— The issuer of callable bonds may call a. them in and pay them off before the maturity date at a price stipulated in the indenture. b.

Serial bonds—With a serial bond, the firm retires portions of the bond issue in a series of different pre-set dates. c.

Convertible bonds—Convertible bonds can be converted into common stock of the issuing company. .

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B. Equity Financing—Sometimes this means the founders increase their personal investment but, more typically, it means issuing stock or retaining the firm's earnings.

1.

Issuing common stock—This type of stock pays dividends, which are not tax-deductible for the corporation (unlike interest paid on bonds).

The differences between book value, par value, and market value are described.

Retaining 2. the firm’s earnings—This means less need to borrow money (and pay interest costs), but also lower dividends (therefore company stock is not as attractive to investors).

C. Hybrid Financing: Preferred Stock—Like bonds, preferred stock has payments for fixed amounts, but unlike bonds, it never matures and can be held indefinitely. No dividends need be paid if there was no profit and when dividends are paid, preferred stockholders are paid before common stockholders.

D. Choosing Between Debt and Equity Financing—The mix of debt versus equity provides the capital structure of the firm. A wide variety of mixes are possible. Figure 15.1 summarizes the factors to be considered in deciding between debt and equity financing.

E. Risk-Return Relationship—The general relationship between risk and The return is described (see Figure 15.2). Different forms of financing will attract different investors because their risk-return preferences vary.

1.

Managing risk with diversification and asset allocation— Diversification means buying several different kinds of investments rather than just one.

2.

Return on investment— In evaluating investments, investors look at three things: returns from dividends (or interest), returns from price appreciation, and total return.

Dividends— a. The rate of return from dividends paid to shareholders is commonly referred to as the current dividend yield (or in the case of interest from a loan, the current interest yield). It is calculated by dividing the yearly dollar amount of dividend income by the investment’s current market value. b.

Price appreciation—Price appreciation refers to an increase in the dollar value of an investment.

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Total return—The sum of an investment’s current dividend (or interest) yield, plus any capital gain, is its total return.

3. time value of money—The time value of money stems from The the principle of compound growth, which is the cumulative growth from interest paid to the investor over various time periods. With each additional time period, the investment grows as interest payments accumulate and earn more interest, thus multiplying the earning capacity of the investment.

The rulea.of 72—The rule of 72 is used to determine the number of years that are needed to double your money. Simply divide the annual interest rate (in percent) into 72. If, for example, you invest at 8 percent, you’ll double your money in about 9 years (72/8 = 9 years).

4.

Making better use of your time value—Figure 15.3 illustrates how the returns from an initial investment of $10,000 accumulate substantially over longer periods of time. Notice that the gains for the last 10 years are much greater than for the first 10 years, illustrating the power of compound growth.

V.

SECURITIES MARKETS

Stocks and bonds are securities and the market in which they're sold is called the securities market. Primary securities markets handle the buying and selling of new stocks and bonds. Bringing a new security to market requires approval from a provincial securities commission and the services of an investment banker (whose three functions are described). The secondary securities market handles the purchase and sale of existing stocks and bonds.

A. Investment Banking—Investment bankers provide specialized services when new securities are issued. They advise companies on the timing and financial terms for a new issue, bear some of the risk of issuing new securities, and create a distribution network that moves new securities through groups of other banks and brokers and into the hands of individual investors.

Stock Exchanges—A stock exchange is a voluntary organization (typically B. a non-profit corporation) formed to provide an institutional setting where its members can buy and sell stock in accordance with the exchange's rules. A stockbroker receives buy and sell orders from those who are not members of the exchange and executes the orders. Online trading is increasing in popularity.

1.

Canadian stock exchanges—The Toronto Stock Exchange is the largest in Canada.

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Foreign stock exchanges—Many countries have stock exchanges.

The New York and American Stock Exchanges are the most prominent of the U.S. stock exchanges. London is the single largest exchange and foreign exchanges have become increasingly important to investors wishing to diversify (but some of them are very risky and volatile).

3.

The over-the-counter (OTC) market—Securities not listed on any exchanges are traded in this complex of investment dealers.

4.

NASDAQ—The National Association of Securities Dealers Automated Quotation is the world’s first electronic stock market.

Buying and Selling Securities— When buying and selling stocks, bonds, C. and other financial instruments, financial managers and individuals need to gather information about possible investments and match them to their investment objectives.

1.

Using financial information services—Financial information is available in many places, including the financial section of daily newspapers. a.

Stock quotations—Figure 15.4 shows how to read a newspaper stock quotation. b.

Bond quotations—Bond prices change daily forming the coupon rate. The relationships among market value, face value, and interest rates of bonds are discussed. Figure 15.5 shows how to read a bond quotation.

Market c. indexes—These provide a useful summary of trends in a specific industry or the stock market as a whole. Bull and bear market trends are described. The Dow Jones Industrial average is the most widely cited market index. It is the sum of market prices for 30 of the largest industrial firms listed on the NYSE. The S&P/TSX average is an index computed from 225 different large Canadian stocks. The S&P 500 index consists of 500 stocks, including 400 industrial firms, 40 utilities, 40 financial institutions, and 20 transportation companies. The NASDAQ composite is regarded by many observers as the most important one since it includes all the stocks listed on the NASDAQ. Buying and selling stocks—Due to major changes in the industry, 2. more and more individuals are buying and selling stocks on the internet, and traditional brokers are worried that before long their services will no longer be needed. In this section the discussion focuses on market orders, limited orders, stop orders, round lots, and odd lots. .

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Stock options— A stock option is the right to buy or sell a stock.

A call option gives its owner the right to buy a particular stock at a certain price, with that right lasting until a particular date. A put option gives its owner the right to sell a particular stock at a specified price, with that right lasting until a particular date. used

D. Financing Securities Purchases—A cash account with a broker can be to cover the costs of purchases and commissions or credit can be used.

1.

Margin trading—The advantages and disadvantages (to both buyers and brokerages) of buying stock on margin are described. An example is provided.

2.

Short sales—This involves borrowing securities from a broker and then selling them with the expectation that they can be replaced later at a lower price. An example is used to illustrate short selling.

VI.

OTHER INVESTMENTS A. Mutual Funds—A mutual fund is a company that pools investments from many investors to purchase a portfolio of stocks, bonds and short-term securities.

No-load funds and load funds are described. Funds differ in their investment goals (e.g., safety or higher income or growth). Ethical funds are mutual funds that avoid investing in companies like cigarette manufacturers or companies that make weapons. Instead, they focus on companies that produce safe and useful products and show concern for their employees and for the environment.

B. Exchange-Traded Funds (ETF)—An ETF is a bundle of stocks (or bonds) in an index that tracks the overall movement of a market. Unlike mutual funds— which are priced only at the end of each day—ETFs can be bought or sold at any time during the day when the market reaches the investor’s target price. Also unlike mutual funds—which incur the costs of active management—ETFs have lower operating expenses because they are bound by rules that specify what stocks will be purchased and when.

Hedge Funds—These are private pools of money that try to give investors C. a positive return regardless of stock market performance. These funds often engage in risky practices like short selling and leveraging.

Commodities—Buying and selling commodities as an investment is done D. on the commodities market through futures contacts. Futures trading is very risky.

Buyers of futures contracts need not put up the full purchase amount; rather, they can post a smaller amount—the margin—that may be as little as 3 percent of the value of the contract. An example is provided.

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VII.

VIII.

SECURITIES REGULATION Canadian regulation is not federal (as in the U.S.) but primarily through the provincial governments. There is currently serious discussion about forming a national securities regulator in Canada. Also, there is some self-regulation through the securities exchanges. Typical provincial regulations are described (e.g. bluesky laws, the filing of a prospectus). The Ontario Securities Act and Toronto Stock Exchange regulations are discussed.

FINANCIAL MANAGEMENT FOR SMALL BUSINESSES New businesses often have insufficient funds, don't plan cash flow requirements, don't use trade credit effectively, and underestimate the value of establishing bank credit as a source of funds.

A. Establishing Bank Credit and Trade Credit—How to do this and the advantages of doing so are described. The business plan is an important document that tells potential lenders why money is needed and how it will be used.

B. Venture Capital—When newer businesses do not have enough funds through borrowing they may look to outside equity funding provided in return for part ownership of the borrowing firm.

IX.

C. Planning Cash for Requirements—The importance for small businesses is emphasized and an example is discussed (see Figure 15.6).

RISK MANAGEMENT Risk refers to uncertainty about future events. It is an important factor in every manager’s job.

A. Coping With Risk—Speculative and pure risks are defined, and examples are provided. The risk management process involves five steps: 1.

Step 1: Identify risks and potential losses

2.

Step 2: Measure the frequency and severity of losses and their impact 3.

Step 3: Evaluate alternatives and choose the techniques that will best handle the losses. There are several alternative strategies that can be used. a.

Risk avoidance (ceasing to participate in a risky activity).

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Risk control (the use of loss-prevention techniques)

c.

Risk retention (self-insurance)

d.

Risk transfer (buying insurance)

4.

Step 4: Implement the risk-management program

5.

Step 5: Monitor results

QUICK QUESTIONS 1.

What are the key objectives of the financial manager?

2.

What are the key responsibilities of the financial manager?

3.

What categories of short-term expenditures are particularly important for financial managers to pay attention to?

What categories of long-term expenditures are particularly important for financial managers to pay attention to?

What are the main sources of short-term funds?

4.

5.

6.

7.

What are the main sources of long-term funds?

What are the advantages and disadvantages of debt and equity financing?

8.

What factors should be considered when a company is trying to decide whether to use debt or equity financing?

What is the risk-return relationship?

9.

What is the role of an investment bank with regard to new issues of stock?

10.

11.

Why might investment in shares of a preferred stock be less risky than an investment in shares of a common stock?

12.

What type of investor would prefer the services of a full-service broker?

13.

What are some circumstances under which a corporation might want to sell

14.

What type of investor is most likely to be attracted to online trading?

bonds?

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Chapter 15—Financial Decisions and Risk Management 15.

Bearer bonds require bondholders to clip coupons from certificates and send them to the issuer to receive an interest payment. Why might this be risky?

16.

What are stock price trends in a bull market? What are stock price trends in a bear market?

How do limit orders and stop orders provide investors with security?

17.

18.

19.

20.

21.

22.

23.

How do investors trade on margin?

From the investor’s perspective, what are the risks associated with short selling?

Who benefits from blue-sky laws? How do they benefit?

Why are so many new businesses under-funded?

What is the difference between pure and speculative risk?

What are the five steps in the risk management process?

IN-CLASS EXERCISES Exercise #1: The Principle of Leverage Activity Overview: This exercise is designed to illustrate the concept of leverage. Students can be asked to do the number crunching, or this can be illustrated by the instructor.

Time Limit: 30 minutes What To Do: 1.

Divide students into three-person groups and ask them to read the following short problem: -------------------------------------------------------------------------------------------------------An individual has identified a business opportunity that requires an investment of $100,000 in assets. It is expected that these assets will generate an annual return of 15%. The individual is considering whether to use all his personal savings or to incur $50,000 in debt financing. Assume that there are not income tax implications, and that a loan can be obtained at an interest rate of 12%. What should the individual do?

-------------------------------------------------------------------------------------------------------2.

Ask the groups to decide which alternative—personal savings or debt financing would be best in this situation. (10 minutes)

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Reassemble the class and allow each group to present its findings. Then moderate a discussion on the concept of leverage. (20 minutes) Don’t Forget: The following points should be made during the discussion:

Expected revenue Interest cost Net income

Personal investment only $100,000 * 15% = $15,000 0 15,000

50% Debt financing $15,000 6,000 9,000

At first glance, it appears that the investor is better off to use personal funds, as the income earned is higher. This does not consider, however, the actual amount of the owner’s investment.

15,000 100,000 15%

Net income Divide by owner’s investment Return on investment

9,000 50,000 18%

This increase in the rate of return is due to the use of leverage, which will increase the shareholders’ return whenever the cost of borrowing is less than the actual return generated.

This does not mean that debt financing would always be the best decision, as illustrated in the next example.

What if the actual return is only 8%?

Personal investment only Expected revenue $100,000 * 8% = $8,000 Interest cost 0 8,000 Net income Net income 8,000 Divide by owner’s investment 100,000 Return on investment 8%

50% Debt financing $8,000 6,000 2,000 2,000 50,000 4%

Wrap-Up: Students can be asked for their opinions on the desirability of the use of leverage, and the circumstances under which they would, or would not, use leverage. The common theme should be that leverage is risky for businesses which find it difficult to accurately forecast sales and cash flows.

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Chapter 15—Financial Decisions and Risk Management Exercise #2: Understanding Risk Management Issues Activity Overview: This activity asks students to analyze risk and return issues for a non-profit organization.

Time Limit: 30 minutes What to Do: 1.

Several days before the exercise is planned, ask students to research one of the following five companies: Air Canada, Bombardier, BP, Google, and Facebook. Each student should complete the following steps (to ensure that all companies are researched, assign equal numbers of students to each company). Ask the students to complete two tasks: a.

Research one of the companies to learn more about the financial risks that have been reported in the news. b.

Write a short explanation of the risks and financial management issues faced by the company you chose.

On the day when the exercise is to be completed, divide the class into five-person 2. groups, making sure that each group is constructed such that all five companies have been researched in each group. (5 minutes) 3.

Within their assigned groups, ask students to answer the following questions: (15 minutes) a.

Were there common themes in the “big stories” in financial management?

b.

What have the various companies done to minimize future risks and losses?

Bring the class together and discuss each group’s answers. Suggestions for each

4. question are as follows: (10 minutes) a.

Were there common themes in the "big stories" in financial management?

Determine to what degree each of the five firms was facing unusual financial management challenges at this time, as opposed to being a firm with solid revenues and net income that was up substantially over the previous year. b.

What have the various companies done to minimize future risks and

losses?

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Part 5—Managing Financial Issues Try to understand how groups have handled the issues of avoiding, controlling, retaining, and/or transferring risk. Do you have helpful suggestions for some of these firms?

Don’t Forget: Make sure that the discussion attempts to identify common themes. If there are few common themes, try to determine why this might be.

Wrap-Up: Remind students that risk management is an increasingly important element in the job of financial managers.

Exercise #3—Are You Endowed with Good Judgment?

Activity Overview: This activity asks students to make some difficult financial choices regarding the risk level of various investments.

Time Limit: 40 minutes What To Do: 1.

Make copies of the following case study and distribute to students in advance of the class when the exercise is to be conducted.

------------------------------------------------------------------------------------------------------YDC Every organization faces decisions about whether to make conservative or risky investments. Let’s assume that you have been asked to evaluate the advantages and drawbacks of conservative versus risky investments—including all relevant ethical considerations—by Youth Dreams Charities (YDC), a local organization that assists lowincome families in gaining access to educational opportunities. YDC is a not-for-profit firm that employs a full-time professional manager to run daily operations. Overall, governance and policy making reside with a board of directors—10 part-time community-minded volunteers who are entrusted with carrying out YDC’s mission.

For the current year, 23 students receive tuition totalling $92,000 paid by YDC. Tuition comes from annual fund-raising activities (a white-tie dance and a seafood carnival) and from financial returns from YDC’s $2.1 million endowment. The endowment has been amassed from charitable donations during the past 12 years, and this year it has yielded some $84,000 for tuition. The board’s goal is to increase the endowment to $4 million in five years to provide $200,000 in tuition annually.

Based on the finance committee’s suggestions, the board is considering a change in YDC’s investment policies. The current rather conservative approach invests the .

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Chapter 15—Financial Decisions and Risk Management endowment in low-risk instruments that have consistently yielded a 5 percent annual return. This practice has allowed the endowment to grow modestly (at about 1 percent per year). The remaining investment proceeds (4 percent) flow out for tuition. The proposed plan would invest one-half of the endowment in conservative instruments and the other half in blue-chip stocks. Finance committee members believe that—with market growth—the endowment has a good chance of reaching the $4 million goal within five years. While some board member like the prospects of faster growth, others think the proposal is too risky. What happens if, instead of increasing, the stock market declines, and the endowment shrinks? What will happen to YDC’s programs then?

Questions for Discussion 1.

Why might a conservative versus risky choice be different at a not-for-profit organization than at a for-profit organization?

2.

What are the main ethical issues in this situation?

3.

What actions should the board take?

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Divide the class into teams of four students and ask them to answer the questions for discussion in their small groups. (20 minutes) 3.

Reassemble the class and try to reach a consensus on answers to the questions. In the discussion, make sure the following points are made: (20 minutes) (1) choice might be different since the ultimate goal of a business is to The earn a reasonable profit, and the business routinely accepts various risks in its pursuit of profit. The ultimate goal of a not-for-profit organization is to provide a service within the available funds. The not-for-profit may not be willing to accept the risk that a downturn in the market could erode the endowment fund for two separate reasons. First, this would reduce or eliminate the funds available for tuition fees in a particular year. Second, a decrease in the endowment fund value could be compared to throwing away donors’ money, and the policy of investing in risky securities may discourage potential donors from making a donation.

The main ethical issues in this situation are how to best fulfill YDC’s (2) responsibility to the students it serves, while most effectively stewarding the money entrusted to the organization through charitable donations.

(3) Answers will vary, depending on students’ evaluation of the level of risk involved and the appropriateness of the charity accepting the risk.

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Part 5—Managing Financial Issues Don’t Forget: Remind students that the management group of YDC has two constituencies to satisfy and it is difficult to satisfy them both.

Wrap-Up: Make the point there are always difficult trade-offs when making investment decisions, and there is no easy decision rule that can be used.

Exercise #4: Market Ups and Downs Activity Overview: This activity asks students to study a particular stock to understand the forces that affect fluctuations in stock prices.

Time Limit: 1 hour What to Do: 1.

Ask students to individually complete Steps 1 through 4 of the Building Your Business Skills exercise at the end of Chapter 15. In these steps, each student is asked to select a common stock that has experienced considerable price fluctuations in the past few years, study the stock’s trading pattern, and write a brief analysis of the internal and external factors that could have contributed to the stock’s price fluctuations. (30 minutes) Divide the class into small groups and ask them to discuss their individual 2. findings, as stated in Step 5 of the exercise. (15 minutes) 3.

Reassemble the class and discuss students’ input. (15 minutes)

Don’t Forget: If time is limited, Steps 1 through 4 can be assigned as homework prior to the discussion in Step 5.

Wrap-Up: Remind students that the causes of price fluctuations are not always evident. Bring the activity to a close by highlighting some of the generalizations made by students regarding their stocks and the industries in which the companies operate.

Exercise #5: What’s Wrong with a Little Inside Scoop?

Activity Overview: This activity asks students to debate the pros and cons of insider trading.

Time Limit: 30 minutes

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Chapter 15—Financial Decisions and Risk Management What to Do: Divide the class into four-member groups and ask each group to make a list of the 1. 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. The class can then discuss specific cases and the levels of perceived fairness in the results of each case.

Wrap-Up: Bring the exercise to a close by summarizing the pros and cons of insider trading.

Exercise #6: 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 • Facebook • Ballard Power Systems • Marketing Technologies, Inc. • JDS Uniphase • Walmart • Amazon.com • Google

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Part 5—Managing Financial Issues 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). Consider the following issues: (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 lot when an individual chooses to make an investment, but this type of investing is not always prudent.

TEACHING TIPS 1. is often taught—sometimes in management chapters—that the three-line It functions of any business firm are production, sales and finance. But as students read the early pages of Chapter 15 dealing with what a financial manager does, there may be a tendency to feel that finance is the most important. It would seem that the wise manager would never make a move without closely consulting the financial manager. You might want to point out that in a small business, the manager, owner, financial manager, and the bookkeeper may be the same person.

A manager who leans too heavily upon the advice of the financial manager may 2. miss some tremendous opportunities for his or her firm. This is especially true of an overly-conservative financial manager. Ask students if they have ever worked at a firm in which it was difficult to even get money out of petty cash to purchase stamps for the firm.

In such an operation, the handling of financial funds has been so systematized toward conservative security that the firm is strangled when it is time to make a quick move.

3.

The previous tip strongly suggests that even though the financial manager is

extremely important to a firm, he or she must act in accordance with the spirit and character of the firm's top management. An overly-conservative financial manager who .

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Chapter 15—Financial Decisions and Risk Management works for an aggressive, opportunistic, forward-thinking, state-of-the-art, risk-taking firm is out of place.

4. relation to the previous tip, unfortunately the financial manager may sometimes In take blame that should be assigned elsewhere. A general manager may want to come across as the "good guy." He or she may say to a new spending opportunity: "Sure, that's a great idea. Let's do it! First, though, you better check it with the financial officer."

When the latter denies funding, he or she becomes the person standing in the way of progress.

5. credit customers of many firms pay their bills within 60, 90, or even 120 The days. That doesn't sound too bad, but if all of these customers would pay up within 30 days, wouldn't that mean a much earlier inflow of cash? Of course. Ask students to identify methods a firm can use to bring in this early payment.

6.firm that extends credit to its customers does so for a reason, to increase its A sales. Sometimes it must do so because its competitors offer credit terms, other times it is to obtain a competitive advantage. Any firm that extends credit knows that it will not collect 100% of its receivables. If, however, the profit on the additional sales obtained by extending credit exceed the losses incurred through bad debts, the firm is better off.

The purpose of credit policies is to reduce, not eliminate, the risk and amount of bad debts incurred by assessing the credit worthiness of the customers.

7.

There is a caution to be sounded not only in credit policy setting but also in inventory control. If inventory levels are kept too low, inventory costs such as warehousing, insurance and interest will be minimized, and the amount of funds invested in inventory will be reduced. At some point, however, customers may decide that your firm has such a skimpy inventory that it is no longer worthwhile to shop there. In such a case, conservative inventory control has eliminated sales. A delicate balance must be struck.

Students will often struggle with the idea that a company will sell on credit, 8. knowing that it will not collect all the money owing from all of the customers. The text refers to the use of credit terms such as 2/10, net 30 for accounts receivable. This encourages prompt payment because the cost of using the money for the extra 20 days is 2%. Annualized, this works out to an interest rate of 36.5%. (0.02 * 365/20). No wonder customers will pay within 10 days, as it is cheaper to borrow from the bank.

Remind students, however, that the firm is on the other side of the agreement with accounts payable. The firm will often have payment terms of 2/10 net 30 on its accounts payable, and the interest free debt is only for 10 days. Delaying payment for 20 days results in a cost of borrowing (no deduction for prompt payment) of 36.5% per year.

9.

Illustrating the function of a factor can usually take place better with middle-aged

students than with college or university students. Nevertheless, here's how the illustration goes. Indicate that a newly married couple have just purchased a major appliance. The appliance dealer indicates that the purchase can be made in "six convenient payments." .

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Part 5—Managing Financial Issues Within a few days, the young couple receive in the mail a small coupon book containing six coupons from, let us say, Consolidated Finance Company, Limited. The man and wife wonder: "Who in the world is Consolidated, and why are they sending us this little booklet?" Well, the answer may well be that Consolidated is a factor that has purchased the accounts receivable of the appliance dealer.

10. textbook states that the credit policies of a firm can go a long way in The determining how swiftly customers will act to reduce a firm's accounts receivables. Firms can also be more aggressive and go out and collect receivables. Here's a statement you might want to make: Sound credit policies are like keeping cholesterol low in your blood and getting plenty of aerobic exercise; collections is like open-heart surgery. This says that sound, perhaps strict, credit policies can prevent much of the painful task of collections.

11.

Related to the previous tip, there is a caution to be sounded not only in credit policy-setting but also in inventory control. If credit policies are too harsh and too demanding, then many profitable sales will be forfeited. The firm will simply scare off those customers deemed to be bad credit risks. A firm can work itself into a similar problem by too carefully handling inventory. No doubt about it, cutting back on inventory is a sure way to cut down the outflow of cash. But, at some point, customers may decide that your firm has such a skimpy inventory that it is no longer worthwhile to shop there.

In such a case, conservative inventory control has eliminated sales. A delicate balance must be struck.

12.

Emphasize that a major portion of short-term financing involves the tug-of-war between accounts receivable and accounts payable. An old finance adage is this: pay slowly and collect quickly. This says that there must be methods devised to get customers to pay their bills quickly, thus keeping the figure for accounts receivable as low as possible and converting what is in those accounts to cash for the firm. Conversely, the old adage would inspire the firm to keep accounts payable as high as possible--without ruining your credit standing with your suppliers. The longer payment on those accounts can be delayed, the longer the firm has use of cash that really belongs to the suppliers.

In some industries, such as garment manufacturing, the sale of accounts 13. receivable to a factor is commonplace, and does not indicate that the business is having difficulty collecting its accounts receivable. Ask students to evaluate why a firm would sell on account and then turn around and factor the outstanding accounts. Why not just insist on payment in cash when the products are delivered? The objective is to have students understand that extending accounts receivable may be necessary to match competitors’ actions when many competitors exist. At the same time, a company may not have sufficient capital to be able to afford to wait 30 days to collect.

14.

Choosing between debt and equity financing is usually a challenge because each

option will offer some advantages. It is unlikely that one option has only disadvantages and the other option has only advantages. This is very true in the long-term financing of a business. There are many reasons to avoid debt. Have students make a list of these. On .

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Chapter 15—Financial Decisions and Risk Management the other hand, financing through equity--awarding a portion of the firm's ownership in order to acquire funds--has its drawbacks, too. Some of the students may have seen the movie Tucker, the saga of a man with a new idea to revolutionize the auto industry. The new concept started with Tucker, but in the middle of the film, we see that he is stymied by his board of directors. How could this be? Well, to obtain the funds to start the corporation, Tucker had to finance through equity, and he lost control of his own dream.

15.

Provide the students with a list of the characteristics of preferred shares, and ask

them to evaluate each characteristic in terms of whether it is typical of debt or equity (common shares). Preferred shares always have a stated par value, a stated dividend rate.

Most preferred shares are non-voting, although voting preferred shares in private corporations are common. Some corporations issue term preferred shares that mature and must be redeemed at a specific date. Other preferred shares have no maturity date.

Still others are callable. This is an excellent exercise for reinforcing the differences between debt and equity. Students may be interested to know that preferred shares are classified as debt or equity on the balance sheet, depending largely on whether they have a fixed maturity date. If the corporation must redeem them, they are debt, not equity.

16.

Emphasize what the text says about retained earnings versus dividends. Ask the students to think about the type of investors that are looking for a firm paying generous, consistent, and regular dividends. Other investors want to invest in a firm that knows how to wisely use profits for the expansion of the operation, and are happy to have the funds reinvested, rather than having to search out other investment opportunities for their funds.

Students may be asked to consider how this differs from an investor using the dividends received to purchase additional shares in the company. Although the company does not get to deduct the dividends from taxable income, the shareholder must pay tax on dividends received, and will therefore have less to invest.

17. text provides a very brief introduction to the role of the financial manager in The the purchase of long-term investments. This material can be expanded by explaining that there are a variety of tools available to the financial manager for evaluating investment opportunities, including discounted cash flow analysis and calculating the payback period. The financial manager will compare the expected future cash inflows to the expected cash outflows, and recommend the investment if the inflows are sufficiently greater than the outflows to provide the desired return on investment.

In the discussion on sources of short-term funds, some forms of debt are 18. evidenced by a written acknowledgement of the debt and others do not have specific acknowledgement. Ask the students to identify the benefit that the firm obtains by having a promissory note or trade acceptance signed, in contrast to open book credit which does not have that documentation. Without the signed documentation, the creditor must prove that the firm received the goods and therefore owed the debt. There is no impact on how collectible the bill is, just convenience.

19.

Remind students of the fable of the Little Red Hen who did everything herself--

because no one would help her. Then ask the students if this is a good approach for a .

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Part 5—Managing Financial Issues small business getting started. When one reads in the textbook about venture capital firms, one cannot miss picking up the idea that such funders want in on the action (by acquiring ownership and/or by making decisions) in return for providing help.

Venture capital firms can be considered lenders of last resort, as they invest in 20. firms with excellent potential, but that are faced with significant cash flow needs as they expand. A common scenario is for a venture capital firm to act as a bridge financer for corporations that are going public but need assistance before such a plan is feasible.

Once the corporation goes public, the venture capitalists dispose of their shares, providing additional funds for the next investment. Providing equity financing rather than debt financing is beneficial to both the venture capitalists, who can have a say in the operations of the high-risk venture, and the business owners, who would otherwise not have sufficient funds and who can benefit from the expertise the venture capitalists have in successfully bringing such companies to the market.

21.

A new entrepreneur might say, in response to the previous tip: "I really don't care who owns a part of the firm or who makes the decisions, just so long as we do what we set out to do." Ask the class: "Why is the preceding an absurdly naive statement?" Of course, the answer is that when controlling ownership falls to someone other than the firm's founder, the firm can go in any number of directions, none of which is necessarily what the founder had in mind.

22. textbook lists four ways to handle risk and potential losses: avoid; control; The retain; transfer. Lead the students in developing examples of each. Here are a few thoughts on automotive operation related to the four ways. If you want to avoid being in an auto accident, then never get inside a car, truck or van. To control risk, drive slowly on less-travelled streets in ideal weather conditions and make very few trips. To retain the risk, purchase no auto insurance (keep in mind that laws in some provinces forbid you to do this). To feel a little more financially secure, transfer the risk to an auto insurance firm (which is what most people do).

23.

Caution students that the term "transfer" of risk may need a little defining. A business can transfer to an insurance firm only as much coverage against potential loss as an insurance company is willing to take on or as a client thinks is necessary. There may be cases where that amount is insufficient. Sometimes in the news we will read that a firm is being sued for, say, $10 million and that the insurance firm is covering only $5 million of that amount. Similarly, property insurance coverage may be less than the cost to repair or replace a damaged building.

24.

Invite a banker to come to your class and discuss the question of secured and unsecured loans. How do banks decide when each type of loan will be made?

25.

Invite several entrepreneurs to your class to have a roundtable discussion on how they secure financing for their businesses.

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Chapter 15—Financial Decisions and Risk Management 26.

Discuss the difference between personal and business credit. Why are credit cards to be considered negative but corporate credit OK? 27. is an acceptable method of acquiring funds. But students should be alerted to Debt the fact that debt is almost always listed as a major cause when a firm finds itself forced out of business. How can debt be kept under control?

28. the class act as the board of directors of a company. Then present them with Have a scenario in which funds for expansion are needed at the same time that shareholders are demanding more dividends. How will they decide on the trade off between these two demands?

29.light of the firm relationship between risk and rate of return, students should be In asked to take another look at the much-maligned "junk bonds." They should be reminded that in terms of nominal yield, junk bonds are not junk. But does this mean they should be used?

30.

Point out that there is not necessarily anything guaranteeing that a given investment is "secure." In fact, an investment in "securities" can turn out to be rather insecure and thus a source of discontent to investors.

31. is merit in emphasizing the relationship between risk and return. If a There business wants to attract funds for a risky venture, it must pay a higher return than ventures that are of lower risk. As a result, an investor desiring a greater return on his or her investment must engage in riskier ventures. The term "risk" in finance really translates best as "uncertain outcome." This means that a "risky" venture can be very positive (generating profits for the owner) or very negative (in which the owner’s investment declines in value) or a very sad one. The beauty of a junk bond is that it pays much higher interest than will a high-rated bond. If the junk bond is eventually cashed in for its full face value and has paid the appropriate interest during it entire life, then it has turned out to be a superb investment. The risk, however, is that the issuer will default on the interest payments, principal repayment, or both.

The use of examples can be very helpful for students in understanding the trade32. off between risk and return. Two alternative investments are available, with both companies projecting a 12% return in the upcoming year. One company is well established and has recorded 12% returns for the last five years. The second is a new start-up company with no track record at all. Ask the students which investment they prefer and why. The general rule is that when investments offer the same return, investors will select the one with the lowest risk, so students are expected to prefer the established company. Students can then be asked what the expected return for the startup company would have to be for them to invest their $10,000 in the new company.

Student responses will vary with their personal level of risk aversion.

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Part 5—Managing Financial Issues 33. out that the stock and bond pages of The Wall Street Journal or the Globe Point and Mail, or the financial page of a local newspaper are reporting on the secondary securities market, not the primary.

34.is the market value of a stock that is important to investors because that is what It the stock can be bought or sold for on the exchanges. Market value is based on the investors’ expectations about the future performance of the firm, and therefore can change significantly when new information becomes available.

35.

The minimum value of the common shares should be the underlying resale value of the assets of the firm - how much money would be generated, after tax, if the assets of the company were sold off and all the liabilities paid, and preferred shares redeemed.

The remaining cash would be available to the common shareholders and, calculated per outstanding share, should provide the minimum value at which a stock trades.

Sometimes, however, the stock price can drop below this amount, making a company vulnerable for takeover. An illustration that students can often relate to is in the movie “Pretty Woman.” The character played by Richard Gere makes his money by purchasing corporations with undervalued stock and selling off the individual assets.

Shares normally trade above the minimum value because of the earnings potential of the company.

36.

Students often have difficulty with the different types of values that can be assigned to common shares. Par value is usually the amount that the shares were originally sold for when the corporation was created. Most jurisdictions in Canada no longer allow par value to be assigned to newly issued shares. To illustrate its irrelevance, present to the class a new company with 10 shareholders. Each pays $100 for a share with a par value of $100, for a total of $1,000 in share capital. The business is very successful and at the end of the year it has earned $2,000. The company is now worth $3,000 and each of the 10 shares has grown in value to $300. Par value remains at $100 and is irrelevant to the investors. If the company issued an additional 10 shares to new investors at this point in time, the share price should be $300, the current value of the shares, even though the par value remains at $100. In this situation, the book value of the shares becomes the $4,000 in total proceeds from issuing the shares ($1000 from the first share issue and $3000 from the second) divided by the 20 shares outstanding, for a book value per share of $200. This is also irrelevant to the amount the existing shareholders should demand if another investor wants to purchase his or her shares.

37.

To illustrate the risk of common shares it is useful to start with the description of

common shares as residual interest shares. The assets of the corporation must first satisfy the claims by creditors and lenders, and then the interests of the preferred shareholders, with the common shareholders having an interest in the remaining or residual assets.

This creates risk for the common shareholders, for if the company does not do well, they are the last in line. The claims by the creditors and preferred shareholders are fixed in value, however. If the company does well, the amount owing to the bank and other creditors does not change. This increase in the value of the company through profitable

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Chapter 15—Financial Decisions and Risk Management operations does benefit the common shareholders, though. This explains why common shares are the riskiest, yet also in high demand.

38.

Students often have difficulty with the difference between the market value and book value of a common share. It is useful to review the concept by presenting a scenario where a corporation originally issued shares at $20 per share, but the share is currently selling at $50 per share. If a shareholder decides to sell a share for $50, who gets the money? Does this sale affect the financial statements of the corporation? This is usually effective in helping the students understand that once the corporation issues its shares, it does not adjust its common share book value, as it is the individual shareholders who receive the cash from subsequent sales. The increase in value due to profits generated is reflected on the balance sheet through the growth in retained earnings.

39.

A first glance by an untrained eye at a group of commodities traders leads to an interpretation of what's happening as one totally confusing brawl. However, the experts assure us that what is happening is a very orderly process of buying and selling. Hard to believe, isn't it? Ask students to determine if this is really the case.

40.

Students may be familiar with the movie “Trading Places,” in which two brothers are trading in orange juice on the commodities market. Their method of dealing with the risk of trading in commodities futures is illegal, and consists of buying insider information.

41.you elect to show films or videos of a market in action, it will be noticed that If the people on the floor are predominantly men. Why is this? One might argue that a woman would have an advantage in this setting because her voice, if sufficiently loud, could easily be distinguished from the other voices in the pit when everyone in the group is shouting while they are trying to complete a transaction.

42. every stock exchange in the world features a sense of pandemonium on the Not trading floor. The Toronto Stock Exchange and the Paris stock exchange (called the "Bourse") are completely automated, and all that shouting is done via computers located at distant points away from the Bourse. The opinion has been advanced numerous times that the New York Stock Exchange, the largest in the U.S., could be similarly automated.

Ask students to consider the advantages and disadvantages of a computerized trading floor, as opposed to the traditional type.

43.

If you are interested in stock market history, make the point that in the famous

crash of 1929, there was actually not one day on which the market crashed. Rather, the crash took nearly three years—from Tuesday, September 3, 1929 to July 8, 1932. On September 3, 1929 the Dow reached 381.17; on July 8, 1932 it bottomed out at 41.22. On September 3, 1929, no one was aware that the Dow Jones Industrial Average would take twenty-five years to be that high again. That's right. It was not until November 23, 1954 that the Dow came back to hit 382.74. The day that is remembered as "the day the market crashed" is Tuesday, October 29, 1929. Whatever damage the Dow absorbed on that day was quickly restored within two days, with the dramatic decline in the Dow beginning in .

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Part 5—Managing Financial Issues The Dow early 1930. dropped In the fall of 2007, the Dow had risen to over 13,000.

339.95 points in the stock market crash that began in 1929. The Dow dropped 3358.35 points, from 10644.62 on March 11, 2001, to 7286.27 on October 9, 2002. Ask students whether they consider the drop in 2001 to be a crash, and how this decline differed from the crash that began in 1929. Also ask students about the big decline that occurred in 2008-2009.

Bonds are issued with terms that constitute a contract, specifying the principal 44. amount that will be repaid, the interest rate used to calculate the interest payments, and the dates on which the interest payments and principal repayment will be made. All these are fixed and do not change over the term of the bond. Market interest rates do change, however, and the selling price of the bond is the only thing that can change to make the bond saleable when interest rates have risen.

45.

A bond buyer can be insulated from the bond market and thus not be concerned with bond "prices." Here's how. If a person buys a bond in a major corporation for $1,000, keeps the bond until maturity, and then cashes in the bond, the bond issuer pays to the buyer the sum of $l, 000. There is no "price" involved here. However, if somewhere in that 20-year span, the bond buyer needs cash and decides to sell the bond to another investor, then we have a "price" in the secondary bond market. The price is determined by the difference between the interest rate the bond pays and the current market interest rate for other bonds with the same remaining term and level of risk. If the market demands 10% and the bond pays 8%, it will sell for less than $1,000.

46. difference between a secured and unsecured bond can be emphasized by The presenting the students with the purchase of a $10,000 bond with a 10% stated interest rate. Two bonds may be purchased, one secured by the assets of the corporation, the second unsecured. Students should be asked which bond they prefer and why. During the discussion it should come out that the security reduces risk by giving the bondholder the first claim on 100% of the secured assets, as the unsecured bondholder would have to wait until all the secured claims are satisfied and would then share in the remaining assets with other debt-holders. Students can then be asked what would have to change in the bond offering to make them buy the unsecured bonds. Some will be willing to accept the additional risk if the interest rate is increased.

The text refers to bonds with a sinking fund provision as less risky, but doesn’t 47. fully explain why. A corporation that fails to put the required funds into the sinking fund is in default. When a default occurs, the bondholders can take action to recover their investment immediately, rather than having to wait until maturity to do so. This ability to intervene early provides the bondholders with better protection therefore less risk.

48.

To help students understand why firms adopt different dividend strategies and

mutual funds adopt different investment strategies, the following example may be useful.

Company A and Company B each have a fair market value of $100,000 and 2,000 shares outstanding, making each share worth $50. During 2007, each of the two companies earns $20,000. Company A does not pay dividends so the share price increases to $60. .

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Chapter 15—Financial Decisions and Risk Management Company B pays a $10 dividend per share at the end of 2007, as it does not have enough investment opportunities for the cash the firm generates. An investor who owns 10 shares in Company A shares has an investment worth (10 * $60) $600. An investor who owns 10 shares of Company B has shares worth (10*$50) $500 plus cash dividends of ($10*10) $100. A mutual fund that is classified as a dividend fund will invest in companies that regularly pay dividends. A mutual fund that is classified as an equity fund will invest in companies that do not pay dividends, but reinvest the funds in their own operations. Ask students what type of investors would prefer to invest in a dividend fund and those that would prefer to invest in an equity fund. Students should think of the type of investors for whom regular cash flow would be important, such as retirees or people planning to leave their jobs and go back to school. It is more convenient to receive dividends than have to sell off a portion of the shares on a regular basis. Students may also recognize that equity funds may be more desirable for long-term investments due to tax considerations, as the shares can increase in value tax-free until they are sold, while dividends are taxed when received.

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Hedging is a way of minimizing risk. Here is an example that may help students understand hedging. The Toronto Blue Jays are playing the Chicago White Sox on Saturday. You bet a friend ten dollars that Toronto will win. Then you have second thoughts, so you bet another friend twelve dollars that Chicago will win. When Chicago wins, your net winnings are two dollars. Had Chicago lost, your net losses would have been two dollars. Not much, you say, but suppose the two bets had been, respectively, $l00,000 and $120,000.

50. Dow Jones Industrial Average is the most often-quoted stock market index.

The However, it should be pointed out to the students that the Dow is composed of only thirty common stocks. Just how accurate is such a limited sample?

51. internet has had a significant impact on the securities trading, leaving The traditional brokers concerned about whether there will be enough demand for their services in the future. This is like the concerns that travel agencies have, given the changes in the airline industry that allow customers to easily book their own flights. Ask the students to discuss the similarities and differences for these two service providers.

Have the students discuss the advantages and disadvantages of using a traditional broker, the types of investors who are likely to use or not use a traditional broker, and the alternatives available to the traditional brokers to increase the demand for their services.

52.

Invite a speaker from your municipal government to talk about municipal bonds and how they help the local community.

53.

Have your students follow the stock price of three companies over the course of the term. Ask them what they learned about stock prices over that period of time.

Invite a financial manager from a business firm to speak to the class about balancing debt and equity sources of funds. How does the firm decide how much stock to sell and how much debt to incur?

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Part 5—Managing Financial Issues 54. Canadian firms are listed on both the TSE and the NYSE. Have a Many discussion of why Canadian corporations would want to be listed on an US stock exchange.

55. the students visit the Web site for the TSE. Have them choose a stock of a Have well-known Canadian corporation and have them look at the line graph that shows the market value of its common shares over the past year.

56.

Related to the above teaching tip, is the bar graph (directly below the line graph) that shows the volume of trades corresponding to the same period. Have a discussion of the correlation between market price fluctuations and sales volumes.

57.

Remind students that securities include stocks as well as bonds and mutual funds; they represent secured, financially valuable claims on the part of investors.

58.

Remind students that new securities are bought and sold in primary markets; existing securities are sold in secondary markets.

59.

Reinforce that a stock is a portion of the ownership of a corporation. Common stocks represent the most basic form of ownership in a company.

60. sure that students understand that stock values can be expressed in three Make different ways: par value, market value, and book value. Review each of these concepts as they are often difficult for students to grasp.

61.

Common stocks are risky securities, but blue-chip stocks are issued by the strongest, most financially sound firms that provide investors with steady income.

62.

Students often confuse this point: Preferred stock is so named because preferred shares have preference, or priority, over common shares when dividends are distributed.

63.

Remind students that a stock exchange is an organization of individuals formed to provide an institutional setting in which stock can be bought and sold.

Students may not know that each stock exchange regulates the places and times at 64. which trading may occur; the trading floor is the physical location where trading takes place.

Make sure students understand the distinction between stockbrokers, discount 65. brokers, and full-service brokers.

Point out that the over-the-counter market is so-called because its original traders 66. acted like retailers; supplies of shares were sold over the counter to interested buyers; even today the OTC market has no trading floor.

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Chapter 15—Financial Decisions and Risk Management 67. to students’ attention that fantasy stock markets are games that teach people Bring how to invest. Students may want to access StocksQuest to work with fantasy stock markets.

68.

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.

69.

Make sure that students understand the differences between government bonds, municipal bonds, and corporate bonds.

70.

Point out that secured bonds are “backed” by company assets in case of default, whereas unsecured bonds—or debentures— pledge no property as security.

71.is important to point out that no-load mutual funds charge no commissions It when investors buy into or sell out of funds; load funds generally charge a commission of 2 to 8 percent.

72.

Reinforce that mutual funds are an attractive investment since a drop in the price of one or two stocks in the pool is likely to have little impact on the total value of the fund.

73.

Remind students that investors seek to strike a balance for risks and returns among their investment options. This risk-return balance can be achieved through diversification and asset allocation.

74.

Reinforce that safer investments tend to offer lower returns; riskier investments tend to offer higher returns.

75.

Students should recognize that investors can purchase stocks using several different types of orders: a market order, a limit order, a stop order, and an order for a round lot or an odd lot.

76.

Point out that insider trading is the use of special knowledge about a firm for profit or gain. It is illegal.

Ask students to describe the type of person who would be interested in holding 77.

Canada Savings Bonds. Then ask them what type of person would be likely to buy junk bonds. How are these two types of people different?

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Part 5—Managing Financial Issues USING THE BOXED INSERTS Opening Case: Entrepreneurship and New Ventures: Social Capital Is Making the World a Better Place This insert describes the activities of the not-for-profit organization called Kiva as it strives to reduce poverty by connecting people through micro-lending. The loans are crowdfunded by accumulating individual donations as small as $25. Kiva and other micro-financing organizations have very high loan repayment rates, and they often help women in developing countries.

Critical Thinking Question 1.

Consider the following statement: “Not-for-profit micro-lending organizations like Kiva are good socially conscious citizens; however, their practices are not justified by basic business fundamentals.” Debate the pros and cons of this argument.

The statement opens the door for a debate about two fundamentally different views of what business and finance should be all about. Students who feel that traditional business practices and values (like focusing on profits) are the right way to go because those traditional business practices have raised the standard of living of people all around the world. They will also argue that there is nothing preventing people who are socially conscious from pursuing their ideas in organizations like Kiva, while traditionalists can pursue their ideas in more profit-oriented firms.

Students who do not like the fact that businesses too often focus solely on profits will applaud the not-for-profit lending organizations, and will be happy that their practices do not follow basic business fundamentals. They will also note that too many businesses are currently using traditional approaches and those businesses control much of the resources in society, and that must change. Their most fundamental argument will be that the positive treatment of people and of the environment is more important than making profit, and that traditional business firms pursue profit at the expense of people and of the environment.

The statement is a great opportunity to discuss one of the long-standing debates in society, namely, what is the proper role for businesses? Simply focusing on profit maximization so that investors are happy is increasingly being questioned by critics who want businesses to pay attention to various other elements in society like employees, customers, suppliers, and the communities in which those businesses operate. Proposals keep popping up that are quite radical by traditional standards. For example, some critics of traditional business practices argue that business firms should adopt a strategy of paying a living wage to all their employees, and then give extra pay to those employees who are particularly productive. If they do this, the workers who are eager to make a lot of money can do so by being unusually productive, while the workers who get more life .

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Chapter 15—Financial Decisions and Risk Management satisfaction off-the-job can do that while still making a living (although much lower) wage. It has also been suggested more generally that businesses should give factors like employee satisfaction and environmental protection higher priority than making profits.

Suggestions like these will generate a lively in-class debate.

Disruptions in Business: Reddit Stock Rebels: Playing a Different Game Critical Thinking Question 1.Consider the following statement: “These Redditt Financial Rebels are disrupting the market and creating artificial movements in stock prices that are not based on profits or sound financial sense. Their actions are unethical if not downright illegal. Do you agree or disagree with this statement?

Student answers will vary.

Split the class in half and force each side to present arguments in favour or against. It’s best to allocate the sides yourself. Just tell the students that a good debater can always reverse an argument so if they are on the wrong side, they can still be very effective in their responses. There is clearly an ethical issue here with what was being done to artificially inflate prices of stocks of companies that were not performing well and had no valid financial reason to increase in value; this movement was purely based on organized pushes as these investors were “gaming” the system. Having said that, students will also rightfully point out that there are a lot of systemic issues with the “real players” in the industry that often manipulate the markets. After a short debate ask students to add their own thoughts and feelings regardless of which side they were originally assigned to.

QUESTIONS AND EXERCISES Questions for Analysis 1.

In what ways do the two sources for debt financing differ from each other? How do they differ from the two sources of equity financing?

Long-term loans and corporate bonds differ in terms of source of money, term and ease of financing, and changeability of the financing conditions. Whereas long-term loans are with commercial banks, are from three to ten years in length, and usually contain clauses allowing changes to the loan's terms, corporate bonds are sold through bond markets and stock exchanges to anyone willing to buy them, have very long terms, tend to involve higher interest rates, but are more commonly used, with lenders more easily found. Both these sources of debt financing differ from equity financing in that they get long-term funds from outside the firm whereas equity financing draws on internal financial sources. Also, debt financing requires the firm to pay interest regularly whereas equity financing does not.

2. 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 .

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Part 5—Managing Financial Issues 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 for expansion can opt for either 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 often be quickly arranged. Bonds take more time to arrange, and can lead to high interest rate costs, depending upon the firm’s credit rating (the lower the credit rating, the higher the interest cost and vice-versa). The advantage of bonds is that they can give the organization funds over a long period of time. If the firm opts for equity financing, it might issue new stock or use retained earnings.

A company might be limited by its form of doing business. For example, if it is a sole proprietorship, it will likely use debt, but if it is a corporation it may use either debt or equity financing.

3.

What is the basic relationship between the amount of risk associated with a project and the likelihood of gains (or losses) on the project? Explain how several financial instruments (money market funds, common stocks, preferred stocks, corporate bonds, etc.) illustrate this basic relationship.

The higher the risk the higher the possible returns on the project but also the greater the possible loss.

GICs—no risk and limited possible gains Common stocks—higher risk and higher potential for gain Preferred stocks—less risk than common stock and therefore less potential for capital gain than common stocks Corporate bonds—low risk and low return (junk bonds have higher risk and a higher return) 4.

Which of the three measures of common stock value is most important? Why?

The market value is most important because it represents the amount that the stock could be sold for at the current time.

Suppose that you are a business owner and you need new and immediate funds to 5. meet short-term operating expenses. From what sources could you gain the capital you need, and what are some of the characteristics of those sources?

(Note: This question asks students to focus on the sources of short-term funds (Question #2 looks similar, but it is asking about long-term sources of funds). .

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The sources of short-term funds described in Chapter 15 are trade credit, secured short-term loans, and unsecured short-term loans. Trade credit (the granting of credit by one firm to another) is essentially a short-term loan. Sellers ship products to buyers more or less on faith that the buyer will make payment within the time frame stated on the invoice.

Secured short-term loans (mostly from banks) are more formal and the seller usually must put up collateral to get the loan. If the loan is not paid back, the bank can seize certain assets to get its money back. Inventory and accounts receivable are types of secured short-term loans.

With an unsecured short-term loan, the buyer does not have to put up collateral.

These loans are usually given to firms that have a solid financial history with the lender.

Lines of credit, revolving credit agreements, and commercial paper are all types of unsecured short-term loans.

6.

What are the risks and benefits associated with the sources of short-term funds (trade credit, secured and unsecured loans, and factoring accounts receivable)? How do these risks and benefits compare with those associated with sources of long-term funds (debt and equity)?

Short-term funds are costly but convenient. Long-term funds normally have lower interest rates than short-term funds.

Application Exercises 7.

Interview the financial manager of a local business. What are the investment goals of this organization? What mix of securities does it use? What advantages and disadvantages do you see in its portfolio?

This exercise contributes a lot of realism to the role of the financial manager.

Also, by noting the advantages and disadvantages in the portfolio, students will be able to apply the information from the chapter to a real-life situation.

Contact a stockbroker for information about setting up a personal account for 8. trading securities. Prepare a report on the broker's requirements for placing buy/sell orders, credit terms, cash account requirements, services available to investors, and commissions/fees schedules.

This should be a fun exercise for the students to complete. Encourage the students to search various brokerage Web sites for the answer to this question. If this is not possible, they may have to directly contact a broker. It will also provide some realistic information for students to utilize in personal financial planning. A broker may be able to furnish printed material that will cover the items requested above. Remember that

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Part 5—Managing Financial Issues although a broker operates in the world of finance, he or she is very much a salesperson marketing a service.

9. to Sedar.com and find the balance sheets of two different corporations Go operating in the same industry (such as Telus and Rogers). Determine the relative emphasis each business has placed on raising money through debt versus equity. Why might these differences exist?

High debt means vulnerability to interest rate changes, but sometimes it is cheaper to finance through debt than equity. If interest rates increase, then people will finance through equity.

10.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?

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.

TEAM EXERCISES Building A Business: Continuing Exercise This exercise requires that students undertake a careful analysis of the pros and cons of debt and equity financing for their business. It also requires them to think about the possibility of selling stock to investors in the event that their business is successful and they decide to “go public.”.

Building Your Business Skills: Market Ups and Downs Follow-Up Questions Do you see any similarities in the movement of the various stocks during the same 1. period? For example, did the stocks move up or down at about the same time? If so, do you think the stocks were affected by the same factors? Explain your thinking.

Many factors, both internal and external, affect stock prices, such as the firm’s earnings, layoffs, labour 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.

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Chapter 15—Financial Decisions and Risk Management 2.

Based on your analysis, did internal or external factors have the greatest impact on stock price? Which factors had the longer-lasting effect? Which factors had the shorter effect?

Answers will vary.

3.

Why do you think it is so hard to predict changes in stock price on a day-to-day basis?

Answers will vary, but students should acknowledge the difficulty of both knowing all possible information about factors that affect stock price and judging accurately what kind of effect those factors will have.

Exercising Your Ethics: Doing Your Duty When Payables Come Due Activity Overview: This activity allows students to role-play and then share their views on ethics in a realworld situation.

Time Limit: 35 minutes What To Do: 1.

Divide the class into four-person teams and ask them to read and follow the instructions for the Exercising Your Ethics: Team Exercise found at the end of Chapter 15. Students should each choose one of the different roles in the exercise. (20 minutes) 2.

Reassemble the class as a whole and discuss what disagreements came up within the various groups. How did the role they played affect their perspective? (15 minutes) Don’t Forget: Remind students that what one individual or group considers unethical may not be considered unethical by another individual or group. Try to determine why different groups have different views about what is ethical or unethical.

Wrap-Up: Remind students that the situation in this exercise has real-world parallels. Ask them to do a little research and find out which companies have withheld supplier payments in an attempt to influence the price of the company’s stock. Have them report back at the next class.

CLOSING CASE Blockchain and Bitcoin: Booming Revolutionary Models or Modern-Day Bubbles Destined to Bust?

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Part 5—Managing Financial Issues This case describes a high-profile cryptocurrency (bitcoin) and some key characteristics of it, most notably its great volatility. But it also notes that an important record-keeping element of bitcoin (the blockchain) may, in fact, be the most valuable and useful aspect of the currency.

Questions for Discussion 1.

What is the current price of bitcoin? Research the monthly trends since mid-2021.

How volatile has the price been? How does the future look for bitcoin now?

Student answers will vary depending on when they take the introduction to business course. But if the past volatility of bitcoin is any indication, there will be great variations in the value of bitcoin, even over the few short weeks of an academic term, so this will generate a lot of discussion.

2. recent articles about blockchain and identify companies that are investing Find resources in it. Name two high-profile companies and explain why they are using blockchain for their organization.

Student answers will vary depending on the sources that their research turns up and the examples that are found. When assessing student answers, make sure that they understand why companies are interested in blockchain, even if they are not involved in bitcoin transactions.

3. you saw in this chapter, evaluating any potential investment requires an As understanding of the risk-reward relationship. Do you believe that the average investor in bitcoin understands both ends of this relationship well? Explain your answer.

It is difficult to know for certain whether the average investor in bitcoin understands the risk-reward relationship. Some investors are undoubtedly speculating in bitcoin to make a quick buck, but others are involved because they believe that the currency (and its underlying blockchain technology) has real value. But the fact that the value of the currency fluctuates dramatically suggests that some investors are not very sophisticated and may not understand the risk-reward relationship.

Student answers to this question will be influenced to some extent by the major they are pursuing. For example, other things being equal, a student majoring in finance may be more likely to understand both ends of the risk-reward relationship than a student majoring in, say, marketing or human resource management. And that knowledge may lead finance students to conclude that anyone who is not majoring in finance will have a less-than-clear understanding of the risk-reward relationship. By contrast, a student majoring in marketing or human resource management may not have encountered the risk-reward relationship yet, and may therefore be more cautious in drawing conclusions about what the “average” person understands. In either case, student answers should show that they understand the basic notion that the greater the risk involved in an

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Chapter 15—Financial Decisions and Risk Management investment, the greater the potential gain (or loss), and the smaller the risk, the smaller the potential gain (or loss).

To increase student interest, draw their attention to Figure 15.2 and ask them where an investment in bitcoin fits in the figure. Recent events suggest that bitcoin occupies the extreme upper right portion of the figure.

People that invest in bitcoin are simply investing in momentum and nothing else, 4. therefore, this is a bubble that will burst once and for all. Agree or disagree? Conduct some research and back up your arguments with supporting facts.

While bitcoin exhibits some of the classic characteristics of a bubble, there is some uncertainty about whether the bubble will burst once and for all, or whether bitcoin will continue to be of interest to investors. This is because bitcoin is designed to overcome two key problems that are evident with traditional currencies that are supported by sovereign governments. If bitcoin can solve these two problems, it may continue to be of great interest to investors.

The first problem is that sovereign nations can manipulate the value of their currencies by increasing or decreasing the supply of money or by simply devaluing the currency to cope with some problem the nation is facing (e.g., an unfavourable trade balance). This can’t happen with bitcoin because the government has no control over it, and because there is a ceiling on the number of bitcoins that will ever be in circulation.

Thus, inflation cannot “eat away” at the value of bitcoin. The second problem that bitcoin addresses is the problem of privacy. The developing trend favouring investor privacy fits nicely with the fact that bitcoin is not controlled by the government, and no one knows who holds bitcoins and how many they hold.

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Part 5—Managing Financial Issues CRAFTING A BUSINESS PLAN PART 5: MANAGING FINANCIAL ISSUES Assignment Overview: The final part of the business plan project asks students to consider how they’ll finance their business. They are also asked 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 5 but the entire plan at this point.

Files to Provide Students: • For this part of the project, students will be asked to complete Part 5: Managing Financial Issues. 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 through 4. The Microsoft Word Business Plan Project Student Template is located on MyLab at Intro to Business https://www.pearsonmylabandmastering.com/northamerica/mybizlab/.

Estimated At-Home Completion Time: If done well, this section will require a minimum of 1 to 3 hours.

Homework Deliverable from Students: The length of this section should be somewhat consistent, although some variance can be expected. You should expect about 3 to 5 pages in this section.

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