Instructor Solution Manual For M Business, 7th Edition O. C. Ferrell, Geoffrey Hirt, Linda Ferrell C

1 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Instructor Solution Manual For M Business, 7th Edition O. C. Ferrell, Geoffrey Hirt, Linda Ferrell CHAPTER 1-16

Chapter 1: The Dynamics of Business and Economics Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s highlights. Followup via the Connect exercises is then encouraged to provide a holistic understanding of the chapter. Use the hyperlinked Table of Contents below to jump to different sections of the manual.

Table of Contents Chapter Forecast ..............................................................................................................................................................................1 Learning Objectives ..........................................................................................................................................................................2 Key Terms and Definitions ................................................................................................................................................................2 Content Outline ................................................................................................................................................................................4 Boxed Text Critical Thinking Questions ......................................................................................................................................... 11 Are You Prepared // to Take Advantage of Emerging Job Opportunities? / ................................................................................. 12 Bonus Teaching Resources ............................................................................................................................................................ 12 Chapter Review Questions ............................................................................................................................................................ 16 Connect Exercises .......................................................................................................................................................................... 17 Class Discussion Questions ............................................................................................................................................................ 18 Build Your Business Plan................................................................................................................................................................ 19 Video Case: Redbox Succeeds by Identifying Market Needs ........................................................................................................ 19 Team Exercise ................................................................................................................................................................................ 21 Build Your Skills ............................................................................................................................................................................. 21 Suggestions for Group Formation ................................................................................................................................................. 22 Term Paper or Project Topics ........................................................................................................................................................ 23 Guest Speaker Suggestions ........................................................................................................................................................... 23 Teaching Suggestions .................................................................................................................................................................... 23

Chapter Forecast

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2 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual We begin our study of business in this chapter by examining the fundamentals of business and economics. First, we introduce the nature of business, including its goals, activities, and participants. Next, we describe the basics of economics and apply them to the United States economy. Finally, we establish a framework for studying business in this text.

Learning Objectives LO 1-1 LO 1-2 LO 1-3 LO 1-4 LO 1-5 LO 1-6 LO 1-7 LO 1-8

Define basic concepts such as business, product, profit, and economics.

Identify the main participants and activities of business.

Explain why studying business is important.

Compare the four types of economic systems.

Describe the role of supply, demand, and competition in a free-enterprise system.

Specify why and how the health of the economy is measured.

Outline the evolution of the American economy.

Explain the role of the entrepreneur in the economy.

Key Terms and Definitions Budget deficit The condition in which a nation spends more than it takes in from taxes Business Individuals or organizations who try to earn a profit by providing products that satisfy people’s needs Capital The funds used to acquire the natural human resources needed to provide products; also called financial resources Capitalism (free enterprise) An economic system in which individuals own and operate the majority of businesses that provide goods and services Communism First described by Karl Marx as a society in which the people, without regard to class, own all the nation’s resources Competition The rivalry among businesses for consumers’ dollars Demand The number of goods and services that consumers are willing to buy at different prices at a specific time Depression A condition of the economy in which unemployment is very high, consumer spending is low, and business output is sharply reduced Economic contraction A slowdown of the economy characterized by a decline in spending and during which businesses cut back on production and lay off workers Economic expansion Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

3 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual The situation that occurs when an economy is growing and people are spending more money; their purchases stimulate the production of goods and services, which in turn stimulates employment Economic system A description of how a particular society distributes its resources to produce goods and services Economics The study of how resources are distributed for the production of goods and services within a social system Entrepreneur An individual who risks his or her wealth, time, and effort to develop for profit an innovative product or way of doing something Equilibrium price The price at which the number of products that businesses are willing to supply equals the amount of products that consumers are willing to buy at a specific point in time Financial resources The funds used to acquire the natural and human resources needed to provide products; also called capital Free-market system Pure capitalism, in which all economic decisions are made without government intervention Gross domestic product (GDP) The sum of all goods and services produced in a country during a year Human resources The physical and mental abilities that people use to produce goods and services; also called labor Inflation A condition characterized by a continuing rise in prices Mixed economies Economies made up of elements from more than one economic system Monopolistic competition The market structure that exists when there are fewer businesses than in a pure-competition environment and the differences among the goods they sell are small Monopoly The market structure that exists when there is only one business providing a product in a given market Natural resources Land, forests, minerals, water, and other things that are not made by people Nonprofit organizations Organizations that may provide goods or services but do not have the fundamental purpose of earning profits Oligopoly The market structure that exists when there are very few businesses selling a product Open economy An economy in which economic activities occur between the country and the international community Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

4 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Product A good or service with tangible and intangible characteristics that provide satisfaction and benefits Profit The difference between what it costs to make and sell a product and what a customer pays for it Pure competition The market structure that exists when there are many small businesses selling one standardized product Recession A decline in production, employment, and income Socialism An economic system in which the government owns and operates basic industries, but individuals own most businesses Stakeholders Groups that have a stake in the success and outcomes of a business Supply The number of products—goods and services—that businesses are willing to sell at different prices at a specific time Standard of living Refers to the level of wealth and material comfort that people have available to them Unemployment The condition in which a percentage of the population wants to work but is unable to find jobs

Content Outline The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a section on which CONNECT activities can be used in the chapter. This is created so that you can facilitate in-class or online discussion effectively.

LO 1-1 Define basic concepts such as business, product, profit, and economics.  

Introduction The Nature of Business o The Goal of Business

PowerPoint Slides

Lecture Outline and Notes: I.

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Key terms:  Business  Product  Profit  Nonprofit organization  Stakeholders

The Nature of Business a. Business refers to the individuals and organizations that seek a profit by providing products that satisfy people’s needs. b. Products refer to goods or services with tangible and intangible attributes that provide satisfaction and benefits. A product can be a good, service, or idea. i. Examples of tangible goods include an automobile, a computer, a phone, and a coat.

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5 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

c.

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ii. Examples of services include dry cleaning, having a physical with your doctor, the performance by a basketball player, and a musical concert. iii. A product can also be an idea. Accountants and attorneys, for example, generate ideas for solving problems.

The goal of business is to earn a profit, the difference between what it costs to make and sell a product and what a customer pays for it. i. Businesses have a right to keep their profits as they choose—within legal limits— because profit is the reward they take in providing products. ii. Earning profits contributes to society by providing employment, which in turn provides money that is reinvested in the economy. iii. Nonprofit organizations do not have the fundamental purpose of earning profits, although they may provide goods or services. iv. Both nonprofit organizations and businesses require management skills, marketing expertise, and financial resources, and they must abide by laws and regulations, act in an ethical and socially responsible manner, and adapt to economic, technological, and social changes. v. Earning a profit requires: 1. Management skills to plan, organize, and control the activities of the business and to find and develop employees so that it can make products consumers will buy. Managers must also oversee the firm’s operations to ensure that resources are transformed into goods and services.

2. Marketing expertise to learn what products consumers need and want and to develop, manufacture, price, promote, and distribute those products.

3. Financial resources and skills to fund, maintain, and expand its operations.

4. The ability to face challenges such as abiding by laws and government regulations.

5. Acting in an ethical and socially responsible manner.

6. Adapting to economic, technological, political, and social changes. vi. To earn a profit, businesses need to produce quality products, operate efficiently, and be socially responsible and ethical in dealing with stakeholders—groups that have a stake in the success and outcomes of a business.

LO 1-2 Identify the main participants and activities of business. 

Key terms:

The People and Activities of Business

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a. The people involved in business activities are the owners, employees, and customers. Note that owners, employees, and customers are the main stakeholders, whereas the external environment consists of competition, the economy, information technology, legal and political forces and social responsibility. vii. Owners have to put up the resources to start a business. They can manage the business themselves or have employees as managers. viii. Employees are responsible for the work that goes on within the business. ix. The major role of a business is to satisfy the customers who buy its goods and services. b. The activities of businesses include primarily management, marketing, and finance. x. Management is included in the same part of the circle (Figure 1.1) as employees because managers coordinate employees’ actions to achieve the firm’s goals, organize people to work efficiently, and motivate them to achieve business goals.

1. Production and manufacturing is another element of management.

Managers plan, organize, staff, and control the tasks required to carry out the work of the company.

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6 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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c.

2. Management is also concerned with acquiring, developing, and using resources effectively and efficiently in a business. xi. Marketing and consumers are in the same segment (Figure 1.1) because the focus of all marketing activities is satisfying consumers.

1. Marketing involves all activities designed to provide goods and services that satisfy consumers’ needs and wants, including gathering information and conducting research to determine customer wants; planning and developing products; and determining price, distribution, and promotion. xii. Owners and finance are in the same part of the circle (Figure 1.1) because, although management and marketing deal with financial considerations, it is primarily the responsibility of the owners to provide financial resources for the operation of the business.

1. Finance refers to all activities concerned with obtaining money and using it effectively.

Why Study Business? xiii. It can help you develop skills and acquire knowledge to prepare you for your future career. xiv. It can help you better understand the many activities necessary to provide goods and services and appreciate the costs associated with these activities. xv. Business activities help create jobs and contribute to the health of local and global economies.

LO 1-3 Explain why studying business is important.  Why Study Business?

LO 1-4 Compare the four types of economic systems. 

The Economic Foundations of Business o Economic Systems o The Free-Enterprise System

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Key terms:  Economics  Natural resources  Human resources  Financial resources  Economic resources  Communism  Socialism  Capitalism (free enterprise)  Free-market system  Mixed economies

II. The Economic Foundations of Business a. Economics is the study of how resources—or factors of production—are distributed for the production of goods and services within a social system. i. Natural resources are land, forests, minerals, water, and other things not made by people. ii. Human resources are the physical and mental abilities that people use to produce goods and services. iii. Financial resources, or capital, are the funds used to acquire the natural and human resources needed to provide products. iv. Natural resources, human resources, and financial resources are sometimes called factors of production. v. The firm can also have intangible resources such as a good reputation for quality products or being socially responsible. b. An economic system describes how a society distributes its resources to produce goods and services that satisfy the needs of its people. All economic systems must answer three questions: i. What goods and services and how much of each will satisfy the needs of the consumer? ii. How will the goods and services be produced? Who will produce them and with

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7 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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what resources? iii. How are the goods and services to be distributed? c. Types of economic systems found in the world: communism, socialism, and capitalism (Table 1.1). i. Karl Marx described communism as a society in which the people, without regard to class, own all the nation’s resources. Also called command economies (China & Cuba).

1. Central government planning determines what products will satisfy citizens’ needs, how they are produced, and how they are distributed.

2. In theory, communism appears efficient and equitable, but in practice, communist economies have been marked by low standards of living, critical shortages of consumer goods, high prices, and little personal freedom.

3. Many countries have turned away from communism and begun to experiment with economic systems governed by supply and demand rather than by central planning. ii. Socialism is an economic system in which the government owns and operates basic industries, but individuals own most businesses (Sweden, Israel, & India).

1. Central planning determines what and how basic goods and services are produced and distributed, but individuals and small businesses provide other products based on consumer demand and the availability of resources.

2. Most socialist nations are democratic and recognize basic individual freedoms.

3. Socialist economies profess egalitarianism—equal distribution of income and social services.

4. Taxes and unemployment are generally higher in socialist countries. iii. Capitalism, or free enterprise, is an economic system in which individuals own and operate most of the businesses that provide goods and services (U.S., Canada, & Japan).

1. Competition, supply, and demand determine which goods and services are produced, how they are produced, and how they are distributed.

2. There are two forms of capitalism: a. Pure capitalism, or a free-market system, exists when all economic decisions are made without government intervention. Adam Smith, the father of capitalism, believed that the invisible hand of competition would best regulate the economy. iv. Mixed economies have elements from more than one economic system. No country practices a pure form of communism, socialism, or capitalism.

1. Many large economies are free-enterprise—including the U.S., Canada, and Japan.

2. Many communist and socialist countries apply free-enterprise principles— including China and Russia. v. Free enterprise allows a company to succeed or fail on the basis of market demand.

Modified capitalism differs from pure capitalism in that the government intervenes and regulates business to a certain extent.

1. One way of regulating business is through laws.

2. Federal Trade Commission Act created the Federal Trade Commission.

3. Importance of government’s role in economy. d. The Free-Enterprise system provides an opportunity for a business to succeed or fail on the basis of market demand. A number of basic individual and business rights must exist for free enterprise to work and businesses to succeed. i. Individuals must have the right to own property.

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8 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual ii. Individuals and businesses must have the right to earn and use profits, within constraints of society’s laws. iii. Individuals and businesses must have the right to make decisions that determine how the business operates, within the limits of the law. iv. Individuals must have the right to decide what career to pursue, where to live, what goods and services to purchase, and more. Businesses can decide where to locate, what goods and services to produce, what resources to use in the production process, and so on.

LO 1-5 Describe the role of supply, demand, and competition in a free-enterprise Key terms: system.  Demand  Supply  The Forces of Supply and Demand  Equilibrium price  The Nature of Competition  Competition  Economic Cycles and Productivity  Pure competition  Monopolistic competition  Oligopoly  Monopoly  Economic expansion  Inflation  Economic contraction  Recession  Unemployment  Depression PPT 1.28 e. The Forces of Supply and Demand (Figure 1.2) i. Demand is the quantity of goods and services that consumers are willing to buy for different prices at a specific time. Consumers will usually buy more of an item as its price falls. ii. Supply is the quantity of goods and services that businesses are willing to sell for different prices at a specific time. Usually, sellers are willing to sell more of a product at higher prices.

PPT 1.29 iii. An equilibrium price is the point at which supply and demand curves intersect, indicating that supply and demand are equal at that point. iv. Supply and demand constantly change in response to economic conditions, PPT 1.30 availability of resources, and degree of competition. v. Critics of supply and demand say that the system does not distribute resources equally among the wealthy and the poor. f. The Nature of Competition i. Competition is the rivalry among businesses for consumers’ dollars. It is a vital PPT 1.32 element of free enterprise. ii. Free-enterprise systems offer four types of competitive environments: 1. Pure competition exists when there are many small businesses selling one standardized product. The trade in agricultural commodities, such as wheat, corn, and cotton, is an example.

2. Monopolistic competition exists when there are fewer businesses than in PPT 1.33 a pure competition system and the differences between the goods they sell are small. Aspirin, soft drinks, and vacuum cleaners are examples.

3. An oligopoly exists when very few businesses sell a product, and it is expensive for new firms to enter the marketplace. The airline industry is an example.

4. A monopoly exists when there is only one producer of a product in a given PPT 1.34 market. Utility companies are examples of monopolies. g. Economic Cycles and Productivity PPT 1.27

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9 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual i. Economic expansion occurs when an economy is growing and people are spending more money.

1. Rapid economic expansion may result in inflation, a continuing rise in prices.

PPT 1.35 ii. Economic contraction occurs when spending declines.

1. It can lead to recessions, which are marked by a decline in production, employment, and income.

PPT 1.36 2. Unemployment is measured as the percentage of the population that wants to work but is unable to find jobs (Figure 1.3). a. Rising levels of unemployment tend to stifle demand, forcing prices down, a condition known as deflation.

PPT 1.37 3. A depression is a severe recession in which unemployment is very high, consumer spending is low, and business output is sharply reduced. iii. Economies constantly expand and contract in response to changes in consumer, business, and government spending. iv. Hyperinflation LO 1-6 Specify why and how the healthy of the economy is measured.

Key terms:  Gross domestic product (GDP)  Budget deficit PPT 1.38 v. Countries measure the state of their economies to determine whether they are expanding or contracting and whether corrective action is necessary to minimize fluctuations.

1. Gross domestic product (GDP) is the sum of all goods and services produced in a country during a year (Figure 1.4) a. GDP measures only those products made within a country, not profits earned from companies’ overseas operations. It does include profits earned by foreign companies within the country being measured. b. It also does not take into account the sum relative to the country’s population; GDP per capita does.

2. Budget deficits occur when a nation spends more than it takes in from taxes. The national debt exceeds $25 trillion in 2020. vi. Other Ways of Measuring the Economy (Table 1.2) 1. Trade balance: The difference between our exports and our imports. If the balance is negative, as it has been since the mid-1980s, it is called a trade PPT 1.39 deficit and is generally viewed as unhealthy for our economy.

2. Consumer Price Index: Measures changes in prices of goods and services purchased for consumption by typical urban households.

3. Per capita income: Indicates the income level of “average” Americans.

Useful in determining how much “average” consumers spend and how much money Americans are earning.

4. Unemployment rate: Indicates how many working age Americans are not working who otherwise want to work. (Americans who do not work in a traditional sense, such as househusbands/housewives, are not counted as unemployed.)

5. Inflation: Monitors price increases in consumer goods and services over specified periods of time. Used to determine if costs of goods and services are exceeding worker compensation over time.

6. Worker productivity: The amount of goods and services produced for each hour worked.

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10 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual LO 1-7 Outline the evolution of the American Economy.  The American Economy o The Importance of the American Economy o A Brief History of the American Economy o Technology and the Economy LO 1-8 Explain the role of the entrepreneur in the economy. o The Role of the Entrepreneur o The Role of Government in the American Economy o The Role of Ethics and Social Responsibility in Business PPT 1.40

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Key terms:  Standard of living  Open economy  Technology  Artificial Intelligence  Big Data  Blockchain  Entrepreneur

III. The American Economy a. A Brief History of the American Economy i. Standard of living refers to the wealth and material comfort that people have available to them. The United States, Germany, Australia, and Norway have a high standard of living. ii. The Early Economy 1. Colonists established an agricultural economy 2. Most people were self-sufficient and produced almost everything they needed iii. The Industrial Revolution 1. Machines and job specialization increased speed and efficiency of production iv. Manufacturing and Marketing economies 1. Industrialization brought about the manufacturing economy, which was devoted to producing goods and services 2. The marketing economy emerged as businesses became more concerned with the needs and wants of consumers v. The Service and New Digital Economy 1. As quality of life improved, people had enough income to hire others to provide services for them, which ushered in the service economy 2. Advanced technology contributes to new service products based on technology and digital media that provide: a. Smartphones b. Social networking c. Virtual worlds vi. Technology and the Economy 1. Artificial intelligence (AI) relates to machine (computer)learning that is able to perform activities and tasks that usually require human intelligence such as decisions, visual perception, and speech recognition.

2. Big data refers to large volumes of structured and unstructured data this is transmitted at very fast speeds.

3. Blockchain is a decentralized record keeping technology that stores linked block of ordered transactions over time. b. The Role of the Entrepreneur i. An entrepreneur risks his or her wealth, time, and effort to develop for profit an innovative product or way of doing something. ii. The free enterprise system provides the conditions for entrepreneurs to succeed. iii. Early American entrepreneurs were often inventors and captains of industry (Thomas Edison (light bulb and record player), John D. Rockefeller (Standard Oil Company), Andrew Carnegie (railroads and U.S. Steel Corporation), Andrew Mellon (Aluminum Company of America and Gulf Oil), Henry Ford (automobile industry),

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11 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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and J.P. Morgan (financial institutions)). iv. Modern American entrepreneurs are frequently changing business practices with innovative technologies (Bill Gates (Microsoft software) and Fred Smith (FedEx)). c. The Role of Government in the American Economy i. The U.S. is a modified capitalism system. ii. Federal, state, and local governments sometimes intervene with regulations aimed at promoting competition and consumer safety. iii. Government agencies such as the U.S. Department of Commerce measure the economy’s health and intervene when economic health is at stake. d. The Role of Ethics and Social Responsibility in Business i. Recent scandals undermined public confidence in corporate America and sparked a new debate about ethics in business (Enron, Countrywide, BP, Bank of America, Citigroup). ii. Business ethics generally refers to the standards and principles used by society to define appropriate and inappropriate conduct in the workplace. In many cases these standards have been codified as laws. iii. Society is increasingly demanding that businesspeople behave ethically and socially responsibly toward customers and other stakeholders. iv. Businesses should determine what society wants and attempt to predict the longterm effects of their decisions.

IV. Can You Learn Business in a Classroom? a. Absolutely! To be successful in business, you need knowledge, skills, experience, and good judgment. b. This book can help students gain some of the knowledge, develop skills, and gain experience needed to be successful in business.

Boxed Text Critical Thinking Questions Taylor Swift Fights Scalpers 1. Describe how the supply-demand problem is offering opportunities for scalpers.

The demand for concert tickets is high and fans must often hurry to purchase tickets before they are sold out. There are a limited number of seats, demand is high, and the equilibrium price is also high. This situation creates opportunities for ticket scalpers.

2. Scalpers raise the equilibrium price once they control the supply. How do you think this Ticket - master Verified Fan System will affect this ability?

The Verified Fan system locates fans less likely to resell their tickets. Fans register and—if they are identified by Ticketmaster’s Verified Fan system—they are sent a link that gives them early access to tickets.

3. As a service provider, do you think performers like Taylor Swift should take an active role in fighting against scalpers? Why or why not?

Answers will vary with some students answering that performers should take an active role because they have the power whereas consumers do not. Other students will argue that the concept of supply and demand should apply, and performers shouldn’t care if fans resell the tickets because they already have their money.

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12 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Competition is Brewing in Kombucha Market 1. Why is the competition in the kombucha industry an example of monopolistic competition?

Because kombucha is relatively easy to produce, manufacturers take steps to differentiate their products, such as developing drinks in a variety of unique, fruity flavors.

2. How are the forces of supply and demand convincing more established brands like PepsiCo to enter the industry?

Consumer interest in the beverage is skyrocketing, and the demand is encouraging the entrance of new competitors.

Coca-Cola has a stake in a kombucha company and Pepsi doesn’t want to miss a market opportunity.

3. If more and more entrants enter the industry, what do you think will happen to the price of kombucha?

Based on the concept of supply and demand, with an increase in the number of sellers, the price should decline.

Up in the Air: Drones and Air Traffic Control 1. How does this situation demonstrate a modified capitalist economic system?

Air traffic control is run by the government to regulate and manage air space. While this type of government control works for airplanes, the rise of a new type of product taking to the skies calls for a more autonomous type of control.

So free enterprise is encouraged but the government needs to regulate the overall system.

2. What is the difference between the current air traffic control system and the proposed air traffic control system for drones?

Unlike the air traffic control system for airplanes, this drone system is private. The FAA will define a drone traffic management framework that commercial operators will follow.

3. Why would it be harder for the government to maintain as much control over drones as it does for airplanes?

As many as 7 million drones could be in the sky at once, according to the Federal Aviation Administration (FAA). The sheer number of drones and companies involved would make it impossible for the government to control.

Are You Prepared // to Take Advantage of Emerging Job Opportunities? / Why is it important to seriously consider what kind of job you want to have, and how do you help keep it once you have been hired?

Because you spend most of your waking hours at work, it is imperative that you explore all avenues when determining what line of work you would like to enter. You need to consider all of the trends in business and the economy. “Research indicates that you won’t be that happy with your job unless you enjoy your work and feel that it has a purpose. Because you spend most of your waking hours every day at work, you need to seriously think about what is important to you in a job.”

Bonus Teaching Resources This section offers bonus teaching resources for class discussion. This is offered in addition to what’s offered in the M: Business text.

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13 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

“Walmart Supercenters” MiniCase Walmart Supercenters have opened in more than 3,000 locations throughout the United States since their inception in 1988.

These outlets offer a retail format that can have major economic and quality of life impacts on a community. Customer satisfaction, a primary goal of Walmart, is achieved through convenience (one-stop shopping) and low prices. Walmart usually manages to out-compete other generalists, such as Kmart and Target, through effective marketing and aggressive expansion policies. Target has shifted its focus to higher quality products at reasonable prices, while Kmart made a less than successful attempt to compete directly with Walmart by opening its own supercenters, known as Big Kmart (or Big K). Target has also begun to open its own supercenters. Walmart’s margins reflect a competitive advantage, however, and customers keep returning because of the low prices.

Emergence of a new Walmart Supercenter means many things to smaller trade areas. For example, when a 213,000 square foot Walmart Supercenter with approximately five acres of floor space opened its doors in Fort Collins, Colorado, the store was in addition to a previously existing, but smaller Walmart Supercenter on the other side of Fort Collins. The city has less than 160,000 residents but is surrounded by several smaller cities and communities that expand the trade area to over 200,000. When it first opened, sales revenues at this store were expected to average $2 million per week, yielding annual sales tax revenues for the city estimated at $2.2 million. The development of the surrounding shopping center was expected to lead to large volumes of traffic. A number of retail stores rent space inside the massive facility, including a fast-food chain, a hair salon, and a portrait studio. The adjacent shopping center includes a Home Depot, a bike shop, a bank, other service providers, and several restaurants.

The effect of a Walmart Supercenter on the local economy is not limited to increased sales tax revenues and business. It also can have negative effects on local retail operations (sometimes referred to as “Mom & Pop” stores) that cannot offer the same low prices and variety as Walmart. Supercenters have driven Walmart to become one of the largest corporations in America. In addition, Walmart is currently the highest volume grocery seller, surpassing chains such as Safeway, Albertson’s, and Kroger, which focus specifically on groceries and do not provide the complete product lines found in a Walmart Supercenter. Many people argue that the introduction of such a large retailer causes local businesses to fail. Citizens also sometimes fight against using limited city budgets for infrastructure development, such as roads, traffic lights, and water/sewer lines, to support Walmart and accompanying sprawling development.

Special interest groups, ranging from environmentalists to older citizens not wishing to see their small town turn into a metropolis, often oppose the development of a new facility. In some instances, even historic sites have fallen victim to urban sprawl and development. In Davidson County, Tennessee, for example, re-zoning was approved by a business-friendly city council for a Walmart and Lowe’s shopping center that destroyed a Native American burial site and a historic civil war site on the Cumberland River. In Russell County, Virginia, a similar controversy emerged over the proposal of a Walmart Supercenter in an industrial site of marginal industrial (coal mining) capacity. Local residents feared that a precedent might be set allowing other, perhaps more lucrative, industrial sites to become commercial space for large multinational corporations, thus hurting local economic development. Local businesses also feared the competitive advantage a large retailer would have, possibly resulting in a negative effect on the local economy. Over 150 communities in America and Canada have pressured “big-box” retailers such as Walmart into withdrawing plans or have publicly voted to reject their retail development. Citizen groups usually employ a number of delay and avoidance tactics. These may include lawsuits, protests, pigeonholing of local politicians, and town hall meetings. Most of these citizen-based initiatives fail, however.

There have been success stories of small towns preventing construction of Walmart Supercenters. For example, residents of the small town of Old Saybrook, Connecticut, were able to fight off a Walmart Supercenter. To do so, the citizens had to raise sufficient money to hire professional help and legal counsel, organize protests, circulate petitions, and raise awareness of the issue. They were able to convince three local political bodies to block the multinational corporation and have since established a website to help other small communities to follow their successful methods.

In spite of the controversies surrounding their introduction, one Walmart Supercenter may bring more than 450 jobs to an area. Many of these positions are not full-time and they may pay low wages, but a number of the positions are higher-paying store managers, assistant store managers, pharmacists, and the like. This increase in jobs can be good for local economies, as Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

14 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual well as national employment figures. In fact, Walmart is the nation’s leading employer. While some small businesses may fail, it is often claimed that more jobs are created by the opening of a supercenter. In addition, Walmart often pays higher wages and offers better benefits than a small mom and pop store can pay its employees.

So, what effect does Walmart have on smaller towns and smaller companies? In a study of competition and retail structure published in the Journal of Marketing (1999), authors Miller, Reardon, and McCorkle explored the relation of “superstores,” such as Walmart and Kmart, to saturation (measured as number of stores per household) of the competitors. They found that as saturation by a generalist (such as Walmart) increased, broad-line specialist (for example, sporting goods, electronics, and furniture stores) saturation did as well. However, the positive effect did not carry over to saturation of limited-line specialist (e.g., “Mom and Pop” stores). The authors did not test the potential negative effect of generalist saturation on limited-line specialist saturation.

Other studies have shown that most shoppers prefer to do their shopping at large discount stores because of the time and money savings, potentially disrupting business on small towns’ main streets and downtowns. Some studies show that Walmart can be good for downtowns, but highly disruptive to surrounding (within a 20-mile radius) communities’ downtowns, as customers are likely to drive to another town to do their shopping. These studies indicate a negative trend for other retailers when a Walmart Supercenter emerges in the town. Indeed, many downtowns have become vacant in an attempt to directly compete with Walmart, while some have thrived. The secret of which stores do well in a downtown setting may rely on customer focus and finding a niche. Even though there may be controversy, the growth of Walmart Supercenters is expected to continue at a rapid rate.

Sources: “About Us: History,” Walmart Stores, http://corporate.walmart.com/our-story (accessed May 9, 2016); Anthony Bianco and Wendy Zellner, “Is Walmart Too Powerful?” Business Week, October 6, 2003, pp. 100-110; Tom Daykin, “Communities Force Big Box Retailers to Rethink Designs,” www.jasonline.com/bym/biz2biz/ljun01/daykcol15061301a.asp (accessed November 2, 2001); “Boycott Walmart/Lowe’s and JDN Realty Corporation, Ravagers of Native America,” www.horizons.k12.mi.us/~aim/walmart.html (accessed November 2, 2001); “PBS—Store Wars: Communities Opposing Megastores,” www.pbs.org/storewars/communitylist.html (accessed August 2, 2010); C.E. Miller, J. Reardon, and D.E. McCorkle, “The Effects of Competition on Retail Structure: an Examination of Intratype, Intertype, and Intercategory Competition,” Journal of Marketing, 1999, 63:107-120; Robert Buan, “Walmart Sets Sail,” [Fort Collins] Coloradoan, October 24, 2001, pp. A1, A2; Robert Buan, “Shoppers Flock to Walmart,” Coloradoan, October 25, 2001, pp. A1, A2; “Fort Collins (city) Colorado,” United States Census Bureau, http://quickfacts.census.gov/qfd/states/08/0827425.html (accessed May 9, 2016); “Our Stores,” Walmart, http://corporate.walmart.com/our-story/our-stores (accessed September 30, 2012).

Discussion Questions for “Walmart Supercenters” MiniCase 1. Do you feel the entry of a Walmart Supercenter in a small trade area (<200,000 population) is positive or negative for the quality of life in that area? Defend your answer after taking a positive or negative position.

Students’ answers may vary. Some reasons for support could include lower costs and more convenience for consumers, jobs for more members of the community, the attraction of more people to the community from surrounding areas, and better business for broad-line specialist stores like sporting goods stores. Some reasons against could include causing mom and pop stores to go out of business, higher congestion around stores, the destruction of historic sites, and environmental degradation.

2. Which members of a community might typically oppose a Walmart Supercenter? What are their objections? How can Walmart answer these complaints?

Members most likely to object include owners of mom and pop stores, environmentalists and other special interest groups, and local citizens who fear the stores will have a negative impact on their economy. Objections range from Walmart’s tendency to boot out local businesses because they cannot compete with the super chain, the increased money in taxes that may be needed to support the superstore’s large infrastructure, traffic congestion around the

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15 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual stores, and the fear of environmental degradation. Students’ answers to the last question will vary, but may include having Walmart’s sustainability manager address citizens to assure them that Walmart will take precautions against environmental damage, create large parking lots to reduce traffic congestion, choose open areas in which to build so that local landmarks remain unaffected, work directly with the community to reduce negative impacts, and improve employment by offering jobs to local citizens.

3. Find information on a small town (other than those mentioned) that has fought Walmart. Give a brief description of the history and tell why you believe the town won or lost.

Student answers will vary.

Controversial Issue: Knowing Business vs. Knowing the Business This can be used in a discussion board or for in-class discussion.

Some people might argue about whether a quarterback or a wide receiver is more important to a football team. The rational answer is that both are important, and a football team would be handicapped if deprived of the services of either.

In operating a business, success is more likely if those in control know business as well as know the business. It would be foolish to ask which type of knowledge is more important. Let’s look at these two types of knowledge.

The phrase “knowing business” refers to an accumulated knowledge of basic procedures and attitudes that have proved useful in running any kind of business. A person who knows business understands accounting, the handling of personnel, marketing, cash flow, inventory control, and effective decision making.

The The phrase “knowing the business” refers to an accumulated knowledge of a particular field such as the automotive industry, oil, journalism, professional sports, processed foods, textiles, and transportation, to name a few. In the past, there have been champions of the idea that a good manager could be effective in any business. But the various waves of mergers and acquisitions have sometimes shown this idea to be less than universally applicable. Here is a fictional sketch to convey what has sometimes happened when managers branched out into new fields.

Wavemaster Shipbuilding, Limited, acquired Hoffman-Torcell Publishing, Midwest Sports Network (MSN), and Fluffy-Lite Bread Bakery. Wavemaster executives, with eyes always on the bottom line, made drastic cuts in the operations at Fluffy-Lite, Hoffman-Torcell, and MSN. The cuts administered by executives who knew nothing of publishing, baking, or sports broadcasting crippled the newly acquired firms, and their fortunes sagged. Wavemaster eventually had to get rid of the three firms. Wavemaster ruined the firms because its decision makers knew nothing of the businesses in which the three firms operated.

A different example would be the fabulous cook who opens a restaurant. Entrepreneurs need to know the business, but the cook of our story does not understand business. The food is so good and so inexpensive that the restaurant is filled for every meal. At such low prices, the business loses money on every meal. The cook needs someone who knows business.

Knowing business and knowing the business—both kinds of knowledge must be present for a firm to be a success.

Discussion Questions for Knowing Business vs. Knowing the Business 1. What does “knowing business” mean?

The phrase “knowing business” refers to an accumulated knowledge of basic procedures and attitudes that have proved useful in running any kind of business. A person who knows business understands accounting, the handling of personnel, marketing, cash flow, inventory control, and effective decision making.

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16 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 2. How does “knowing the business” differ from “knowing business”?

The phrase “knowing the business” refers to an accumulated knowledge of a particular field. There is a lot of value in knowing a particular field well.

3. How can a manager utilize these two types of knowledge to be a success?

A manager needs a combination of specialized knowledge of his or her chosen field, combined with general knowledge about basic business practices and attitudes that are useful in any field of business. If a manager has general knowledge about business, but no specific knowledge of the field, he or she could make poor decisions and vice versa.

Chapter Review Questions 1. What is the fundamental goal of business? Do all organizations share this goal?

The fundamental goal of business is to earn profits. Nonprofit organizations do not share this fundamental goal, although they often provide goods and services.

2. Name the forms a product may take and give some examples of each.

A good (automobile, calculator, beverage, or notebook).

A service (dry cleaning, overnight mail delivery, a haircut, a checkup by a doctor).

An idea (consultants and attorneys, for example, generate ideas for solving problems).

3. Who are the main participants of business? What are the main activities? What other factors have an impact on the conduct of business in the United States?

The main participants in business are owners, employees, and customers. The main business activities include management, marketing, and finance. Other factors having an effect on the conduct of business are legal and regulatory forces, the economy, competition, technology, and ethical and social concerns.

4. What are four types of economic systems? Can you provide an example of a country using each type?

Communism (China, North Korea, Vietnam, and Cuba) Socialism (Sweden, India, Denmark, and Israel) Capitalism (United States, Canada, and Australia) Mixed economies (most nations operate as mixed economies) 5. Explain the terms supply, demand, equilibrium price, and competition. How do these forces interact in the American economy?

Supply is the quantity of goods or services that businesses are willing to sell at different prices at a specific time, while demand is the quantity of products and services that consumers are willing to buy at different prices at a specific time. Equilibrium price is the price at which the quantity of products that businesses are willing to supply equals the quantity of products consumers are willing to buy at a specific point in time. Competition is the rivalry among businesses to convince customers to buy their products.

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17 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual These forces interact in the American economy, causing the distribution of resources and products to be determined by supply and demand. Supply and demand change in response to changes in economic conditions, availability of resources, and degree of competition.

6. List the four types of competitive environments and provide an example of a product of each environment.

Pure competition (agricultural commodities such as wheat, corn, and cotton) Monopolistic competition (aspirin, soft drinks, and vacuum cleaners) Oligopolies (aluminum industry, steel industry, automobile manufacturers, and airlines) Monopolies (utility companies) 7. List and define the various measures governments may use to gauge the state of their economies. If unemployment is high, will the growth of GDP be great or small?

The gross domestic product is the sum of all goods and services produced by a country during a year. It measures only those products made within a country and therefore excludes profits from companies’ overseas operations. It does include profits earned by foreign companies within the country being measured. The existence of a budget deficit indicates that a nation is spending more than it is getting from taxes. Inflation is characterized by a continuing rise in prices. When unemployment is high, the demand for products and services is low; thus, the level of production decreases. Accordingly, the growth of the GDP is small.

8. Why are fluctuations in the economy harmful?

Fluctuations in the economy are associated with inflation and unemployment. They are a major cause of human distress. Moreover, the potential for fluctuations in the economy make it more difficult for businesses and consumers to plan for the future.

9. How did the Industrial Revolution influence the growth of the American economy? Why do we apply the term service economy to the United States today?

The Industrial Revolution led to an increase in factories as technology provided machines by which workers could make products more efficiently. Work in factories became more specialized. Transportation, especially railroads, allowed farmers to send their surplus crops and goods to markets. Innovations in farm equipment increased farm productivity; fewer workers were required on the farm, and more workers moved to factory jobs in the cities. The U.S. economy is devoted to the production of services that make life easier for consumers.

10. Explain the federal government’s role in the American economy.

The U.S. economic system operates as modified capitalism because business is regulated to a certain extent through federal, state, and local governments. Most government regulation seeks to preserve competition and to protect consumers and employees.

Connect Exercises Below are the available exercises in Connect for this chapter. Please also see the Connect Content Matrix in your Instructor Resource library for additional details on these exercises (including Learning Objectives, topics, Bloom’s level, AACSB, etc.)

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18 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 1. Concert Ticket Prices Sky-Rock-Et (Case Analysis): Demonstrate your understanding of the concepts of Free Enterprise and how a business may succeed or fail on the basis of market demand.

2. Economic Systems: Communism & Capitalism (Click & Drag): Demonstrate your understanding between the fundamental differences between communism and capitalism, two of the basic economic systems found in the world today, and how they address the distribution of resources.

3. Basic Economic Systems: Capitalism, Socialism, and Communism (iSeeit! Animated Video Case): Describe how one's economic life would be under the three major economic systems of the world: capitalism, socialism, and communism.

4. Supply and Demand (iSeeit! Video Case): Understand how supply and demand influences prices in our capitalistic system.

5. Truzios of Italy Makes Specialty Sauces (Case Analysis): Demonstrate your understanding of the impact of supply and demand on pricing, profits, and decision-making.

6. Kiva: Giving Poor Entrepreneurs a Chance (Video Case): Demonstrate your understanding of the economic foundations of business by watching a video about a company called Kiva, which was established to provide loans to entrepreneurs in developing countries.

7. Varieties of Competition (iSeeit! Animated Video Case): Demonstrate your understanding of the four major types of competition that can exist within capitalism.

8. Stakeholders – So Much is at Stake (iSeeit! Video Case): Demonstrate your understanding of business stakeholders and the role they play in the success or failure of a business.

Class Discussion Questions 1. Discuss the economic changes occurring in Russia and Eastern European countries, which once operated as communist economic systems. Why are these changes occurring? What do you think the result will be?

Russia and eastern European countries have turned away from communism and toward economic systems governed by supply and demand rather than by central planning. Before the Soviet Union fell, the economy was stagnant and there was serious political unrest. After the Soviet Union fell, many of the countries that had been taken over by the Soviet Union also began to move away from communism. Despite the potential inequalities that might lie in supply and demand relationships, many feel it is the best way to create an efficient marketplace. In many communistic countries without competition, growth tends to stagnate.

In terms of the results, student answers might vary. However, it is not easy to transition from a communist country to a more competitive supply and demand system. Instructors might want to draw students’ attention to Cuba. Facing severe economic constraints, Cuba laid off thousands of government workers and began pushing more for private enterprise. However, many of these workers will not have much experience in the private sector in a country where entrepreneurship was—and to a certain extent still is—highly discouraged by restrictive laws.

2. Why is it important for the government to measure the economy? What kinds of actions might it take to control the economy’s growth?

It is important for the government to measure the economy to determine whether corrective action is necessary to minimize fluctuations. One way that the government might try to spur growth is by reducing its interest rates or increasing its own spending for goods and services. In periods of inflation, the government might try to lower growth by raising interest rates to discourage spending by businesses. Students will likely come up with additional answers.

3. Is the American economy currently expanding or contracting? Defend your answer with the latest statistics on GDP, inflation, unemployment, productivity, and so on. How is the federal government responding?

Many students will probably say the economy is in a period of economic contraction since we are still very much in the recovery period from the most recent recession. However, unemployment has begun to decrease, and GDP has been going up since the recession. In 2011 the GDP was about $15.09 trillion, GDP per capita was about $48,100, the unemployment rate was about 9 percent, and the inflation rate was 3 percent. These numbers will likely have changed by the time this book comes out. The government has reduced interest rates to encourage borrowing to aid Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

19 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual in the recovery process. It also enforces laws to prevent anticompetitive practices such as monopolies. Competition helps keep prices closer to their equilibrium, which helps to create a more efficient marketplace. Students will likely have many more examples of how the government is responding.

Build Your Business Plan I think the best way to get the students excited about developing their business plans is to facilitate lively class discussions.

Ask the students for the pros and cons of using an established product/business for their business plans. Students are going to think it will be easier to deal with an established product when indeed they have no idea that many companies are privately held, and information may not be readily available. More importantly, students do not realize how difficult it may be to improve upon an established product or business. Unless the students come up with a unique promotional idea or distribution channel for the established product/service, students will end up doing a research project on a product that is already successful. That is not what the business plan project is about.

Encourage students to share their experiences of businesses they attempted, were successful in starting, or have desires to start. It may be a painting service, an eBay service provider, or a lawn care service. Push the students to identify what kinds of businesses/services they believe their communities need. Students need to realize how important it is for them to think about how many others in the community share their desire for a particular product or service. Often students will suggest another video store, pizza parlor, or workout gym for their new business or service. You need to force the students to think about how substantial the demand is for this product/service.

Video Case: Redbox Succeeds by Identifying Market Needs Redbox’s telltale bright red kiosks in stores and fast-food restaurants across the country have become an image of what a great business model can accomplish. The company’s ability to offer customers a convenient and inexpensive DVD rental option has allowed them to grow despite the widespread growth of streaming services such as Netflix and Amazon. In addition, Redbox has responded competitively by partnering with Verizon to offer their own streaming service in conjunction with DVD rentals. As one of the top rental companies in the United States, Redbox is a true entrepreneurial success story.

Building Redbox into a successful firm was not easy, however. It was fraught with challenges. Like most successful companies, Redbox started out by identifying a need. It recognized that consumers could not often find the movies they wanted in convenient locations. Like all good ideas, Redbox required funding to get started. This proved to be a major difficulty. Realizing that customers did not want to pay much for renting movies, Redbox decided to charge only one dollar. Yet the kiosks, which contain over 800 components, required a large amount of capital. The combination of the capital-intensive nature of the business and the low prices was not an attractive recipe for venture capital funding.

However, Redbox was certain that demand for its product offerings would exceed the costs. The company finally found a partner in the more established Outerwall, formerly known as Coinstar, which already had partnerships with many different retailers. The alliance opened the way for Redbox to begin installing kiosks at the front of stores.

Redbox did not immediately expand across the country. Instead, it took a cautious approach toward its business model. It began by focusing its efforts on making one kiosk profitable, then replicating this way of thinking regionally and nationally. In this way, Redbox was able to test its concept without taking the risk of widespread failure.

Even though it was expanding, it was some time before Redbox was able to earn a profit. Like all entrepreneurs, the founders of Redbox had to take many risks if they wanted the company to succeed. “The risks for starting Redbox were significant,” said Marc Achler, vice president of new business, strategy, and innovation. “The first couple years we had some red ink. It took us

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20 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual a while before we turned profitable.” Yet with persistence and continual relationship building with retailers, Redbox has been able to secure more than 50 percent of the DVD-rental market.

One way that Redbox has been able to secure such a large share of the market is by meeting the needs of a variety of stakeholders. Redbox views its customers as its first priority and has developed its kiosks and database to meet their needs.

For instance, customers can reserve movies online and pick them up at their nearest kiosk. If a kiosk happens to be out of a particular movie, customers can search the Redbox database to locate the movie at a nearby kiosk. This combination of convenience and low prices has attracted customers who desire a simplified process to renting movies. The same is true for their streaming service, Redbox Instant by Verizon, which offers unlimited streaming for the same price as competitors and the option to purchase DVDs from the site.

Additionally, Redbox has created a process that also benefits the needs of its retail partners. Redbox kiosks help attract consumers to the store, where they may purchase additional products. Customers must come back the next day to return their movie, where they may once again purchase more products from the retailer. In this way, Redbox creates a win-win situation for both itself and its partners.

This is not to say that everything is easy for Redbox. For instance, it must continually safeguard against allowing underage children to rent inappropriate (rated-R) movies. And while Redbox has approached this changing and dynamic marketplace proactively, it must continue to do so in order to maintain its competitive position. The company’s ability to price rentals and streaming services at 70 percent of the price of competitors and still make a 6 percent return is impressive, but this can easily change as competitors find ways to lower their prices or consumers’ desires change.

Sources: Kevin Kelleher, “The Rise of Redbox Should Spook Netflix,” CNNMoney, February 10, 2012, http://tech. fortune.cnn.com/2012/02/10/therise-of-redbox-should-spook-netflix/ (accessed May 14, 2014); Marc Graser, “Redbox Now Controls More than 50% of Home Video Disc Rental Biz,” Variety, July 25, 2013, http:// variety.com/2013/biz/news/redboxnow-controls-more-than-50-of-homevideo-disc-rental-biz-1200568295/ (accessed May 14, 2014); Joan E. Solsman, “Verizon-Redbox Venture Advances,” The Wall Street Journal, December 12, 2012, http://online. wsj.com/news/articles/SB1000142 412788732429660457817565342 3616518 (accessed May 14, 2014); Kyle Stock, “Redbox Sacrifices Margins to Drive DVD Rentals,” Bloomberg Businessweek, September 17, 2013, www.businessweek.com/ articles/2013-09-17/redbox-sacrificesmargins-to-drive-dvd-rentals (accessed May 14, 2014).

Video Case Discussion Questions 1. Why are consumers so willing to rent from Redbox?

Redbox has developed its kiosks and database to meet customer needs. Its videos are inexpensive compared to other rental stores. Customers can reserve movies online and pick them up at their nearest kiosk. If a kiosk happens to be out of a particular movie, customers can search the Redbox database to locate the movie at a nearby kiosk. This combination of convenience and low prices has attracted customers who desire a simplified process to renting movies.

2. How was Redbox able to overcome some of its earliest challenges?

Redbox overcame initial funding challenges by partnering with Coinstar, which also had established partnerships with retailers that helped Redbox get their kiosks into popular retailers. Redbox was careful to expand a little at a time to make sure the kiosks would be profitable and mitigate the risk of wide-scale loss. Its continual expansion, popularity with consumers, and partnerships with retailers has enabled the firm to become profitable. It also tries to create certain controls to obey applicable laws, such as not allowing underage children to rent R-rated movies.

3. What are some recommendations for ways that Redbox can maintain its high market share?

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21 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Students might have some different answers, but Redbox should definitely maintain its consumer orientation and monitor trends in the competitive environment to keep track of what competitors such as Netflix are doing. The firm might want to create additional partnerships to perhaps eventually expand its offerings into more online streaming, since streaming appears to be increasing in popularity. Further partnerships with film companies and video game firms could also increase Redbox’s selection of products.

Team Exercise Major economic systems, including capitalism, socialism, and communism, as well as mixed economies, were discussed in this chapter. Assuming that you want an economic system that is best for the majority, not just a few members of society defend one of the economic systems as the best system. Form groups and try to reach agreement on one economic system. Defend why you support the system that you advance.

Build Your Skills Supply and Demand Background WagWumps are a new children’s toy with the potential to be a highly successful product. WagWumps are cute and furry, and their eyes glow in the dark. Each family set consists of a mother, a father, and two children. Wee-Toys’ manufacturing costs are about $6 per set, with $3 representing marketing and distribution costs. The wholesale price of a WagWump family for a retailer is $15.75, and the toy carries a suggested retail price of $26.99.

Task Assume you are a decision maker at a retailer, such as Target or Walmart, that must determine the price the stores in your district should charge customers for the WagWump family set. From the information provided, you know that the SRP (suggested retail price) is $26.99 per set and that your company can purchase the toy set from your wholesaler for $15.75 each. Based on the following assumptions, plot your company’s supply curve on the graph provided in Figure 1.6 and label it “supply curve.”

Quantity 3,000 5,000 7,000

Price $16.99 $21.99 $26.99

Using the following assumptions, plot your customers’ demand curve on Figure 1.6 and label it “demand curve.”

Quantity 10,000 6,000 2,000

Price $16.99 $21.99 $26.99

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22 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

For this specific time, determine the point at which the quantity of toys your company is willing to supply equals the quantity of toys the customers in your sales district are willing to buy and label that point “equilibrium price.”

Suggestions for Group Formation If this is a first-year course, it probably makes sense to assign students to groups since they do not know each other. An ideal group size is 4 or 5 students. From the Appendix at the end of Chapter 1, you can see that the first assignment is to develop their business proposals. If you are on a 15-week semester, this should be due around the fourth week of the semester. At that point you will not have covered the marketing chapters, but the idea of the business proposal is just to get the groups to start thinking about what is ahead for the group. In order to avoid a disaster, require the groups to submit their idea of a product or service to you within the first 10 days/two weeks of the course. This allows you to steer them in the right direction if they are in over their heads, or if their idea is not feasible.

History has shown that rotating the leadership of the group helps everyone to be more accountable for their actions (or lack of action). You might suggest that each week one student serve as the leader and coordinate/lead meetings, while the other serves as a recorder of meeting notes and tasks assigned to each group member. Over the course of the semester students should be able to have each role at least once. Inform the students that they will be completing an evaluation of each group member’s contribution to the group after the project is completed.

Consider having a Business Plan Competition at the end of the semester and invite local professionals in to judge. You could require that all teams participate in the competition or it could be voluntary. Maybe the first time you do it you might ask for teams to volunteer. Offer financial prizes (maybe $100 each) to the best plan, the most likely to succeed, and the most creative business plan. The forum for this should be after their oral presentation to the class, which would give them some experience before doing it for the judges. Consider involving all the other sections of the Introduction to Business course in this competition. Knowing they will be competing for a financial prize could serve as a great motivator for students.

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23 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 1. The Life and Influence of Karl Marx 2. The Life and Influence of Adam Smith 3. How Railroad Transportation in the 1800s Affected the American Economy 4. Eli Whitney: An Innovator of Standardization in Manufacturing 5. Advantages and Disadvantages of Small Business Entrepreneurship

Guest Speaker Suggestions 1. A representative from the Small Business Administration or Small Business Development Center or a small business owner/entrepreneur to speak about the opportunities in small business or in entrepreneurship.

2. A professor or teacher from economics or social science to talk about economic system changes in Russia.

3. A professor or representative of a campus international association to speak on differences in American business practices and those of other cultures.

Teaching Suggestions 1. Instructors may use the materials provided in this Instructor’s Manual in a variety of ways. Many prefer to give a lecture interspersed with PowerPoint slides and/or transparencies. These have been designed to add to student understanding of the chapter content.

2. The lecture is generally followed by class discussion of Key Terms and Definitions, Check Your Progress, and Get Involved.

3. Supplemental lecture material follows the Lecture Outline and Notes. One supplemental lecture is provided for each chapter. After discussing the course, the syllabus, and the next session’s assignment, some instructors may wish to use the Supplemental lecture material as a beginning lecture on the first day. In addition to the supplemental lecture(s), a Controversial Issue is provided for each chapter.

4. Additional material is provided in the textbook and in the boxed texts. Also, discussion questions are provided in the Instructor’s Manual for “Going Green” and “Business Challenges” boxed material.

5. A quiz is provided for each chapter. This quiz may be used as a practice quiz or as an in-class quiz. As an alternative to giving the quiz at the conclusion of the lecture, some instructors prefer to give the quiz at the beginning of class (prior to a lecture) to determine how well students have read the chapter assignment or to use the quiz as a means for discussing the chapter.

6. Instructors also have a variety of options in giving in-class and out-of-class assignments. The following are some possibilities: a. Instructors may assign a brief “writing to learn” exercise in which students summarize their thoughts or write answers. This may be a short in-class exercise in which students write answers to one or all of the Additional Discussion Questions and Exercises. The instructor may call on a random number of students to read their written exercises or to discuss answers in class. b. A list of suggestions for guest speakers is provided for the chapter. The instructor may arrange for a speaker, although some instructors give class members or teams the responsibility of arranging for speakers. The number of speakers planned for the entire course and the amount of time allowed for each speaker must be considered by the instructor in planning the sequence of the course.

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24 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual c.

Some students are not test wise. One suggestion that may help students prepare for tests is to have each student develop one test question (multiple-choice, true/false, completion, etc.) based on the key terms and concepts. These questions and answers may be shared in pairs or in teams of individuals. For a unit test, some instructors use one or two questions submitted by students. d. Term paper or project topics may be assigned to be completed over a long period of time. An option to a written term paper is to have a short oral presentation on the term paper or project topics. Many instructors give students a choice of topics from different chapters, allowing them the flexibility of choosing from the topics.

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25 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Chapter 2: Business Ethics and Social Responsibility Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s highlights. Followup via the Connect exercises is then encouraged to provide a holistic understanding of the chapter. Use the hyperlinked Table of Contents below to jump to different sections of the manual.

Table of Contents Chapter Forecast ........................................................................................................................................................................... 25 Learning Objectives ....................................................................................................................................................................... 26 Key Terms and Definitions ............................................................................................................................................................. 26 Content Outline ............................................................................................................................................................................. 27 Key Terms and Definitions ............................................................................................................................................................. 32 Content Outline ............................................................................................................................................................................. 32 Boxed Text Critical Thinking Questions ......................................................................................................................................... 36 Are You Ready // To Go Green and Think Ethics with Your Career? /........................................................................................... 37 Bonus Teaching Resources ............................................................................................................................................................ 37 Chapter Review Questions ............................................................................................................................................................ 40 Connect Exercises .......................................................................................................................................................................... 41 Class Discussion Questions ............................................................................................................................................................ 42 Build Your Business Plan................................................................................................................................................................ 42 Video Case: The Challenge of Building Trust in Business .............................................................................................................. 43 Team Exercise ................................................................................................................................................................................ 44 Build Your Skills ............................................................................................................................................................................. 45 Term Paper or Project Topics ........................................................................................................................................................ 49 Guest Speaker Suggestions ........................................................................................................................................................... 49 Teaching Suggestions .................................................................................................................................................................... 49

Chapter Forecast In this chapter, we take a look at the role of ethics and social responsibility in business decision making. First, we define business ethics and examine why it is important to understand ethics’ role in business. Next, we explore a number of business ethics issues to help you learn to recognize such issues when they arise. Finally, we consider steps businesses can take to improve ethical behavior in their organizations. The second half of the chapter focuses on social responsibility and unemployment. We describe some important issues and detail how companies have responded to them.

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26 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Learning Objectives LO 2-1 LO 2-2 LO 2-3 LO 2-4 LO 2-5

Describe the importance of business ethics and social responsibility.

Detect some of the ethical issues that may arise in business.

Specify how businesses can promote ethical behavior.

Explain the four dimensions of social responsibility.

Evaluate an organization’s social responsibilities to owners, employees, consumers, the environment, and the community.

Key Terms and Definitions Bribes Payments, gifts, or special favors intended to influence the outcome of a decision Business ethics Principles and standards that determine acceptable conduct in business Codes of ethics Formalized rules and standards that describe what a company expects of its employees Consumerism The activities that independent individuals, groups, and organizations undertake to protect their rights as consumers Corporate citizenship The extent to which businesses meet the legal, ethical, economic, and voluntary responsibilities placed on them by their stakeholders Ethical issue An identifiable problem, situation, or opportunity that requires a person to choose from among several actions that may be evaluated as right or wrong, ethical or unethical Plagiarism The act of taking someone else’s work and presenting it as your own without mentioning the source Social responsibility A business’s obligation to maximize its positive impact and minimize its negative impact on society Sustainability Conducting activities in a way that allows for the long-term well-being of the natural environment, including all biological entities. Sustainability involves the assessment and improvement of business strategies, economic sectors, work practices, technologies, and lifestyles so that they maintain the health of the natural environment Whistleblowing The act of an employee exposing an employer’s wrongdoing to outsiders, such as the media or government regulatory agencies

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27 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Content Outline The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a section on which CONNECT activities can be used in the chapter. This is created so that you can facilitate in-class or online discussion effectively.

LO 2-1 Describe the importance of business ethics and social responsibility.   

Introduction Business Ethics and Social Responsibility The Role of Ethics in Business

PowerPoint Slides

Lecture Outline and Notes: I.

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Key terms:  Business ethics  Social responsibility

Business Ethics and Social Responsibility a. Business ethics are principles and standards that determine acceptable conduct in business b. Acceptable behavior is determined by: i. The organization ii. Stakeholders iii. Customers iv. Competitors v. Government regulators vi. Interest groups vii. The public viii. The individual’s personal principles c. Global Trust in Different Institutions (Figure 2.1) i. In business, trust is the glue that holds the customer relationship together ii. Most unethical activities within organizations are supported by an organizational culture that encourages employees to bend the rules. d. “Tone from the top” i. Managers must show a strong commitment to ethics and compliance ii. “Tone from the top” requires top managers to acknowledge their own role in supporting ethics and compliance iii. Top managers must: 1. Create strong relationships with ethics and compliance department 2. Clearly communicate expectations for ethical behavior to all employees 3. Educate managers/supervisors about the company’s ethics policies 4. Train managers and employees on what to do if an ethics crisis occurs e. Social responsibility is a business’s obligation to maximize its positive impact and minimize its negative impact on society i. Social responsibility and ethics are not the same 1. Ethics refers to individual’s or work group’s decisions 2. Social responsibility is the impact of the entire organization’s activities on society f. Laws and regulations i. Timeline of Ethical and Socially Responsible Activities (Table 2.1) ii. Sarbanes-Oxley Act 1. Criminalized securities fraud and stiffened penalties for corporate fraud 2. Enacted after the accounting scandals in the early 2000’s iii. Dodd-Frank Act 1. Passed to reform the financial industry and offer consumers protection

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28 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

II. PPT 2.10

against complex and/or deceptive financial products 2. Enacted after the most recent recession The Role of Ethics in Business a. Growing concerns about legal and ethical issues in business strengthen the public’s perceptions that ethical standards and the level of trust in business need to be raised i. Recent legal and ethical issues: 1. Identity Theft 2. Accounting fraud 3. Cybercrimes 4. Deceptive advertising 5. Unfair competitive practices ii. Learning to recognize and resolve ethical issues is a key step in evaluating ethical decisions

LO 2-2 Detect some of the ethical issues that may arise in business. o o o PPT 2.11

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Recognizing Ethical Issues in Business Fairness and Honesty Making Decisions about Ethical Issues

Key terms:  Ethical issue  Bribes  Plagiarism

b. Recognizing ethical issues i. An ethical issue is an identifiable problem, situation, or opportunity that requires a person to choose from among several actions that may be evaluated as right or wrong, ethical or unethical ii. Recognizing ethical issues is the most important step in understanding business ethics iii. One of the principal causes of unethical behavior in organizations is overly aggressive financial or business objectives c. TABLE 2.2 Organizational Misconduct in the United States d. Bribes are payments, gifts, or special favors intended to influence the outcome of a decision i. Many business issues seem straightforward and easy to resolve on the surface, but are in reality very complex ii. Experience with the culture in which a business operates is critical to understanding what is ethical or unethical e. Misuse of Company Time i. Theft of time is a common area of misconduct observed in the workplace ii. Time theft costs are estimated to cost companies hundreds of billions of dollars annually iii. It is widely believed that the average employee “steals” 4.5 hours a week with late arrivals, leaving early, long lunch breaks, inappropriate sick days, excessive socializing, and engaging in personal activities such as online shopping and watching sports while on the job. f. Abusive or intimidating behavior is the most common ethical problem for employees i. Bullying is associated with a hostile workplace when a person or group is targeted and is threatened, harassed, belittled, verbally abused, or overly criticized 1. Within the concept of abusive behavior, intent should be a consideration 2. Abusive behavior is difficult to assess and manage because of diversity in culture and lifestyle g. Actions Associated with Bullies (Table 2.3) h. Misuse of company resources has been identified as a leading issue in observed misconduct in organizations i. Issues might include:

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29 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 1. Spending an excessive amount of time on personal e-mails 2. Submitting personal expenses on company expense reports 3. Using the company copier for personal use ii. Many companies have implemented official policies delineating acceptable use of company resources i. Conflict of Interest i. Exists when a person must choose whether to advance his or her own personal interests or those of others ii. To avoid, employees must be able to separate their personal financial interests from their business dealings iii. Inside trading is the buying or selling of stocks by insiders who possess material that is still not public iv. Bribery can also be a conflict of interest j. TABLE 2.4 Least Corrupt Countries k. Fairness and Honesty i. Employees must: 1. Abide by the laws 2. Cause no harm through dishonesty 3. Use company resources fairly and honestly 4. Be aware of company policies 5. Recognize ethical behavior ii. Companies must: 1. Use fair competition practices 2. Give full disclosure of potential harm by a product iii. Employer and Companies must 1. Recognize dishonesty has become a significant problem 2. Take steps to combat it 3. Examples include: sports scandals and college admissions iv. Communications 1. Be truthful in advertising 2. Product labeling v. Business Relationships 1. Meet obligations 2. Keep company secrets 3. Avoid undue pressure forcing others to act unethically vi. Plagiarism is taking someone else’s work and presenting it as your own without mentioning the source l. Making Decisions about Ethical Issues i. It can be difficult to recognize specific ethical issues ii. People often need years of experience to accurately recognize and react to ethical situations iii. Questions to Consider in Determining Whether an Action is Ethical (Table 2.5)

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Improving Ethical Behavior in Business

Key terms:  Codes of ethics  Whistleblowing

m. Improving Ethical Behavior in Business i. Three factors that influence business ethics (Figure 2.2): 1. Individual Standards and Values 2. PLUS Managers’ and Co-Workers’ Influence 3. PLUS Opportunity: Codes and Compliance Requirements

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30 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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4. EQUAL Ethical/Unethical Choices in Business ii. Many employees use different ethical standards at work than they do at home iii. The activities and examples set by managers and co-workers are critical in gaining consistent ethical compliance iv. If a company fails to provide good examples and direction, confusion and conflict will develop 1. Leading to unethical choices in business Codes of ethics are formalized rules and standards that describe what a company expects of its employees i. Employees must have established ethics policies if employees are to determine what conduct is acceptable ii. Codes and policies on ethics encourage the creation of an ethical culture in the company iii. The enforcement of ethical codes and policies through rewards and punishments increases the acceptance of ethical standards by employees Table 2.8 A Selection of the World’s Most Ethical Companies Whistleblowing is the act of an employee exposing an employer’s wrongdoing to outsiders such as the media or government regulatory agencies i. One of the most important components of an ethics program is a means through which employees can report observed misconduct anonymously ii. More companies are establishing programs to encourage employees to report illegal or unethical practices internally iii. In 2010, Congress passed the Dodd-Frank Act, which includes a “whistleblower bounty program” Improving Ethical Behavior in Business i. The current trend is to move away from legally based ethical programs to cultural or integrity-based programs that make ethics a core organizational value ii. Effective business ethics programs are good for business performance iii. Firms that develop higher levels of trust function more efficiently and effectively and avoid damaged company reputations and product images

LO 2-4 Explain the four dimensions of social responsibility. 

Key terms:  Corporate citizenship

The Nature of Social Responsibility

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The Nature of Social Responsibility a. Social Responsibility Requirements (Table 2.7) i. Financial and Economic Viability ii. Compliance with Legal and Regulatory Requirements iii. Ethics, Principles, and Values iv. Philanthropic Activities b. Corporate citizenship is the extent to which businesses meet the legal, ethical, economic, and voluntary responsibilities placed on them by their stakeholders i. Commitment to corporate citizenship indicates a strategic focus on fulfilling the social responsibilities expected of it by its stakeholders ii. Involves action and measurement of the extent to which a firm embraces corporate citizenship philosophy and following through by implementing appropriate initiatives

LO 2-5 Evaluate an organization’s social responsibilities to owners, employees, consumers, the environment, and the community.

Key terms:  Consumerism  Sustainability

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31 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual  

Social Responsibility Issues Unemployment IV.

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Social Responsibility Issues a. Managers consider social responsibility on a daily basis. i. Among the many social issues that mangers must consider are their firms’ relations with: 1. Owners and stockholders 2. Employees 3. Consumers 4. The environment 5. The community b. TABLE 2.9 The Arguments For and Against Social Responsibility c. Relations with Owners and Stockholders i. Maintaining proper accounting procedures ii. Providing investors with all relevant information iii. Protecting owner’s rights and investments d. Employee Relations i. Provide a safe workplace and pay them adequately ii. Provide equal opportunities for all employees iii. Keep them informed of what is happening in the company iv. Listen to their grievances and treat them fairly e. Consumer Relations - Consumerism involves the activities that independent individuals, groups, and organizations undertake to protect their rights as consumers i. Write letters ii. Lobby government agencies iii. Make public service announcements iv. Boycott irresponsible companies f. Consumer Bill of Rights (John F. Kennedy, 1962) i. The right to safety ii. The right to be informed iii. The right to choose iv. The right to be heard g. Sustainability i. Conducting activities in a way that allows for the long-term well-being of the natural environment, including biological entities ii. Involves the assessment and improvement of business strategies, economic sectors, work practices, technologies, and lifestyles so that they maintain the health of the natural environment h. Sustainability Issues i. Pollution 1. Water: Society is demanding clean water 2. Air: Acid rain and global warming 3. Land: Garbage, strip mining, and poor forest conservation ii. Alternative energy 1. Reducing carbon emissions forces alternative energy sources i. Response to Environmental Issues i. Making processes more eco-friendly is called “green” business ii. Recycling aluminum, paper, and glass iii. Using green power sources when available iv. Larger companies may have a Vice President of Environmental Affairs v. Greenwashing is creating a positive green association for non-green products

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32 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual PPT 2.41

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Community Relations i. Donations to local and national charities ii. Volunteer support of local causes Unemployment a. Unemployment, while an economic issue, carries ethical implications b. Some companies refuse to hire unemployed workers due to lack of experience rather than hiring and then training them c. Factory closures are seen as unethical because it contributes to unemployment d. Protesters say unemployment leads to the growing gap between rich and poor

Chapter 2 Appendix: The Legal and Regulatory Environment Key Terms and Definitions Express warranty It stipulates the specific terms the seller will honor Fraud A purposefully unlawful act to deceive or manipulate in order to damage others Implied warranty Imposed on the producer or seller by law, although it may not be a written document provided at the time of sale Tort A private or civil wrong other than a breach of contract Uniform Commercial Code (UCC) A set of statutory laws covering several business law topics

Content Outline Lecture Outline and Notes: I.

II.

Sources of Law a. Business law refers to the rules and regulations that govern the conduct of business. i. The regulatory environment is created based on inputs from competitors, customers, employees, special interest groups, and the public’s elected representatives. ii. Lobbying by pressure groups who try to influence legislation often shapes the legal and regulatory environment.

Courts and the Resolution of Disputes a. The primary method of resolving conflicts and business disputes is through lawsuits, where one individual or organization takes another to court using civil laws.

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33 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

III.

IV.

b. All decisions made in the courts are based on criminal and civil laws derived from the legal and regulatory system. c. The Court System i. Courts must have jurisdiction, or the legal power, through a judge, to interpret and apply the law and make a binding decision in a particular case. ii. In a trial court, the court must determine the facts of the case and the judge must decide which law or set of laws is pertinent to the case and must then apply those laws to resolve the dispute. iii. An appellate court deals solely with appeals relating to the interpretation of law. d. Alternative Dispute Resolution Methods i. Mediation is a form of negotiation to resolve a dispute by bringing in one or more third-party mediators, usually chosen by the disputing parties, to help reach a settlement. ii. Arbitration involves submission of a dispute to one or more third-party arbitrators, usually chosen by the disputing parties, whose decision usually is final. iii. A mini-trial is when both parties agree to present a summarized version of their case to an independent third party. iv. A private court system is similar to arbitration in that an independent third party resolves the case after hearing both sides of the story.

Regulatory Administrative Agencies a. The Federal Trade Commission (FTC) most influences business activities related to questionable practices that create disputes between businesses and their customers. i. If a company continues the questionable practice, the FTC can issue a cease-anddesist order, which is an order for the business to stop doing whatever has caused the complaint. b. The Food and Drug Administration (FDA) enforces regulations prohibiting the sale and distribution of adulterated, misbranded, or hazardous food and drug products (Table A-1). c. The Environmental Protection Agency (EPA) develops and enforces environmental protection standards and conducts research into the adverse effects of pollution. d. The Consumer Product Safety Commission recalls about 300 products a year, ranging from small, inexpensive toys to major appliances.

Important Elements of Business Law a. Sales agreements: Important elements of business law include the Uniform Commercial Code (UCC), the law of torts and fraud, the law of contracts, the law of agency, the law of property, and the law of bankruptcy. b. The Uniform Commercial Code (UCC) is a set of statutory laws covering several business law topics. i. Article II addresses the rights of buyers and sellers, transfers of ownership, warranties, and the legal placement of risk during manufacture and delivery.

1. Article II of the UCC deals with express and implied warranties. a. An express warranty stipulates the specific terms the seller will honor. b. An implied warranty is imposed on the producer or seller by law, although it may not be a written document provided at the time of sale. c. The Law of Torts and Fraud i. A tort is a private or civil wrong other than a breach of contract.

1. A tort is imposed on the producer or seller by law, although it may not be a written document provided at the time of sale.

2. An important part of tort law is product liability, businesses’ legal responsibility for any negligence in the design, production, sale, and consumption of products. ii. Fraud is a purposefully unlawful act to deceive or manipulate in order to damage

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34 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual others. d. The Law of Contracts i. A contract is a mutual agreement between two or more parties that can be enforced in a court if one party chooses not to comply with the terms of the contract. ii. Many aspects of contract law are covered under the Uniform Commercial Code. iii. Only those contracts that meet certain requirements—called elements—are enforceable by the courts.

1. To enforce a contract must show that it contains the following elements: voluntary agreement, consideration, contractual capacity of the parties, and legality.

2. The second requirement for enforcement of a contract is that it must be supported by consideration—that is, money or something of value must be given in return for fulfilling a contract.

3. A person cannot be forced to abide by the terms of a promise unless that person receives a consideration.

4. Contractual capacity is the legal ability to enter into a contract.

5. Legality is the state or condition of being lawful. iv. Breach of contract is the failure or refusal of a party to a contract to live up to his or her promises. e. The Law of Agency i. An agency is a common business relationship created when one person acts on behalf of another and under that person’s control.

1. Two parties are involved in an agency relationship: The principal is the one who wishes to have a specific task accomplished; the agent is the one who acts on behalf of the principal to accomplish the task. a. An agency relationship is created by the mutual agreement of the principal and the agent. b. A principal grants authority to the agent through a formal power of attorney, which is a legal document authorizing a person to act as someone else’s agent. f. The Law of Property i. Property law is extremely broad in scope because it covers the ownership and transfer of all kinds of real, personal, and intellectual property. ii. Real property consists of real estate and everything permanently attached to it. iii. Personal property basically is everything else and can be subdivided into tangible and intangible property.

1. Tangible property refers to items that have a physical existence, such as automobiles, business inventory, and clothing.

2. Intangible property consists of rights and duties; its existence may be represented by a document or by some other tangible item. iv. Intellectual property refers to property, such as musical works, artwork, books, and computer software, that is generated by a person’s creative activities.

1. Copyrights protect the ownership rights on material (often intellectual property) such as books, music, videos, photos, and computer software.

2. Patents give inventors exclusive rights to their invention for 20 years.

3. A trademark is a brand (name, mark, or symbol) that is registered with the U.S. Patent and Trademark Office and is thus legally protected from use by any other firm. g. The Law of Bankruptcy i. There are also laws dealing with bankruptcy, which occurs when individuals or companies ask a bankruptcy court to declare them unable to pay their debts and thus release them from the obligation of repaying those debts.

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35 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual V.

VI.

VII.

Laws Affecting Business Practices a. Laws that determine parameters and requirements for business decision making include the Sherman Antitrust Act, the Clayton Act, and a number of other laws (Table A-4). i. The Sherman Antitrust Act, passed in 1890, is meant to prevent businesses from restraining trade and monopolizing markets. ii. The Clayton Act, passed in 1914, prohibits price discrimination, tying and exclusive agreements, and the acquisition of stock in another corporation where the effect may be to substantially lessen competition or tend to create a monopoly. b. In spite of these laws regulating business practices, there are still many questions about the regulation of business.

Investigate the Internet: Legal and Regulatory Issues a. With the growing use of the Internet, maintaining an acceptable level of privacy for consumers is becoming a major concern. i. Some consider that tracking individuals who visit or “hit” their website by attaching a cookie is an invasion of privacy. ii. The CAN-SPAM Act of 2004 restricts unsolicited email advertisements. iii. The Children’s Online Privacy Protection Act (COPPA) prohibits website and Internet providers from seeking personal information from children under age 13 without parental consent.

Legal Pressure for Responsible Business Conduct a. To ensure greater compliance with society’s desires, both federal and state governments are moving toward increased organizational accountability for misconduct. b. Whistleblowers may soon get new protections, thanks to a Securities and Exchange Commission (SEC) ruling limiting companies’ abilities to censor and intimidate employees who report violations. c. The SEC’s whistleblower program was created in 2010 as part of the Dodd-Frank Act. i. The intent of the program is to curb legal and ethical misconduct before it leads to disastrous consequences, such as the global financial crisis. ii. The Ethics Resource Center has found that 21 percent of employees experience retaliation after reporting misconduct. iii. The SEC is fighting back and taking steps to protect the rights of whistleblowers. iv. These steps demonstrate the SEC’s commitment to whistleblower protection and could lead to fewer companies suppressing future reporting of misconduct. v. Failure to comply with the seven minimum requirements of the FSGO (Table A-5), may result in not only penalties but also the loss of customer trust, public confidence, and other intangible assets. d. The Sarbanes-Oxley Act criminalized securities fraud and strengthened penalties for corporate fraud. i. It created an accounting oversight board that requires corporations to establish codes of ethics for financial reporting and to develop greater transparency in financial reports to investors and other interested parties. ii. Additionally, the law requires top corporate executives to sign off on their firms’ financial reports, and they risk fines and jail sentences if they misrepresent their companies’ financial position. iii. Major provisions of the Sarbanes-Oxley Act (Table A-6) 1. Criminalized securities fraud and strengthened penalties for corporate fraud 2. Created an accounting oversight board that requires corporations to establish codes of ethics for financial reporting 3. Developed greater transparency in financial reports to investors and other interested parties.

4. The law required top corporate executives to sign off on their firms’ financial reports, and they risk fines and jail sentences if they misrepresent

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36 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual their companies’ financial position. e. In spite of the benefits Sarbanes-Oxley offers, it did not prevent widespread corporate corruption from leading to the most recent recession. f. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed (Table A-7). i. It attempted to improve upon provisions laid out in the Sarbanes-Oxley Act. ii. In addition to new regulations for financial institutions, the legislation created a Consumer Financial Protection Bureau (CFPB) to protect consumers from complex or deceptive financial products. iii. The Dodd-Frank Act contains 16 titles meant to increase consumer protection, enhance transparency and accountability in the financial sector, and create new financial agencies. iv. Dodd-Frank takes whistleblower protection a step further by offering additional incentives to whistleblowers for reporting misconduct. If whistleblowers report misconduct. v. If whistleblowers report misconduct that results in penalties of more than $1 million, the whistleblower will be entitled to a percentage of the settlement. vi. The act also created three new agencies: the Consumer Financial Protection Bureau (CFPB), the Office of Financial Research, and the Financial Stability Oversight Council.

Boxed Text Critical Thinking Questions Tyson Looks for Sustainable Meat 4. What were some of the sustainability mishaps Tyson has faced in the past?

Tyson’s greenhouse gas emissions are thought to be equivalent to those emitted by the country of Ireland.

Additionally, Tyson was forced to pay a fine of $2 million for contaminating a river with chicken waste from a processing plant. It has also been accused of inhumane treatment of animals.

5. What are some ways Tyson hopes to improve its sustainability and the ethical treatment of animals?

The CEO has added the position of a chief sustainability officer and promised to better the treatment of animals. The company has also pledged to cut emissions by 30% by 2030.

6. Do you think Tyson is investing more in alternative meats because it is beneficial to the environment or because the market is increasing in demand? Explain your reasoning.

Answers will vary with some students answering that Tyson is just meeting a consumer preference while other students will argue that Tyson is trying to be more sustainable and ethical.

Building a Better Everyday Life with Ikea 4. Describe the strides IKEA is attempting to take in sustainability.

IKEA is reducing carbon emissions and has a long-term goal to become “carbon positive,” which means removing more carbon dioxide emissions than it creates. The company is switching to electric delivery trucks and is committed to completely switching over to electric trucks in every location. IKEA has invested around $2 billion in renewable energy and expects to be climate positive—producing more energy than it uses—by 2030.

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37 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 5. How does IKEA display corporate social responsibility? How does this differ from ethical conduct?

Employees are encouraged to mentor young students, assist senior citizens, and more. In 1982, IKEA opened the IKEA foundation. Besides fighting for children’s rights and education, the IKEA Foundation awarded a grant of $2.3 million to the World Resources Institute to help bring clean electricity to a million people in India and East Africa.

6. Why do you think a culture of volunteerism might be helpful in recruiting new employees?

Answers will vary but most students will answer that volunteerism and the skills learned in as an IKEA volunteer create marketable skills that employees and employers’ value. Additionally, many of today’s employees value jobs that align with the IKEA vision “to create a better everyday life for the many people.”

Sherwin-Williams Paints Itself in a Corner 4. If Sherwin-Williams knew about the dangers of lead paint more than a century ago (it denies this claim), how would this violate the concepts of fairness and honesty? Do you think this should affect the verdict?

If Sherwin-Williams knew about the dangers, then it violates the concept of fairness and honesty as it relates to disclosure of potential harm caused by product use. Fairness and honesty are at the heart of business ethics and relate to the general values of decision makers. Answers will vary with some students answering that it should affect the verdict and others disagreeing.

5. Recall that lead paint in homes was not made illegal until 1978. Yet knowledge that it was toxic inside the home was accepted since the 1950s. Do you think other stakeholders should be held liable for the cleanup?

Again, answers will vary with some students answering that government agencies should be held accountable since they did not enforce a lead paint ban. Other students will argue that only the companies responsible for making the paint should be held liable.

Are You Ready // To Go Green and Think Ethics with Your Career? / What has helped drive the increasing awareness of the importance of business ethics and social responsibility?

A few years ago, companies were under pressure from employees and consumers to understand the importance of ethical and social responsibility issues. Today, green business strategies give a firm a commercial advantage in the marketplace.

Companies recognize that being socially responsible and ethical is good for the business’s bottom line, as well as for its reputation.

What are the projected opportunities for a career in “green business” sector?

Consumers are more in tune with and concerned about green products, policies, and behaviors by companies than ever before. Companies are looking for new hires to help them see their business creatively and bring insights to all aspects of business operations. The International Renewable Energy Industry estimates that the number of jobs in the renewable energy job market could rise to 24 million by 2030.

New industries are being created and old ones are adapting to the new market demands, opening up many varied job opportunities that will lead not only to a paycheck, but also to the satisfaction of making the world a better place.

Bonus Teaching Resources This section offers bonus teaching resources for class discussion. This is offered in addition to what’s offered in the M: Business text.

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38 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

“Recycling: A Dilemma for Business Firms” MiniCase In the United States, the amount of consumer and industrial waste has been increasing regularly. Ecological authorities frequently tout recycling as a means of slowing down waste and the need for landfill space. Biodegradable products, those which decompose, are also recommended.

As more companies strive to be ecologically responsible as well as appeal to consumers by offering “green” products, many have come to believe the evidence that such programs may actually be economically profitable. Many companies now offer “green” versions of their traditional products as the proof mounts that many consumers favor these products. Organizations such as Walmart are reducing pollution and waste in anticipation of future federal regulatory mandates. 3M offers toilet-bowl brushes made from the leftover plastic fibers from is Scotch-Brite cleaning cloths. Similarly, Preserve Products offers toothbrushes and other household and personal grooming products made from recycled Stonyfield Farm yogurt containers.

Many large retailers offer recycling centers for paper, plastics, and aluminum. Best Buy even offers electronics recycling at many of its stores. Large grocery chains frequently give consumers discounts on their purchases if they bring their own bags with them. While recycling has become increasingly widespread, recycling centers can be problematic for two reasons: (1) the lack of a market for recycled products in some areas and (2) the cost of maintaining the recycling centers. For example, one manager of a major retailing firm pointed out that people used the recycling bins to dispose of all kinds of unwanted trash and garbage, disregarding the specific types of materials to be placed in the bins. Every morning, employees had to clean the parking lot of debris from the recycling bins. People would toss in glass, metal, cloth, and garbage in plastic sacks—materials not to be deposited in the recycling bins.

Many cities in the United States, concerned about the declining amount of landfill space, have introduced recycling for trash and garbage pickup. Those municipalities, as in the case of individual business firms, need an outlet for materials saved for recycling. Sorting is a requirement for municipal recycling—whether done by each household or by specialized sorting equipment.

Two trends may lead to increased recycling by consumers and business firms. One trend is charging for nonrecyclable garbage.

For example, some municipalities refuse to pick up nonrecycled trash and garbage, forcing households to hire private firms to pick up nonrecycled items. Another trend is through regulation that requires recycling, such as the German Green Point Law, which requires manufacturers to assume responsibility for the disposal of their packaging.

When consumers and business firms find it is in their economic interests to recycle, then perhaps producers will find ways to use recycled products. For example, Pitney Bowes of Canada Ltd. is one of many companies that now sells copiers that take reusable toner cartridges. Thermo Tech Technologies Inc., another Canadian company, uses a patented technology to turn organic wastes into animal feed supplements or fertilizers.

Technology also has many innovative uses proposed for recycled plastics—some as reformulated plastics, others as insulation or building materials. Biodegradability is the main problem with plastics. Biodegradable plastics, however, can be composted and are therefore healthier for the environment. Household and personal care product firm Seventh Generation offers biodegradable diapers, cleaners, and detergents. While these products must be composted properly in order to fully biodegrade, they do represent a step in the right direction toward fully biodegradable plastics.

Recycling, no doubt, is here to stay. Social responsibility on the part of consumers and businesses will encourage greater use of recycling. Governmental regulation also will spur greater use of recycling in the future.

Sources: Kristina Dell, “The Promise and Pitfalls of Bioplastic,” Time, May 3, 2010, http://www.time.com/time/magazine/article/0,9171,1983894,00.html (accessed May 10, 2016); “The Home Depot and the Environment,” Home Depot, Inc. corporate website, https://corporate.homedepot.com/CorporateResponsibility/Environment/Pages/default.aspx (accessed May 10, 2016); Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

39 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Jacquelyn Ottman, “A Little Creativity Could Lead to a Big Advantage,” Marketing News, March 27, 1995, p. 11; Kevin Kelly, “It Really Can Pay to Clean up Your Act,” Business Week, November 7, 1994, p. 141; Johanna Powell, “Companies Get Their Due for Public Service,” The Financial Post, November 12, 1994, p. s15; Seventh Generation website, http://www.seventhgeneration.com/search/node/biodegradable (accessed September 27, 2012).

Discussion Questions for “Recycling: A Dilemma for Business Firms” MiniCase 4. Why has recycling become more popular and widespread?

As more consumers become concerned about the environment and climate change, recycling has become more common. Many cities offer recycling services now, and some organizations also have recycling bins for commonly recycled items. Furthermore, companies like Best Buy offer recycling services for difficult-to-recycle items like electronics. As resources become scarcer and more consumers reject companies perceived as wasteful, organizations have sought to improve their recycling practices in order to cut down on waste and to increase goodwill.

5. What are some of the issues hindering businesses and organizations from offering further recycling services?

Recycling can be expensive because people must be hired to sort the recycled goods. There must also be a market for recyclables. In recessionary periods, oftentimes it becomes too expensive to continue to offer recycling programs because companies seek to cut back on extra expenses. Some cities and towns have found that recycling programs can be expensive to maintain also.

6. What are some of the solutions companies are developing to help cut down on waste and to recycle more?

Some companies are turning to energy saving measures like using renewable energy. They are also looking toward cutting-edge materials to help reduce waste that ends up in landfills. Biodegradable plastics in packaging are relatively new and, while they are not in widespread use, are growing in acceptance and popularity.

Controversial Issue: Would You Be the One to Blow the Whistle?

Ethics is concerned not only with an individual’s conduct but also with how an individual responds to the actions of others. An employee who takes action upon observing improper conduct by a fellow employee is often referred to as a whistleblower.

Having read of the harassment that most often comes to a whistleblower, however, a person will probably think long and carefully before blowing the whistle. The case below is a fictitious example used to discuss the ethical problems for employees.

Adam Brown worked in the design engineering department of a manufacturing firm. One of the policies of the manufacturing firm was that no employee should accept gifts of more than $20 from outside suppliers or firms. As part of his job, Adam Brown frequently communicated and worked with the purchasing department in his firm in providing material and equipment specifications for purchases. Adam’s dealings with Martin Cooper, director of the purchasing department, and other employees of the purchasing department were friendly and cordial, and all purchases made for the manufacturing firm seemed to be made in a professional manner.

One day while talking to a sales representative of one of his firm’s suppliers, Adam discovered that Martin Cooper and his wife had received a free trip to the Bahamas, with all air, hotel, and meal expenses paid by the sales representative’s company.

Adam knew that Martin had not won the trip in a drawing or sweepstakes, and he realized it was an “under the table” gift to Martin for buying the sales representative’s products. Accepting such a gift from a supplier was strictly against company policy. Adam likes Martin, and Adam has no evidence that Martin had given special consideration to the supplier in selecting the supplier’s products. Also, the supplier’s products have met or exceeded all the engineering specifications. Adam rationalizes that most likely the trip was just an expression of appreciation from the supplier, but he still agonizes about what he should do.

(Note: the following questions will all vary depending on the students’ point of view. Make sure that they defend their responses no matter which stance they take.)

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40 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Discussion Questions for Would You Be the One to Blow the Whistle?

4. Was Martin Cooper’s free trip an example of unethical business behavior?

Student answers will vary.

5. Should Adam report to one of his company’s executives about what he had discovered? Or should he talk to Martin Cooper? Or should he just keep quiet?

Student answers will vary.

6. If he decides to do nothing, is Adam guilty of unethical business behavior?

Student answers will vary.

Chapter Review Questions 11. Define business ethics. Who determines whether a business activity is ethical? Is unethical conduct always illegal?

Business ethics refers to principles and standards that determine acceptable conduct in business. Ethical behavior is determined by the public, government regulators, interest groups, and competitors. Unethical conduct is not always illegal, but it does not conform to the principles of society. Ethics goes beyond legal issues. It attempts to build trust among the participants of business.

12. Distinguish between ethics and social responsibility.

Ethics relates to an individual’s values and standards and the decisions he or she makes. Social responsibility concerns the impact of a business’s activities on society.

13. Why has ethics become so important in business?

The negative publicity received by many unethical business practices has made consumers very much aware of ethical issues. Consumers are putting pressure on businesses to behave more ethically with all the parties involved directly or indirectly in business affairs.

14. What is an ethical issue? What are some of the ethical issues discussed in your text? Why are they ethical issues?

An ethical issue is an identifiable problem, situation, or opportunity that requires a person to choose from among several actions that may be evaluated as right or wrong, ethical or unethical. The text categorizes a number of issues, including misuse of company time, bribery, abusive behavior, misuse of company resources, conflicts of interest, communications, and business relationships. These are ethical issues because they involve actions that may be considered unacceptable by society, because they could be perceived as unfair, and/or because they could cause potential harm to other stakeholders.

15. What is a code of ethics? How can one reduce unethical behavior in business?

A code of ethics is a set of formalized rules and standards that describes what a company expects of its employees.

One can reduce unethical behavior in business by developing and promoting a code of ethics, and by using different methods such as training, group discussions, or corporate communications.

16. List and discuss the arguments for and against social responsibility by business (Table 2.8). Can you think of additional arguments (for or against)?

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41 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Pure Arguments for social responsibility include (1) business helped create problems and should help to solve them; (2) business has the financial and technical resources to help solve problems; (3) as a member of society, business should do its fair share to help others; (4) social responsibility can help prevent increased government regulation; and (5) social responsibility helps to ensure economic survival. Arguments against social responsibility include (1) social responsibility detracts from the profit-making objectives of business; (2) participation in social responsibility programs gives business power at the expense of other segments of society; (3) business may not have the expertise to solve social problems; and (4) social problems are the responsibility of government agencies.

Students may be able to offer additional arguments for or against being socially responsible.

17. What responsibilities does a business have toward its employees?

A business should provide employees with a safe workplace, pay them adequately, listen to their grievances, and treat them fairly.

18. What responsibilities does business have with regard to the environment? What steps have been taken by some responsible businesses to minimize the negative impact of their activities on the environment?

Businesses have the responsibility of maintaining a healthy environment. Businesses must take responsibility for their actions as part of society. Some companies focus on prevention as part of environmental responsibility. Others view the protection of the environment as a way of reducing costs and increasing profits. More companies are adopting social responsibility audits to determine how effective the programs have been and to help develop future programs.

19. What are a business’s responsibilities toward the community in which it operates?

Businesses have responsibilities to the general welfare of the communities and societies in which they operate. Many businesses simply want to make their communities better places for everyone to live and work.

Connect Exercises Below are the available exercises in Connect for this chapter. Please also see the Connect Content Matrix in your Instructor Resource library for additional details on these exercises (including Learning Objectives, topics, Bloom’s level, AACSB, etc.)

9. Ethical and Socially Responsible Concerns (Click & Drag): Demonstrate your understanding of the changes in perceptions of social responsibility and ethics over time.

10. The Stakeholders Involved in Social Responsibility (Click & Drag): Demonstrate your knowledge of the stakeholders involved in social responsibility.

11. Ethics (Manager’s Hot Seat Video Case): Put yourself in the shoes of a manager dealing with a difficult ethical situation.

12. Corporate Social Responsibility (iSeeit! Video Case): This short video describes the concept of corporate responsibility and its impact on society.

13. Warby Parker (End-of-Chapter Video Case): Understand ethical and socially responsible practices.

14. The Dilemma of Cross-Selling Insurance Policies (Case Analysis): Demonstrate your understanding of ethical dilemmas, recognizing issues related to ethics, corporate responsibility, and sustainability.

15. Is Sybil’s Ethics Sheet in Balance? (Manager’s Hot Seat Video Case): Demonstrate your understanding of ethical dilemmas and evaluate ways to handle them.

16. Corporate Social Responsibility (iSeeit! Video Case): Demonstrate your understanding of the actions that lead toward a positive public image and good corporate citizenship.

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42 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Class Discussion Questions 4. Discuss some recent examples of businesses engaging in unethical practices. Classify these practices as issues of conflict of interest, fairness and honesty, communications, or business relationships. Why do you think the businesses chose to behave unethically? What actions might the businesses have taken?

Student answers will vary, but they should support their answers with information from the text.

Sample student answer: When Duke Energy acquired Progress Energy, it was agreed that the Duke Energy CEO would step down and the Progress Energy CEO would assume the position of CEO of the newly merged company. However, shortly after the merger, the board—the majority consisting of Duke Energy board members—ousted the CEO of Progress Energy and reinstated the CEO of Duke Energy. Although the board members explained that the Progress Energy CEO’s management style was not sufficient for the job, stakeholders suspected a conspiracy and Duke Energy was investigated.

Potential ethical issues include conflict of interest if the board members acted in their own best interests rather than in the interests of the company; fairness and honesty if they did conspire to replace the CEO all along; insufficient communication since most stakeholders, many workers, and even some board members did not understand why the ouster took place; and business relationships since the replacement appeared to breach the agreement between the two companies when they merged. In this example, students might assume that the board members from Duke Energy favored the Duke Energy CEO for more personal reasons. Some proposed actions would have been to refuse to merge if there were concerns about the other CEO’s management style, negotiate a new agreement about the CEO position before the merger, place the company and stakeholder relationships first and avoid conflicts of interest, or, if there were legitimate reasons for replacing the CEO, clearly communicating to stakeholders why the replacement should take place.

5. Discuss with your class some possible methods of improving ethical standards in business. Do you think that business should regulate its own activities or that the federal government should establish and enforce ethical standards? How do you think businesspeople feel?

Student answers will vary. Students who might favor businesses regulating their own activities might argue that businesses understand their industries better and would therefore have a better understanding of which ethical standards to adopt. Businesses could also come up with unique and creative ways to meet the needs of their stakeholders than if they were constrained by regulation. Those who favor government regulation might point toward the many business scandals that have occurred in recent years and the necessity for government regulation to close loopholes and keep businesses from advancing their own interests at the expense of society. Most businesspeople prefer less regulation as it tends to limit their activities, although some opinions of businesspeople might vary depending on the person.

6. Find some examples of socially responsible businesses in newspapers or business journals. Explain why you believe their actions are socially responsible. Why do you think the companies chose to act as they did?

Student answers will vary depending on their choices. Some good places to investigate would be Ethisphere magazine’s “World’s Most Ethical Companies” or Fortune magazine’s “Best Companies to Work for.”

Build Your Business Plan Find an example within your community of an ethical and/or societal violation, which can be an issue still being resolved. Lead a discussion on the facts of this violation and what the implications are of this violation with the community. Have the students identify the stakeholders affected by this action.

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43 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Ask the students for volunteers to discuss the industry they are considering for their business plan. Probe them to identify any environmental violations, product defects, recalls, etc. that they need to be aware of as they proceed to gather information on this industry.

Video Case: The Challenge of Building Trust in Business Corporate scandals, a growing awareness of environmental issues, and the last global recession have greatly altered the public’s perspective of corporate America. Gone are the days in which consumers blindly trusted company publicity and rhetoric. The public’s trust in business has been shattered, and many companies have a long way to go to earn it back.

The Arthur Page Society and the Business Roundtable Institute for Corporate Ethics are dedicated to corporate accountability and ethics. The organizations released a study addressing Americans’ mistrust of business and how corporations can begin to win back the hearts and minds of consumers. The study, entitled “The Dynamics of Public Trust in Business— Emerging Opportunities for Leaders,” shows that public trust in business has reached a low point. As the economy begins to recover, trust in business has increased. However, trust of business continues to be a serious challenge for businesses to overcome.

This presents major difficulties for businesses because trust is the glue that holds relationships together.

A major issue appears to be the imbalance of power. Many consumers are still angry over business scandals and unemployment rates while corporate management still makes huge profits. The government defended corporate bailouts as a way to keep large companies from failing (which could have worsened the recession). Most of the money has since been paid back, and the government has made a profit. Unemployment has decreased in the last few years, although among young people it is still 15 percent. It is believed that if youth unemployment returned to pre-recession rates, the federal government would recoup $7.8 billion.

Distrust of business is not limited to the United States. According to the Edelman Trust Barometer, 54 percent of global consumers indicate that they trust business. Financial service institutions and banks have the lowest rankings in consumer trust worldwide, at 51 percent. More recent scandals at J.P. Morgan Stanley, HSBC, and British financial services firm Barclays continue to keep trust in this sector low.

Although the Arthur Page Society and the Business Roundtable see their report as a way to start a national dialogue, the report does offer a series of suggestions for businesses. First and foremost, the balance of power must be equalized.

Companies must focus on creating mutual value and leaders must try to gain and retain trust. The study also suggests that corporations create quality goods/services, sell goods/services at fair prices, create and maintain positive employment practices, give investors a fair return, remain active in social responsibility, and create transparency.

Most firms have not been involved in scandals or misconduct. In fact, most companies operate in an ethical and socially responsible manner. Unfortunately, the public sees reports of misconduct in a few businesses and generalizes the misconduct to all businesses. Nevertheless, companies need to communicate their values and maintain responsible conduct. Another example involves the growing public concern regarding how businesses affect the environment—investors want details on a business’s impact and what that business is doing to be more sustainable. As the public fights to make its desires known regarding business behavior, businesses that sincerely want to help the world are receiving some help. Maryland, Vermont, New York, California, and three other states have made “benefit corporations” legal. These corporations must make their values public, report yearly on their socially beneficial behavior, and agree to third-party audits of their social responsibility actions. Acquiring this designation requires the approval of more than half a company’s shareholders. Companies may also establish themselves as B corporations, which certifies their socially responsible focus. It is entirely possible for businesses to regain public trust, but it means a change in values for many businesses in today’s corporate America.

Sources:

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44 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual “Who Really Pays for CSR Initiatives,” Environmental Leader, February 15, 2008, www.environmentalleader.com/2008/02/15/who-really-paysfor-csr-initiatives/ (accessed April 7, 2014); “Global Fund,” www.joinred.com/globalfund (accessed April 7, 2014); Reena Jana, “The Business of Going Green,” BusinessWeek Online, June 22, 2007, www.businessweek.com/stories/2007-06-22/thebusiness-benefits-of-goinggreenbusinessweek-business-newsstockmarket-and-financial-advice (accessed April 7, 2014)

Video Case Discussion Questions 4. What are some of the reasons cited in the Arthur Page Society and the Business Roundtable Institute for Corporate Ethics Report for public distrust of corporations?

A major issue cited in the report is imbalance of power between top executives and the rest of the workers. The public is angry over corporate bailouts and rising unemployment while corporate management still makes huge profits. If students have a chance to view this report, they can feel free to expand on this question.

5. What are some of the recommendations made by this report? Can you think of any other recommendations to give companies on how to behave more ethically?

The report recommends that corporations take steps to equalize the balance of power through creating mutual value.

Corporations must also seek to regain and retain trust. The study also suggests that corporations create quality products/services, sell products/services at fair prices, create and maintain positive employment practices, give investors a fair return, remain active in social responsibility, and create transparency. Students’ recommendations to the second part will vary.

6. What are the benefits of being perceived as an ethical company? What are the downsides of having a reputation for ethical misconduct?

Students’ responses to this question may vary. Be sure that they adequately defend their reasoning. A few things they may mention are increased goodwill among stakeholders of ethical companies, increased profits, and trust.

Downsides of being unethical include the opposite: decreased profits, decreased trust, and decreased sales.

Team Exercise Sam Walton, founder of Walmart, had an early strategy for growing his business related to pricing. The “Opening Price Point” strategy used by Walton involved offering the introductory product in a product line at the lowest point in the market. For example, a minimally equipped microwave oven would sell for less than anyone else in town could sell the same unit. The strategy was that if consumers saw a product, such as the microwave, and saw it as a good value, they would assume that all of the microwaves were good values. Walton also noted that most people don’t buy the entry-level product; they want more features and capabilities and often trade up.

Students will form teams and assign the role of defending this strategy or casting this strategy as an unethical act. They can present their thoughts on either side of the issue.

Sample Answers:  Strategy as Ethical: As long as there are plenty of these minimally equipped products on hand and Walmart is transparent about their prices and functionality, then there is nothing wrong with the strategy. In fact, it is an excellent business strategy because it attracts consumers and provides them with the choice to purchase the minimally equipped product or choose to upgrade to a higher priced product with more features.

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45 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 

Strategy as Unethical: Walmart is using a penetration pricing strategy to drive competitors out of business. Its entire strategy is to draw consumers away from the competition into its stores and then up-sell them to higher-priced products. Although this might not be illegal as long as the lower-priced products are available, this practice is unfair to local businesses that cannot compete and is an underhanded way of persuading consumers to come to its stores.

Build Your Skills Making Decisions about Ethical Issues Background The merger of Lockheed and Martin Marietta created Lockheed Martin, the number-one company in the defense industry—an industry that includes such companies as McDonnell Douglas and Northrop Grumman. You and the rest of the class are managers at Lockheed Martin Corporation, Orlando, Florida.

You are getting ready to do the group exercise in an ethics training session. The training instructor announces you will be playing Gray Matters: The Ethics Game. You are told that Gray Matters, which was prepared for your company’s employees, is also played at 41 universities, including Harvard University, and at 65 other companies. Although there are 55 scenarios in Gray Matters, you will have time during this session to complete only the four scenarios that your group draws from the stack of cards.

Task Form into groups of four to six managers and appoint a group leader who will lead a discussion of the case, obtain a consensus answer to the case, and be the one to report the group’s answers to the instructor. You will have five minutes to reach each decision, after which time, the instructor will give the point values and rationale for each choice. Then you will have five minutes for the next case, etc., until all four cases have been completed. Keep track of your group’s score for each case; the winning team will be the group scoring the most points. Since this game is designed to reflect life, you may believe that some cases lack clarity or that some of your choices are not as precise as you would have liked. Also, some cases have only one solution, while others have more than one solution. Each choice is assessed to reflect which answer is the most correct. Your group’s task is to select only one option in each case.

Source: Permission granted by the author of Gray Matters, George Sammet Jr., Vice President, Office of Corporate Ethics, Lockheed Martin Corporation, Orlando, Florida, to use these portions of Gray Matters: The Ethics Game © 1992. If you would like more information about the complete game, call 1-800-3ETHICS.

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46 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

The following information is extracted from Gray Matters: The Ethics Game Manual: Objectives 1. Make students aware of various ethical challenges that can arise in their day-to-day job responsibilities.

2. Stimulate students’ imaginations regarding the ethical consequences of their business decisions and actions.

3. Strengthen students’ skills in applying textbook knowledge to hypothetical situations.

4. Involve students in discussion rather than have them listen passively to a lecture or read an abstract set of ethical principles.

This game is designed to teach the solving of ethical dilemmas that occur almost every day in every kind of business. It is also designed to create controversy. It is structured to bring out more than just one company’s policies—to allow the participants to argue multiple approaches to ethical dilemmas. For example, is there only one answer—regardless of the circumstances?

Or are there modifying influences? Right is right, but what is right?

The intentional controversy doesn’t stop with the answers. It carries on into the values of the answers. In a game, there must be scorekeeping. You may disagree with the values of some of the answers, but do you always agree with the penalties in football? Or that fine line that distinguishes a hit from an error in baseball?

Ethics is dynamic. No one solution is always correct nor is another solution always wrong. Some solutions appeal to some while other solutions appeal to others. In Gray Matters, every mini-case poses four solutions. In some cases, only one solution

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47 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual is correct; in others, more than one is correct. But which is most correct? In a few mini-cases, none of the posed answers are correct. But one will be the best selection from the options listed.

In theory, each possible answer should entice somebody, thereby generating discussion. It is the discussion that is valuable, for out of the discussion will come the rationale for an answer. None of the posed answers can be changed. The players must pick the one they can best justify—based on company policies, their experiences, their education, their ethical training, and their beliefs.

Materials  

4 mini-case cards (in textbook exercise) 4 (each) A-B-C-D answer flags (instructor can use 3x5 index cards where the answer letters (A-B-C-D) are written one per card)

How to Play Competition adds spice to the game, just as it does in real life. It can be played by individuals, or by a larger play group divided into teams. When the class is too large to play as individuals, organize the players into competitive groups. The number of groups optimally should be 3 to 5 (but can be as many as 10). Preferably, no more than 4 to 6 players should be in each group.

A group spokesperson will be appointed.

For each mini-case, the group should be allowed 5 minutes for discussion among themselves. At the end of 5 minutes, the leader will ask each group spokesperson to hold up an answer flag pertaining to the group’s selected answer. The answers will be recorded by the instructor. Each group will then be asked to explain their answer in one minute. Based on the answer flag presented, each group will be awarded points according to the answers given below. (You may want the groups to keep track of their own scores, or you may wish to photocopy and use the score sheet at the end of this section.)

What is the most essential ingredient to the success of the game? Complete discussion of the ethical dilemma in each question and answer by all the participants.

Answers, Point Values, and Rationale

CASE NO.

ANSWER A

POINTS 0

B

5

C

10

D

-5

4

RATIONAL May solve the workload problem if you can physically and mentally carry this double workload over a long period.

Does not solve the ethical issue, so no credit.

It brings to the attention of the supervisor the poor work ethic of your colleague. It also may give you an opportunity to properly expand your own activity.

If it works, this is the easy way to solve the problem. Be aware, however, if it doesn’t work, you may have to take the next step.

Pushes the problem solving onto someone else. The

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48 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual problem is between you, your supervisor, and your colleague.

Solve it there.

CASE NO.

7

CASE NO.

ANSWER A B C D

POINTS 5 5 0 10

RATIONAL May do some good.

May do some good.

Too confrontational.

Gets the right people involved in solving the problem.

ANSWER A

POINTS -10

B

5

C

-10

D

10

RATIONAL How many other company policies do you also ignore?

May solve the problem but then it may not. In fact, it may get very confrontational and most likely will not.

In that case you deserve -10 points.

This is the easiest way for you to handle the problem and the one with the most chance of success.

ANSWER A

POINTS -10

B C D

0 10 5

36

CASE NO.

40

RATIONAL That makes you also guilty of theft.

He probably knows that.

Ethics will have it investigated.

This may also get the problem investigated; but then again, it may not.

Score Sheet: Photocopy the chart, fill in the group leader’s name at the top of each column, and record the points for the choices selected.

CASE NO. 4

7

ANSWER A B C D A

POINTS 0 5 10 -5 5

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49 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

36

40

B C D A B C D A B C D

5 0 10 -10 5 -10 10 -10 0 10 5

TOTAL POINTS

Source: Gray Matters: The Ethics Game by George Sammet, Jr., Lockheed Martin Corporation.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 6. Advantages and Disadvantages of Social Responsibility Programs for Business 7. A Study of Unethical Business Practices 8. A Survey of Social Responsibility Programs in Corporations (can do a questionnaire survey of local firms) 9. Ralph Nader: Consumer Advocate 10. Environmental Issues and Their Solutions

Guest Speaker Suggestions 4. A professor or teacher to talk about ethics in business.

5. A representative from a business firm to speak about business ethics, problems with business ethics in a competitive environment, and the importance of business ethics in dealing with consumers.

6. A business communication or English professor or teacher to speak to the class on what constitutes plagiarism, how to paraphrase, and how to use correct documentation.

7. An individual (concerned environmentalist, teacher, professor, etc.) to speak on local environmental issues.

8. A consumer relations manager to describe consumer relations programs of a local firm.

Teaching Suggestions 7. As indicated in “Teaching Suggestions” for Chapter 1, instructors may wish to vary the daily organization of the lesson.

Varying the sequence of activities adds variety to class presentation.

8. At the beginning of the chapter in the textbook and in this Instructor’s Manual, objectives are provided. Many instructors write the objectives on the chalkboard or on an overhead at the beginning of the class session and then at the end of the session check off each objective to determine if all the objectives have been achieved. Educational research indicates students learn more effectively when there is a summarization or review of the textbook content at the end of class sessions.

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50 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 9. As a “writing to learn” exercise, allow approximately five minutes for students to write their thoughts or summary on this topic: What is the importance of ethics and social responsibility in business today? The writing exercise can be done with or without the use of the textbook. The purpose of the exercise is for students to consider the topic and apply the knowledge learned in the reading assignment. Research indicates that the act or process of writing helps students to retain information. Feedback may be done by calling on a few students at random to read their writing. Remember, not all feedback need be for a letter grade; instead, the feedback may be treated as an activity to enhance learning.

For large classes, an alternative to calling on individual students is to break into small groups and have them share their writing within the small group.

10. “Check Your Progress” is important for this chapter. A suggestion for large lecture halls is to assign different question numbers to different rows. Then call upon one person in a row to give his or her answer.

11. The instructor can lecture using the “Lecture Outline and Notes,” covering all of the chapter content. An alternative is not to cover the entire chapter but simply to use the PowerPoints to cover main points of the chapter; then the instructor may have time to use the “Supplemental Lecture” and/or “Controversial Issue” material provided in this Instructor’s Manual. If students are to have read the chapter prior to class, then the instructor may spend less time lecturing and more time with additional material, discussion questions, and boxed material or cases.

12. Use the quiz provided. Have students write answers quickly. Then have students call out the correct answers in unison. Ask if there are any questions about any of the answers.

13. Occasionally, an instructor may wish to give oral instructions or information to reinforce listening skills. One business professor gives part of her test instructions orally; she believes that teachers reward inattention by repeating information time and time again. She warns students that she will give the instructions only once and will not repeat instructions. Her students learn to listen!

Chapter 3: Business in a Borderless World Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s highlights. Followup via the Connect exercises is then encouraged to provide a holistic understanding of the chapter. Use the hyperlinked Table of Contents below to jump to different sections of the manual.

Table of Contents Chapter Forecast ........................................................................................................................................................................... 51 Learning Objectives ....................................................................................................................................................................... 51 Key Terms and Definitions ............................................................................................................................................................. 51 Content Outline ............................................................................................................................................................................. 54 Boxed Text Critical Thinking Questions ......................................................................................................................................... 61 Are You Ready // to Take Your Career on a Global Adventure? / ................................................................................................. 62 Bonus Teaching Resources ............................................................................................................................................................ 62 Chapter Review Questions ............................................................................................................................................................ 64 Connect Exercises .......................................................................................................................................................................... 67 Class Discussion Questions ............................................................................................................................................................ 68 Build Your Business Plan................................................................................................................................................................ 68 Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

51 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Video Case: Electra Bikes: Better, Cooler, Awesomer!.................................................................................................................. 68 Team Exercise ................................................................................................................................................................................ 69 Build Your Skills ............................................................................................................................................................................. 69 Term Paper or Project Topics ........................................................................................................................................................ 71 Guest Speaker Suggestions ........................................................................................................................................................... 71 Teaching Suggestions .................................................................................................................................................................... 71

Chapter Forecast In this chapter, we explore business in this exciting global marketplace. First, we look at the nature of international business, including barriers and promoters of trade across international boundaries. Next, we consider the levels of organizational involvement in international business. Finally, we briefly discuss strategies for trading across national borders.

Learning Objectives LO 3-1 Explore some of the factors within the international trade environment that influence business.

LO 3-2 Assess some of the economic, legal, political, social, cultural, and technological barriers to international business.

LO 3-3 Specify some of the agreements, alliances, and organizations that may encourage trade across international boundaries.

LO 3-4 Summarize the different levels of organizational involvement in international trade.

LO 3-5 Contrast two basic strategies used in international business.

Key Terms and Definitions Absolute advantage A monopoly that exists when a country is the only source of an item, the only producer of an item, or the most efficient producer of an item Asia-Pacific Economic Cooperation (APEC) An international trade alliance that promotes open trade and economic and technical cooperation among member nations Association of Southeast Asian Nations (ASEAN) A trade alliance that promotes trade and economic integration among member nations in Southeast Asia Balance of payments The difference between the flow of money into and out of a country Balance of trade The difference in value between a nation’s exports and its imports

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52 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Cartel A group of firms or nations that agrees to act as a monopoly and not compete with each other, in order to generate a competitive advantage in world markets Comparative advantage The basis of most international trade, when a country specializes in products that it can supply more efficiently or at a lower cost than it can produce other items Contract manufacturing The hiring of a foreign company to produce a specified volume of the initiating company’s product to specification; the final product carries the domestic firm’s name Countertrade agreements Foreign trade agreements that involve bartering products for other products instead of for currency Direct investment The ownership of overseas facilities Dumping The act of a country or business selling products at less than what it costs to produce them Embargo A prohibition on trade in a specific product European Union (EU) A union of European nations established in 1958 to promote trade among its members, one of the largest single markets today Exchange rate The ratio at which one nation’s currency can be exchanged for another nation’s currency Exporting The sale of goods and services to foreign markets Franchising A form of licensing in which a company—the franchiser—agrees to provide a franchisee a name, logo, methods of operation, advertising, products, and other elements associated with a franchiser’s business, in return for a financial commitment and the agreement to conduct business in accordance with the franchiser’s standard of operations General Agreement on Tariffs and Trade (GATT) A trade agreement, originally signed by 23 nations in 1947, that provided a forum for tariff negotiations and a place where international trade problems could be discussed and resolved Global strategy (globalization) A strategy that involves standardizing products (and as much as possible, their promotion and distribution) for the whole world, as if it were a single entity Import tariff A tax levied by a nation on goods imported into the country Importing The purchase of goods and services from foreign sources Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

53 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Infrastructure The physical facilities that support a country’s economic activities, such as railroads, highways, ports, airfields, utilities and power plants, schools, hospitals, communication systems, and commercial distribution systems International business The buying, selling, and trading of goods and services across national boundaries International Monetary Fund (IMF) An organization established in 1947 to promote trade among member nations by eliminating trade barriers and fostering financial cooperation Joint venture A partnership established for a specific project or for a limited time Multinational corporation (MNC) A corporation that operates on a worldwide scale, without significant ties to any one nation or region Multinational strategy A plan, used by international companies, that involves customizing products, promotion, and distribution according to cultural, technological, regional, and national differences North American Free Trade Agreement (NAFTA) Agreement that eliminates most tariffs and trade restrictions on agricultural and manufactured products to encourage trade among Canada, the United States, and Mexico Offshoring The relocation of business processes by a company or subsidiary to another country. Offshoring is different than outsourcing because the company retains control of the offshored processes Outsourcing The transferring of manufacturing or other tasks—such as data processing—to countries where labor and supplies are less expensive Quota A restriction on the number of units of a particular product that can be imported into a country Strategic alliance A partnership formed to create competitive advantage on a worldwide basis Trade deficit A nation’s negative balance of trade, which exists when that country imports more products than it exports Trading company A firm that buys goods in one country and sells them to buyers in another country World Bank An organization established by the industrialized nations in 1946 to loan money to underdeveloped and developing countries; formally known as the International Bank for Reconstruction and Development World Trade Organization (WTO) International organization dealing with the rules of trade between nations

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54 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Content Outline The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a section on which CONNECT activities can be used in the chapter. This is created so that you can facilitate in-class or online discussion effectively.

LO 3-1 Explore some of the factors within the international trade environment that influence business.  

Introduction The Role of International Business o Why Nations Trade o Trade Between Countries o Balance of Trade

PowerPoint Slides PPT 3.4

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Key terms:  International business  Absolute advantage  Comparative advantage  Outsourcing  Exporting  Importing  Balance of trade  Trade deficit  Balance of Payments

Lecture Outline and Notes: V. The Role of International Business a. International business refers to the buying, selling, and trading of goods and services across national boundaries. i. Falling political barriers and new technology are making it possible for more companies to sell their products in new markets.

1. For example, American brands such as McDonald’s are becoming increasingly popular in places like China. ii. Most of the world’s population and two-thirds of its total purchasing power are outside the U.S. iii. Global marketing requires balancing global brands with the need of local consumers. b. Why Nations Trade i. Nations and businesses engage in trade: 1. To obtain raw materials and goods that might otherwise be unavailable to them or that are available elsewhere at a lower price 2. To sell surplus materials or goods to acquire funds to buy the goods, services, and ideas its people need ii. An absolute advantage exists when a country is the only source of an item, the only producer of an item, or the most efficient producer of an item. iii. A comparative advantage occurs when a country specializes in products that it can supply more efficiently or at a lower cost than it can produce other items. iv. As a result of some countries gaining a comparative advantage over the U.S. in the provision of some services, many U.S. companies are outsourcing, or transferring manufacturing and other tasks to countries where human resources, labor, and supplies are less expensive.

1. Outsourcing has become a controversial practice in the United States because many jobs have moved overseas, where those tasks can be accomplished for lower costs. c. Trade Between Countries i. Exporting is the sale of goods and services to foreign markets. ii. Importing is the purchase of goods and services from foreign sources.

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55 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual PPT 3.8

d. Balance of Trade i. A nation’s balance of trade is the difference in value between its exports and imports.

1. A trade deficit—a negative balance of trade—is potentially harmful because it can mean the failure of businesses, the loss of jobs, and a lowered standard of living. (Table 3.1) a. The U.S. has had a trade deficit for quite some time. b. The U.S. has a trade deficit with China; although its exports to China have been increasing, it has not been sufficient enough to keep up with the increase in imports from China. (Figure 3.1) 2. When a nation exports more goods than it imports, it has a favorable balance of trade, or trade surplus. a. Until about 1970, the United States had a trade surplus due to an abundance of natural resources and the relative efficiency of its manufacturing systems. b. TABLE 3.2 Top 10 Countries with which the United States Has Trade Deficits/Surpluses ii. The balance of payments is the difference between the flow of money into and out of a country.

1. A country’s balance of trade, foreign investments, foreign aid, loans, military expenditures, and money spent by tourists comprise its balance of payments.

2. A country with a trade surplus generally has a favorable balance of payments because it is receiving more money from trade with foreign countries than it is paying out.

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LO 3-2 Assess some of the economic, legal, political, social, cultural, and technological barriers to international business. 

International Trade Barriers

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Key terms:  Infrastructure  Exchange rate  Import tariff  Exchange controls  Cartel

VI. International Trade Barriers a. Completely free international trade seldom exists, and there are numerous challenges to conducting business across international borders. b. Economic Barriers i. Economic Development 1. When considering doing business abroad, businesspeople need to recognize that they cannot take for granted that other countries offer the same things as found in the United States. a. Industrialized nations are economically advanced countries such as the United States, Japan, Great Britain, and Canada. b. Less-developed countries (LDCs) are less economically advanced than industrialized nations and are characterized by low per capita income. c. LDCs are a huge and growing market for many products, and many companies are realizing the huge profit potential there.

2. A country’s level of development is determined by its infrastructure, the physical facilities that support its economic activities. ii. Exchange Rates 1. The ratio at which one nation’s currency can be exchanged for another nation’s currency is the exchange rate.

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56 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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c.

a. Influences the cost of imports and exports.

2. Devaluation occurs when a government decreases the value of its currency in relation to other currencies. a. Encourages other nations to buy more of a country’s goods and services.

3. Reevaluation increases the value of a currency relative to other currencies.

It occurs rarely.

Ethical, Legal, and Political Barriers i. A company that enters the international marketplace must contend with potentially complex relationships among the different laws of its own nation, international laws, and the laws of the nation with which it will be trading; various trade restrictions imposed on international trade; changing political climates; and different ethical values. ii. Laws and Regulations 1. The U.S. has many laws governing activities of U.S. firms engaged in international trade.

2. Webb-Pomerene Export Trade Act (1918) exempts U.S. firms from antitrust laws if firms are acting together to enter international trade.

3. Laws in other countries differ from U.S. laws and businesspeople need to be aware of the differences before conducting business there. a. Some countries have laws limiting the amount of local currency that can be taken out of the country and the amount of currency that can be brought in. b. Although countries such as China and Vietnam have and enforce their copyright laws, controlling the amount of counterfeit products sold in their countries is very challenging. iii. Tariffs and Trade Regulations 1. Tariffs and other trade restrictions are part of a country’s legal structure.

2. An import tariff is a tax levied by a nation on imported goods. a. A fixed tariff is a specific amount of money levied on each unit of product brought into the country. b. An ad valorem tariff is based on the value of the item. c. Countries sometimes levy tariffs for political reasons. d. Import tariffs are more commonly employed to protect domestic products by raising the price of imported ones. e. Critics of tariffs argue that their use inhibits free trade and competition; others believe they are necessary to keep domestic wages high and unemployment low.

3. Exchange controls restrict the amount of currency that can be bought or sold.

4. A quota limits the number of units of a particular product that can be imported into a country.

5. An embargo prohibits trade in a specific good. It may be established for political, economic, health, or religious reasons.

6. A common reason for setting quotas or tariffs is to prohibit dumping, the selling of products for less than it costs to produce them. a. A company may dump its products because it permits quick entry into a market; the domestic market for the firm’s product is too small to support an efficient level of production; or because technologically obsolete products are no longer salable in the country of origin. b. Dumping is difficult to prove, but even the suspicion of dumping may lead to the imposition of tariffs or other trade controls,

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57 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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sometimes prompting trade wars. iv. Political Barriers 1. Businesses must consider the political instability of the countries where they want to set up operations: Political unrest may create a hostile or even dangerous environment for business.

2. Political considerations may lead to the formation of a cartel, a group of firms or nations that agree to act as a monopoly and not compete with each other, to create a competitive advantage in world markets. a. OPEC is an example of a cartel. d. Social and Cultural Barriers i. Most businesspeople engaged in international trade underestimate the importance of social and cultural differences. (Table 3.3) ii. Differences in spoken and written language may create problems for businesses; even when words are correctly translated, cultural differences may affect the meaning of translated words. iii. Differences in body language and personal space may generate uncomfortable feelings and misunderstanding when businesspeople of different countries negotiate with each other.

1. Body language is nonverbal, usually unconscious communication through gestures, posture, and facial expression.

2. Personal space is the distance at which one person feels comfortable talking to another.

3. Acceptable gestures also vary from culture to culture. iv. Differences in family roles also influence business activities, especially with regard to marketing and advertising to children. v. The people of other nations often have a different perception of the importance of time. vi. Companies engaged in foreign trade must observe the national and religious holidays and local customs of the host country. vii. Unlike the U.S., most countries use the metric system for measurement. viii. Problems linked to cultural and social differences may be minimized through research. e. Technological Barriers i. Lack of technological infrastructures can be viewed as a barrier or as an opportunity.

1. For example, lack of infrastructure for landlines in places like Africa are creating opportunities for cell phone companies. ii. Changes in technology also bring new challenges and competition.

LO 3-3 Specify some of the agreements, alliances, and organizations that may encourage trade across international boundaries. 

Trade Agreements, Alliances, and Organizations o General Agreement on Tariffs and Trade o The United States-Mexico-Canada Agreement o The European Union o Asia-Pacific Economic Cooperation o Association of Southeast Asian Nations o World Bank o International Monetary Fund

Key terms:  General Agreement on Tariffs and Trade (GATT)  World Trade Organization (WTO)  North American Free Trade Agreement (NAFTA)  European Union (EU)  Asia-Pacific Economic Cooperation (APEC)  Association of Southeast Asian Nations (ASEAN)  World Bank

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58 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 

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International Monetary Fund (IMF)

a. The North American Free Trade Agreement (NAFTA) went into effect in 1994 and merged Canada, the U.S., and Mexico into one market. i. NAFTA has eliminated most tariffs and trade restrictions on agricultural and manufactured products among the three countries.

1. NAFTA makes it easier for U.S. businesses to invest in Mexico and Canada; provides protection for intellectual property; expands trade by requiring equal treatment of U.S. firms in both countries; and simplifies country-oforigin rules, hindering Japan’s use of Mexico as a staging ground for further penetration into U.S. markets. ii. Canada and Mexico are crucial trading partners to the United States. iii. Many U.S. companies have taken advantage of Mexico’s low labor costs and proximity to the United States to set up production facilities, sometimes called maquiladoras. iv. Despite its benefits, NAFTA has been controversial, and disputes continue to arise over the implementation of the agreement. v. Mexicans have been disappointed that the agreement failed to create more jobs. vi. NAFTA has been a positive factor for U.S. firms wishing to engage in international business. b. The European Union (EU) i. Was established in 1958 to promote trade among its members. To facilitate free trade among its members, the EU is working toward standardization of business regulations, import duties, and value-added taxes; elimination of customs checks; and has a standardized currency (the euro) for use by all members. ii. The long-term goals are to eliminate all trade barriers within the EU, improve the economic efficiency of the EU nations, and stimulate economic growth. iii. The EU has enacted some of the world’s strictest laws concerning antitrust issues. It passed a law giving its Internet users the “right to be forgotten,” and the European Parliament is encouraging the breakup of Google. iv. The prosperity of the EU has suffered in recent years.

1. Greece, Ireland, and Portugal required steep bailouts from the IMF. Spain and Cyprus also requested bailouts. Greece was forced to default, which negatively impacts other EU nations because it makes them appear riskier as well.

2. Standard & Poor’s downgraded the sovereign debt of several EU nations.

Germany, however, has largely avoided the economic woes plaguing other countries. It was not downgraded but maintained its high ratings. c. Asia-Pacific Economic Cooperation (APEC) i. Promotes open trade and economic and technical cooperation among its 21 member nations. ii. Differs from other international trade alliances in its commitment to facilitating business and its practice of allowing the business/private sector to participate in a wide range of APEC activities. iii. Despite some economic turmoil, companies of the APEC have become increasingly competitive and sophisticated in global business.

1. China has become a manufacturing powerhouse.

2. Less visible Pacific Rim nations, such as Thailand, Singapore, Vietnam, and Hong Kong, have also become major manufacturing and financial centers. d. Association of Southeast Asian Nations (ASEAN) i. A trade alliance that promotes trade and economic integration among member

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59 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual nations in Southeast Asia. ii. ASEAN’s goals include the promotion of free trade, peace, and collaboration between its members. iii. In 1993, ASEAN began to reduce or phase out tariffs among countries and eliminate nontariff trade barriers. iv. However, ASEAN is facing challenges as a unified trade bloc. Unlike members of the European Union, the economic systems of ASEAN members are quite different.

Major conflicts have also occurred between member-nations. v. Despite these challenges, ASEAN plans to increase economic integration by 2015, but unlike the European Union, it will not have a common currency or fully free labor flows between member-nations. e. World Bank i. Also known as the International Bank for Reconstruction and Development ii. Was established by industrialized nations in 1946 to loan money to underdeveloped and developing countries. f. International Monetary Fund (IMF) i. Was established in 1947 to promote trade among member nations by eliminating trade barriers and fostering financial cooperation. ii. The IMF tries to avoid financial crises and panics by alerting the international community about countries that will not be able to repay their debts.

LO 3-4 Summarize the different levels of organizational involvement in international trade. 

Getting Involved in International Business o Exporting and Importing o Trading Companies o Licensing and Franchising o Contract Manufacturing o Outsourcing o Offshoring o Joint Ventures and Alliances o Direct Investment

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Key terms:  Countertrade agreements  Trading company  Licensing  Franchising  Contract manufacturing  Offshoring  Joint venture  Strategic alliance  Direct investment  Multinational corporation (MNC)

VII. Getting Involved in International Business a. Exporting and Importing i. Exporting sometimes takes place through countertrade agreements, which involve bartering products for other products instead of for currency. ii. Such arrangements are fairly common in international trade, especially between Western companies and eastern European nations. iii. An estimated 40 percent or more of all international trade agreements contain countertrade provisions. b. Trading Companies i. Buy goods in one country and sell them to buyers in another country. ii. They perform all activities that are required to move products from one country to another. c. Licensing and Franchising i. Licensing is a trade arrangement in which one company, the licensor, allows another company, the licensee, to use its company name, products, patents, brands, trademarks, raw materials, and/or production processes in exchange for a fee, or royalty.

1. Licensing is an attractive alternative to direct investment when the political

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60 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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d. e.

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f.

g.

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stability of a foreign country is in doubt or when resources are unavailable for direct investment.

2. Licensing is especially advantageous for small manufacturers wanting to launch a well-known brand internationally. ii. Franchising is a form of licensing in which a company, the franchiser, agrees to provide a franchisee a name, logo, methods of operation, advertising, products, and other elements associated with the franchiser’s business in return for a financial commitment and the agreement to conduct business in accordance with the franchiser’s standard of operations.

1. KFC and McDonald’s are the top two global franchises. McDonald’s has to adapt its menu somewhat to appeal to local tastes. (Table 3.5) iii. Licensing and franchising enable a company to enter the international marketplace without spending large sums of money abroad or transferring personnel to handle overseas operations. iv. If the licensee or franchisee does not maintain high standards of quality, the product’s image may be hurt.

Contract manufacturing occurs when a foreign company produces a specified volume of a firm’s product to specifications and uses the domestic firm’s name on the final products.

Outsourcing i. Is controversial ii. Insourcing, when foreign companies transfer jobs and business to the U.S., is becoming more common Offshoring i. The relocation of business processes by a company or subsidiary to another country ii. Different than outsourcing because the company retains control of the process— not subcontracting to a different company. iii. Reasons to offshore involve lower wages, skilled labor, and taking advantage of different time zones.

Joint Ventures and Alliances i. Many countries do not permit direct investment by foreign companies or individuals. A company may also lack sufficient resources or expertise to operate in another country. ii. A joint venture is a partnership between a foreign company and a domestic business or government. iii. A strategic alliance is a partnership formed to create a competitive advantage on a worldwide basis. It is especially useful in industries where the costs of competing alone are too high for a single company.

Direct Investment i. Direct investment is the ownership of overseas production and marketing facilities.

1. Walmart directly invested in China but had to allow for unions in order to fit in with the local culture. ii. Multinational corporations operate on a worldwide scale, without significant ties to any one nation or region and represent the highest level of international business involvement. (Table 3.6) 1. Many MNCs are targeted by antiglobalization activists who contend they increase the gap between rich and poor, misuse scarce resources, exploit labor in less-developed countries, and harm the environment.

2. Many multinationals originated in the U.S.

LO 3-5 Contrast two basic strategies used in international business. 

International Business Strategies

Key terms:  Multinational strategy  Global strategy

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61 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual o o PPT 3.38

Developing Strategies Managing the Challenges of Global Business

(globalization)

VIII. International Business Strategies a. Developing Strategies i. Companies doing business internationally have traditionally used a multinational strategy, customizing their products, promotion, and distribution according to cultural, technological, regional, and national differences. ii. More and more companies are moving from this customization strategy to a global strategy (globalization), which involves standardizing products (and, as much as possible, promotion and distribution) for the whole world, as if it were a single entity. iii. Before moving outside their own borders, companies must conduct environmental analyses to evaluate the potential of and problems associated with various markets and to determine which strategy is best for doing business in those markets. iv. Astute businesspeople today “think globally, act locally.” b. Managing the Challenges of Global Business i. Many barriers to global trade have fallen. ii. Managers who meet the challenges of creating and implementing effective and sensitive business strategies can be successful. iii. Benchmarking of international best practices can help firms. iv. Being globally aware is essential for today’s managers.

Boxed Text Critical Thinking Questions Harley Davidson Gets Up to Speed in International Markets 7. What barriers does Harley-Davidson face in marketing its motorcycles to countries outside of the United States?

Harley-Davidson faces competition from already-established brands like Royal Enfield, the leading bike brand in Asia.

Tariffs are another challenge.

8. What are some ways Harley-Davidson is overcoming these challenges?

Harley-Davidson’s plan is to reduce the complexity of its products and sharpen the strategic focus of its business, investing in markets that will drive profitability and growth. Harley is overcoming the challenge of tariffs by building international plants.

9. What opportunities does Harley-Davidson have in other countries that they do not necessarily have in the United States?

Harley-Davidson markets a small electric bike, Livewire, designed to compete with electric bike brands like Honda.

Europe could be a lucrative market for Harley-Davidson’s Livewire because the top 10 most “environmentally conscious” countries are European. Additionally, about 80 percent of households in Indonesia, Thailand, and Vietnam own a motorcycle or scooter.

Chinese Airlines Soaring to Great Heights 7. What advantages do U.S. airlines have over Chinese airlines? What advantages do Chinese airlines have over U.S. airlines?

Currently, Chinese airlines do not have the infrastructure to handle all the flights, leading to significant layovers, delays, and cancellations. China also needs more airports. Local Chinese governments are paying so airlines will come

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62 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual to their cities. These subsidies are allowing China’s airlines to grab market share, negatively affecting nearby countries.

8. What barriers are Chinese airlines facing as they rapidly grow as a global player?

Air China currently makes one-sixth the profit of American Airlines. Chinese airlines were hard hit by COVID-19 (coronavirus). Recovery will be impacted by uncertain changes to business and international travel.

9. How do you think China’s subsidies of its airlines will impact its relations with airlines in other countries? Explain your answer.

Answers will vary but most students will mention that European countries are proposing sanctions against the Chinese airlines.

Data Privacy Concerns Take the World by Storm 6. What type of international barriers are companies like Facebook and Google facing in the realm of user privacy?

General Data Protection Regulation (GDPR), allows people to request data that has been collected about them and restricts businesses on how they can use that data. It also forces companies to notify users of how data collected about them will be used. If companies don’t comply with this new regulation, they could face up to $1 billion in fines.

7. Describe the global implications of the GDPR law.

The EU is encouraging other countries to develop tougher online privacy regulations by making data protection a part of trade deals. Even companies not based in the EU are subject to the regulation if it involves processing personal data of EU citizens.

8. How might tougher regulations make it harder for users in Europe to utilize online services?

Data collection used for behavioral advertising is worth billions of dollars annually. Companies may choose to charge European residents for online services since the services will not be generating income or the companies may choose to not do business in Europe.

Are You Ready // to Take Your Career on a Global Adventure? / What are some of the skills required to be a successful businessperson in the borderless world of the 21st century?

To be successful you must have an idea not only of the differing regulations from country to country, but of different languages, ethics and communication styles, and the varying needs and wants of international markets. From a regulatory side, you may need to be aware of laws related to intellectual property, copyrights, antitrust, advertising, and pricing in every country. Translating is never only about translating the language. Perhaps even more important is ensuring that your message gets through. Whether on a product label or in advertising or promotional materials, the use of images and words varies widely across the globe.

Bonus Teaching Resources This section offers bonus teaching resources for class discussion. This is offered in addition to what’s offered in the M: Business text.

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63 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

“Effects of Trade Legislation” MiniCase This textbook emphasizes that free and open trade between nations is healthy for the economies of most nations. Reviewing historical events will not necessarily indicate a cause-and-effect relationship, but insight can be gained by studying trade legislation of the past.

Various scholars have analyzed the reasons for the stock market crash of 1929—especially in the wake of the most recent recession. Actually, that crash did not occur in a single day at the New York Stock Exchange. The so-called crash took nearly three years, stretching from the bull market high of September 3, 1929, to July 8, 1932, the date the Dow Jones Industrial Average hit a record low of 41.22. Many individuals suggest that the impending passage of the Smoot-Hawley Tariff Act led to the crash. The Smoot-Hawley Act was designed to give American firms an advantage over foreign companies. There were several reasons why a tariff bill would have such a negative effect on people involved in the stock market. Many people felt the bill was bad for American business firms. It would raise tariff barriers that would make it more difficult for foreign firms to sell their wares in the United States. Opponents of the measure realized that if high tariffs made selling in the United States more difficult for foreign firms, then foreign sales would drop. The end result would be that foreign firms would be less able to buy needed goods from American firms.

Secondly, in international trade, it has become an almost automatic reflex for a country whose firms are hurt by high tariffs to retaliate by increasing its own tariffs. The passage of the Smoot-Hawley Act resulted in high tariffs on an international scale.

International trade became very difficult, and the United States had almost no meaningful trade with other nations. Because of the current unfavorable balance of trade with Japan and China, many legislators and union officials have suggested tougher trade legislation is needed for the United States. Legislators point out that Japanese products flood this country while American firms have barely gotten a toe inside the door of the Japanese market. Although Americans have made in-roads into the Chinese market, the United States has more of a trade deficit with China than any other country.

Another problem occurs when nations subsidize industries or market groups. For example, several European nations have subsidies for agricultural or farm products and place restrictions on United States farm product exports. Japan also provides subsidies or protected markets for its agricultural products. Naturally, United States farm interests feel these are unfair trade restrictions.

Legislation is frequently suggested to counter perceived unfair trade restrictions. But opponents of restrictive legislation for the United States point out the results of the Smoot-Hawley Act and suggest a similar trade bill would damage the nation’s economic health just as the 1930 act did. Many advocates of “freer” trade believe the best way to deal with restrictive trade policies of other countries is to negotiate for freer markets.

Discussion Questions for “Effects of Trade Legislation” MiniCase 7. Why did the United States pass the Smoot-Hawley Act in 1930?

The government passed the act to give American firms an advantage over foreign companies in the midst of the Depression. Instead, it had a detrimental effect.

8. What interest groups would be interested in passing similar legislation today?

Likely groups might include anti-globalization groups that may wish to limit trade more within the United States. It also might include humanitarian groups that believe too much unregulated free trade between countries may hurt minorities or citizens of developing countries, while benefiting their more developed trading partners (the controversy surrounding NAFTA raises such concerns).

9. Other than tariff duties, what other trade restrictions could nations impose on the products of other nations?

Quotas, or restrictions on the number of units of a particular product that can be imported into a country, and embargoes, prohibitions on trade in a particular product, can limit the types and amounts of products traded between countries as well.

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64 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Controversial Issue: High Dollar, Low Dollar—Which is Better?

This can be used in a discussion board or for in-class discussion.

In the 1950s, it took 4.2 German marks to equal a dollar. At that same time, a dollar was worth more than 350 Japanese yen.

At this writing, a dollar is worth about 79 yen, and the German mark was replaced years ago by the European Union’s euro.

One dollar is equivalent to about 0.77 euros. These figures reflect radical change. There are both benefits and negative consequences of this change.

Consider the negative side of a declining dollar abroad. Because of the shrinking international value of the dollar, American purchases of goods and services abroad are made more difficult. For example, an American firm buying wool sweaters from a foreign firm for resale in the United States will experience a significant rise in the cost of acquiring the sweaters. In addition, American tourists will find that everything in a foreign country will cost more than it did in the earlier days of the strong dollar.

There are positive aspects to a falling dollar. Although it makes it more difficult for Americans to purchase foreign goods, at the same time, the declining dollar makes it easier for foreign firms or citizens to make purchases in the United States. The increase in more foreign purchases of American products (increased exports) helps American business. If a low dollar persists over a long period of time, increased purchases by other countries and decreased buying of foreign products by Americans will eventually help the trade balance. Improving the trade balance means helping to reduce the United States’ balance of payments deficit.

Today’s business firms must be competitive in the global economy. What is positive for one nation may be negative for another. Thus, one nation’s exchange rate in relation to the value of another nation’s currency continues to be a matter of debate. As arguments can be made for both the strong dollar and the weak dollar, most trade negotiators will probably seek a middle-of-the-road position.

Discussion Questions for “High Dollar, Low Dollar—Which is Better?”

7. What are the effects of a strong dollar for the United States?

A strong dollar allows Americans to purchase more from foreign countries. On the downside, it may discourage firms from foreign countries to make purchases in the United States.

8. What are the effects of a relatively weak dollar for the United States?

A weak dollar will prevent Americans from buying as much products from foreign countries. Costs for American businesses that acquire merchandise from foreign suppliers will also rise. It will allow companies from foreign countries to purchase more from the United States. On the flip side, this could be a positive thing. A weak dollar can actually help restore the country’s balance of payments because Americans are not spending as much abroad (decreasing debt) and foreign countries will purchase more American products (allowing more money to flow into the economy). Additionally, American suppliers may be more likely to get their inventory from the U.S., rather than from foreign countries, which may further stimulate the American economy.

9. Which do you think is better—a strong dollar or a relatively weak dollar?

Students’ answers will vary.

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65 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 20. Distinguish between an absolute advantage and a comparative advantage. Cite an example of a country that has an absolute advantage and one with a comparative advantage.

A nation with an absolute advantage is the only or most efficient producer of an item. A nation with a comparative advantage specializes in products that it can supply more efficiently; however, it is not the sole producer of those products.

Examples provided by students to the second part of the question will vary, but potential examples include the fact that South Africa has an absolute advantage in gem-quality diamond production, while the United States has a comparative advantage in agricultural products. The United States specializes in agricultural products such as wheat and cotton, but it is not the only producer of those products.

21. What effect does devaluation have on a nation’s currency? Can you think of a country that has devaluated or revaluated its currency? What have been the results?

Devaluations decrease the value of a currency in relation to other currencies. They make that country’s goods less expensive for foreign buyers. Revaluations increase the value of a currency in relation to other currencies. They make that country’s goods more expensive for foreign buyers, but foreign goods would cost the country’s consumers less.

Examples provided by students to the second part of the question will vary, but many will cite Mexico as a country that has devalued its currency. This devaluation has increased the number of Mexican products sold in the United States and has favored tourism from the United States.

22. What effect does a country’s economic development have on international business?

Less-developed countries are likely to have much less infrastructure than developed countries. Thus, it may be difficult to develop operations in these countries. The wages offered for routine jobs in less-developed countries are lower than the minimum wages existing in industrialized countries. Consequently, many businesses from industrialized countries open assembly plants in less developed countries to reduce labor costs.

23. How do political issues affect international business?

Political and governmental decisions can affect business through such barriers as tariffs, embargoes, terrorism, business favoritism, and so on.

24. What is an import tariff? A quota? Dumping? How might a country use import tariffs and quotas to control its balance of trade and payments? Why can dumping result in the imposition of tariffs and quotas?

An import tariff is a duty levied by a nation on imported goods. A quota is the maximum number of units of a particular product that can be imported into a country. Dumping occurs when a country or business sells products at less than what it costs to produce them.

A country, such as the United States, could set higher import tariffs on another country’s products sold in the United States, thus forcing the United States consumers buying imported goods to pay a higher price. A quota may be set on the number of units that can be sold in the United States. For example, import tariffs on Japanese televisions might mean that Japanese televisions might cost more. If quotas were established for Japanese televisions, only a certain number could be imported into the United States. Either situation tends to protect domestic manufacturers. By selling more domestic products, the balance of trade and payments would be more favorable for the United States.

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66 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual A country or firm that practices dumping harms local businesses by offering a product at a much cheaper price. In order to limit the access to its market by the dumping firm or country, the local government might decide to constrain the imports of the product considered. Thus, the government is likely to impose tariffs and quotas.

25. How do social and cultural differences create barriers to international trade? Can you think of any social or cultural barriers (other than those mentioned in this chapter) that might inhibit international business?

Social and cultural differences create barriers to international trade through:  Differences in language, body language, perception of personal space, and perception of time. 

Differences in local customs, national holidays, and religious holidays.

Another cultural or social difference not mentioned in the textbook includes communication variations. For example, the format and physical features of letters, memos, and fax messages vary from one country to another. And just as social customs involving greetings and body motions vary, so do the communication approaches used in letters.

Communications in the United States and Canada are much more direct and shorter than messages sent by other countries. Students may be able to suggest additional barriers based on their own knowledge and experiences.

26. Explain how a countertrade agreement can be considered a trade promoter. How does the World Trade Organization encourage trade?

A countertrade agreement is really a bartering agreement, which makes it possible for a nation with limited currency to use raw materials or other products in place of currency in purchasing goods.

The World Trade Organization encourages trade by administering the WTO agreements (legal ground rules for international commerce), presenting a forum for trade negotiations, handling trade disputes, monitoring national trade policies, providing technical assistance and training for developing countries, and cooperating with other international organizations.

27. At what levels might a firm get involved in international business? What level requires the least commitment of resources? What level requires the most?

A firm can get involved in a variety of ways. Probably the smallest commitment is through exporting. Many companies first get involved in global business by exporting. A small company may market its products overseas directly, or it may deal with a middleman, commonly called an export agent.

The highest level of international business involvement is the multinational corporation. In between are trading companies, licensing and contract manufacturing arrangements, direct investment, and joint ventures.

28. Compare and contrast licensing, franchising, contract manufacturing, and outsourcing.

Licensing is a trade arrangement in which a licensor allows a licensee to use its company name, products, patents, brands, trademarks, raw materials, and/or production processes in exchange for a fee or royalty.

Franchising is a form of licensing in which the franchiser has a tighter control over the activities of the franchisee. The franchisee is provided with more support from the franchiser than the licensee. This support includes a name, logo, methods of operation, advertising, products, etc. In exchange for this support, the franchiser not only receives a financial commitment, but also can control the way in which the business is conducted.

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67 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Licensing and franchising lower the costs of businesses’ development by involving third parties in the opening and management of new facilities.

Contract manufacturing is an arrangement in which a foreign company produces a specified volume of a firm’s product to specifications and uses the domestic firm’s name on the final products. Contract manufacturing enables a company to benefit from the lower production costs offered in a foreign country without investing in that country.

Outsourcing involves transferring a specific set of tasks such as production or data entry to countries where labor or supplies are less expensive.

29. Compare multinational and global strategies. Which is best? Under what circumstances might each be used?

A multinational strategy involves customizing products and promotion to local conditions; a global strategy uses the same products and promotional techniques throughout the world. A multinational strategy acknowledges social and cultural differences between countries, while a global strategy deems that these differences can be ignored. The best strategy to be used depends on the country considered and on the product to be exported.

A global strategy can be used when the cultural and social differences between countries do not directly affect the mode of consumption of the product. However, when consumption patterns vary greatly from one nation to another, then a multinational strategy may be advisable.

Connect Exercises Below are the available exercises in Connect for this chapter. Please also see the Connect Content Matrix in your Instructor Resource library for additional details on these exercises (including Learning Objectives, topics, Bloom’s level, AACSB, etc.)

17. India’s Comparative Advantage (Case Analysis): Demonstrate your understanding of international trade as it relates to one major country, India.

18. Measuring Global Trade (Case Analysis): Demonstrate your understanding of global trade by answering questions about trade deficit and surplus.

19. Balance of Trade and Balance of Payment (iSeeit! Animated Video Case): This short video case describes how nations achieve a trade surplus or trade deficit based on the levels of imports/exports.

20. Electra Bikes (Video Case): Understand how, in order to be successful in the global marketplace, businesses must be familiar with the key business terms associated with global marketing, as well as the global forces that can affect business success and profitability.

21. ConveyerPape: Supplying Conveyer Belts Internationally (Case Analysis): Demonstrate your understanding of available strategies to engage in international business, and the legal barriers that could alter engagement in international business.

22. Choosing a Strategy for International Business (Click & Drag): Demonstrate your understanding of strategies for international business by identifying examples of multinational and global strategies.

23. GrubHub and the Dynamic Business Environment (Video Case): Demonstrate your understanding of the barriers to international business as they apply to GrubHub’s expansion to other countries.

24. Entering Foreign Markets (iSeeit! Video Case): Demonstrate your understanding of the modes of entry options available to a business seeking to expand internationally.

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68 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Class Discussion Questions 7. If the United States were to impose additional tariffs on cars imported from Japan, what would happen to the price of Japanese cars sold in the United States? What would happen to the price of American cars? What action might Japan take to continue to compete in the U.S. automobile market?

If the United States were to impose additional tariffs on cars imported from Japan, the price of Japanese cars sold in the United States would go up. The prices on American cars would stay the same for a while, but if demand rises significantly then the prices of American cars may rise. Japan might choose to locate factories in America so that it would not have to import its cars. Thus, it could avoid the heavier tariffs.

8. Although NAFTA has been controversial, it has been a positive factor for U.S. firms desiring to engage in international business. What industries and specific companies have had the greatest potential for expanding into Canada and Mexico? What opportunities exist for small businesses that cannot afford direct investment in Mexico and Canada?

Student answers will vary. Production facilities called maquiladoras have been popular in Mexico. Mexico has also been attracting major technology industries. Small businesses that cannot afford to locate in Mexico or Canada can still license their products in those countries as licensing rules have been relaxed.

9. Identify a local company that is active in international trade. What is its level of international business involvement and why? Analyze the threats and opportunities it faces in foreign markets, as well as its strengths and weaknesses in meeting those challenges. Based on your analysis, make some recommendations for the business’s future involvement in international trade. (Your instructor may ask you to share your report with the business.)

Student answers will vary based on which business they choose.

Build Your Business Plan This chapter allows students to have fun as they learn about living in a global environment. Ask the students where they have traveled outside the United States. What cultural differences did they notice? Did they have any problems communicating with the locals?

For those who have not traveled outside the United States, you need to involve them in a different way. Have the students check the label of their jacket or the shirt collar of the student sitting next to them. This process will help students realize how few products, even companies based in the United States, are actually produced in the United States. Encourage the students to explain why this is the case.

Challenge the students to consider whether their product/service (or the idea) could ever be exported. What problems would they encounter? What countries would be the easiest to enter?

Video Case: Electra Bikes: Better, Cooler, Awesomer!

This case describes Electra Bikes and the challenges it faced as it went global. Electra Bikes was founded with the mission of making bike riding fun again. It began developing hip, vintage-style cruiser bikes that had characteristics of the rockabilly culture. The company had patented Flat Foot Technology® that allowed for better leg extension. This gave it a comparative advantage over competitors. Eventually, Trek Bicycles acquired Electra Bikes.

When Electra Bikes expanded into other countries, it found that consumers in those countries liked the “genuine Americana” theme. However, the company faces numerous challenges that vary from country to country. Electra outsources to China and Taiwan due to the lower costs involved. It has to pay import duties on bikes imported into different countries. Currency Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

69 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual fluctuations are always challenging. There is also the issue of regulations. Because different countries have different regulations, Electra must sometimes modify its bikes and add features that are required by the law of the country. Still, the global environment offers many opportunities for Electra to increase sales. Also, since Trek now takes care of the distribution concerns, Electra can now do what it does best—develop quality bikes.

Video Case Discussion Questions 7. Describe how Electra maintains a worldwide comparative advantage.

Electra Bikes has unique features that differentiate it from competitors and would be hard for rivals to imitate. In this case, Electra Bikes—as an American firm—is able to market its “genuine Americana” theme in a way that would be difficult for foreign competitors. Electra benefits from its patented Flat Foot Technology® that gives better leg extension. Because it holds the patent, competitors cannot copy the technology whether they be domestic or foreign.

Additionally, now that Electra has been acquired by Trek, it has access to a world-class distribution network that many competitors do not have.

8. What are some global difficulties Electra had to overcome when it expanded into different countries?

Global challenges Electra has faced include economic barriers (currency fluctuations and the need to outsource to reduce production costs) as well as legal barriers (import tariffs, different regulations requiring different features on bikes).

9. Why did Electra—which markets itself with a “genuine Americana” message—decide to outsource production to Asia? Do you believe this is appropriate?

It is not cost-efficient for Electra to have its bikes manufactured in the United States. By outsourcing to Asia it can take advantage of lower labor costs. Student answers may vary about the appropriateness of this decision. Some people might feel that Electra is being slightly misleading because the parts of the bike are not actually made in America. Others will likely feel that it is acceptable as long as the company itself is an American firm.

Team Exercise Visit Transparency International’s Country Corruption Index Web site: http://www.transparency.org/cpi2015#results-table.

Students then form groups and select two countries. They will research some of the economic, ethical, legal, regulatory, and political barriers that would have an impact on international trade. Students should be sure to pair a country with a high level of perceived corruption (lower scores) with a country that has a low level of perceived corruption (higher scores). Students will then report their findings.

Build Your Skills Global Awareness Background As American businesspeople travel the globe, they encounter and must quickly adapt to a variety of cultural norms quite different from the United States. When encountering individuals from other parts of the world, the best attitude to adopt is “Here is my way. Now what is yours?” The more you see that you are part of a complex world and that your culture is different from, not better than, others, the better you will communicate and the more effective you will be in a variety of situations. It takes time, energy, understanding, and tolerance to learn about and appreciate other cultures. Naturally you’re Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

70 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual more comfortable doing things the way you’ve always done them. Remember, however, that this fact will also be true of the people from other cultures with whom you are doing business.

Task You will “travel the globe” by answering questions related to some of the cultural norms that are found in other countries.

Form groups of four to six class members and determine the answers to the following questions. Your instructor has the answer key, which will allow you to determine your group’s Global Awareness IQ, which is based on a maximum score of 100 points (10 points per question).

Match the country with the cultural descriptor provided.

A. Saudi Arabia B. Japan C. Great Britain D. Germany E. Venezuela F. China G. Greece H. Korea I. India J. Mexico

_____ 1. When people in this country table a motion, they want to discuss it. In America, “to table a motion” means to put off discussion. _____ 2. In this country, special forms of speech called keigo convey status among speakers. When talking with a person in this country, one should know the person’s rank. People from this country typically will not initiate a conversation without a formal introduction. _____ 3. People from this country often pride themselves on enhancing their image by keeping others waiting. _____ 4. When writing a business letter, people in this country like to provide a great deal of background information and detail before presenting their main points. _____ 5. For a man to inquire about another man’s wife (even a general question about how she is doing) is considered very offensive in this country. ______ 6. When in this country, you are expected to negotiate the price on goods you wish to purchase. ______ 7. While North Americans want to decide the main points at a business meeting and leave the details for later, people in this country need to have all details decided before the meeting ends to avoid suspicion and distrust. ______ 8. Children in this country learn from a very early age to look down respectfully when talking to those of higher status. ______ 9. In this country the husband is the ruler of the household, and the custom is to keep the women hidden. _____ 10. Many businesspeople from the United States experience frustration because yes does not always mean the same thing in other cultures. For example, the word yes in this country means, “OK, I want to respect you and not offend you.” It does not necessarily show agreement.

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71 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Answer Key: 1. C 2. B 3. E 4. D 5. A 6. J 7. F 8. H 9. I 10. G

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 11. History of Trade Legislation in the United States 12. Business Opportunities and Barriers to Entry in China 13. Study of the Trade Relationships between the United States and Japan 14. Case Study of United States Businesses Engaged in International Trade 15. Examples of Recent Countertrade Exchanges (select approximately five examples)

Guest Speaker Suggestions 9. A representative of the International Trade Administration (part of the Department of Commerce) to speak about opportunities for U.S. firms in the global economy. Or a professor of international business or international marketing could also speak about similar topics.

10. An executive from a local firm to describe doing business overseas—advantages, benefits, and problems.

11. A representative of a foreign consulate to talk about doing business in that country.

12. A professor or representative of a campus international association to speak on differences in American business practices and those of other cultures.

13. A professor or a teacher from economics or social science to talk about world trade barriers.

Teaching Suggestions 14. This chapter has much information and many terms to be mastered. Consider different approaches for imparting information to students. One outside assignment is to have students write the definitions of the “Key Terms and Concepts.” Probably a better assignment is to have students write an example for each of the “Key Terms and Concepts”; this approach places less stress on rote memory and forces students to synthesize information.

15. Because of the number of terms in this chapter, another possibility is to have each student submit two test questions they have developed from the chapter content. The one restriction to the test questions is that they cannot duplicate questions included in “Check Your Progress,” or on the Web site. The purpose of this exercise is to encourage students to think about the content they should study to prepare for a test. To make the assignment meaningful, the instructor can promise to use some of the submitted questions. (If students wish to share their test questions with other students, they will have reviewed a great deal of information.)

16. Also, for mastery of the information and terms of the chapter, instructors may wish to very carefully cover all content in a lecture using the PowerPoint slides to reinforce main points.

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72 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 17. Again, because of the importance of this chapter, make a point of going over the answers to “Check Your Progress.”

18. Students should have read the additional boxed material. Discussion questions are given in this Instructor’s Manual and are available on a slide and transparency master. Break the class into small groups. Assign different groups different boxed material to answer questions. Use the transparency to assign questions. Have groups discuss answers, and then have a group representative present the group’s answers.

19. The video case can be an outside assignment. One solution is to divide the class in three groups and assign a question to each group. Discuss written answers to cases. Examples of answers are provided in this Instructor’s Manual.

20. A list of suggestions for guest speakers and term papers or project topics is provided for each chapter in this Instructor’s Manual.

Chapter 4: Options for Organizing Business Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s highlights. Followup via the Connect exercises is then encouraged to provide a holistic understanding of the chapter. Use the hyperlinked Table of Contents below to jump to different sections of the manual.

Table of Contents Chapter Forecast ........................................................................................................................................................................... 73 Learning Objectives ....................................................................................................................................................................... 73 Key Terms and Definitions ............................................................................................................................................................. 73 Content Outline ............................................................................................................................................................................. 75 Boxed Text Critical Thinking Questions ......................................................................................................................................... 82 Want to Be an Entrepreneur? // Know Which Form of Business Is Best for You / ....................................................................... 83 Bonus Teaching Resources ............................................................................................................................................................ 84 Chapter Review Questions ............................................................................................................................................................ 87 Connect Exercises .......................................................................................................................................................................... 88 Class Discussion Questions ............................................................................................................................................................ 89 Build Your Business Plan................................................................................................................................................................ 89 Video Case: PODS Excels at Organizing a Business........................................................................................................................ 89 Team Exercise ................................................................................................................................................................................ 91 Build Your Skills ............................................................................................................................................................................. 91 Term Paper or Project Topics ........................................................................................................................................................ 93 Guest Speaker Suggestions ........................................................................................................................................................... 93 Teaching Suggestions .................................................................................................................................................................... 94

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73 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Chapter Forecast This chapter examines three primary forms of business ownership—sole proprietorship, partnership, and corporation—and weighs the advantages and disadvantages of each. These forms are the most often used whether the business is a traditional brick-and-mortar company, an online-only one, or a combination of both. We also take a look at S corporations, limited liability companies, and cooperatives; discuss some trends in business ownership; and touch on one of the most common forms of organizations for non-profits. You may wish to refer to Table 4.1 to compare the various forms of business ownership mentioned in the chapter.

Learning Objectives LO 4-1 LO 4-2 LO 4-3 LO 4-4

Describe the advantages and disadvantages of the sole proprietorship form of organization.

Describe the two types of partnership and their advantages and disadvantages.

Describe the corporate form of organization and its advantages and disadvantages.

Assess the advantages and disadvantages of mergers, acquisitions, and leveraged buyouts.

Key Terms and Definitions Acquisition The purchase of one company by another, usually by buying its stock Articles of partnership Legal documents that set forth the basic agreement between partners Board of directors A group of individuals, elected by stockholders to oversee the general operation of the corporation, who set the corporation’s long-range objectives Common stock Stock whose owners have voting rights in the corporation, yet do not receive preferential treatment regarding dividends Cooperative (co-op) An organization composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization Corporate charter A legal document that the state issues to a company based on information the company provides in the articles of incorporation Corporation A legal entity, created by the state, whose assets and liabilities are separate from its owners Dividends Profits of a corporation that are distributed in the form of cash payments to stockholders General partnership Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

74 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual A partnership that involves a complete sharing in both the management and the liability of the business Initial public offering (IPO) Selling a corporation’s stock on public markets for the first time Joint venture A partnership established for a specific project or for a limited time Leveraged buyout (LBO) A purchase in which a group of investors borrows money from banks and other institutions to acquire a company (or a division of one), using the assets of the purchased company to guarantee repayment of the loan Limited liability company (LLC) Form of ownership that provides limited liability and taxation like a partnership but places fewer restrictions on members Limited partnership A business organization that has at least one general partner, who assumes unlimited liability, and at least one limited partner, whose liability is limited to his or her investment in the business Merger The combination of two companies (usually corporations) to form a new company Nonprofit corporations Corporations that focus on providing a service rather than earning a profit but are not owned by a government entity Partnership A form of business organization defined by the Uniform Partnership Act as “an association of two or more persons who carry on as co-owners of a business for profit” Preferred stock A special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do Private corporation A corporation owned by just one or a few people who are closely involved in managing the business Public corporation A corporation whose stock anyone may buy, sell, or trade Quasi-public corporations Corporations owned and operated by federal, state, or local government S corporation Corporation taxed as though it were a partnership with restrictions on shareholders Sole proprietorships Businesses owned and operated by one individual; the most common form of business organization in the United States Stock Shares of a corporation that may be bought or sold

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75 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Content Outline The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a section on which CONNECT activities can be used in the chapter. This is created so that you can facilitate in-class or online discussion effectively.

LO 4-1 Describe the advantages and disadvantages of the sole proprietorship form of organization.  

Key terms:  Sole proprietorships

Introduction Sole Proprietorships o Advantages of Sole Proprietorships o Disadvantages of Sole Proprietorships

PowerPoint Slides PPT 4.4

PPT 4.6

PPT 4.7

Lecture Outline and Notes: IX. Introduction a. There are three principal forms of organizing a business, whether it is a traditional “brick and mortar” organization, or a virtual corporation that does business exclusively through the Internet. b. The three primary forms of business that we will examine are sole proprietorship, partnership, and corporation. (Table 4.1 & Figure 4.1) i. Proprietorships far outnumber corporations, but they net far fewer sales and less income. ii. Partnerships are the least used form of business. iii. Corporations account for the majority of all U.S. sales and income but represent a relatively small number of organizations in the United States.

X. Sole Proprietorships a. Sole proprietorships are businesses owned by one person. i. The most common form of business organization in the United States. ii. Typically small businesses employing fewer than 50 people. b. Advantages of Sole Proprietorships i. They have the advantage of a simple management structure and the ability to make quick decisions. ii. Ease and Cost of Formation 1. Forming a proprietorship is easy and inexpensive, requiring only state and local licenses and permits where applicable.

2. An entrepreneur starting a new sole proprietorship must find a suitable site from which to operate the business.

3. Many small businesses started out in their founders’ garages. iii. Sole proprietorships have the advantage of secrecy as operating plans and financial reports do not have to be disclosed to others. iv. All profits from the business belong to the owner. v. The proprietor has complete control over how the business is run.

1. This control allows the proprietor to respond quickly to competitive conditions or to changes in the economy. vi. Sole proprietorships have the greatest degree of freedom from government regulation.

1. Nonetheless, proprietors must ensure that the follow all laws that do apply to their business. vii. Taxation

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76 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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1. Profits from the business are considered the personal income of the sole proprietor and are taxed at individual tax rates.

2. The sole proprietor can also establish a tax-exempt retirement or profitsharing account, which is exempt from current income tax. viii. A sole proprietorship can be dissolved easily; the only legal condition is that all loans must be paid off. c. Disadvantages of Sole Proprietorships i. The sole proprietor has unlimited liability in meeting the debts of the business; if the business cannot pay its obligations, the owner’s personal, nonbusiness holdings might have to be used to pay the debt. ii. Limited Sources of Funds 1. There are a limited number of financial sources from which the sole proprietor can borrow (bank, friends, family, and the Small Business Administration).

2. Additionally, sole proprietors might have to pay higher interest rates on funds borrowed from banks than do large corporations because they are considered higher risks.

3. The proprietor may have to pledge personal assets to guarantee loans. iii. The sole proprietor must be able to perform many functions and possess skills in diverse areas such as management, marketing, finance, accounting, and personnel. iv. The life expectancy of a sole proprietorship is directly related to that of the owner and his or her ability to work. v. It is usually difficult for a small sole proprietorship to offer the same wages, benefits, and advancement possibilities that are often found in a large corporation. vi. Taxation 1. Under current tax rates, sole proprietors pay a higher marginal tax rate than do small corporations on income of less than $75,000.

2. The tax effect often determines whether a sole proprietor incorporates the business. d. An example of a sole proprietorship might be an entrepreneur opening up a delicatessen. As a sole proprietor, he keeps his profits but is personally responsible for all risks and financial obligations.

LO 4-2 Describe the two types of business partnerships and their advantages and disadvantages. 

Partnerships o Types of Partnership o Articles of Partnership o Advantages of Partnerships o Disadvantages of Partnerships o Taxation of Partnerships

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Key terms:    

Partnership General partnership Limited partnership Articles of partnership

XI. Partnerships a. Most states have a model law governing partnerships based on the Uniform Partnership Act, which defines a partnership as “an association of two or more persons who carry on as co-owners of a business for profit.” i. Partnerships are the least used form of business organization. b. Keys to success in a partnership include: (Table 4.2) i. Keeping profit sharing and ownership equal ii. Partners’ skill sets should complement each other iii. Honesty is critical

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iv. Maintain face-to-face communication v. Maintain transparency vi. Be aware of funding constraints so one partner does not get stuck with additional debt vii. To be successful, you need experience. So, tailor your business to your skills. viii. Family should be a priority, try to minimize business problems so you can enjoy your family. ix. Do not fall in love with “the idea” and forget to actually implement the idea. x. Be optimistic but also realistic in terms of sales, growth, and planning. c. Types of Partnership i. A general partnership involves partners sharing completely the management of a business and the liability for its debts. ii. A limited partnership has at least one general partner who assumes unlimited liability and at least one limited partner whose liability is limited to the amount of investment in the business.

1. Limited partnerships exist for risky investment projects where the chance of loss is great. a. Limited partners are barred from participating in the management of the business, but they share in the profits. b. A master limited partnership is a limited partnership traded on securities exchanges d. Articles of Partnership (Table 4.3) i. Articles of partnership are legal documents that set forth the basic agreement between partners. ii. Usually specify the money or assets each partner has contributed to the partnership (called partnership capital); each partner’s individual management role or duty; how the profits and losses of the partnership will be divided among the partners; and how a partner may leave the partnership and any other restrictions that might apply to the agreement. e. Advantages of Partnerships i. Ease of Organization 1. Starting a partnership requires little more than drawing up articles of partnership.

2. The name of the partnership should be registered with the state. ii. Availability of Capital and Credit 1. When a business has several partners, the partnership can rely on a combination of talents and pooled financial resources.

2. Partnerships tend to be larger than sole proprietorships and thus have greater earning power and higher credit ratings. iii. Partnerships can provide diverse skills because partners are able to specialize in their areas of expertise. iv. Small partnerships can react quickly to changes in the business environment. v. The partnership has fewer regulatory controls over its activities than the public corporation. f. Disadvantages of Partnerships i. Limited partners have no voice in management and bear most of the risk of the business. ii. Partnerships may be subject to disagreements when the goals and objectives of one partner change; many partnership disputes wind up in court. iii. Unlimited Liability 1. In general partnerships, the general partners have unlimited liability for total debts the business incurs; this disadvantage increases if one partner has greater personal financial resources.

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2. The disadvantage is reduced for limited partners, who can only lose their initial investment. iv. All partners are responsible for the business actions and decisions of all other partners. v. Life of the Partnership 1. A partnership is terminated upon the death or withdrawal of a partner.

2. In very large partnerships, provisions for continuation of the partnership may be provided for in the articles of partnership.

3. Selling a partnership interest has the same effect as the death or withdrawal of a partner, and it is difficult to place a value on the partner’s share of the partnership. vi. The distribution of the profits as specified in the articles of partnership may not reflect each partner’s contribution. vii. Limited Sources of Funds 1. There are limits to sources of funds (capital) available to a partnership because there is no public value placed on the business.

2. Partnerships may have to pay higher interest rates on borrowed funds than do large corporations because they may be considered greater risks. g. Taxation of Partnerships i. Partnerships are quasi-taxable organizations, which means they do not pay taxes; the individual partners report their share of the profits on their individual tax returns and are taxed at the ordinary income tax rate for individuals. h. An example of a successful partnership is Google, which arose out of a partnership between Larry Page and Sergey Brin. Today, it is the world’s top search engine.

LO 4-3 Describe the corporate form of organization and its advantages and disadvantages. 



Corporations o Creating a Corporation o Types of Corporations o Elements of a Corporation o Advantages of Corporations o Disadvantages of Corporations Other Types of Ownership o Joint Ventures o S Corporations o Limited Liability Companies o Cooperatives

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Key terms:  Corporation  Stock  Dividends  Corporate charter  Private corporation  Public corporation  Initial public offering (IPO)  Quasi-public corporations  Nonprofit corporations  Board of directors  Preferred stock  Common stock  Joint Venture  S Corporation  Limited liability company  Cooperative (co-op)

XII. Corporations a. A corporation is a legal entity created by the state, with assets and liabilities distinct from those of the owner of the corporation. i. Legally, a corporation has many of the rights, duties, and powers of a person, including the right to receive, own, and transfer property. They can enter into contracts with individuals or with other legal entities, and they can sue and be sued in court. ii. Represent the majority of sales and income in the U.S. iii. Corporations are typically owned by many individuals and organizations who own

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shares of the business, called stock. Thus, corporate owners are called stockholders or shareholders.

1. Stockholders can buy, sell, give or receive as gifts, or inherit their shares of stock.

2. Stockholders are entitled to all profits that are left after all the corporation’s other obligations have been paid; these are distributed in the form of cash payments called dividends.

3. TABLE 4.4 World’s Biggest Dividend Payers 4. However, some corporations may retain profits to expand the business. b. Creating a Corporation i. A corporation is created under the laws of the state in which it incorporates, a procedure sometimes referred to as chartering.

1. In most states, the company name must end in “company,” “corporation,” “incorporated,” or “limited” to show that the owners have limited liability.

2. The individuals who create the corporation are known as the incorporators.

3. Articles of incorporation must be completed and filed with the appropriate state office (often the secretary of state).

4. Articles of incorporation contain basic information about the business, including: a. Name and address of the corporation. b. Objectives of the corporation. c. Classes of stock (common, preferred, voting, nonvoting) and the number of shares of each class of stock to be issued. d. Expected life of the corporation (usually forever). e. Financial capital required at the time of incorporation. f. Provision for transferring shares of stock between owners. g. Provisions for the regulation of internal corporate affairs. h. Address of the business office registered with the state of incorporation. i. Names and addresses of the initial board of directors. j. Names and addresses of incorporators. ii. Based on the information in the articles of incorporation, a corporate charter is issued by the state to create the corporation. The then owners establish the corporation’s bylaws and elect a board of directors. c. Types of Corporations i. A corporation doing business in the state in which it is chartered is a domestic corporation. ii. When a corporation does business in other states, it is then referred to as a foreign corporation. iii. If a corporation does business outside the nation in which it is incorporated, it is termed an alien corporation. iv. A private corporation is owned by only one person or a few people closely involved in its management. TABLE 4.5 America’s Largest Private Companies 1. Private corporations do not offer stock for sale to the public.

2. Privately-owned corporations are not required to publicly disclose financial information, but they must pay taxes.

3. The snack food company Mars is a private corporation v. A public corporation is one whose stock anyone may buy, sell, or trade.

1. Publicly-owned corporations must disclose financial information to the public under specific laws that regulate the trade of stocks and other securities.

2. A private corporation may “go public” through an initial public offering (IPO) by selling its stock so that it can be traded in public markets.

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3. Public corporations may be “taken private” when one or a few individuals purchase all of the firm’s stock so that it can no longer be traded publicly.

4. A list of the world’s largest corporations is compiled by Fortune. Large corporations are not always profitable every year—in 2011, Fannie Mae had negative profits.

5. TABLE 4.6 American Companies with More than Half of Their Revenues from Outside the United States vi. Quasi-public corporations are corporations owned and operated by federal, state, or local government. These provide a service to citizens, rather than earn profits.

Examples are NASA and the United States Postal Service. vii. Nonprofit corporations focus on providing a service rather than earning a profit but are not owned by a government entity. Examples are Children’s Television Workshop, Elks Clubs, the American Lung Association, the American Red Cross, museums, and private schools.

1. Most nonprofits are organized as 501(c)(3) organizations, which receive certain tax exemptions, and donors contributing to these organizations may reduce their tax deductibility for their organizations. d. Elements of a Corporation i. The Board of Directors 1. The board of directors is elected by the stockholders to oversee the general operation of the corporation.

2. The board of directors sets the long-range objectives of the corporation and sees that the objectives are achieved on schedule.

3. The board members are legally liable for the mismanagement of the firm or for any misappropriation of funds 4. One of the board’s most important duties is to elect or hire the chairman of the board, the president of the company, and the chief executive officer (CEO).

5. Directors can be from both inside and outside the company. Most boards include outside directors because they are thought to be less biased in their assessment of the company’s progress. ii. Corporations issue two types of stock: preferred and common.

1. Preferred stock usually allows no voting rights but confers preference in the distribution of company profits. a. Owners of preferred stock are a special class of owners because, although they generally do not have any say in running the company, they have a claim to profits before other stockholders do. b. Most preferred stock carries a cumulative claim to dividends, which means that if preferred stock dividends are not paid in one year, they accumulate to the next year.

2. Common stock allows the owner voting rights. a. Owners of common stock do not get any preferential treatment with regards to dividends, but they do get some say in the operation of the corporation by voting on board members and other important issues. b. Common stockholders have a preemptive right to purchase new shares of the common stock directly from the corporation. e. Advantages of Corporations i. The owners’ maximum liability or potential loss is equal to their original investment. ii. Stockholders can sell or trade shares of stock without causing the termination of the corporation.

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iii. The corporation may continue its existence forever or until the owners agree to sell it or to liquidate its assets. iv. External Sources of Funds 1. Long-term funds can be raised more easily by a public corporation than by partnerships or sole proprietorships.

2. The firm can raise new funds by selling new shares or bonds to the public. v. Readily available external financing makes it easier for a business to expand into national and international markets. f. Disadvantages of Corporations i. The corporation pays taxes on its income, and stockholders pay taxes on the dividend distributions they receive from the company. ii. The formation of a corporation can be costly and may require the services of an attorney. iii. Financial and other proprietary information must be disclosed to shareholders, creditors, and the Securities and Exchange Commission (SEC)—which oversees the securities of corporations—and competitors may be able to access these documents. iv. Employee-Owner Separation 1. Non-owner employees may feel that their work benefits only the owners.

2. Employee stock ownership plans (ESOPs) give shares of the company’s stock to employees to help create more of a partnership between the company and the employees and to boost productivity. g. Hostile Takeovers XIII. Other Types of Ownership a. Joint Ventures i. A joint venture is a partnership established for a specific project or for a limited time. ii. The partners in a joint venture may be individuals or organizations, as in the case of international joint ventures. iii. Control of a joint venture may be shared equally, or one partner may control decision-making. b. S Corporations i. An S corporation is a form of business ownership that is taxed as though it were a partnership. ii. Advantages include simple taxation, limited liability of shareholders, perpetual life, and ability to shift income and appreciation to others. iii. Disadvantages include restrictions on the number (75) and types (individuals, estates, and certain trusts) of shareholders and the difficulty of formation and operation. c. Limited Liability Companies i. A limited liability company (LLC) is a form of business ownership that provides limited liability but is taxed like a partnership. ii. A major reason for using the LLC form is to protect members’ personal assets; they are also flexible, simple to run, and do not require the members to hold meetings, keep minutes, or make resolutions. d. Cooperatives i. A cooperative (co-op) is an organization composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization. Examples are Oglethorpe Power Corp., Ocean Spray, and REI. ii. The co-op is set up not to make money for itself but to help its members make money. iii. The most common example of a co-op is found in farming or agricultural organizations.

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82 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual iv. Purchasing, distribution, and advertising savings can benefit the co-op members.

LO 4-4 Assess the advantages and disadvantages of mergers, acquisitions, and leverage buyouts. 

Trends in Business Ownership: Mergers and Acquisitions

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Key terms:  Merger  Acquisition  Leverage buyout (LBO)

XIV. Trends in Business Ownership: Mergers and Acquisitions (Table 4.7) a. Companies achieve growth and improve profitability by expanding their operations, often by developing and selling new products or by merging with or purchasing other companies. b. A merger occurs when two companies combine to form a new company i. Horizontal merger: When firms that make and sell similar products merge. ii. Vertical merger: When companies operating at different but related levels of an industry merge. iii. Conglomerate merger: When firms in unrelated industries merge. c. Not all mergers are pleasant. When Duke Energy and Progress decided to merge, it was initially decided that Progress CEO Bill Johnson would lead the newly merged company.

However, shortly after the merger, the board of directors ousted Bill Johnson and reinstalled Duke CEO Jim Rogers as CEO in a move that resulted in widespread criticism. d. An acquisition occurs when one company purchases another usually by buying its stock. i. Corporate raider: A company or individual who wants to acquire or take over another company and first offers to buy some or all of its stock at a premium in a tender offer. ii. Poison pill: The firm allows stockholders to buy more shares of a stock at lower prices than the current market value to head off a hostile takeover. iii. Shark repellant: Management requires a large majority of stockholders to approve a takeover. iv. White knight: A more acceptable firm that is willing to acquire a threatened company. e. A leveraged buyout (LBO) is the purchase of a company by a group of investors with borrowed money, using the assets of the company to guarantee repayment of the loan. i. Merger mania is what happened in the 1980s and 1990s during a prolonged wave of mergers and acquisitions. ii. Some people view mergers and acquisitions favorably, pointing out that they boost corporations’ stock prices and market value, to the benefit of their stockholders. iii. Mergers can be controversial, with critics arguing that they hurt companies because management has to focus excessively on avoiding takeovers.

Boxed Text Critical Thinking Questions Cascade Engineering: Go B Corp or Go Home 10. How does Cascade use B corporation certification as a way to improve both company processes as well as the environment?

Cascade Engineering looks at decisions from a beneficial viewpoint which often requires managers to make nonprogrammed decisions to develop unique solutions to positively impact the community. Taking proactive steps to become a sustainable company has value to both the environment and the company. Cascade doesn’t wait for Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

83 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual legislation and ethical guidelines to be imposed by the government, the company has taken it upon themselves to adopt eco-friendly business practices.

11. How does B corporation certification encourage corporations to be socially responsible?

The B corporation certification shows that companies can succeed both financially and socially. In order to become a B-corp, a company must be both for-profit and for society. These businesses are purpose-driven and are designed to give back to communities, the environment, and employees.

12. Do you think it is possible for a plastics company to make a positive contribution toward sustainability? What are some of the benefits from the corporate form of organization that Cascade Engineering likely receives?

Answers will vary with a few students stating that it is impossible for a plastics company to make positive contributions. Most students will point to the reduction in emissions and use of oil, elimination of waste, thus the company is able to produce goods that do not negatively affect the environment.

The advantages of a corporation include limited liability, ease of transfer of ownership, perpetual life, external sources of funds, and expansion potential. Advantages of being a B-Corp include leading a movement, differentiating your company, and attracting talent, customers, and investors.

Slowing Down Fast Fashion 10. How do private companies have more control than public corporations?

Privately owned corporations are not required to disclose financial information publicly, but they must, of course, pay taxes.

11. What are some of the advantages of a privately held company over a sole proprietorship?

The advantages include limited liability, ease of transfer of ownership, perpetual life, expansion potential, and external sources of funds.

12. Why might private ownership be more beneficial to a small tech company like Evrnu?

As a privately held company, Evrnu is able to retain tight control over the direction of the company while choosing the investors it partners with. Many small companies are not initially profitable and as a private corporation it does not have to disclose financial information.

“Meat” the Vegetarian Butcher 9. What are the benefits of a limited liability company?

The benefits of a LLC form of ownership include protecting the owner’s personal assets in case of lawsuits. LLCs are also flex-ible, simple to run, and do not require the owners to hold meetings, keep minutes, or make resolutions, all of which are necessary in corporations.

10. Describe the type of liability founder Jaap Korteweg had under his chosen business model.

Korteweg incorporated DVS in the Netherlands as a BV. A BV is equivalent to a LLC in the U.S. 11. What benefits does self-funding a business have over other types of funding?

With self-funding, there are no interest payments, stockholders to please, or friends and family to repay.

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84 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Sole proprietorships are the most common form of business organization in the United States. They are easy to form but have many liabilities as outlined in the text.

A limited partnership is used more often in risky investments where the limited partner stands only to lose his or her initial investment. Real estate limited partnerships are a common example and help to protect the limited partner from the risk and instability of the housing market.

Corporations tend to be larger businesses, but do not need to be. Again, there are pros and cons as outlined in the chapter.

Bonus Teaching Resources This section offers bonus teaching resources for class discussion. This is offered in addition to what’s offered in the M: Business text.

“Organizing a Business” MiniCase To the owners of a business, the form of business organization is of great importance. Whether a business is organized as a sole proprietorship, a partnership, or a corporation, the form will have a real impact on taxes, the distribution of profits, the ownership and control of the business, as well as the liabilities of the business owners. Making the right decision about how to organize is crucial to the long-term profitability of most organizations. This lecture discusses three situations in which people organizing businesses had to decide on an appropriate form of business organization. In each of the following cases, ask students to consider how they might organize the business.

Scenario 1: David and Linda Johnson decided to join with their close friend Pat Barton to form a new business to market pet products. The partners purchased the exclusive license to market a patented insecticide-dispensing comb that kills fleas and ticks on dogs and cats. The comb contains a special insecticide that saturates the comb’s sturdy teeth and coats the animal’s skin and fur, killing fleas and ticks on contact. The product has been proven successful in a test at a major university and in private tests conducted by veterinarians. The insecticide used in the comb has been judged as very safe because it is derived from natural sources. The partners decided to name the product the d’flea liquid-dispensing comb and to market it throughout North America. Because this is a new product and potential buyers would have to be educated about the product, the partners felt that veterinarians and pet stores might be the best channels for obtaining access to the market.

Because the new partners were marketing only one product, they did not have to finance production facilities or other expenses associated with physically making the product. They had to establish promotion and communications to try to encourage veterinarians and pet stores to carry the product.

There were a number of considerations about how to establish the business. The new owners of the business considered a sole proprietorship, a partnership, and a corporation as alternatives for organizing their new business.

Discussion Question #1: What form of business organization should they use?

Note to the instructor: The corporate form of organization is the most obvious form of organization because of the risk of lawsuits resulting from the widespread distribution of an insecticide. It is possible that even though the insecticide may be safe, because of misuse of the product or other problems, a small group of investors marketing a product such as this would want to limit the risk associated with the product in case of a lawsuit.)

Scenario 2:

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85 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Susan Schmitt recently quit working for a major publishing company and has decided to become a freelance editor and writer for a number of publishing companies who might need her services. Susan plans to purchase a new computer, wordprocessing software, and other equipment that she will need to write and edit manuscripts. She plans to work in her home office so she can be closer to her family and use extra time during the day to work on manuscripts.

Susan is trying to decide whether she should incorporate or operate as a sole proprietor. As a legal entity, a corporation has many of the rights, duties, and powers of a person, and the incorporators have limited liability for the business. Susan is especially interested in forming a corporation because this would allow her to keep her business assets and liabilities separate from those of her family. Thus, any liability or risk associated with her business would be isolated from her family’s finances.

Susan’s other alternative is a sole proprietorship. The sole proprietorship has unlimited liability in meeting the debts of the business. Thus, if Susan’s business cannot pay its creditors, Susan might have to use personal non-business holdings such as a car or house to pay off debts. As a sole proprietor, Susan will also have to pay taxes on her income at the same rate as her personal taxes.

Discussion Question #2: What do you think Susan should do?

In this case, it is fairly obvious that because of the limited risks of operating the business and because the business is tied directly to Susan’s regular work activities, a sole proprietorship will be the simplest and most inexpensive way for her to organize her business.

Scenario 3: Margaret Stern and Janet Seglin have decided to fulfill a life-long dream of opening their own retail store. They live in a town with a population of less than 50,000, and they are interested in opening a gourmet coffee and tea store. Margaret and Janet plan to call their business The Gourmet Coffee Store.

The Gourmet Coffee Store will serve fresh-roasted gourmet coffee and tea to generate traffic. They are also considering serving pastries and desserts to encourage people to come to the store and look at the gourmet coffee products that they plan to sell. Some of the gourmet coffees the store will offer include Hawaiian Kona, Kenya AA, Sumatra Mandheling, and JamaicanBlueMountain. Margaret and Janet plan to buy roasted coffee beans from wholesalers and make them available in the store through displays. They will grind coffee beans for use in coffee makers for customers who want ground coffee.

The women believe that their initial investment will be around $25,000. They have leased a small store area in a neighborhood shopping center for only $1,000 per month.

They are trying to decide whether to organize as a partnership or as a corporation. One reason for considering a partnership is that a partnership requires little more than drawing up articles of partnership. No legal charters have to be granted, although the name of the business should be registered with the state. They have pooled their financial resources and have a better credit rating than they might have if they were operating independently. A partnership would allow them to use their diverse skills in running the store and to share decision making to achieve the most effective management of the store.

On the other hand, they have read some information about corporations and are interested in some of the advantages of incorporation, such as limited liability and possible tax advantages. However, incorporating sounds complex, and Margaret and Janet are unsure of what to do.

Discussion Question #3: How do you think The Gourmet Coffee Store should be organized? Should it be organized as a partnership or as a corporation?

Based on the information given, it is likely that a partnership would suffice for the women at this stage of their involvement.

This case presents a number of issues discussed in the book to explain advantages and disadvantages of corporations versus partnerships. The instructor may wish to point out that as the Gourmet Coffee Store grows and its management becomes more complex, the women may decide to incorporate at some point in the future.

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86 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Controversial Issue: What Is a Partnership Worth?

This can be used in a discussion board or for in-class discussion.

The textbook relates that a disadvantage of a partnership is the sometimes-difficult situation that arises when a partner wants to sell his or her interest in the business. The tough question arises about how much one partner’s interest in the firm is worth.

This issue tells of an impasse reached by two partners, with names disguised. Ask students to decide what would be the fairest settlement of the problem of the partnership.

Nancy and Arthur were partners in a new printing establishment in a medium-sized community in the Northwest. Each put up $40,000 to launch the firm. Things didn’t go terribly well the first year, and the business lost $8,000. This meant that Nancy’s interest in the business dropped to $36,000 and likewise for Arthur. At this point, Nancy expressed the desire to get out of the business, but Arthur didn’t see how he could buy her out because his supply of ready cash was far short of $36,000. Nancy understood but continued to state unequivocally that when the time was right, she wanted out.

Despite her stand on withdrawing, Nancy continued to work diligently to make a success of the firm, as did Arthur. The second year resulted in a loss of $2,000, thus reducing each partner’s interest to $35,000. Nancy became even more determined to dissolve the partnership. During the third year, Nancy and Arthur purchased a state-of-the-art press that would enable them to attract clients whom they had never approached previously. In addition, two competing printing firms in town went out of business. Printing jobs began picking up for Nancy and Arthur, and the future started to look better. Still, Nancy professed a determination to get out of printing. At the end of the third year, Nancy and Arthur each held a $41,000 interest in the business—thanks to a sales boom in the third year.

Arthur was now ready to buy out Nancy, and he said that he could offer her $41,000 in cash for her half of the business. This made sense to Arthur. After all, the accounting records showed Nancy’s interest at $41,000. Much to his surprise, Nancy replied that she would sell gladly—for $80,000!

When asked to explain her demand, Nancy said: “I can see now that this firm has great potential and massive future earnings.

If I sell out for $41,000, I know that someday I will feel like a fool. I’d have to tell my friends, ‘Can you believe that Arthur’s $2,000,000 business was once half mine, and I sold my half for just $41,000?’ No, Arthur, I must have $80,000.”

“If you are so interested in future earnings,” Arthur shot back, “Then you should stay in the business to receive them! If you get out now, you have no right to those earnings. And it is not right for you to ask me to pay those future earnings to you right now.”

Discussion Questions for “What Is a Partnership Worth?”

10. What is the problem with this partnership?

The printing business did not go very well the first year and one of the equal partners, Nancy, wanted out. However, the other partner, Arthur, did not have enough cash to buy out her share of the business. Once the business started doing better and Arthur was able to buy out Nancy’s share, Nancy decided that she would settle for no less than an $80,000 buyout.

11. What is Nancy’s reasoning in asking for $80,000 rather than the $41,000 that her share of the business is presently worth?

Nancy is calculating future potential of the business. While she still wants out of the partnership, she acknowledges that the business has great potential to be successful and she wants to be compensated accordingly. Arthur does not believe this is fair. He thinks she should ask for the present value of her share of the business or to continue to be a partner in order to share in future profits.

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87 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

12. What do you think would be an equitable settlement of this impasse?

Students’ answers will vary, but they must support their stance.

Chapter Review Questions 30. Name five advantages of a sole proprietorship.

1. Sole proprietorships are easy and inexpensive to form.

2. Sole proprietors do not have to discuss their operating plans with anyone.

3. All profits from a sole proprietorship belong to the owner.

4. A sole proprietor has direct control of the sole proprietorship and can make decisions without anyone else’s approval.

5. Sole proprietorships have the most freedom from government regulations

31. List two different types of partnerships and describe each.

A general partnership is a complete sharing in the management of the business, and each partner has unlimited liability for the debts of the business. A limited partnership has at least one general partner who assumes unlimited liability and at least one limited partner whose liability is limited to his or her initial investment. A limited partner does not participate in the management of the business.

32. Differentiate among the different types of corporations. Can you supply an example of each type?

A private corporation is owned by just one or a few people who are closely involved in managing the business. These people, often a family, own all of the corporation’s stock, and no stock is sold to the public. Examples will vary, but Levi Strauss & Co. is a private corporation.

The stock of a public corporation is not held in the hands of a few persons. Instead, its stock may be bought, sold, or traded by anyone. Wal-Mart, IBM, Apple, and ExxonMobil are public corporations.

Quasi-public corporations such as NASA or the U.S. Postal Service are owned and operated by federal, state, or local governments.

Nonprofit corporations are not owned by the government and focus on providing a service rather than earning a profit. The University of Southern California, the American Red Cross, and Greenpeace are examples of such organizations.

33. Would you rather own preferred stock or common stock? Why? The answer depends on what type of involvement in the firm the stockholder desires. Preferred stock owners receive a fixed dividend before common stockholders can receive any dividends on their shares. The disadvantage of Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

88 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual preferred stock is that their owners have no voting right to elect the board of directors. Although common stock owners receive no preferential treatment in the distribution of profits, they do get to vote on members of the board of directors and other important issues relevant to the operation of the firm.

34. Contrast how profits are distributed in sole proprietorships, partnerships, and corporations.

Sole proprietorships keep all profits and decide how to use them. In a partnership, profits are distributed to the owners in the proportions specified in the articles of partnership. Corporate profits are distributed to the owners in the form of dividend payments, but only after all other expenses have been paid.

35. Which form of business organization has the least government regulation? Which has the most?

Sole proprietorships have the least government regulation. Public corporations have the most regulation.

36. Compare the liability of the owners of partnerships, sole proprietorships, and corporations.

Sole proprietors have the greatest liability because, as sole owners, they have no one to share the burden with if they fail or are sued. General partners also have great liability, but it is shared among all the general partners. The liability of limited partners and corporate stockholders is limited to their initial investment.

37. Why would secrecy in operating a business be important to an owner? What form of organization would be most appropriate for a business requiring great secrecy?

Secrecy is important to business owners because they do not want their competitors to learn their trade secrets. A sole proprietorship would probably be most appropriate for a business requiring great secrecy because the secret can be kept by the owner.

38. Which form of business requires the most specialization of skills? Which requires the least? Why? Corporations allow the most specialization of skills. Sole proprietorships probably require the least specialization; sole proprietors must be able to “wear many hats” and perform many functions. The number of employees in a corporation allows for a high degree of specialization, whereas a sole proprietorship with a small number of employees cannot afford the specialization possible in a larger company.

39. The most common example of a cooperative is a farm co-op. Explain the reasons for this and the benefits that result for members of cooperatives.

Cooperatives are organizations composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization. Farm co-ops are beneficial because they can purchase supplies, such as fertilizer and seed, in large quantities at discounted prices and pass the savings on to member farmers. They also store and market grain, help distribute members’ products more efficiently than each farmer could on an individual basis and advertise members’ products. They allow farmers to save money and to earn a higher profit.

Connect Exercises Below are the available exercises in Connect for this chapter. Please also see the Connect Content Matrix in your Instructor Resource library for additional details on these exercises (including Learning Objectives, topics, Bloom’s level, AACSB, etc.)

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89 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 25. Business Ownership (Click & Drag): Demonstrate your understanding of the factors that influence business ownership.

26. Business Ownership: Zingerman's Deli (Case Analysis): Demonstrate your understanding of the progression of a small business from a partnership into a corporation.

27. Ultra Motor Company Limited and the E-Bike (Case Analysis): Demonstrate your understanding of the decisions facing the managers of a small business as it grows.

28. Advantages and Disadvantages of Business Formation (Click & Drag): Demonstrate your understanding of the risks and liabilities, formalities and expenses, and income tax rules when selecting a type of business formation.

29. Forms of Business Ownership (iSeeit! Animated Video Case): Gain a better understanding of the advantages and disadvantages of organizing a business as a sole proprietorship, partnership, or corporation.

30. Hardware House: Finding Sources of Cash for Expansion (Case Analysis): Demonstrate your understanding of the different ways that businesses can be organized.

31. Domino’s Still Rolling in the Dough (Video Case): Demonstrate your understanding of the different types of business ownership.

Class Discussion Questions 10. Select a publicly owned corporation and bring to class a list of its subsidiaries. These data should be available in the firm’s corporate annual report, Standard and Poor’s Corporate Records, or Moody Corporate Manuals. Ask your librarian for help in finding these resources.

Students’ responses will vary depending upon the companies they chose. One example might be Berkshire Hathaway.

Among its many subsidiaries, Berkshire Hathaway owns Business Wire, Jordan’s Furniture, GEICO Auto, BNSF, The Pampered Chef, See’s Candies, International Dairy Queen, Inc., Fruit of the Loom Companies, and Benjamin Moore & Co 11. Select a publicly owned corporation and make a list of its outside directors. Information of this nature can be found in several places in your library; the company’s annual report; its list of corporate directors; and various financial sources. If possible, include each director’s title and the name of the company that employs him or her on a fulltime basis.

Students’ responses will vary depending upon the companies they choose. One example might be Procter & Gamble.

As of this writing, its directors include Francis S. Blake. Angela F. Braly. Amy L. Chang. Scott D. Cook. Joseph Jimenez.

Co-Founder and Managing Partner of Aditum Bio (a biotech venture fund). Debra L. Lee. Chief Executive Officer of Leading Women Defined, Inc. Terry J. Lundgren. Christine M. McCarthy.

Build Your Business Plan Ask the students how many of their families are involved in a family business. Why did their family decide to start their own business? How have the students been affected by the involvement of the family in the business? Perhaps their family vacations are limited because there is a feeling that “they can’t be away from the business.” It would be interesting to see if these students would like to start their own business, or if they have been turned off by how this has affected their family life.

For those who have never experienced a family business, why would they like to own their own business? Have them debate the pros and cons of having a partnership instead. If they elect to have a partnership, as many business plan teams do, what do they have to resolve at the inception of their business?

Video Case: PODS Excels at Organizing a Business Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

90 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual What happens when homeowners need to store their belongings temporarily? Before 1998, people would choose to either rent storage space, which can be costly and inconvenient, or store their belongings in their front yards. Yet, starting in 1998, another option was introduced: PODS. PODS, short for Portable On Demand Storage, was founded after a group of firemen noticed the difficulties that many people faced when they needed to store their belongings for a short period. PODS delivers storage containers and leaves them in front of a house or business. A specially made hydraulic lift called Podzilla is able to place the container on ground level, which makes it easier for owners to store their belongings inside the container. PODS will then pick up the containers and move them to either its warehouses for storage or to anywhere else in the country.

When PODS was first started, banks and financial institutions were uncertain about how successful the moving and storage services company would be. Another issue was the expense of the actual containers. PODS containers, made of plywood over steel frames, cost between $2,200 and $2,500 each. If the company failed, the banks could repossess the containers.

However, because PODS was a first-mover and there were no other comparable companies around, the banks feared that they would not be able to resell the containers. The risk for banks and financial institutions was high. This meant that PODS initially depended on venture capitalists for funding.

Once the company got started, however, PODS proved it was well worth the investment. More than a decade later, PODS can be found on three continents and has more than 200 million customers across the United States, Canada, the United Kingdom, and Australia. More franchises are planned for France, South Africa, Europe, Asia, Latin America, and South America.

In addition to its convenience, PODS has also become known for its high-quality services and social responsibility. For instance, the company provided PODS containers to help recovery efforts in Hurricane Katrina. In 2011, PODS became a finalist in the National Association of Professional Organizers award for best service provider.

As PODS has expanded, its business organization has also undergone changes. Originally, PODS was formed as a sole proprietorship. Many businesses start off as sole proprietorships because of the benefits involved, such as ease of formation and greater control over operations. PODS’s initial name was PODS LLC, meaning that it was a limited liability company.

Limited liability companies provide more protection to owners so that their personal belongings will not be seized to pay the company’s debts. It also frees owners from some of the restrictions that exist for corporations.

However, as businesses grow nationally, they become much more difficult for one or two individuals to handle. PODS soon realized that its rapid expansion required a new form of business organization. PODS decided to become a private corporation and renamed itself PODS Enterprises Inc. Although more people became involved in the ownership of the company, a small group of individuals maintains control over much of the general corporate operations. PODS stock is not issued publicly.

Eventually, PODS also decided to adopt a franchise model. The corporation began to allow other entrepreneurs, called franchisees, to license its name and products for a fee. This provided PODS with additional funding as well as the opportunity to expand into more areas. Because PODS is already successful, franchisees have a lower failure rate than starting their own businesses from scratch. Franchisees also understand their particular markets better than a corporation can.

“Franchisees bring another advantage, though, and that is their knowledge and connections in the local market, so they can take advantage of particularities in a market,” said the senior vice president of Franchise Operations. This increases PODS’s adaptability when it expands into other areas.

On the other hand, because corporations are able to bring together several knowledgeable individuals, PODS corporate headquarters finds that it is better able to handle larger markets such as Los Angeles and Chicago. With this business model, PODS has figured out how to meet the needs of both local markets, through franchisees, and larger markets. Because of PODS’s ability to understand the best ways of organizing its business, the company has been able to reap the benefits from all types of market sizes.

Sources: “PODS LLC: Company Profile,” Bloomberg,http://www.bloomberg.com/profiles/companies/751647Z:US-pods-llc (accessed March 29, 2016); “PODS Taking a Chunk Out of Moving and Storage Market,” USA Today, August 4, 2006, Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

91 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual www.usatoday.com/money/smallbusiness/2006-08-04-pods_x.htm (accessed March 29, 2016); Consortium Media Services, “PODS Recognized as One of the Nation’s Best Service Providers by Professional Organizing Association,” Yahoo!® Voices, February 28, 2011, http://voices.yahoo.com/pods-recognized-as-one-nationsbest-service7701664.html (accessed July 26, 2012); Soti, "Portable On Demand Storage (PODS) Case Study," http://www.soti.net/PDF/PODS-SOTI-Casestudy.pdf (accessed March 29, 2016); World Franchis Associates, "PODS Multi-unit Franchise," 2015, http://www.worldfranchisecentre.com/p-detail.php?bid=91 (accessed March 29, 2016).

Video Case Discussion Questions 10. What are some advantages of sole proprietorships for PODS? What are some disadvantages?

Advantages of the sole proprietorship model for PODS included the ease of formation, the greater amount of control that the owners had over operations, the flexibility of sole proprietorships, the fact that the owners could keep all the profits, and less government regulation. Disadvantages include the limited skill sets the owners might have, more limited sources of funds, lack of qualified employees, lack of continuity, and taxation depending on the sole proprietor’s income. Normally, a sole proprietorship would also have unlimited liability, but because PODS was a limited liability company, it had limited liability like a corporation but was taxed like a partnership.

11. What are some advantages of private corporations for PODS? What are some disadvantages?

Advantages of a private corporation organization for PODS include limited liability, ease in the transfer of ownership, perpetual life, additional sources of funds, and greater expansion potential. Unlike public corporations, PODS is closely owned by a certain number of people and does not have to disclose financial statements. It therefore does not have to spend as many resources complying with regulations as public corporations do. However, disadvantages include double taxation, additional paperwork, and limitations on who can own stock, which in turn puts more limitations on the amount of external funding coming into the organization.

12. How has adopting a franchise model made PODS more adaptable?

The franchise model enabled PODS to secure additional external funding as well as the opportunity to expand into more areas. Franchisees also understand their particular markets better than a corporation can. Franchisees can take advantage of this knowledge to become successful in ways that a larger private corporation might not be able.

Team Exercise Students will form groups and find examples of mergers and acquisitions. Mergers can be broken down into traditional mergers, horizontal mergers, and conglomerate mergers. When companies are found, students will note how long the merger or acquisition took, if there were any requirements by the government before approval of the merger or acquisition, and if any failed mergers or acquisitions were found that did not achieve government approval. They will report their findings to the class, and they will explain what the companies hoped to gain from the merger or acquisition.

Build Your Skills Background Ali Bush sees an opportunity to start her own website development business. Ali has just graduated from the University of Mississippi with a master’s degree in computer science. Although she has many job opportunities outside the Oxford area, she wishes to remain there to care for her aging parents. She already has most of the computer equipment necessary to start the Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

92 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual business, but she needs additional software. She is considering the purchase of a server to maintain websites for small businesses. Ali feels she has the ability to take this start-up firm and create a long-term career opportunity for herself and others. She knows she can hire Ole Miss students to work on a part-time basis to support her business. For now, as she starts the business, she can work out of the extra bedroom of her apartment. As the business grows, she’ll hire the additional fulland/or part-time help needed and reassess the location of the business.

Task Using what you’ve learned in this chapter, decide which form of business ownership is most appropriate for Ali. Use the tables provided to assist you in evaluating the advantages and disadvantages of each decision.

Sole Proprietorship Advantages

Disadvantages

● ● ● ●

● ● ● ● Partnership

Advantages

Disadvantages

● ● ● ●

● ● ● ● Corporation

Advantages

Disadvantages

● ● ● ●

● ● ● ●

Suggestions for use: You could broaden the focus of this exercise, depending on class size and time available, by asking students to elaborate on the points of their outline. For example, you could break the class into groups and assign “Sole Proprietorships—Advantages” to one group, “Sole Proprietorships—Disadvantages” to another group, and so on. Let them decide how they will present the information when you get to the part in the lecture where you ask them to discuss their assigned subject area.

Sole Proprietorship Advantages ●

Ease and low cost of formation

Disadvantages ●

Unlimited liability

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93 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual ● ● ● ● ● ●

Secrecy Control over profits Control of the business Taxation Ease of business dissolution Freedom from government regulation

● ● ● ●

Limited sources of funds Limited skills Lack of continuity Difficulty keeping qualified employees Taxation issues

● Partnership

Advantages

Disadvantages

● ● ● ● ● ●

● ● ● ●

Ease of organization Availability of capital and credit Combined knowledge and skills Faster decision making Fewer regulatory controls Fixed distribution of profits

● ●

Unlimited liability Mutual business responsibility Limited life of the partnership Difficulty selling a partnership interest Potential for unfair sharing of profits Limited sources of funds

Corporation Advantages

Disadvantages

● ● ● ● ●

● ● ● ●

Limited liability Ease of transfer of ownership Perpetual life External sources of funds Expansion potential

Double taxation Cost of forming a corporation Disclosure of information Employee-owner separation

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 16. Requirements for Incorporation (in your state) 17. Advantages and Disadvantages of Leveraged Buyouts 18. A History of Cooperatives in the United States 19. A Study of Successful Sole Proprietorships (or Partnerships) (Note to instructor: This study could be done by interviewing a number of sole proprietors or partners in your area. The number to be interviewed can be determined by the instructor.)

Guest Speaker Suggestions 14. A sole proprietor from a local firm to discuss formation, management, advantages, and disadvantages of sole proprietorships.

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94 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 15. A member of a partnership in your local area to discuss formation, management, advantages, and disadvantages of partnerships.

16. An executive from a private or public corporation in your local area to discuss formation, management, advantages, and disadvantages of corporations.

17. A representative of a bank or financial institution to speak—from a lender’s perspective—about the differences between sole proprietorships, partnerships, and corporations.

18. An attorney to talk about some of the legal aspects of forming a business.

Teaching Suggestions 21. This chapter is very important to students’ understanding of business organizations. Most instructors will stress the chapter content in lectures by using the “Lecture Outline and Notes.”

22. The “Supplemental Lecture,” with three scenarios presented, helps to emphasize the differences in the forms of organization. The “Controversial Issue” illustrates the problems in dissolving a partnership.

23. Focusing on the boxed material and the case study will help students achieve the objectives of the chapter. Answers for both the boxed material and case studies are provided in this Instructor’s Manual.

24. The “Check Your Progress” section in the textbook will help in understanding chapter content. These topics may be assigned as an outside class assignment. One of the problems in giving textbook questions as outside assignments is that students frequently do not do the assignments and wait for the instructor to give them the answers. Instructors can avoid these problems in several ways: (1) collecting assignments at random and assigning a grade; (2) occasionally giving some of the same questions as a quiz, thus rewarding students who have done their assignments; (3) having students hand in assignments and giving credit for work submitted (or penalties for work not submitted); and (4) calling on students at random to write on the chalkboard their answers to specific questions (giving a small number of points for correct answers).

25. Bring some copies of telephone Yellow Pages to class. Divide the class into small groups. Have them look at selected pages (the instructor chooses the page numbers). Have them answer these questions: a. How can you tell if a firm is incorporated? b. Can you tell if a firm is a sole proprietorship or a partnership? c. (Name some specific firms appearing in your Yellow Pages.) Are these firms likely to be sole proprietorships, partnerships, or corporations? Why? d. (Select one or two pages in your Yellow Pages.) How many of these firms do you think employ more than 50 people?

Chapter 5: Small Business, Entrepreneurship, and Franchising Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s highlights. Followup via the Connect exercises is then encouraged to provide a holistic understanding of the chapter. Use the hyperlinked Table of Contents below to jump to different sections of the manual.

Table of Contents Chapter Forecast ........................................................................................................................................................................... 95 Learning Objectives ....................................................................................................................................................................... 95 Key Terms and Definitions ............................................................................................................................................................. 95 Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

95 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Content Outline ............................................................................................................................................................................. 96 Boxed Text Critical Thinking Questions ....................................................................................................................................... 104 Do You Know// How to Make a Small Business Survive? / ......................................................................................................... 105 Bonus Teaching Resources .......................................................................................................................................................... 105 Chapter Review Questions .......................................................................................................................................................... 108 Connect Exercises ........................................................................................................................................................................ 109 Class Discussion Questions .......................................................................................................................................................... 110 Build Your Business Plan.............................................................................................................................................................. 110 Video Case: Sonic—A Successful Franchise with an Old-Fashioned Drive-In Experience ........................................................... 110 Team Exercise .............................................................................................................................................................................. 112 Build Your Skills ........................................................................................................................................................................... 112 Term Paper or Project Topics ...................................................................................................................................................... 114 Guest Speaker Suggestions ......................................................................................................................................................... 115 Teaching Suggestions .................................................................................................................................................................. 115

Chapter Forecast This chapter surveys the world of entrepreneurship and small business. First, we define entrepreneurship and small business and examine the role of small business in the American economy. Then we explore the advantages and disadvantages of small-business ownership and analyze why small businesses succeed or fail. Next, we discuss how an entrepreneur goes about starting a business and the challenges facing small businesses today. Finally, we look at entrepreneurship in larger organizations.

Learning Objectives LO 5-1 LO 5-2 LO 5-3 LO 5-4 LO 5-5 LO 5-6 LO 5-7

Define entrepreneurship and small business.

Explain the importance of small business in the U.S. economy and why certain fields attract small business.

Specify the advantages of small-business ownership Analyze the disadvantages of small-business ownership and the reasons why many small businesses fail.

Describe how to start a small business and what resources are needed.

Evaluate the demographic, technological, and economic trends that are affecting the future of small business.

Explain why many large businesses are trying to “think small.”

Key Terms and Definitions Business plan A precise statement of the rationale for a business and a step-by-step explanation of how it will achieve its goals Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

96 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Entrepreneurship The process of creating and managing a business to achieve desired objectives Franchise A license to sell another’s products or to use another’s name in business, or both Franchisee The purchaser of a franchise Franchiser The company that sells a franchise Intrapreneurs Individuals in large firms who take responsibility for the development of innovations within the organizations Microentrepreneur Entrepreneurs who develop businesses with five or fewer employees Sharing economy An economic model involving the sharing of underutilized resources Small business Any independently owned and operated business that is not dominant in its competitive area and does not employ more than 500 people Small Business Administration (SBA) An independent agency of the federal government that offers managerial and financial assistance to small businesses Social entrepreneurs Individuals who use entrepreneurs to address social problems Undercapitalization The lack of funds to operate a business normally Venture capitalists Persons or organizations that agree to provide some funds for a new business in exchange for an ownership interest or stock

Content Outline The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a section on which CONNECT activities can be used in the chapter. This is created so that you can facilitate in-class or online discussion effectively.

LO 5-1 Define entrepreneurship and small business.  

Introduction The Nature of Entrepreneurship o What is a Small Business?

Key terms:  Entrepreneurship  Small business  Small Business Administration (SBA)

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97 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual o

The Role of Small Business in the American Economy

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Lecture Outline and Notes: XV. The Nature of Entrepreneurship and Small Business a. Entrepreneurship is the process of creating and managing a business to achieve desired objectives. The entrepreneurship movement has been accelerating. i. Some entrepreneurs who start small businesses have the ability to see emerging trends; in response, they create a company to provide a product that meets customer needs. ii. Technology once available only to the largest firms can now be obtained by small business. iii. Companies such as Procter & Gamble, McDonald’s, and Dell Computers all started out as small businesses. Now they have become major global corporations. Many of the entrepreneurs that founded these businesses, such as Steve Jobs (Apple), Michael Dell (Dell Computers), Larry Page and Sergey Brin (Google), and Bill Gates (Microsoft) are recognized as some of the greatest entrepreneurs. (Table 5.1) b. What Is a Small Business? i. The textbook’s definition of small business is any independently owned and operated business that is not dominant in its competitive area and employs fewer than 500 people. (Table 5.3) ii. This is similar to the definition used by the Small Business Administration (SBA), an independent agency of the federal government that offers managerial and financial assistance to small businesses. c. The Role of Small Business in the American Economy (Table 5.2) i. Small businesses are vital to the soundness of the American economy. ii. Over ninety-nine percent of all U.S. firms are classified as small businesses, and they employ 50 percent of private workers. iii. They represent 98 percent of all U.S. exporters of goods and contribute 33 percent of the value of these exports. iv. Small businesses fuel job creation and innovation and provide significant opportunities for minorities and women to succeed in business. v. About 1.8 million net new jobs annually are created by small businesses.

1. Many new jobs are also created by big-company/smallcompany alliances. vi. Women-owned businesses are responsible for more than 10 million businesses nationwide. vii. Minority-owned businesses have been growing faster than other classifiable firms as well, representing 15 percent of all small businesses. viii. 99.7 percent of all businesses employ fewer than 500 people.

Businesses employing 19 or fewer people account for 89.6 percent of all businesses. ix. Small businesses contribute highly to innovation and bring significant changes and benefits to customers. For instance, the

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98 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual airplane, audio tape recorder, fiber-optic examining equipment, the heart valve, optical scanner, personal computer, soft contact lenses, the Internet, and even the zipper were innovations by small businesses.

1. Founder and CEO of the small firm UniKey, Phil Dumas, invented a new way for consumers to keep their doors locked 2. Invented Kevo, a motorized deadbolt that links to users’ iPhones (with just a touch of a finger, consumers can lock and unlock their doors from remote locations) 3. UniKey distributes products in major retailers such as Lowe’s and Home Depot 4. Just one example of a small company with the ability to innovate and contribute to the benefit of customers

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LO 5-2 Explain the importance of small business in the U.S. economy and why certain fields attract small business. 

Key terms: 

Sharing economy

Industries That Attract Small Business

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d. Industries That Attract Small Business i. Small businesses are found in every industry, but some areas are especially attractive because they are relatively easy to enter, require low initial financing, and/or offer relatively easy ways to target a specific group of customers. ii. Retailing and Wholesaling 1. A retailer acquires goods from producers or wholesalers and sells them to consumers. Retailing is attractive to smallbusiness owners because it is easy to gain experience and exposure in the field and the financial cost of opening a retail store is relatively low.

2. Nonstore retailing also offers many opportunities. Two types of nonstore retailing are direct marketing and direct selling.

3. Wholesalers supply products to industrial, retail, and institutional users for resale or for use in making other products. Small businesses are successful in wholesaling activities because they are close to final customers and know how to keep them satisfied. iii. Services 1. Service providers work for others but do not actually produce tangible goods.

2. The service sector accounts for 80 percent of U.S. jobs.

3. Many service providers are also retailers because they provide their services to ultimate consumers. iv. Manufacturing 1. Small businesses can often customize products to meet specific customer needs and wants.

2. The Malcolm Baldrige Award recognizes achievements in quality and performance in businesses of all sizes v. High Technology businesses depend heavily on advanced scientific and engineering knowledge.

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99 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 1. In general, high-tech businesses require greater capital and have higher initial startup costs than do other small businesses.

2. 37 percent of high-tech jobs are in small business. vi. Sharing Economy 1. The past decade has seen a rise in the sharing economy, an economic model involving the sharing of underutilized resources.

2. The sharing economy is often referred to as the “gig economy” because independent contractors earn income going from job to job. The sharing economy offers opportunities for those who want to be their own entrepreneurs or want additional income even though they have another job.

LO 5-3 Specify the advantages of small-business ownership. 

Advantages of Small-Business Ownership o Independence o Costs o Flexibility o Focus o Reputation

PPT 5.18

PPT 5.19

PPT 5.20

XVI. Advantages of Small-Business Ownership a. Traits of Entrepreneurs (Table 5.4) i. Independence 1. Independence and the opportunity to better themselves are leading reasons why entrepreneurs go into business for themselves.

2. Freedom to work where and when they want is desired by many small-business entrepreneurs. ii. Small businesses usually require less money to start and maintain than large ones. iii. Flexibility 1. Small businesses have the flexibility to adapt to changing market demands.

2. With only one layer of management, decisions can be made quickly. iv. Small firms can focus their efforts on a precisely defined market niche—a specific group of customers—to address a need that other companies have not addressed. v. Many small firms can develop reputations for quality and service, demonstrating a commitment to customer satisfaction.

LO 5-4 Analyze the disadvantages of small-business ownership and the reasons why many small businesses fail. 

Key terms:

Key terms:  Undercapitalization

Disadvantages of Small-Business Ownership o High Stress Level o High Failure Rate

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100 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual PPT 5.22

XVII.

PPT 5.23

Disadvantages of Small-Business Ownership a. High Stress Level i. Worries about the business, competition, or changing market demand cause stress. ii. Long workdays are the norm. b. High Failure Rate (Table 5.4) i. There is no guarantee of small business success. ii. Half of all small businesses fail within five years. iii. Small businesses fail for many reasons.

1. Poor business management causes many failures.

2. Other causes include burdens imposed by government regulation, insufficient funds during slow sales periods, and competition from others. iv. The shortest path to failure in business is undercapitalization— lacking sufficient funds needed to operate the business normally. v. Poor management is the cause of many business failures: Just because an entrepreneur has a brilliant vision for a small business does not mean he or she has the knowledge or experience to manage a growing business effectively.

1. Expanding a hobby into a business may work if a genuine market niche exists, but all too often people start such a business without identifying a real need for the goods or services. vi. Growth requires specialized management skills that the owner may not have nor have the time to acquire.

1. Growth often requires the owner to give up a certain amount of direct authority, and it can be hard for someone who has called all the shots to give up control.

2. Some business owners choose to stay micropreneurs, which operate small-scale businesses with no more than five employees.

LO 5-5 Describe how to start a small business and what resources are needed. 

Starting a Small Business o The Business Plan o Forms of Business Ownership o Financial Resources o Approaches to Starting a Small Business o Help for Small-Business Managers

PPT 5.24

PPT 5.25

XVIII.

Key terms:     

Business plan Venture capitalists Franchise Franchiser Franchisee

Starting a Small Business a. Creating a small business involves starting out with a concept or idea. Then it involves creating a business plan. After, the entrepreneur must devise a strategy to guide planning and development. b. The Business Plan i. A business plan is a precise statement of the rationale for the business and a step-by-step explanation of how it will achieve its goals. ii. It should include an explanation of the business, an analysis of the competition, estimates of income and expenses, a strategy for acquiring sufficient funds to keep the business going, and other

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101 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

PPT 5.26

PPT 5.27

PPT 5.28

PPT 5.29

PPT 5.30

PPT 5.31

information. iii. The business plan should act as a guide and reference document. iv. It should be revised periodically to ensure that the firm’s goals and strategies can adapt to changes in the environment. v. Business plans also allow companies to assess market potential, determine price and manufacturing requirements, and refine product selection. c. Forms of Business Ownership i. After developing a business plan, the entrepreneur has to decide on an appropriate legal form of business ownership, such as a sole proprietorship, partnership, or corporation. d. Financial Resources i. To make money from a small business, the owner must provide or obtain money (capital) to start the business and to keep it running smoothly. Financing options include loans, stocks, or equity financing. ii. Equity Financing 1. Equity financing occurs when the owner uses real personal assets rather than borrowing funds from outside sources to get started in a new business.

2. Small businesses can also obtain equity financing by finding investors for their operations. a. They may sell stock in the business to family members, friends, employees, or other investors. b. Venture capitalists are persons or organizations that agree to provide some funds for a new business in exchange for an ownership interest or stock. c. This form of equity financing requires that the small business owner share the profits or the control of the business. iii. Debt Financing 1. Banks are the main suppliers of external debt financing to small businesses.

2. The Small Business Administration offers financial assistance to qualifying businesses.

3. Small business owners can look to family and friends as sources for loans of long-term funds or other assets, such as computers or automobiles that are exchanged for an ownership interest in a business.

4. The amount a financial institution is willing to loan depends on its assessment of the venture’s likelihood of success and of the entrepreneur’s ability to repay the loan. a. The owner is often required to put up collateral—a financial interest in the property or fixtures of the business—to guarantee payment of the debt. b. The small business owner may also have to offer some personal property as collateral, such as a home, in which case the loan is called a mortgage.

5. Financial institutions can also grant a small business a line of credit—an agreement by which a financial institution promises to lend a business a predetermined sum on demand.

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102 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

PPT 5.32

PPT 5.33

PPT 5.34

PPT 3.35

PPT 5.36

6. Small businesses may also obtain funding from their suppliers in the form of trade credit; suppliers allow the business to take possession of the needed goods and services and pay for them at a later date or in installments.

7. Occasionally, small businesses engage in bartering, trading their own products for the goods and services offered by other businesses.

8. Some community groups, state, and local agencies sponsor loans, especially to minority businesspeople or for development in certain areas. e. Approaches to Starting a Small Business i. Starting from Scratch Versus Buying an Existing Business 1. Buying an already existing business has the advantage of providing a network of existing customers and suppliers.

2. However, the entrepreneur must deal with the problems the business already has. ii. Franchising 1. A license to sell another’s products or to use another’s name in business, or both, is a franchise. a. The company that sells a franchise is the franchiser. b. The purchaser of a franchise is called a franchisee.

2. The franchisee acquires the rights to a name, logo, methods of operation, national advertising, products, and other elements associated with the franchiser’s business in return for a financial commitment and the agreement to conduct business in accordance to the franchiser’s standard of operations.

3. The initial fee to join a franchise varies greatly. In addition, franchisees buy equipment, pay for training, and obtain a mortgage or lease. The franchisee also pays the franchiser a monthly or annual fee based on the percentage of sales or profits.

4. Supercuts, Dunkin’ Donuts, and Planet Fitness are examples of franchises. (Table 5.5) 5. Advantages of Franchising a. Franchising allows a franchisee the opportunity to set up a small business relatively quickly, and a franchise outlet often reaches the breakeven point faster than an independent business would because of its association with an established brand. b. Management training and support c. Brand-name appeal d. Standardized quality of goods and services e. National and local advertising programs f. Financial assistance g. Proven products and business formats h. Centralized buying power i. Site selection and territorial protection j. Greater chance for success 6. Disadvantages of Franchising a. Franchise fees and profit sharing with the

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103 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

PPT 5.39

f.

franchiser b. Strict adherence to standardized operations c. Restrictions on purchasing d. Limited product line e. Possible market saturation f. Less freedom in business decisions 7. The practice of franchising first began in the United States in the 19th century when Singer used it to sell sewing machines. The concept of franchising grew especially rapidly during the 1960s, when it expanded to diverse industries.

Help for Small Business Managers i. Many organizations exist to help small businesses 1. Small Business Administration a. Small Business Development Centers b. Service Corps of Retired Executives c. Active Corps of Executives d. Small Business Institutes 2. College courses and seminars 3. Chambers of Commerce and U.S. Department of Commerce 4. National publications, weekly business journals/newspapers.

5. Advice and help from other small businesses 6. Networking—building relationships and sharing information with colleagues—is vital for any businessperson.

7. Incubators are organizations created to accelerate development and success of startup organizations.

LO 5-6 Evaluate the demographic, technological, and economic trends that are affecting the future of small business.

Key terms:



The Future for Small Business o Demographic Trends o Technological and Economic Trends PPT 5.40 XIX. The Future for Small Business a. Demographic Trends i. The baby boom generation (those born between 1946 and 1964) is wealthy and aging, but not actively pursued by most small businesses. ii. Another market with huge potential for small business is the Millennials or Generation Y (those born between 1981 and 1997); PPT 5.41 who shop frequently and spend lavishly. iii. The generation after Millennials is Gen Z, which accounts for 61 million people in the United States. This group, which is starting to enter the workforce, tends to seek a fun, flexible work environment.

PPT 5.42 iv. The growing number of immigrants living in the United States represents another potential market for small business. Immigrants represent about 17 percent of the population. b. Technological and Economic Trends i. Technological advances have opened many new markets to small business.

1. Technology has enabled the substantial growth of Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

104 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

c.

entrepreneurs working out of their homes, known as homebased businesses. ii. Small businesses can react quickly to changes in the economy. iii. Economic turbulence provides opportunities and threats iv. Changes in communication and technology can allow small companies to customize their services quickly for international customers. v. Deregulation of the energy market and interest in alternative fuels and in fuel conservation has spawned many small businesses.

Most Business-Friendly States (Table 5.6)

LO 5-7 Explain why many large businesses are trying to “think small.” 

Key terms: 

Intrapreneurs

Making Big Businesses Act “Small”

PPT 5.44

XX. Making Big Businesses Act “Small” a. The success and competitiveness of small businesses have led many large corporations to take a closer look at what makes their smaller rivals tick. b. Many large corporations are focusing on downsizing. This process involves the reduction of management layers, corporate staff, and work tasks in order to make the firm more flexible, resourceful, and innovative like a smaller business. c. Many companies are trying to instill a spirit of entrepreneurship. In major corporations, intrapreneurs, like entrepreneurs, are employees who take responsibility for the development of innovations of any kind within the large organization.

Boxed Text Critical Thinking Questions A Growing Success: Leola Produce Auction 13. What type of business does Leola Produce Auction operate in?

Leola Produce Auction operates a wholesaler in the service sector.

14. Describe how Leola Produce Auction acts as a middleman for buyers and sellers.

The Leola Produce Auction is an efficient middleman for produce buyers and sellers. It gives farmers a place to sell their goods, while buyers can purchase high-quality produce in large quantities.

15. What type of consumer does Leola Produce Auction appear to predominately target?

Grocery stores are the biggest buyer.

AMS Clothing Gears Up for Sportswear Battles 13. What are the advantages of serving an underserved market?

An underserved market offers huge business opportunities with little competition.

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105 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

14. In what type of competition is AMS Clothing competing: pure competition, monopolistic competition, oligopoly, or monopoly? Explain your reasoning.

AMS Clothing is competing in a monopolistic competition market since there are many competitors offering differentiated products.

15. How may the laws of supply and demand enable a small company like AMS Clothing to become profitable by serving a market niche?

Answers will vary. There are many market niches that are unprofitable for large companies because of their size and expenses. A small company can meet the demand at a lower price as cited in the case. The owner charges $10 per jersey, compared to the $100 Nike and Adidas jerseys made in Kenya.

The Root of Briogeo’s Success 12. How did Nancy Twine use entrepreneurial skills to develop a successful hair care company?

Like many entrepreneurs, Nancy Twine had the ability to recognize an unfilled market need and leverage this to create a high-growth company with a lucrative future.

13. What type of industry does Briogeo operate in?

Briogeo is a manufacturer selling directly to retailers.

14. What type of financing did Nancy Twine end up using to start her business?

Nancy Twine picked mostly angel investors, more known for investing in tech companies.

Do You Know// How to Make a Small Business Survive? / What is one of the most common reasons people become entrepreneurs? What challenges do they face?

Independence is one of the main reasons why people turn to entrepreneurship. People who do not do well in an office setting and who prefer to set their own hours and have more freedom tend to prefer entrepreneurship. Starting your own business is not easy, especially in slow economic times. Even in a good economy, taking an idea and turning it into a business has a very high failure rate. The possibility of failure can increase even more when the economy is in decline. This section offers sound, practical advice in learning how to run a business on a shoestring is a great opportunity to cut the fat and to establish lean, efficient operations.

Bonus Teaching Resources This section offers bonus teaching resources for class discussion. This is offered in addition to what’s offered in the M: Business text.

“When Expansion Can Lead to Failure” MiniCase The textbook points out that one of the problems with small businesses is the inability to cope with growth. The following lecture describes a small business expansion that is typical of the experience of other firms.

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106 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Matt Morgan was the manager of a variety store that was part of a large national chain. The variety store was located in a small town of 10,000 in southern Florida. The small town was growing rapidly because tourists from the North had discovered the town’s beautiful beach on the Atlantic.

Matt had arrived in town at the start of a slow-building boom and reasoned that now was an opportune time for him to go into business for himself. He left his job with the variety-store chain. Locating an empty store space next to the variety store, Matt and his wife Nettie converted the area into an orange juice and hot dog stand with a long counter and high bar stools.

Fresh-squeezed orange juice on hot Florida days seemed to hit the spot with locals and tourists alike. Matt put in a few tables and expanded the menu by adding some beverages, hamburgers, and soft ice cream.

Because Matt and Nettie had engaging personalities and tried to know most of their regular customers by name, their business blossomed. A very small breakfast menu was offered, and the business—called the Orange Connection—was a financial bonanza for Matt and Nettie.

Matt opened up at 6:00 a.m. for breakfast. Many people on their way to work in the growing town stopped by for coffee, juice, and a danish. Some retired people also stopped by for a plate of bacon and eggs. By 9:00 a.m., shoppers and tourists stopped by seeking nothing more than a cold drink. Around 10:30 each morning, the Orange Connection was jammed, with all seats taken and numerous people standing at the counter waiting to be served.

At 11:00, Nettie would join Matt in serving quick, short-order lunches. Even though many of the orders were to go, there was always a seating shortage for lunch, but crowds kept coming back.

In the afternoon, another wave of customers would come seeking just a cool drink. The evening hours saw a slight increase in orders of hot dogs and hamburgers. Business dropped off by 7:00 p.m., and Matt would close the Orange Connection at 7:30 p.m. The Orange Connection was closed on Sunday.

The town’s response to the Orange Connection had been overwhelming. The Orange Connection was frequently overflowing, and some customers had to be turned away. Matt and Nettie began to think about expanding to a larger facility. After a year of doing some simple surveying and talking with everyone who would discuss the matter, the Morgans decided to knock out their south wall and develop a restaurant with three times the space of the original Orange Connection. During the renovation and construction, crowds continued at their normal peak level.

Finally, the new Orange Connection opened as a swanky restaurant with a staff of skilled chefs and a complete menu. In the original facility, lunch consisted of a hamburger, sack of potato chips, orange juice, and a frozen custard cone. In the new expanded facility, lunch consisted of a meal such as fried chicken, mashed potatoes, green beans, tossed salad, chilled fruit sections, rolls and butter, iced tea, and apple pie a la mode. With this new facility, Matt realized he would have to stay open until 11:00 p.m. and serve three complete meals from a varied menu. Although the staff was larger, Matt and Nettie still worked long hours and were there to greet their many friends and customers.

The only problem was that the friends and customers weren’t there for the Morgans to greet. Crowds at the Orange Connection dropped off, and the evening meal was a strangely silent time. Matt devised all kinds of promotional gimmicks to lure the crowds back, but nothing seemed to work. Apparently, expanding the Orange Connection was not a success.

Eventually, the Morgans sold what remained of their business and moved to California. They never really understood why the new Orange Connection was not a success. The Morgans and some business friends had to conclude that whatever magic there was in the original Orange Connection did not carry over to the large restaurant. In his later years, Matt Morgan was heard to say, “I guess I should never have knocked out that wall. Our little orange juice stand had a certain personality all its own. That mystique died when we opened the restaurant.”

Discussion Questions for “When Expansion Can Lead to Failure” MiniCase Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

107 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 10. Why do you think the new expanded restaurant did not succeed?

Consumers probably valued the original Orange Connection because it contained more of a family, homey feel to it. It was unlike other restaurants around the area in its simplicity and convenience, and its uniqueness probably contributed to its demand. The fact that the Morgans knew everyone by name made the customers feel special. The new restaurant may have alienated many of the loyal customers, who probably felt that their needs would not be met to the same extent. The newer restaurant, despite the Morgans’ efforts, probably would not possess the same homey personality as the original. Customers probably felt that they would be forgotten. Additionally, perhaps customers interpreted the expansion as a way to increase the Morgans’ profits at the expense of customer service and relationships.

11. What could the Morgans have done differently in their planning?

The Morgans should have performed more market research to determine why customers valued their restaurant so.

What were their opinions concerning expansion? Would they be in favor of a bigger restaurant, and if not, what were the reasons? If the Morgans could have anticipated and understood their customers’ objections to a larger, fancier restaurant, then they could have worked to reassure their customers that the new restaurant would not lose the personality that made the original Orange Connection so beloved. A market analysis was completely lacking, which they should have used to help formulate a business plan for the new restaurant.

Controversial Issue: Are Small Businesses Dependent on the Presence of the Owner?

This can be used in a discussion board or for in-class discussion.

Many small businesses begin as one-person operations. Most small business owners put in extremely long hours and seldom take vacations. Although such firms later employ other workers, the management style and personality of the owner seem to be necessary to the survival of the firm. Here are some examples.

Ted and Ralph formed a partnership to operate a service station in a large midwestern city. Both were on the premises from 7 a.m. until closing at 8 p.m. Both were skilled at greeting the public, and they made many friends as business boomed.

Although they maintained ownership of the station, Ted and Ralph began to spend time away from work, leaving capable subordinates in charge. But the firm just wasn’t the same without Ted and Ralph on hand, and business dropped. Ted and Ralph realized that to keep the station highly successful, they both had to be on the premises.

For many years, Mabel and Theo Harker operated Harker’s Cafe in a large city in the Southwest. Theo was the chief cook, and Mabel waited on customers who sat at the counter. Although they hired several other cooks and waitresses, Mabel and Theo were the stable core of the business. The two worked long hours, and business seemed to go more smoothly when the owners were there. Realizing how important they were personally to the success of the cafe, the Harkers never took a vacation and never left the cafe in the hands of the hired staff. Instead, in late summer and around Christmas, the Harkers closed down the entire cafe for a week at a time. Customers agreed that the place would not be Harker’s Cafe without Mabel and Theo.

Discussion Questions for “Are Small Businesses Dependent on the Presence of the Owner?”

13. Why does it seem to be necessary for the owner(s) to be on the premises all the time?

Customers likely begin to associate the owners with the business, particularly if it’s a small business. A business is more than just a place to buy merchandise; it also consists of the personalities of the workers and the relationships formed between employees, or in this case, the owners and the customers. Customer relationships are especially important in small businesses to attract customers away from larger competition. Since the owners are the first people customers come into contact with, they likely form important relationships with the owners that contribute to their later patronage of the business; thus, the absence of the owners takes away from those core relationships.

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108 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Additionally, customers trust that the owners have better expertise and know-how of the business than subordinates do.

14. Can there be personality cults in small businesses? Is it possible for customers to create a personality cult around the owners of a business?

As the above examples illustrate, it does seem like customers can create personality cults around the owners of a business. Business owners are often “people” persons and are very enthusiastic and knowledgeable about their products. It is possible for customers to blend the owners’ personalities with the business so that they become almost inseparable.

15. How might the owner go about reducing customers’ dependency upon the presence and/or personality of the owner and leading customers to depend more on the business itself?

Students’ answers will vary.

Chapter Review Questions 40. Why are small businesses so important to the U.S. economy?

More than 99 percent of all U.S. firms are classified as small businesses. Small businesses are fueling job creation and innovation.

41. Which fields tend to attract entrepreneurs the most? Why? The fields of retailing, services, and high technology tend to attract small businesses because these fields (except for high technology) are relatively inexpensive to enter. They generally do not require a large initial investment or a lot of experience.

42. What are the advantages of starting a small business? The disadvantages?

Advantages of small business ownership include independence and flexibility in terms of the location and opening hours of the business. Additional advantages include lower costs, flexibility to adapt to changing market conditions, focus on a limited market niche, and reputation. Among the disadvantages of small businesses are the high stress level and the high failure rate.

43. What are the principal reasons for the high failure rate among small businesses?

The main reasons for the high rate of failure among small businesses are undercapitalization, inability to cope with growth, poor business management, over optimism, burdens imposed by government regulation, insufficient reserves to withstand slow sales, and vulnerability to competition.

44. What decisions must an entrepreneur make when starting a small business?

When starting a small business, an entrepreneur must first conceive a business plan. He or she must then select a specific form of business ownership and secure sufficient financial resources.

45. What types of financing do small entrepreneurs typically use? What are some of the pros and cons of each?

Few small-business owners have the funds necessary to start a business. Small-business owners can obtain financing from friends and family. However, the relationship may suffer if the business fails. Small businesses may seek Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

109 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual financing from banks or other financial institutions. A bank may require collateral or a mortgage, and the bank can repossess the property if the business fails to repay the loan.

A financial institution may grant a line of credit, an agreement by which the financial institution promises to lend the business a predetermined sum of money on demand.

Other sources of financing include local and state agencies, the Small Business Administration, and venture capitalists.

46. List the types of management and financial assistance that the Small Business Administration offers. 

Counseling for firms in difficulty



Consulting on operations improvements



Training for owners/managers and employees

 

Business clinics Advice from SCORE and ACE



Loan programs

47. Describe the franchising relationship.

Franchisees purchase a franchise for a fee, plus start-up costs. Franchisees may also pay a fee, based on a percentage of sales, for advertising and promotion.

48. What demographic, technological, and economic trends are influencing the future of small businesses?

Aging baby boomers, echo boomers, and an increasing number of immigrants living in the United States represent potentially huge markets for small businesses. Technological advances have opened many new markets to small businesses. Small businesses can adapt to changing trends faster than large corporations.

49. Why do large corporations want to become more like small businesses?

The continuous success of small businesses, their capacity to innovate, their flexibility, and their ability to adapt quickly to market changes are some of the reasons why large corporations want to become more like small businesses.

Connect Exercises Below are the available exercises in Connect for this chapter. Please also see the Connect Content Matrix in your Instructor Resource library for additional details on these exercises (including Learning Objectives, topics, Bloom’s level, AACSB, etc.)

32. Entrepreneurs Reinvent Pizza (Case Analysis): Understand how small businesses are vital to the soundness of the American economy.

33. The Buzz about Burt's Bees (Case Analysis): This case analysis helps students to understand that small businesses are found in nearly every industry, but retailing and wholesaling, manufacturing, and high technology are especially attractive to entrepreneurs because they are relatively easy to enter and require low initial financing.

34. How an Entrepreneur Can Secure Financing (iSeeit! Animated Video Case): This brief video shows how small businesses go about finding sources of financing.

35. Randy's Spray Foam Insulation Business (Case Analysis): Consider types of financing, approaches to starting a business, and the business plan as they pertain to one entrepreneur’s business.

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110 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 36. Launching a Business – JCF Health and Fitness (Case Analysis): Demonstrate your understanding of the importance of small business and entrepreneurship by watching a video about one small business.

37. The Business Plan: A Roadmap to Success (iSeeit! Animated Video Case): Demonstrate your understanding of how and why businesses write business plans and identify what sections and content generally are found in business plans.

Class Discussion Questions 12. Interview a local small-business owner. Why did he or she start the business? What factors have led to the business’s success? What problems has the owner experienced? What advice would he or she offer a potential entrepreneur?

Students’ answers will vary depending upon the business they chose.

13. Using business journals, find an example of a company that is trying to emulate the factors that make small businesses flexible and more responsive. Describe and evaluate the company’s activities. Have they been successful? Why or why not?

Students’ answers will vary depending upon the business they choose.

14. Using the business plan outline in Appendix B, create a business plan for a business idea that you have. (A man named Frederick Smith once did a similar project for a business class at Yale. His paper became the basis for the business he later founded: Federal Express!)

Students’ answers will vary depending upon their business idea.

Build Your Business Plan Intuitively, students turn to the Internet for their information first. While this is a good idea, you don’t want them to neglect what resources are available to them locally. The Chamber of Commerce, Economic Development Authority, and City Planning Office are all possible sources for information on the community. Perhaps you might want to invite a local employee of one of these organizations to class as a guest lecturer.

Students need to understand the demographics and needs of their community. On a macro level, ask them about the economic forecast for their area. Have them determine the level (number and quality) of new businesses entering the area.

Video Case: Sonic—A Successful Franchise with an Old-Fashioned Drive-In Experience For those who are nostalgic for the classic drive-in diner experience, the Sonic fast-food chain helps fill that need. Sonic offers customers a dose of nostalgia with its 1950s-style curbside speakers and carhop service. As the United States’ largest drive-in fast-food chain, Sonic offers a unique and diverse menu selection that helps set it apart from a highly competitive fast-food franchise market. Founder Troy Smith launched the first Sonic Drive-In (known then as Top Hat Drive-In) in Shawnee, Oklahoma, in 1953 as a sole proprietorship. He later added a partner, Charlie Pappe, and eventually turned the business into a franchise.

Despite its traditional feel, the company has seized upon new trends and opportunities to secure more business. Customers at Sonic frequently eat in their cars or at tables outside the restaurant. However,

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111 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Sonic has begun building indoor dining prototypes in colder areas to test whether this will entice more customers to eat at its locations. The prototype still makes use of the restaurant’s traditional patio but encloses it to protect customers from the elements. Each of these restaurants maintains its carhop and drive-thru features in order to retain the “Sonic experience.”

Today, Sonic is a publicly traded company and ranks among the top 30 restaurants among Franchise Times' Top 200+.

Franchising is an appealing option for entrepreneurs looking to begin businesses without creating them from scratch. In the case of Sonic, when a franchisee purchases a franchise, he or she is getting a business that already has a national reputation and a national advertising campaign. The company also offers its franchisees tremendous support and training. As a pioneer, Troy Smith was required to innovate; as a Sonic franchisee, one steps into an already proven system.

That being said, successfully running a franchise is not easy. One entrepreneur who owns 22 Sonic franchises said the franchisee’s job is to ensure that each customer has the best experience possible, thereby making repeat visits more likely. To accomplish this, a franchisee must build his or her locations, purchase equipment, hire excellent employees, make certain the products live up to Sonic’s reputation, maintain a clean, inviting facility, and much more. In order to run 22 franchises, the entrepreneur runs his locations as limited partnerships, ensuring that a managing partner is on site at each location to keep day-to-day operations running smoothly.

Some of Sonic’s success may be attributed to its stringent requirements for selecting franchisees. Although franchisees must have excellent financial credentials and prior restaurant/entrepreneurial experience, the most important factor is that each franchisee fit into the Sonic culture. Sonic offers two types of franchises. The traditional franchise, which includes the full restaurant set-up, requires an initial investment of between $1.1 million and $2 million. Franchisees are required to pay 5 percent in ongoing royalty fees and a franchise fee of $45,000. A Sonic in a travel plaza, a mall food court, or a college campus are all examples of the nontraditional model. Because these set-ups do not include the drive-in and carhop features, initial investment is less. However, royalty and advertising fees still apply.

For entrepreneurs looking for limited risk, franchises like Sonic are great options. The advantages are abundant, as discussed earlier. There is a high failure rate among small businesses. Entering into a successful franchise significantly cuts down on the risk of failure, although a franchisee does have to watch for market saturation, poor location choice, and other determining factors. However, there are also disadvantages; chiefly, franchisees are often required to follow a strict model set by the franchiser. For instance, in addition to prior restaurant experience, Sonic requires its franchisees to be financially and operationally able to open two or more drive-ins. These types of requirements may make it difficult for entrepreneurs who want to set their own terms. However, with Sonic’s successful business model and brand equity, there is no shortage of individuals who would like to operate a Sonic franchise.

Sources: Sonic Beach website, http://www.sonicbeach.com/ (accessed March 29, 2016); Sonic website, www.sonicdrivein.com (accessed March 29, 2016); “Strictly Speaking,” Sonic website,www.sonicdrivein.com/business/franchise/faq.jsp (accessed July 27, 2012); Sonic, "Awards," https://www.sonicdrivein.com/corporate/awards(accessed March 29, 2016); Entrepreneur Media, Inc., "Sonic Drive-In Restaurants," Entrepreneur, 2016,https://www.sonicdrivein.com/corporate/awards (accessed March 29, 2016).

Video Case Discussion Questions 13. What is Sonic’s competitive advantage over other fast-food franchises?

Sonic supplies a healthy dose of nostalgia that is lacking at other fast-food chains. With its retro styling and carhop service, Sonic satisfies those who miss old-fashioned drive up restaurant chains.

14. What are the advantages of becoming a Sonic franchisee?

Being a franchise owner, you receive the benefit of a national reputation and advertising campaigns. The franchisor also gives franchisees training and support to help them run their business.

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112 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

15. What are the disadvantages of buying into the Sonic franchise?

Like with any business, franchisees must work hard to make their businesses successful. It can also be difficult to follow the franchisor’s rules and standards—which are imperative in achieving a uniform brand image around the nation and the world. The standards are also generally high for franchisees. They must have good finances, prior experience, and they must be able to pay royalty fees (which can cut into profits) to the franchisor.

Team Exercise Have students explore successful global franchises. They should go to the companies’ websites and find the requirements for applying for three franchises. The chapter provides examples of successful franchises. Students should ask themselves: What do the companies provide, and what is expected to be provided by the franchisor? They will compare and contrast each group’s findings for the franchises researched. For example, at Subway, the franchisee is responsible for the initial franchise fee, finding locations, leasehold improvements and equipment, hiring employees and operating restaurants, and paying an 8 percent royalty to the company and a fee into the advertising fund. The company provides access to formulas and operational systems, store design and equipment ordering guidance, a training program, an operations manual, a representative on-site during opening, periodic evaluations and ongoing support, and informative publications.

Build Your Skills Creativity Background The entrepreneurial success stories in this chapter are about people who used their creative abilities to develop innovative products or ways of doing something that became the basis of a new business. Of course, being creative is not just for entrepreneurs or inventors; creativity is an important tool to help you find the optimal solutions to the problems you face on a daily basis. Employees rely heavily on their creativity skills to help them solve daily workplace problems.

According to brain experts, the right-brain hemisphere is the source of creative thinking; and the creative part of the brain can “atrophy” from lack of use. Let’s see how much “exercise” you’re giving your right-brain hemisphere.

Task 1. Take the following self-test to check your Creativity Quotient.

2. Write the appropriate number in the box next to each statement according to whether the statement describes your behavior always (3), sometimes (2), once in a while (1), or never (0).

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113 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

3. Check your score using the following scale: a. 30-60 High creativity. You are giving your right-brain hemisphere a regular workout. b. 20–29 Average creativity. You could use your creativity capacity more regularly to ensure against “creativity atrophy.” c. 10–19 Low creativity. You could benefit by reviewing the questions you answered “never” in the above assessment and selecting one or two of the behaviors that you could start practicing. d. 0–9 Undiscovered creativity. You have yet to uncover your creative potential.

Source: Adapted from Carol Kinsey Gorman, Creativity in Business: A Practical Guide for Creative Thinking, Crisp Publications Inc., 1989, pp. 5–6. © Crisp Publications Inc., 1200 Hamilton Court, Menlo Park, CA 94025.

The Build Your Skills exercise allows students to measure their Creativity Quotient, which comes from exercising your right brain hemisphere. Students might find this interesting in determining their own creativity and relating this to their possible success in entrepreneurship.

Michelangelo, the great Renaissance artist and creative genius, best known for his Sistine Chapel ceiling frescoes and his colossal 18-foot marble sculpture of David, is supposed to have said that he didn’t create his sculptures. He only uncovered what was already there. And that’s exactly what creativity is—uncovering what’s already there.

Here are some additional ideas for giving your students some help in developing their creativity skills: 1. Between now and the next class session, ask students to select three items from the list of mental aerobic exercises presented below.

2. At the next class session, have them report in one of the following formats the results of your creativity conditioning. a. Write a 2-3 paragraph paper for your instructor where you highlight some positive/negative results of your “mental workouts.”

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114 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual b. Take a few minutes at the beginning of class and ask several students to describe the results of these mental conditioning exercises. c. Break into groups of 3-4 students and share some outcomes of your participation in this exercise.

Mental Aerobic Exercises       





If you’re right-handed, try using your left hand to do things. If you’re left-handed, switch to your right for a while.

Do a jigsaw or crossword puzzle.

Try a new way of expressing your creativity (cook something you’ve never made before, paint a picture, write a poem, throw a party that has an interesting theme).

Guess at measurements rather than using a ruler, tape measure, or measuring cup. Then measure and see how close you were.

Watch three-quarters of a movie on video, stop the tape, and think of your own ending.

Stretch your thinking beyond what might be your typical approach to solving problems. See if you can solve one of these brain teasers (answers provided below): 1. Arrange the letters below into one word: NEW DOOR 2. Change the Roman numeral that represents the number 9 (IX) into a 6 by using only one line.

3. Determine in what order the numbers below are arranged: 8, 5, 4, 9, 1, 7, 6, 3, 2, 0 Go to the library and look up an article or find a biography about a famous creative person (Thomas Edison, Walt Disney, Steven Spielberg, etc.) and spend 20 minutes skimming the book or reading the article, looking for insights into the creative process. For example, Thomas Edison is considered to be the most prolific inventor the world has ever seen. Among his inventions are the incandescent light bulb, the phonograph, and the motion picture projector.

One quotation attributed to Edison is “*Creative+ genius is 99% perspiration and 1% inspiration.”

Go to a day-care center and spend a half hour observing 2-, 3-, and 4-year-olds at play. Jot down any “creative” things you observe the children doing. (“Tests show that a child’s creativity plummets 90 percent between ages 5 and 7. By the age of 40, most adults are about 2 percent as creative as they were at 5.”1)

Answers to brain teasers: (If no one gets the answer for any of these brain teasers, you may want to give the hint provided in parentheses before giving the answer.)

1. ONE WORD (HINT: Are you taking the instructions very literally?)

2. SIX (HINT: The instructions did not say it had to be a Roman numeral six) 3. Alphabetically (HINT: Is there another way to think of these numbers besides as figures?)

Source: Emily T. Smith, “Are You Creative?” Business Week, September 30, 1985, p. 81.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 20. The Small Business Administration: Past and Present 21. A Study of a Successful Franchiser 22. Why Women Entrepreneurs Are Attracted to Small Business Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

115 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Guest Speaker Suggestions 19. A representative of the Small Business Administration, the Small Business Development Centers, or Small Business Institutes to speak about the functions of the organization.

20. A small-business owner to speak about start-up, management, advantages, and disadvantages of going into business for himself or herself.

21. A local franchisee to speak about the start-up, operation, advantages, and disadvantages of obtaining a franchise.

Teaching Suggestions 26. Vary the sequence of classes for the sake of variety.

27. For a writing exercise, begin by asking students to write for approximately five minutes on the topic of: What Are the Advantages of Franchises for the Small-Business Owner?

(Stop students at the end of the allotted time. Now have students give their writing to a student sitting next to them; have them compare answers. Do they agree? Talk about answers in class.)

28. Give a lecture in class. Depending on time, the instructor may wish to use the “Supplemental Lecture” and/or the “Controversial Issue.” Both present situations regarding small business problems.

29. Go over the practice quiz provided. Discuss answers in class.

30. Again, depending on time available, instructors may wish to review the additional boxed material by using the discussion questions provided in this Instructor’s Manual.

31. Spend a short amount of time by going over the answers to the questions for the video case. Students should have read these cases, and they should have either written the answers or have considered the answers. Call upon volunteers for answers.

Chapter 6: The Nature of Management Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s highlights. Followup via the Connect exercises is then encouraged to provide a holistic understanding of the chapter. Use the hyperlinked Table of Contents below to jump to different sections of the manual.

Table of Contents Chapter Forecast ......................................................................................................................................................................... 116 Learning Objectives ..................................................................................................................................................................... 116 Key Terms and Definitions ........................................................................................................................................................... 116 Content Outline ........................................................................................................................................................................... 118 Boxed Text Critical Thinking Questions ....................................................................................................................................... 126 What Kind of Manager // Do You Want to Be? / ........................................................................................................................ 127 Bonus Teaching Resources .......................................................................................................................................................... 127 Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

116 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Chapter Review Questions .......................................................................................................................................................... 130 Connect Exercises ........................................................................................................................................................................ 131 Class Discussion Questions .......................................................................................................................................................... 132 Build Your Business Plan.............................................................................................................................................................. 133 Video Case: Building a Strong and Healthy Business................................................................................................................... 133 Team Exercise .............................................................................................................................................................................. 134 Build Your Skills ........................................................................................................................................................................... 134 Term Paper or Project Topics ...................................................................................................................................................... 136 Guest Speaker Suggestions ......................................................................................................................................................... 136 Teaching Suggestions .................................................................................................................................................................. 137

Chapter Forecast For any organization—small or large, for profit or nonprofit—to achieve its objectives, it must have equipment and raw materials to turn into products to market, employees to make and sell the products, and financial resources to purchase additional goods and services, pay employees, and generally operate the business. To accomplish this, it must also have one or more managers to plan, organize, staff, direct, and control the work that goes on. This chapter introduces the field of management. It examines and surveys the various functions, levels, and areas of management in business. The skills that managers need for success and the steps that lead to effective decision making are also discussed.

Learning Objectives LO 6-1 LO 6-2 LO 6-3 LO 6-4 LO 6-5

Explain management’s role in the achievement of organizational objectives.

Describe the major functions of management.

Distinguish among three levels of management and the concerns of managers at each level.

Specify the skills managers need in order to be successful.

Summarize the systematic approach to decision making used by many business managers.

Key Terms and Definitions Administrative managers Those who manage an entire business or a major segment of a business; they are not specialists but coordinate the activities of specialized managers Agenda A calendar, containing both specific and vague items, that covers short-term goals and long-term objectives Analytical skills Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

117 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual The ability to identify relevant issues, recognize their importance, understand the relationships between them, and perceive the underlying causes of a situation Brainstorming A technique in which group of members spontaneously suggest ideas to solve a problem Conceptual skills The ability to think in abstract terms and to see how parts fit together to form a whole Controlling The process of evaluating and correcting activities to keep the organization on course Crisis management (contingency planning) An element in planning that deals with potential disasters such as product tampering, oil spills, fire, earthquake, computer virus, or airplane crash Directing Motivating and leading employees to achieve organizational objectives Downsizing The elimination of a significant number of employees from an organization Employee empowerment When employees are provided with the ability to take on responsibilities and make decisions about their jobs Financial managers Those who focus on obtaining needed funds for the successful operation of an organization and using those funds to further organizational goals First-line managers Those who supervise both workers and the daily operations of an organization Human relations skills The ability to deal with people, both inside and outside the organization Human resources managers Those who handle the staffing function and deal with employees in a formalized manner Information technology (IT) managers Those who are responsible for implementing, maintaining, and controlling technology applications in business, such as computer networks Leadership The ability to influence employees to work toward organizational goals Management A process designed to achieve an organization’s objectives by using its resources effectively and efficiently in a changing environment Managers Those individuals in organizations who make decisions about the use of resources and who are concerned with planning, organizing, staffing, directing, and controlling the organization’s activities to reach its objectives Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

118 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Marketing managers Those who are responsible for planning, pricing, and promoting products and making them available to customers Middle managers Those members of an organization responsible for the tactical planning that implements the general guidelines established by top management Mission The statement of an organization’s fundamental purpose and basic philosophy Networking The building of relationships and sharing of information with colleagues who can help managers achieve the items on their agendas Operational plans Very short-term plans that specify what actions individuals, work groups, or departments need to accomplish in order to achieve the tactical plan and ultimately the strategic plan Organizing The structuring of resources and activities to accomplish objectives in an efficient and effective manner Planning The process of determining the organization’s objectives and deciding how to accomplish them; the first function of management Production and operations managers Those who develop and administer the activities involved in transforming resources into goods, services, and ideas ready for the marketplace Staffing The hiring of people to carry out the work of the organization Strategic plans Those plans that establish the long-range objectives and overall strategy or course of action by which a firm fulfills its mission Tactical plans Short-range plans designed to implement the activities and objectives specified in the strategic plan Technical expertise The specialized knowledge and training needed to perform jobs that are related to particular areas of management Top managers The president and other top executives of a business, such as the chief executive officer (CEO), chief financial officer (CFO), chief operating officer (COO), who have overall responsibility for the organization.

Content Outline The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a section on which CONNECT activities can be used in the chapter. This is created so that you can facilitate in-class or online discussion effectively.

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119 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

LO 6-1 Explain management’s role in the achievement of organizational objectives.  

Introduction The Importance of Management

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Lecture Outline and Notes: XXI. The Importance of Management a. Any organization, small or large, public or private, needs managers to plan, organize, staff, direct, and control the work that goes on. i. In short, managers help organizations achieve their objectives. b. Management is a process designed to achieve an organization’s objectives by using its resources effectively and efficiently in a changing environment. i. Effectively means having the intended result. ii. Efficiently means accomplishing the objectives with a minimum of resources. c. Managers make decisions about the use of the organization’s resources, and are concerned with planning, organizing, leading, and controlling the organization’s activities so as to reach its objectives. (Figure 6.1) d. Every organization, in the pursuit of its objectives, must acquire resources (employees, suppliers, and financial resources) and coordinate their use to turn out a final good or service. i. Employees are one of the most important resources, and successful companies foster employee loyalty. ii. Suppliers are another important consideration because a good supplier maximizes efficiencies and reduces costs. iii. Financial resources pay for essential activities.

1. Primary funding comes from owners and shareholders, banks, and other financial institutions. iv. Managers must carefully coordinate and control all of these resources in order for the organization to meet its objectives. e. Management is universal. It takes place not only in business, but also in government, the military, labor unions, hospitals, schools, and religious groups—any organization requiring the coordination of resources. i. For example, Sergio Marchionne, the CEO of Fiat, saved the company from bankruptcy and, after acquiring Chrysler, saved them as well.

LO 6-2 Describe the major functions of management. 

Key terms:  Management  Managers  Staffing  Downsizing

Key terms:      

Management Functions o Planning o Organizing o Directing o Controlling

   PPT 6.6

XXII.

Planning Mission Strategic plans Tactical plans Operational plans Crisis management (contingency planning) Organizing Directing Controlling

Management Functions

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120 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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a. To harmonize the use of resources so that businesses can develop, produce, and sell products, managers engage in a series of activities: b. Planning i. Planning is the process of determining the organization’s objectives and deciding how to accomplish them.

1. Designs the map that is the groundwork for all other functions 2. Involves forecasting events and determining the best course of action from a set of options or choices.

3. The plan specifies what should be done, by whom, where, when, and how.

4. All organizations need to develop plans, but before an organization can plan a course of action, it must first determine what it wants to achieve. c. An organization’s mission is the statement of an organization’s fundamental purpose and basic philosophy. i. Answers the question: What business are we in? ii. Clear and concise statement that describes an organization’s reason for existence. d. A goal is the result that a firm wishes to achieve. i. Companies usually have multiple goals ii. A goal has three key components: An attribute sought, a target to be achieved, and a time frame in which the goal is to be achieved. e. Objectives i. Objectives, the ends or results desired by the organization, derive from the organization’s mission. ii. Can be simple or elaborate. Profit, competitive advantage, efficiency, and growth are examples of objectives. iii. The principal difference between goals and objectives is that objectives are generally stated in such a way that they are measurable. iv. Objectives provide direction for all managerial decisions and establish criteria by which performance can be evaluated. f. There are three general types of plans for meeting objectives. i. Strategic plans are long-range plans developed by top-level managers.

1. Strategic plans generally cover periods ranging from one year or longer, and may relate to plans to add products, purchase companies, sell unprofitable segments of the business, issue stock, and/or move into new markets.

2. Strategic plans must take into account the firm’s capabilities and resources, the changing business environment, and organizational objectives. a. For example: Combekk, a Dutch firm that makes knives and tools, set an objective to increase sales by introducing a heavyweight pot called a Dutch Oven that cost $450. b. Tactical plans are short-range plans designed to implement the activities and objectives specified in the strategic plan.

3. They usually cover a period of one year or less and help keep the organization on the course established in the strategic plan.

4. Because tactical plans allow the organization to react to changes in the environment while continuing to focus on the company’s overall strategy, management must periodically review and update them.

5. Because of their short-term nature, tactical plans are easier to adjust or abandon if changes in the environment or the firm’s performance so warrant. ii. Operational plans are very short term and specify what actions specific individuals, work groups, or departments need to accomplish in order to achieve the tactical plan and ultimately the strategic plan.

1. They apply to details in executing activities in one month, week, or even

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121 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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XXIII. a.

b. c.

d.

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XXIV. a.

b. c. d.

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XXV. a. b.

c.

day. iii. Another element in planning is the idea of crisis management or contingency planning, which deals with potential disasters such as product tampering, oil spills, fire, earthquake, computer virus, or airplane crash.

1. Companies that have contingency plans tend to respond more effectively when problems occur than do firms that lack such planning.

2. Many businesses do not have updated contingency plans to handle the types of crises that their companies might encounter. a. A recent study reveals that more than 85 percent of small or midsized businesses have ineffective or outdated emergency recovery plans.

3. Crisis management plans cover two elements: maintaining business throughout a crisis and communicating with the public, employees, and officials about the problem and the company’s response.

Organizing Organizing is the structuring of resources and activities to accomplish objectives in an efficient and effective manner. i. Structure helps organizations accomplish goals. Rarely are individuals in an organization able to achieve common goals without some form of structure.

Managers organize by reviewing plans and determining what activities are necessary to implement them.

Managers divide the work into small units and assign it to specific individuals, groups, or departments. i. As companies reorganize for efficiency, they are organizing work into teams to handle core processes such as new product development instead of the more traditional departments. ii. Organizing is continuous because change is inevitable.

Organizing is important for the following reasons. i. Helps create synergy. ii. Establishes lines of authority iii. Improves communication iv. Helps avoid duplication of resources v. Improves effectiveness by speeding up decision making Directing Directing is motivating and leading employees to achieve organizational objectives.

Managers tell their employees what to do and when to do it using deadlines, then encourage them to do their work.

All managers are involved in directing, but it is especially important to lower-level managers.

Directing also involves determining and administering rewards and recognition.

Managers motivate employees with incentives and in allowing employees to participate.

Recognition and appreciation are often the best motivators.

Controlling Controlling is the process of evaluating and correcting activities to keep the organization on course.

Controlling involves five activities: i. Measuring performance. ii. Comparing present performance with standards or objectives. iii. Identifying deviations from the standards. iv. Investigating the causes of deviations. v. Taking corrective action when necessary.

Controlling and planning are closely linked: Planning establishes goals and standards for performance, while controlling helps firms ensure that performance toward those goals is

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122 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual achieved. d. The control process also helps managers deal with problems arising from outside of the firm.

LO 6-3 Distinguish among three levels of management and the concerns of managers at each level. 

Types of Management o Levels of Management o Areas of Management

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XXVI.

Key terms:  Top managers  Middle managers  First-line managers

Types of Management a. Levels of Management (Figure 6.2) i. There are usually three levels of management, which form a pyramid—top management, middle management, and front-line or supervisory management.

(Figure 6.3) 1. Managers at all three levels perform all five management functions, but the amount of time they spend on each function varies.

2. For top managers, the most important management function is planning.

3. For middle managers, the most consuming function is organizing.

4. For front-line managers, the most consuming function is controlling. ii. Top managers include the president, the chief executive officer, the chief financial officer, the chief operations officer, and other top executives, such as the chief privacy officer, who have overall responsibility for the organization.

1. In publicly owned corporations, the CEO’s boss is the board of directors.

2. Top managers also represent their company to the public and to government regulators.

3. Top managers generally have many years of experience and command top salaries. In addition to top salaries, top management typically gets bonuses, long-term incentive awards, stock, and stock options. (Table 6.1) a. Executive compensation has been criticized b. Compensation committees and boards of directors are now seeking ways to keep compensation commensurate with performance. i. However, many firms are trying to curb criticism of excessive executive compensation by trying to align CEO compensation with performance.

4. Workforce diversity is also an important issue in today’s corporations, and effective managers have found that diversity is good for workers and for the bottom line. a. A diverse workforce is better at making decisions regarding issues related to consumer diversity. b. 2The five rules of successful diversity recruiting include get everyone involved, showcase your diversity, work with diversity groups within your community, spend money, and sell, sell, sell— and measure your return on investment. (Table 6.2) iii. Middle managers are responsible for tactical planning to implement the general guidelines established by top management (e.g., plant managers, division managers, and department managers).

1. Responsibility is more narrowly focused than top managers 2. Middle managers are involved in the specific operations of the organization and spend more time organizing than other managers.

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123 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 3. The ranks of middle managers have been shrinking as more companies downsize to be more productive. iv. First-line managers supervise workers and day-to-day operations of the organization.

1. They spend most of their time directing and controlling.

2. Foremen, supervisors, and office managers are examples of first-line management. b. Areas of Management (Table 6.3) i. At each level of management, managers specialize in the areas of finance, production and operations, human resources, marketing, and administration. ii. Financial manager focuses on obtaining the funds needed for the successful operation of the organization and using those funds to further organizational goals. iii. Production and operations manager develops and administers the activities involved in transforming resources into goods, services, and ideas ready for the marketplace. iv. Human resources manager handles the staffing function and deals with employees in a formalized manner. v. Marketing manager is responsible for planning, pricing, and promoting products and making them available to customers through distribution. vi. Information technology (IT) manager is responsible for implementing, maintaining, and controlling technology applications in business, such as computer networks. vii. Administrative manager manages an entire business or a major segment of a business; does not specialize in a particular function.

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LO 6-4 Specify the skills managers need in order to be successful. 



Skills Needed by Managers o Technical Expertise o Conceptual Skills o Analytical Skills o Human Relations Skills Leadership o Employee Empowerment

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XXVII.

Key terms:      

Technical expertise Conceptual skills Analytical skills Human relations skills Leadership Employee empowerment

Skills Needed by Managers (Table 6.4) a. Managers are typically evaluated using the metrics of how effective and efficient they are.

Necessary skills include technical expertise, conceptual skills, analytical skills, and human relations skills. b. Technical expertise, the specialized knowledge and training needed to perform jobs that are related to particular areas of management. i. Technical skills are most needed by first-line managers and are least critical to toplevel managers. c. Conceptual skills, the ability to think in abstract terms and to see how parts fit together to form the whole. i. Top management must be able to evaluate continually where the company will be in the future. ii. Conceptual skills also involve the ability to think creatively. d. Analytical skills refer to the ability to identify relevant issues, recognize their importance, understand the relationship between them, and perceive the underlying causes of a situation. i. All managers need to think logically, but this skill is probably most important to the success of top-level managers.

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124 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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e. People skills, or human relations skills, are the ability to deal with people, both inside and outside the organization. i. People skills are especially important in hospitals, airline companies, banks, and other organizations that provide service.

XXVIII. Leadership a. Leadership is the ability to influence employees to work toward organizational goals. i. There are three basic styles of leadership.

1. Autocratic leaders make all the decisions and then tell employees what must be done and how to do it.

2. Democratic leaders allow their employees to get involved in decisions.

Employees involved in decision making generally require less supervision.

3. Free-rein leaders let their employees work without much interference. ii. The effectiveness of each leadership style depends on several factors.

1. An autocratic style is generally needed to stimulate unskilled, unmotivated employees.

2. Highly skilled, trained, and motivated employees may respond better to democratic or free-rein leaders.

3. Other considerations are the manager’s abilities and the situation itself. a. When a situation requires a quick decision, for example, an autocratic style of leadership may be best because the manager does not have to consider input from a lot of people.

4. The “best” style depends on specific circumstances, and effective managers strive to adapt their style as warranted. iii. Requirements for Successful Leadership (Table 6.5) 1. Some of the “best” managers are listed on Fortune magazine’s America’s Most Admired Companies and their CEOs. iv. Authentic Leadership 1. A bit different from the other three leadership styles because it is not exclusive 2. Both democratic and free-rein leaders could qualify as authentic leaders 3. Passionate about the goals and mission of the company, display corporate values in the workplace, and form long-term relationships with stakeholders 4. Kim Jordan of New Belgium Brewing is an authentic leader v. Employee empowerment occurs when employees are provided with the ability to take on responsibilities and make decisions about their jobs 1. Participative corporate culture has been found to be beneficial because employees feel like they are taking an active role in the firm’s success 2. Leaders must adopt systems that support an employee’s ability to provide input and feedback on company decisions 3. Manager should be trained in ways to empower employees to make decisions even in challenging situations in which the right decision may not be so clear vi. Leadership in Teams 1. In today’s business world, decisions made by teams are becoming the norm 2. An effective way for encouraging employee empowerment 3. Decision making in teams is collective a. Most effective teams are when all employees are encouraged to contribute their ideas and recommendations 4. Common for more outspoken employees to dominate the team and engage in groupthink, in which team members go with the majority rather than what they think is the right decision

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125 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual a. Training employees how to listen to one another and provide relevant feedback can help to prevent these challenges LO 6-5 Summarize the systematic approach to decision making used by many Key terms: business managers.  Brainstorming  Agenda  Decision Making  Networking o Recognizing and Defining the Decision Situation o Developing Options o Analyzing Options o Selecting the Best Option o Implementing the Decision o Monitoring the Consequences  Management in Practice PPT 6.41

PPT 6.42

PPT 6.43

PPT 6.44

PPT 6.45

PPT 6.46

XXIX. Decision Making: Decision making is important in all management functions and all levels, whether the decisions are on a strategic, tactical, or operational level. A systematic approach includes a six-step process. (Figure 6.4) a. Recognizing and Defining the Decision Situation i. The first step in decision making is recognizing and defining the situation—whether the situation is positive or negative. ii. Situations calling for small-scale decisions often occur without warning; situations requiring large-scale decisions generally occur after some warning signals. iii. Once a situation has been recognized, managers must define it. b. Developing Options i. The next step is to develop a list of possible courses of action. ii. Brainstorming is a technique in which group members spontaneously suggest ideas to solve a problem. This can be effective in encouraging creativity and exploring a variety of options. iii. Creativity is very important. c. Analyzing Options i. Next, managers should analyze the practicality and appropriateness of each option. ii. When assessing appropriateness, a decision maker should consider whether the proposed option adequately addresses the situation. d. Selecting the Best Option i. Selection is often a subjective procedure because many situations do not lend themselves to mathematical analysis. ii. It may be possible to select a combination of several options. e. Implementing the Decision i. Implementation can be fairly simple or very complex, depending on the action. ii. Managers should be ready to deal with unexpected consequences. f. Monitoring the Consequences i. Without proper monitoring, the consequences of decisions may not be known quickly enough to make efficient changes. ii. If the desired result was not achieved, managers may discover that the situation was incorrectly defined, or the decision was good even though the desired result has not yet shown up, or that implementation was flawed.

XXX. Management in Practice a. Management is not a cut-and-dried process. b. John P. Kotter says that management functions can be condensed into two basic activities: i. Figuring out what to do despite uncertainty, great diversity, and an enormous amount of potentially relevant information. ii. Getting things done by a large and diverse set of people without having direct

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126 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual control over most of them.

Managers spend as much as 75 percent of their time working with others. i. Managers spend a lot of time establishing and updating an agenda of vague and specific items that pertain to short-term goals and long-term objectives. ii. Managers also spend a lot of time networking—building relationships and sharing information with colleagues.

1. Networks are not limited to immediate subordinates and bosses; they include other people in the company as well as customers, suppliers, and friends.

2. Networking helps managers carry out their responsibilities.

3. Websites like LinkedIn are helping managers and employees network with one another to achieve their professional goals. d. Managers spend a great deal of time confronting the complex and difficult challenges facing business today. i. Rapid changing technology, increased scrutiny of individual and corporate ethics and social responsibility, impact of social media, changing nature of workforce, new laws and regulations, increased global competition, declining education standards, and making the best use of time e. It is only through creativity and imagination that managers can make effective decisions that benefit their organizations. c.

PPT 6.47

PPT 6.48

Boxed Text Critical Thinking Questions Rebecca Ray Designs Has It in the Bag 16. What management skills did Rebecca Yuhasz Smith need to found her successful business?

Answers will vary but most students will answer that Rebecca Smith needed all of the management skills to found her business. She needed technical and conceptual skills to create and produce her handbags. To plan and strategize the business goals required analytical skills. To organize and execute the goals required human relations and leadership skills.

17. How does Rebecca Yuhasz Smith use the four functions of management to operate her business?

The management functions Rebecca Smith uses to operate her business include: planning the organization’s goals, organizing different job functions, leading others to develop and sell the products, and controlling activities needed for achieving objectives.

18. What types of decisions did Rebecca Yuhasz Smith need to make as her business grew?

Rebecca had to make strategic decisions to accomplish the long-term goals and objectives she set for her company, in order to successfully grow into a national high-fashion business that has expanded from handbags into accessories and home décor. She also had to make decisions that affected the tactical plans to meet the vast human resource skills and other needs of the company. Rebecca had to make the correct tactical decisions to execute her growth strategy.

Lowe’s Undergoes a Major Remodel 16. What type of managerial skills is Marvin Ellison exhibiting in his decisions to overhaul Lowe’s?

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127 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Ellison has used his analytical skills to determine that retail tactics were insufficient to promote higher-performing products.

17. Describe ways in which Marvin Ellison is demonstrating the four management functions.

Planning: He provided the strategic plan and direction for the overhaul and created a tactical plan to promote high performing products.

Organizing: He eliminated senior positions and created other lower-level positions and shut down one of their divisions, Orchard Supply Hardware.

Directing: After eliminating Orchard Supply Hardware, he recognized the negative impact on employee morale. He addressed this issue, by offering the affected employees job placement assistance, severance packages, and priority consideration for Lowe’s positions.

Controlling: He hired leaders experienced on the sales floor to help executives understand daily store operations.

18. Outline the six steps of decision making that Marvin Ellison likely used in his decision to shut down Orchard Supply Hardware stores.

In trying to figure out how to effectively overhaul Lowe’s to better compete with Home Depot, Marvin Ellison had to systematically go through the following steps: (1) recognizing and defining the decision situation, (2) developing options to resolve the situation, (3) analyzing the options, (4) selecting the best option, (5) implementing the decision, and (6) monitoring the consequences of the decision.

Potbelly Sandwiched in a Crowded Market 15. Describe how Potbelly, under Johnson’s leadership, is engaging in the four management functions.

Answers will vary, but Johnson had to focus on planning to differentiate Potbelly from its competitors, organizing and controlling to determine how many and which stores to close, and directing to overall the management team.

16. Do you think Johnson’s plans are more operational, tactical, strategic, or a combination? Explain your reasoning.

Answers will vary, but most students will state that Johnson is using a combination of plans.

17. As Johnson works to increase sales and revamp the company, do you think an autocratic, democratic, or free-rein leadership style would be most effective? Explain your reasoning.

Answers will vary, but most students will probably lean towards a democratic leadership style.

What Kind of Manager // Do You Want to Be? / What factors are leading to the increasing difficulty of management jobs?

The requirements for management jobs become more demanding with every passing year—with the speed of technology and communication increasing by the day, and the stress of global commerce increasing pressures to perform. There is also the consideration of restructuring and downsizing, which has changed where jobs are available and has in some cases reduced the number of available positions.

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128 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual This section offers bonus teaching resources for class discussion. This is offered in addition to what’s offered in the M: Business text.

“The Mystique of Leadership” MiniCase The textbook defines leadership as the “ability to influence employees to work toward organizational goals.” The text also indicates that there are different kinds of leadership styles that are effective at particular times and places and in the hands of certain leaders.

There is a mystique about the very word leadership. Leadership abilities may very well be in the eye of the beholder. Why are some individuals considered to be leaders? These individuals exhibit charisma, courage, charm, intelligence, and inspiration.

Yet, people very close to the leader may know of many weaknesses possessed by the distinguished leader.

Prime Minister Winston Churchill is an example of a leader who was able to obtain the respect and loyalty of the British people during the six long years of war. Churchill had the ability to perk up the spirits of the people; his speeches, broadcast over the BBC, are considered classics. In Churchill’s words, there was a strong, quiet confidence that Great Britain would prevail against all enemies and that this would be for all time referred to as “her finest hour.”

Despite the horrendous burden of government weighing heavily on his shoulders, Churchill found time to be out among the people and when he did so, he was an inspirational model for those lucky Britons who actually saw him. Winston Churchill appeared to be the perfect example of a leader.

John Colville was a personal secretary to Churchill for a long period, including the years from 1939 to 1945, during World War II. He kept a diary during those years, and in 1985 Colville’s notes were published by W. W. Norton and Company as the Fringes of Power, 10 Downing Street Diaries 1939-1955.Colville’s references to Churchill make his diary compelling reading.

Colville was aware of how popular Churchill was with the public. It should be noted that Colville admired Churchill.

Nevertheless, Colville witnessed—at extremely close range—some traits that showed Churchill to be very much a normal human with normal failings. In fact, some of Churchill’s behavior would appear to be the opposite of that which would influence others to work toward the achievement of organizational goals. For example, there were times when Churchill could be extremely inconsiderate of those who worked for him. Churchill often worked until 2:00 or 3:00 in the morning and expected his staff to do the same. There is the example in which Churchill told his staff that they would need to rise at 5:00 in the morning so the prime minister and his party could be off to their next assignment by 7:00. The staff arose as told, but the prime minister proceeded to sleep very late without giving so much as a fleeting thought to notifying his staff of the change in his plans, causing his entire staff to lose some three hours of sleep. If the prime minister came to realize that he had been inconsiderate, he would never apologize. Instead, he would be overly friendly to those he had wronged; they were supposed to get the message.

Churchill, according to Colville, could be very petty and would hold grudges against political enemies far beyond normal lengths of time. In private conversation, Churchill would say frightful things about those political foes. If an idea came from the wrong person, Churchill would immediately criticize it. There were times when his staff and even Mrs. Churchill had to step in and show the prime minister the error of his ways.

In the early days of his prime ministership, Churchill got personally involved in far too many things, sending memos to numerous people in the government and the military on small matters that a good sergeant could have taken care of. There were days when the staff surrounding Churchill felt that the government was operating in a well-advanced state of confusion because of Churchill’s apparent lack of administrative skill. Some felt that Churchill drank too much.

Despite the incidents that Colville reveals in his masterful diary, Churchill is still classified by most historians as a great leader.

And Colville—despite all he knows about the real Churchill—also concludes that he was a truly great man. The mystery of the secret of leadership remains. How many faults can one possess and still be effective at leading others? And can one be an Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

129 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual effective leader in certain times and places? It should be noted that shortly after the war ended, the British voted against Churchill’s party, and he left his position of prime minister.

Discussion Questions for “The Mystique of Leadership” MiniCase 12. Can you think of other well-known individuals who were perceived as great leaders, persons also known for personal faults or frailties that could have led to a loss of leadership? What made these individuals great leaders?

Students’ responses will vary.

13. Which leadership style did the great leaders mentioned above exhibit? Autocratic style? Democratic style? Freerein style?

Responses will vary depending on what the students wrote for Question #1. Churchill’s style would most likely be autocratic.

Controversial Issue: Conflicting Communications of Managers This can be used in a discussion board or for in-class discussion.

Managers need good human relations, or people, skills. They must be able to communicate goals, and they have to understand their employees’ needs so that they can motivate them to perform. Managers must also provide appropriate leadership.

Managers are not always very good at their jobs. Usually, poor management results from poor communication or interpersonal skills. Typical of some employees’ experience is this one, told by David Manning, a college student who worked as a radio announcer for a small station in a college town. The manager-owner of the radio station, Greg Smith, had often told the members of his staff: “I want you to know that my door is always open. Come in anytime if you have a suggestion to make our station the best on the air. Come see me.”

The young announcer took the manager at his word. David noticed that the music staff gave the announcer a list of numbers (such as 88745, 98432, 72341, etc.) of CDs to be pulled from the files and played on a classical music program. The announcer observed that it would take the music staff just a few more seconds to type after each number a notation, such as “Symphony #4 by Beethoven, Chicago Symphony Orchestra, Bruno Walter conducting.” Such notations would save David (and other announcers) a lot of time and would make the classical music program sound much better on the air.

David decided to make his suggestion to the manager. He went through the manager’s “open door” and presented his ideas.

Greg Smith, the manager, replied: “I don’t want you kids coming in here complaining. If you can’t do the work, then quit. Your nitwit ideas are of no value to my radio station.” The manager went on and on for several minutes. At the conclusion of his tirade, the manager said to David: “My door is always open; come back and see me with an idea anytime!”

Needless to say, David never returned to the manager’s office with any more suggestions.

Discussion Questions for Knowing Business vs. Knowing the Business 16. Did the manager give mixed signals to his employees? Why? The manager definitely gave mixed signals to his employees. He probably wanted his leadership style to appear democratic, but he had no idea how to do it. He didn’t want to give up control, even though he wanted to appear to be a fair manager.

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130 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

17. Can managers improve their management styles? How? Students’ answers may vary.

Chapter Review Questions 50. Why is management so important, and what is its purpose?

Management is the process of coordinating human, physical, and financial resources to achieve an organization’s objectives. Management is important because people in an organization must work together to achieve some stated or implied objective. Management takes place in any organization calling for the coordination of resources.

51. Explain why the American Heart Association would need management, even though its goal is not profit-related.

All organizations, whether profit or nonprofit organizations, are involved with the process of coordinating human, physical, and financial resources to achieve their objectives. Managers and employees of nonprofit organizations work together to achieve the objectives of their organizations.

52. Why must a company have financial resources before it can use human and physical resources?

An organization must have financial resources in order to purchase human resources (hire people) and to purchase physical resources.

53. Name the five functions of management and briefly describe each function.

The five functions of management include planning, organizing, staffing, directing, and controlling. Planning is the process of selecting a course of action to achieve organizational objectives. Organizing consists of structuring all resources and activities to accomplish objectives in an efficient and effective manner. Staffing is hiring people to carry out the work of the organization. Directing is motivating and leading employees to achieve organizational objectives.

Controlling is evaluating and correcting activities to keep the organization on course.

54. Identify the three levels of management. What is the focus of managers at each level?

The three levels of management include top management, middle management, and first-line management. Top management includes the president and other top executives who have overall responsibility for the organization.

Middle management includes plant managers, division managers, and other managers who have a narrower focus under top managers. First-line management includes all the managers who supervise workers. These managers are involved in the everyday operations of the organization.

55. In what areas can managers specialize? From what area do top managers typically come?

The areas of management include financial management, production and operations management, human resources (personnel) management, marketing management, information technology management, and administrative management. Financial managers deal primarily with an organization’s financial resources. Production and operations managers are concerned with the transformation of an organization’s resources into goods, services, and ideas.

Human resources managers deal with employees in a formalized manner as related to hiring, training, and benefits.

Marketing managers are responsible for planning, pricing, and promoting products and making them available to customers. Information technology managers deal primarily with establishing, maintaining, and controlling computer

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131 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual networks. Administrative managers do not specialize in any particular area but manage an entire business or major segment of a business.

56. What skills do managers need? Give examples of how managers use these skills to do their jobs.

Skills needed by managers include leadership, technical expertise, conceptual skills, analytical skills, and human relations skills. Leadership is the ability to influence and motivate employees to work toward the achievement of organizational goals. Technical expertise is the specialized knowledge needed to perform a job, such as managing an auto production line. Conceptual skills are the ability to think in abstract terms so that a manager can fit parts together to form a whole perspective of a business operation. Analytical skills are the ability to identify relevant issues and recognize their importance, understand the relationships between them, and perceive their underlying causes.

Human relations skills involve dealing with people both inside and outside the organization.

57. What are three styles of leadership? Describe situations in which each style would be appropriate.

There are three styles of leadership: autocratic, democratic, and free-rein. Autocratic leaders make all decisions and then tell employees what must be done and how to do it. Autocratic leaders work best when dealing with lower-level employees who are poorly motivated and require more supervision to accomplish the task.

Democratic leaders allow their employees to get involved in decision making. Democratic leaders work well in organizations that allow people to participate in decisions, such as accounting firms, consulting agencies, middle- and upper-management areas, or corporations.

Free-rein leaders let their employees work without much interference. Free-rein leaders work well in research and development firms where employees are highly educated and need freedom to conduct research projects.

58. Explain the steps in the decision-making process.

Decision making is a six-step process that occurs at all management levels. The first step involves recognizing and defining the situation. Step two involves developing possible courses of action, both standard and creative ones. Step three involves analyzing the feasibility, appropriateness, and consequences of each option. Step four involves selecting the best option from the list of options. The decision is implemented in step five. Step six requires the monitoring of the decision’s consequences. These steps in decision making should be viewed only as a broad framework to help people in their approaches to decision making.

59. What is the mathematical formula for perfect management? What do managers spend most of their time doing?

There is no mathematical formula for perfect management. Most management decisions are largely subjective.

Most managers spend as much as 75 percent of their time working with others. They also spend a lot of time establishing and updating an agenda of goals, networking with their colleagues, and confronting the complex and difficult challenges in the business world today.

Connect Exercises Below are the available exercises in Connect for this chapter. Please also see the Connect Content Matrix in your Instructor Resource library for additional details on these exercises (including Learning Objectives, topics, Bloom’s level, AACSB, etc.)

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132 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 38. Managerial Roles (Click & Drag): Explore the different roles that managers fill in performing their roles.

39. Steps in Decision Making (Click & Drag): Understand that managers make many different kinds of decisions, such as hours of work, which employees to hire, what products to introduce, and what price to charge for a product. Decision making is important in all management functions and levels whether the decisions are on a strategic, tactical, or operational level.

40. The Functions of Management (Click & Drag): Understand that managers engage in planning, organizing, staffing, directing, and controlling to coordinate the use of resources so that the business can develop, make, and sell products.

41. Management, Leadership (iSeeit! Animated Video Case): This brief video describes the three major forms of leadership: autocratic, democratic, and free-rein. It describes how each one could be used in efforts to achieve the same outcome.

42. Leadership Transition at Country Packaging (Case Analysis): Demonstrate your understanding of the effectiveness of management and leadership behaviors given characteristics of the situation and the level of the leader.

43. SMART Goals (iSeeit! Animated Video Case): Demonstrate your understanding of the information required to set goals and lead employees toward accomplishing the goals of the business.

44. SWOT Analysis (iSeeit! Animated Video Case): Demonstrate your understanding of what a SWOT analysis is and how it can be applied to business planning.

45. The Four Functions of Management in Action (iSeeit! Animated Video Case): Demonstrate your understanding of the four functions of management that occur simultaneously in every organization.

46. Too Much Personality, Too Little Performance (Manager’s Hot Seat Video Case): As a manager, you need to understand personality attributes because they affect how people perceive and act within the organization.

47. Growth and Crisis at Marriott International (Case Analysis): Demonstrate your understanding of the different functions and levels of management.

Class Discussion Questions 15. Give examples of the activities that each of the following managers might be involved in if he or she worked for the Coca-Cola Company: financial manager, production and operations manager, personnel manager, marketing manager, administrative manager, information technology manager, foreman.

Sample student answers (answers will vary):  Financial manager: Project income and expenses over Coca-Cola’s next quarter; project income and expenses for the next year; investigate feasibility of new Coca-Cola projects and investments from a financial standpoint; collect data on company finances and operations; develop financial and operational reports; determine long-term and short-term financing needs for Coca-Cola and its different subsidiaries; analyze the financial contributions of Coca-Cola’s product lines to ensure and provide recommendations to top management.  Production and operations manager: Develop business plans to support objectives of various product lines; purchase necessary supplies for product development; plan and design new plants and Coca-Cola production facilities; improve production and operational performance efficiency at different facilities; ensure that CocaCola products meets relevant quality standards.  Personnel manager: Engage in the recruiting of new employees; interview and hire qualified individuals to be a part of Coca-Cola’s various teams; oversee Coca-Cola’s performance appraisal system; properly store and retrieve personnel files; oversee Coca-Cola benefit systems; ensure confidentiality of employee information.  Marketing manager: Plan the promotion of new Coca-Cola products; select relevant media for promotional campaigns; appropriate the costs of advertising and other promotional campaigns; develop pricing objectives of Coca-Cola products; determine effectiveness of pricing strategies; determine product features; aid in product development and test marketing; oversee commercialization of new Coca-Cola products; delete products that do not reach certain profit objectives.  Administrative manager: Oversee the work performance of one of Coca-Cola’s companies; collect and distribute information throughout the company; manage quality and cost control of the company; frequently Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

133 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual





meet with managers from the different departments to go over planning and forecasting; direct the different administrative functions within the company.

IT manager: Create safeguards to protect company information in computer systems from unauthorized sources; create a streamlined process for people inside the company who have legitimate reasons to use the system; create contingency plans for protecting the system’s data during a crisis situation; develop efficient methods to communicate to global employees, partners, and suppliers though Coca-Cola’s IT system; provide support for training to help employees understand how to use the system.

Foreman: Supervise and direct workers in a particular department or business segment; implement plans by top and middle managers; evaluate performance of Coca-Cola employees; develop plans for correcting performance shortcomings; support employees in their daily operations.

16. Interview a small sample of managers, attempting to include representatives from all three levels and all areas of management. Discuss their daily activities and relate these activities to the management functions of planning, organizing, staffing, directing, and controlling. What skills do the managers say they need to carry out their tasks?

Student’s answers will vary depending upon the sample of managers they choose.

17. You are a manager of a firm that manufactures conventional ovens. Over the past several years, sales of many of your products have declined; this year your losses may be quite large. Using the steps of the decision-making process, briefly describe how you arrive at a strategy for correcting the situation.

First, students will have to recognize and define the decision situation. Students should recognize that the problem is that sales of conventional ovens have declined. They might define the decision situation as something like, “Investigate options to reduce the losses from decreasing sales of conventional ovens.” The second step is to develop options to resolve the situation. As part of this process, students might choose to launch an investigation to find out why sales have declined. Are there new substitutes for the conventional overs that consumers are choosing instead?

Depending upon the why, students might come up with alternatives such as investigate ways to upgrade the conventional oven, engage in heavier promotion to increase awareness of the benefits of the conventional oven, look into changing the current pricing strategy, etc. They must then analyze the options, the third step of the process.

After analyzing the options, including the advantages and disadvantages of each, students will choose the option they think is best. They should provide support for why they feel a particular option is the best choice. Then they must implement the decision. Students should be detailed regarding how they plan on implementing the proposed solution. Afterwards, they should state how they plan to monitor the consequences of the decision. For instance, they might investigate whether sales are beginning to rise again, whether sales are meeting the company’s sales goals, etc.

Build Your Business Plan Commence a discussion on what leadership skills are necessary to be an effective leader. What national figures (government official or corporate figure) do students believe are the best example of a true leader? If students have a hard time thinking of someone, use Jack Welch of GE as an example. Jack Welch led GE for 20 years utilizing the strategy of retaining only GE divisions that are #1 or #2 in the market and growing the company by an aggressive acquisition strategy. Jack instituted creative and revolutionary ideas such as Six Sigma, the 70/20/10 employee evaluation process, and an open dialog within the management structure.

While it may be difficult for students to relate to Welch’s successes, all students can relate to bosses who have exhibited strong leadership skills. Query students on what those leadership skills were and how their bosses were able to command and not demand respect.

Video Case: Building a Strong and Healthy Business Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

134 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual JCF Health & Fitness is a total body-training program created for women. The program utilizes personalized group fitness in a team-like atmosphere. Daris Wilson, founder of JCF Health & Fitness, discovered that many women feel unsure about how to use gym equipment beyond cardio machines and basic free weights. Wilson made it his mission to eliminate the intimidation that women feel in a traditional gym setting by building his company using a group fitness model.

JCF Health & Fitness often offers 21-day boot camp programs at a discounted rate on Groupon to attract new clients. And, to highlight its services, JCF Health & Fitness released a series of spotlight videos featuring real clients.

Wilson also reevaluated his offerings. Instead of offering exclusively month-to-month memberships, Wilson introduced yearly memberships. Wilson believes his business is successful because he had a clear sense of what he wanted to offer from the very beginning. His ability to meet the needs of his clients has created a sense of trust and community.

Video Case Discussion Questions 16. Why is it important for JCF Health & Fitness employees to share the same mission as Wilson?

It is important for employees to share the company’s “mission to empower individuals toward happiness through a culture of fitness, leadership, camaraderie, and results.” This focus on the mission of developing a rapport with their trainer and creating goals makes people enjoy working out and then motivates them to continue.

17. How do the goals of JCF Health & Fitness set them apart from other fitness companies?

JCF Health & Fitness’s goals of eliminating the intimidation that women feel in a traditional gym setting by focusing on a group fitness model helps set it apart from other companies. JCF also learns about the limitations and fitness levels of its clients through a questionnaire and a one-on-one meeting designed to develop a rapport and create goals.

18. How can Wilson continue to use an entrepreneurial mindset to grow his company?

Answers will vary, but students should support their answers.

Team Exercise Students will form groups and assign the responsibility of locating examples of crisis management implementation for companies dealing with natural disasters (explosions, fires, earthquakes, etc.), technology disasters (viruses, plane crashes, compromised customer data, etc.), or ethical or legal disasters. They should ask themselves the following questions: How did these companies communicate with key stakeholders? What measures did the company take to provide support to those involved in the crisis? Report your findings to the class.

Build Your Skills Functions of Management Background Although the text describes each of the five management functions separately, you learned that these five functions are interrelated, and managers sometimes perform two or more of them at the same time. Here you will broaden your perspective of how these functions occur simultaneously in management activities.

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135 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

1. Imagine that you are the manager in each scenario described in the following table and you have to decide which management function(s) to use in each.

2. Mark your answers using the following codes:  P Planning  O Organizing  S Staffing  D Directing  C Controlling Number 1

2

3

4

5

Scenario Your group’s work is centered on a project that is due in two months. Although everyone is working on the project, you have observed your employees involved in what you believe is excessive socializing and other time-filling behaviors. You decide to meet with the group to have them help you break down the project into smaller subprojects with mini-deadlines. You believe this will help keep the group members focused on the project and that the quality of the finished project will then reflect the true capabilities of your group.

Your first impression of the new group you’ll be managing is not too great. You tell your friend at dinner after your first day on the job: “Looks like I got a baby sitting job instead of a management job.”

You call a meeting of your work group and begin it by letting them know that a major procedure used by the work group for the past two years is being significantly revamped, and your department will have to phase in the change during the next six weeks. You proceed by explaining to them the reasoning your boss gave you for this change. You then say, “Let’s take the next 5 to 10 minutes to let you voice your reactions to this change.” After 10 minutes elapse with the majority of comments being critical of the change, you say: “I appreciate each of you sharing your reactions; and I, too, recognize that all change creates problems. The way I see it, however, is that we can spend the remaining 45 minutes of our meeting focusing on why we don’t want the change and why we don’t think it’s necessary; or we can work together to come up with viable solutions to solve the problems that implementing this change will most likely create.” After about five more minutes of comments being exchanged, the consensus of the group is that the remainder of the meeting needs to be focused on how to deal with the potential problems the group anticipates having to deal with as the new procedure is implemented.

You are preparing for the annual budget allocation meetings to be held in the plant manager’s office next week. You are determined to present a strong case to support your department getting money for some high-tech equipment that will help your employees do their jobs better. You will stand firm against any suggestions of budget cuts in your area.

Early in your career, you learned an important lesson about employee selection. One of the nurses on your floor unexpectedly quit. The other nurses were putting pressure on you to fill the position quickly because they were overworked even before the nurse left, and then things were really bad. After a hasty recruitment effort, you made a decision based on insufficient information. You ended up regretting your quick decision during the three months of problems that followed until you finally had to discharge the new hire. Since then, you have never let anybody pressure you into making a quick hiring decision.

Answer(s)

Suggested answer key: 1. Planning (selecting a course of action to achieve organizational objectives) organizing (structuring resources and activities to accomplish objectives in an efficient and effective manner) Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

136 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

directing (motivating and leading employees to achieve organizational objectives) controlling (evaluating and correcting activities to keep the organization on course) 2. Planning (you will need this function to get your group headed in the right direction) organizing (trying to get this group of employees to carry out the plans will be a challenge) directing (motivating and leading employees to achieve objectives will be a high priority) controlling (you will, no doubt, have to work closely with this group until you can develop them into a group of self-starters) 3. Planning (deciding how to accomplish the new goal of making the change) organizing (you will need to determine what new relationships should be developed in order to successfully implement the change) directing (you have already used your influence to get your group to move toward making the change, and will undoubtedly need to do more throughout the change process) controlling (you will need to monitor what’s happening to make sure things stay on track) 4. Directing (you will need to use your leading skills [influence] to get what your department needs) controlling (the budgeting process is one tool used in controlling) 5. Staffing (hiring the right people to carry out the work of the organization) 6. Controlling (your monitoring of the performance of the new employee led to your making needed corrections—discipline and eventually discharge—and your new selection system helps to ensure that your work group will achieve its objectives)

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 23. The Team Concept in Management 24. Management Training 25. The Importance of Computers for Modern Managers 26. Frederick Smith, CEO of Federal Express (or some other CEO) 27. Frederick Taylor, Father of Scientific Management

Guest Speaker Suggestions 22. A professor or teacher to talk about careers in management.

23. A manager from a local firm representing top-level management, middle management, or first-line management.

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137 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Teaching Suggestions 32. Use the “Lecture Outline and Notes” and PowerPoint slides to highlight the main points of the chapter.

33. Discuss the opening vignette and other boxed material. Use the “Boxed Text Discussion Questions” to review some of this boxed material. Ask students how the boxed material relates to the major functions of management, the three levels of management, and the skills managers need to be successful.

34. Go over the “Check Your Progress” in the textbook.

35. Divide the class into six teams. (Large sections may require more than six teams.) Using the “Build Your Skills” exercise in the textbook, assign each team one managerial function. The team should decide on some examples of activities for which the managers might be involved. Have a team representative report or write the examples on the chalkboard.

Chapter 7: Organization, Teamwork, and Communication Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s highlights. Followup via the Connect exercises is then encouraged to provide a holistic understanding of the chapter. Use the hyperlinked Table of Contents below to jump to different sections of the manual.

Table of Contents Chapter Forecast ......................................................................................................................................................................... 138 Learning Objectives ..................................................................................................................................................................... 138 Key Terms and Definitions ........................................................................................................................................................... 138 Content Outline ........................................................................................................................................................................... 140 Boxed Text Critical Thinking Questions ....................................................................................................................................... 147 Organization, Teamwork, and Communication // Are You Ready to Apply These Skills on the Job? / ...................................... 149 Bonus Teaching Resources .......................................................................................................................................................... 149 Chapter Review Questions .......................................................................................................................................................... 152 Connect Exercises ........................................................................................................................................................................ 154 Class Discussion Questions .......................................................................................................................................................... 154 Build Your Business Plan.............................................................................................................................................................. 154 Video Case: A Freshii Approach to Food and Business................................................................................................................ 155 Team Exercise .............................................................................................................................................................................. 155 Build Your Skills ........................................................................................................................................................................... 155 Term Paper or Project Topics ...................................................................................................................................................... 157 Guest Speaker Suggestions ......................................................................................................................................................... 158 Teaching Suggestions .................................................................................................................................................................. 158

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138 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Chapter Forecast Because a business’s structure can so profoundly affect its success, this chapter will examine organizational structure in detail.

First, we discuss how an organization’s culture affects its operations. Then we consider the development of structure, including how tasks and responsibilities are organized through specialization and departmentalization. Next, we explore some of the forms organizational structure may take. Finally, we consider communications within business.

Learning Objectives LO 7-1 LO 7-2 LO 7-3 LO 7-4 LO 7-5 LO 7-6 LO 7-7 LO 7-8

Explain the importance of organizational culture.

Describe how organizational structures develop.

Describe how specialization and departmentalization help an organization achieve its goals.

Determine how organizations assign responsibility for tasks and delegate authority.

Compare and contrast some common forms of organizational structure.

Distinguish between groups and teams.

Identify the types of groups that exist in organizations Describe how communication occurs in organizations.

Key Terms and Definitions Accountability The principle that employees who accept an assignment and the authority to carry it out are answerable to a superior for the outcome Centralized organization A structure in which authority is concentrated at the top, and very little decision-making authority is delegated to lower levels Committee A permanent, formal group that performs a specific task Customer departmentalization The arrangement of jobs around the needs of various types of customers Decentralized organization An organization in which decision-making authority is delegated as far down the chain of command as possible Delegation of authority Giving employees not only tasks but also the power to make commitments, use resources, and take whatever actions are necessary to carry out those tasks Departmentalization The grouping of jobs into working units usually called departments, units, groups, or divisions Functional departmentalization Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

139 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual The grouping of jobs that perform similar functional activities, such as finance, manufacturing, marketing, and human resources Geographical departmentalization The grouping of jobs according to geographic location, such as state, region, country, or continent Grapevine An informal channel of communication, separate from management’s formal, official communication channels Group Two or more individuals who communicate with one another, share a common identity, and have a common goal Line-and-staff structure A structure having a traditional line relationship between superiors and subordinates and also specialized managers—called staff managers—who are available to assist line managers Line structure The simplest organizational structure, in which direct lines of authority extend from the top manager to the lowest level of the organization Matrix structure A structure that sets up teams from different departments, thereby creating two or more intersecting lines of authority; also called a project-management structure Multidivisional structure A structure that organizes departments into larger groups called divisions Organizational chart A visual display of the organizational structure, lines of authority (chain of command), staff relationships, permanent committee arrangements, and lines of communication Organizational culture A firm’s shared values, beliefs, traditions, philosophies, rules, and role models for behavior Organizational layers The levels of management in an organization Product departmentalization The organization of jobs in relation to the products of the firm Product-development teams A specific type of project team formed to devise, design, and implement a new product Project teams Groups similar to task forces that normally run their operation and have total control over a specific work project Quality-assurance teams (or quality circles) Small groups of workers brought together from throughout the organization to solve specific quality, productivity, or service problems Responsibility The obligation, placed on employees through delegation, to perform assigned tasks satisfactorily and be held accountable for the proper execution of work Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

140 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Restructure To change the basic structure of an organization Self-directed work team (SDWT) A group of employees responsible for an entire work process or segment that delivers a product to an internal or external customer Span of management The number of subordinates who report to a particular manager Specialization The division of labor into small, specific tasks and the assignment of employees to do a single task Structure The arrangement or relationship of positions within an organization Task force A temporary group of employees responsible for bringing about a particular change Team A small group whose members have complementary skills; have a common purpose, goals, and approach; and hold themselves mutually accountable

Content Outline The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a section on which CONNECT activities can be used in the chapter. This is created so that you can facilitate in-class or online discussion effectively.

LO 7-1 Explain the importance of organizational culture.

LO 7-2 Describe how organizational structures develop.   

Introduction Organizational Culture Developing Organizational Structure

PowerPoint Slides PPT 7.4

Key terms:  Organizational culture  Structure  Organizational chart

Lecture Outline and Notes: XXXI. Organizational culture refers to a firm’s shared values, beliefs, traditions, philosophies, rules, and role models for behavior. a. Also referred to as corporate culture, an organizational culture exists in every organization regardless of size, type, product, or profit objective. b. In a sense, the organization’s culture provides a detailed map for employees and outsiders as to how the organization functions. i. A firm’s culture may be expressed formally through codes of ethics, memos, manuals, and ceremonies. ii. A firm’s culture may be expressed informally through dress codes, work habits, extracurricular activities, and stories. A firm’s culture is more commonly expressed

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141 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

c. d. e.

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a.

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b.

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c.

informally. iii. When values and philosophies are shared by all members of an organization, they will be expressed in its relationships with stakeholders.

Organizational culture helps ensure that all members of a company share values and suggests rules for how to behave and deal with problems within the firm.

Setting a positive organizational culture sets the tone for all other decisions.

Organizational culture helps ensure that all members of a company share values and suggests rules for how to behave and deal with problems within the organization.

Developing Organizational Structure (Figure 7.1) Structure is the arrangement or relationship of positions within an organization. i. Develops when managers assign work tasks and activities to specific individuals or work groups and coordinate the diverse activities required to reach the firm’s objectives. ii. Structure determines the arrangement and relationship of positions within the organization in a way that facilitates the attainment of the firm’s mission, strategic plans, and objectives. iii. How well an organization makes decisions, responds to problems, and influences employees’ attitudes toward their work is largely determined by the organization’s structure. iv. Well-structured organizations are usually very effective, competitive, and sustained over the long term.

Organizational structure is depicted through organizational charts—visual displays of structure, lines of authority (chain of command), staff relationships, permanent committee arrangements, and lines of communication.

Growth requires organizing—the structuring of human, physical, and financial resources to achieve objectives in an effective and efficient manner. For instance, as a clothing store evolves and grows, it requires the hiring of more employees and involves more complex organizational structures.

LO 7-3 Describe how specialization and departmentalization help an organization achieve its goals. 

Assigning Tasks o Specialization o Departmentalization

Key terms:      

XXXIII.

PPT 7.12

Specialization Departmentalization Functional departmentalization Product departmentalization Geographical departmentalization Customer departmentalization

Assigning Tasks a. In any organization, activities must be coordinated, assigned to work groups, and controlled; this requires specialization and departmentalization. b. Specialization i. After identifying all activities that must be accomplished, managers then break these activities down into specific tasks that can be handled by individual employees. ii. Specialization is the division of labor into small, specialized tasks and the assignment of single tasks to employees.

1. Henry Ford revolutionized specialization by creating the assembly line. iii. The rationale for specialization is efficiency.

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142 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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c.

1. Specialization minimizes the time lost when workers shift from one job to another.

2. Specialization may occur when activities to be performed are too numerous for one person to handle. iv. Overspecialization can have negative consequences: Employees may become bored and dissatisfied with their jobs, leading to poor work quality, injuries, and high employee turnover.

Departmentalization (Figure 7.2) i. Departmentalization is the grouping of jobs into working units that are usually called departments, units, groups, or divisions. ii. Most companies use more than one departmentalization plan to enhance productivity.

1. Many cities use departmentalization to group jobs into working units. iii. Functional departmentalization involves the grouping of jobs that perform similar functional activities, such as finance, manufacturing, marketing, and human resources.

1. Advantages include supervision by experts and easier supervision of employees.

2. The biggest disadvantage is that decision making involving more than one department may be slow, and it requires greater coordination.

3. This form of departmentalization is common in small organizations. iv. Product departmentalization is the grouping of jobs around the firm’s products.

1. Each division develops and implements its own product plans, monitors the results, and takes corrective action as necessary. a. Campbell’s Soup uses product departmentalization, but also engages in geographic departmentalization in various regions.

2. Some advantages are the coordination of all activities related to the product and the simplification of the decision-making process.

3. The disadvantages include duplicating specialized functions and emphasizing one product rather than overall organizational objectives. v. Geographical departmentalization is the grouping of jobs by geographical location, such as state, region, country, or continent.

1. An advantage is that organizations can respond to the unique requirements of a geographic area.

2. Grouping by location can require a large administrative staff and control system to coordinate operations, and tasks are duplicated among the different regions. vi. Customer departmentalization is the grouping of jobs around the needs of various customers. Like geographical departmentalization, customer departmentalization does not focus on the organization as a whole and requires a large staff to coordinate the operations of the various groups.

LO 7-4 Determine how organizations assign responsibility for tasks and delegate authority. 

Assigning Responsibility o Delegation of Authority o Degree of Centralization o Span of Management o Organizational Layers

Key terms:       

Delegation of authority Responsibility Accountability Centralized organization Decentralized organization Span of management Organizational layers

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143 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual XXXIV. PPT 7.21

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Assigning Responsibility a. Delegation of Authority i. Delegation of authority is not only giving tasks to employees but also empowering them to make commitments, use resources, and take whatever actions are necessary to carry out those tasks. ii. Delegation gives a responsibility, or obligation, to employees to carry out assigned tasks satisfactorily. iii. The principle of accountability means that subordinates who accept an assignment and the authority to carry it out are answerable to a superior for the outcome. iv. The process of delegation establishes a pattern of relationships and accountability between superior and subordinates. v. However, the act of delegating authority to a subordinate does not relieve the superior of accountability for the delegated job. b. Degree of Centralization i. The extent to which authority is delegated throughout an organization determines its degree of centralization. ii. In a centralized organization, authority is concentrated at the top level, and very little decision-making authority is delegated to lower levels.

1. Organizations tend to be more centralized when the decisions to be made are risky and low-level managers are not highly skilled in decision making.

2. Overcentralization can cause problems in part because it may take longer for the organization as a whole to implement decisions and to respond to changes and problems on a regional scale. iii. A decentralized organization is one in which authority is delegated as far down the chain of command as possible.

1. Decentralization is characteristic of organizations that operate in complex and unpredictable environments.

2. Lower-level managers who interact with the external environment often develop a good understanding of it and are able to react quickly to changes.

3. The delegation of authority to lower levels of managers may increase productivity.

4. Decentralization requires that lower-level managers have strong decisionmaking skills.

5. In recent years, the trend has been toward more decentralized organizations. c. Span of Management i. There is no simple guideline as to how many subordinates managers should manage, but experts suggest: 1. Top managers should not directly supervise more than four to eight people.

2. Lower-level managers, who supervise relatively routine tasks, can manage a larger number of subordinates. ii. Span of management refers to the number of subordinates who report to a particular manager. (Figure 7.3) 1. A wide span of management exists when a manager directly supervises a large number of employees.

2. A narrow span of management exists when a manager directly supervises only a few subordinates. iii. A narrow span is appropriate when superiors and subordinates are not close together, the manager has many other responsibilities, frequent interaction is needed, and problems are common. iv. A wide span is appropriate when superiors and subordinates are close together, the

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144 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual manager has few other responsibilities, a low level of interaction is needed, few problems arise, subordinates are competent, and operating procedures are in existence. v. Narrow spans are typical in centralized firms, while wide spans are more common in decentralized firms. d. Organizational layers are the levels of management in an organization. i. A company with many layers is considered tall; its span of management is narrow.

Administrative costs are usually higher and communications slower. ii. Organizations with few layers are considered flat and have wide spans of management. In this type of structure, managers perform more administrative duties and spend more time supervising and working with subordinates. iii. Companies that decentralize flatten their structures and widen their spans of management, often by eliminating layers of middle management.

PPT 7.26

LO 7-5 Compare and contrast some common forms of organizational structure. 

Forms of Organizational Structure o Line Structure o Line-and-Staff Structure o Multidivisional Structure o Matrix Structure

PPT 7.27 PPT 7.28

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XXXV.

Key terms:     

Line structure Line-and-staff structure Restructure Multidivisional structure Matrix structure

Forms of Organizational Structure a. Line Structure i. Line structure is based on direct lines of authority, from the top executive to the lowest-level employee. (Figure 7.4) ii. Line structures are the simplest form and most common in small businesses. iii. An advantage of the line structure is the clear chain of command that enables managers to make decisions quickly; a mid-level manager needs to consult only his or her immediate supervisor, not several people. iv. A disadvantage of the line structure is that it requires managers to be knowledgeable about the wide range of activities for which they are responsible. b. Line-and-Staff Structure i. A line-and-staff structure has a traditional line relationship between superiors and subordinates, and specialized managers—called staff managers—are available to assist line managers. (Figure 7.5) 1. Line managers are directly involved in the operation of the business, while staff managers provide advice and support on specialized matters.

2. Staff managers do not have direct authority over line managers, but they do have authority over their own subordinates. ii. Line-and-staff organizations may experience overstaffing and ambiguous lines of communication. Employees may become frustrated because of the lack of authority to carry out decisions. c. Multidivisional Structure i. A multidivisional structure organizes departments into larger groups, called divisions.

1. Just as departments can be formed on the basis of geography, customer, product, or a combination of these, so too divisions can be formed based on any of these methods of organizing.

2. Permits delegation of decision-making authority so that division and department managers can specialize and decisions are made better and faster. They allow those closest to the action to make decisions that will

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145 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual affect them. d. Matrix Structure i. A matrix structure, often called a project management structure, sets up teams from different departments by creating two or more intersecting lines of authority.

Also called a project-management structure. (Figure 7.7) 1. Employees are responsible to two managers.

2. Matrix structures are usually temporary; team members go back to their functional or line departments after a project is finished. ii. An advantage of the matrix structure is that this form of organization provides flexibility, enhances cooperation and creativity, and enables organizations to respond quickly to changes. iii. The matrix structure is generally expensive and quite complex. Employees may be confused about who has authority—the project manager or the immediate supervisor.

PPT 7.32 PPT 7.33

LO 7-6 Distinguish between groups and teams.

LO 7-7 Identify the types of groups that exist in organizations. 

The Role of Groups and Teams in Organizations o Committees o Task Forces o Teams

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XXXVI.

Key terms:  Group  Team  Committee  Task force  Project teams  Product-development teams  Quality-assurance teams (or quality circles)  Self-directed work team (SDWT)

The Role of Groups and Teams in Organizations a. Regardless of how they are organized, most of the essential work of business occurs in individual work groups and teams. i. A group has been defined as two or more individuals who communicate with one another, share a common identity, and have a common goal. ii. A team is a small group whose members have complementary skills; a common purpose, goals, and approach; and who hold themselves mutually accountable. iii. All teams are groups, but not all groups are teams. (Table 7.1) iv. Work groups emphasize individual products, individual accountability, and even individual leadership; work teams share leadership roles, have both individual and mutual accountability, and create collective work products. b. The type of groups an organization establishes depends on the tasks it needs to accomplish and the situation it faces. c. A committee is usually a permanent, formal group that does some specific task. d. A task force is a temporary group of employees responsible for bringing about a particular change. i. They typically come from all departments and levels of an organization. e. Teams i. Teams have the advantages of being able to pool members’ knowledge and skills, creating more solutions to problems than can individuals, and enhancing employee acceptance of and commitment to team goals. ii. Project teams are similar to task forces but normally run their own operation and have total control over a specific work project. They are almost always temporary, although a large project may last several years. iii. Product-development teams are a special type of project team formed to devise,

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146 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual design, and implement a new product. iv. Quality-assurance teams (or quality circles) are fairly small groups of workers PPT 7.38 brought together from throughout the organization to solve specific quality, productivity, or service problems. v. A self-directed work team (SDWT) is a group of employees responsible for an entire work process or segment that delivers a product to an internal or external customer. Sometimes called self-managed teams or autonomous work groups, SDWTs reduce the need for extra layers of management and thus can help control costs.

1. Self-directed work teams permit the flexibility to change rapidly to meet the competition or respond to customer needs.

2. The defining characteristic of SDWTs is the extent to which it is empowered or given authority to make and implement work decisions.

LO 7-8 Describe how communication occurs in organizations.

Key terms: 

Communicating in Organizations o Formal and Informal Communication o Monitoring Communications o Improved Communication Effectiveness

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XXXVII. a. b. c. d.

e.

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f.



Grapevine

Communicating in Organizations Communication can be formal or informal. (Table 7.2) Communication within an organization can flow in a variety of directions and from a number of sources, each using both oral and written forms of communication. (Figure 7.7) It is clear that the more successful the communication system is within an organization, the more successful the firm is.

Alternatives to face-to-face communication are increasing due to technological advances. i. Many companies use internal networks called intranets to share information with employees. Employees in different locations rely on email, social media, audio conferencing, fax, Internet, videoconferencing, or other technological tools to accomplish their goals.

Formal Communication i. Formal channels of communication are intentionally defined and designed by the organization. ii. They represent the flow of communication within the formal organizational structure as shown on organizational charts.

1. Upward communication flows from lower to higher levels of the organization and includes such information as progress reports, suggestions for improvement, inquiries, and grievances.

2. Downward communication refers to the traditional flow of information from upper organizational levels to lower levels. This type of communication involves directions, assignment of tasks and responsibilities, performance feedback, and certain details about the organization’s strategies and goals.

3. Horizontal communication involves the exchange of information among colleagues and peers on the same organizational level, such as across and within departments. Horizontal communication informs, supports, and coordinates activities both within the department and with other departments.

4. Diagonal communication occurs when individuals from different units and organizational levels communicate.

Informal Communication Channels

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147 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

PPT 7.48

i. Friendships and other non-work, social relationships comprise the informal organization of a firm, and their impact can be great. ii. The grapevine is an informal channel of communication, separate from management’s formal, official communication channels.

1. The channel through which the most significant informal communication flows.

2. Information passed along the grapevine may relate to the job or organization, or it may be gossip and rumors unrelated to either.

3. Managers who understand how the grapevine works can utilize it by feeding it facts to squelch rumors and incorrect information. They can also obtain valuable information from the grapevine that could improve decision making. g. Monitoring Communications i. Technological advances have created problems with employees misusing their time and electronic devices at work ii. Many companies find it necessary to monitor employees’ computer usage while they are working 1. Instituting practices that show respect for employee privacy but do not abdicate employer responsibility are increasingly necessary in today’s workplace.

2. Artificial intelligence (AI) is having a significant impact on workplace monitoring, benchmarking, and understanding how employees “feel” about their jobs. h. Improving Communication Effectiveness i. Without effective communication, the activities and overall productivity of projects, groups, teams, and individuals will be diminished. ii. One of the major issues of effective communication is in obtaining feedback.

1. Listening is a skill that involves hearing, and most employees listen much more than they actively communicate to others.

2. Managers should encourage employees to provide feedback, even if it’s negative. iii. Strong and effective communication channels are a requirement for companies to distribute information to different levels of the company. iv. Communication is necessary in helping every organizational member understand what is expected of him or her. Many business problems can be avoided if clear communication exists within the company. v. The use of Zoom and WebEx for video conferencing, team collaboration, and even daily communication between employees is changing the work environment. vi. Email is a dominant form of workplace communication in many offices.

Boxed Text Critical Thinking Questions Sugar Bowl Bakery is a Sweet Success 19. How do the founders of Sugar Bowl Bakery use teamwork to make their bakery a success?

As defined in this chapter, a team is a small group whose members have complementary skills; have a common purpose, goals, and approach; and hold themselves mutually accountable. That definition describes the Sugar Bowl Bakery brothers. They all shared the goal of purchasing a coffee shop. They held themselves mutually accountable Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

148 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual and worked any jobs they could find. They saved and pooled their money together. They shared operational responsibilities through the utilization of their complementary skill sets.

20. How do you think communication contributed to Sugar Bowl Bakery’s current status?

This culture of shared responsibility has led to continual success for over 30 years. In 2008, the brothers had to pivot from a retail operation to a national wholesale provider of baked goods. They would not have been able to successfully transition without the key ability to communicate.

21. Do you think Sugar Bowl has a centralized or decentralized structure? Why? Having such a strong value toward teamwork leads Sugar Bowl to demonstrate a decentralized structure. Teams are partly defined by their shared leadership roles. Teams demonstrate open-ended discussions and active problemsolving. Teams discuss, decide, and do work together.

SpaceX: Out of this World Communication 19. What characteristics does Gwynne Shotwell have that makes her a good fit for SpaceX’s organizational culture?

Gwynne Shotwell recognizes the value of strong communication and teamwork. She is well-suited to SpaceX’s selfdriven organizational culture and is a risk-taker.

20. How does SpaceX display teamwork to overcome challenges?

The organizational culture inspired by Musk means that employees are always collaborating on how to make his seemingly impossible ideas into a reality. When the rocket exploded in 2016, SpaceX investigators teamed up with each other to investigate the cause of the explosion. They were able to determine that the issue was the fuel tank.

21. How do you think strong communication skills helped Gwynne Shotwell lead SpaceX through its explosion crisis?

Shotwell balances Musk as a less emotional and steadier leader. When the rockets exploded, she quickly realized that as the leader of the company, she needed to display confidence to the other employees. Thus she was able to communicate strong, confident leadership.

Teamwork: Now Streaming at Netflix 18. Describe how Netflix uses teams in its organization.

Employees at Netflix work in cross-functional teams, meaning that employees from different functional areas work together to create solutions. Another quality infused into the culture at Netflix is to always be recruiting. Everyone at Netflix has the responsibility of building a great team 19. Do you think Netflix has more of a narrow span of management or a wide span of management? Explain your reasoning.

Answers will vary but most students will state that Netflix uses a wide span of management since employees must have strong collaborative skills to work with cross-functional teams.

20. Based on how Netflix seems to delegate authority, what degree of centralization do you think Netflix uses in its organizational structure? Explain your reasoning.

Students should answer that Netflix is structured as a decentralized organization since it has an organizational structure that provides employees with more freedom to manage themselves. Netflix also values independent decision-making, teamwork, honest communication, effective people, and few rules which shows a high degree of decentralization.

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149 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Organization, Teamwork, and Communication // Are You Ready to Apply These Skills on the Job? / How has technology created new job positions?

The area of corporate communications provides lots of opportunities for specific jobs that facilitate communication systems.

Thanks to technology, there are job positions to help disseminate information through online newsletters, intranets, crowdsourcing, or internal computer networks to share information to increase collaboration. In addition to the many advances using electronic communications, there are technology concerns that create new job opportunities. Monitoring workplace communications such as the use of e-mail and the Internet have created new industries. There have to be internal controls in the organization to make sure that the organization does not engage in any copyright infringement. If this is an area of interest, there are specific jobs that provide an opportunity to use your technological skills to assist in maintaining appropriate standards in communicating and using technology.

Bonus Teaching Resources This section offers bonus teaching resources for class discussion. This is offered in addition to what’s offered in the M: Business text.

“Informal Leaders within an Organization” MiniCase Within an organization, there may be informal leaders—individuals who have no formal authority over others yet can influence the behavior of others. The story below points out how managers can use informal leaders to achieve desired objectives.

Dr. John Alvarez was hired to be the dean of continuing education for Wilson University. Alvarez would be responsible for a large evening program of credit classes for part-time students. He inherited an efficient staff, along with Dr. Irvin Luce, the assistant dean (second in command), an administrator with many years’ experience at Wilson University. Dr. Luce was to assist the dean in any way possible.

The new dean was experiencing his first taste of administration, and things were moving along fairly well. Yet the new dean felt his objectives were not being achieved as rapidly as he had hoped. To better equip himself for his new responsibilities, Dr. Alvarez enrolled in a management course in a neighboring university and found the course offered great advice.

One day, the professor of the management class lectured on the topic of the informal leader. The gist of the professor’s lecture was this: An informal leader wields power in an organization, power of which the informal leader may not even be aware. When new challenges arise, workers tend to discover first what reaction the informal leader has to the new event. Once that knowledge is obtained, the group will usually follow the lead of the informal leader. Here is an illustration of the informal leader in action.

Ellsworth Livingston took over as principal of Longfellow Elementary School on August 10. Before classes had started, he had scheduled several informal get-togethers with his teaching faculty, mostly women. Rather than read bulletins and memos from the school district headquarters, Ellsworth went out of his way to learn as much as he could about the teachers. Without being obvious, Ellsworth carefully observed each of the teachers. Seeing them interact informally told him volumes about the social networks at Longfellow Elementary School.

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150 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Ellsworth was especially interested in identifying the faculty’s informal leader. By the time classes began, he had zeroed in on Mrs. Nila Pratt, a third-grade teacher. How did Ellsworth determine that Nila Pratt was the informal leader? Here are the clues from Ellsworth’s observations.

When teachers clumped together for conversation during refreshment breaks, the biggest circle formed around Nila, and those in Nila’s circle would press her for opinions on everything. If Nila told a joke, it always received rumbling laughter. In open forums when Nila voiced an opinion, every teacher in the room turned around to see what she was saying. Also, in the open forum, other teachers would preface their remarks with a lead-in such as: “Well, it’s just like Nila says....” When Nila had her students working on an autumn display for the bulletin board, all the teachers came by to get ideas on how they should do their bulletin boards. On and on the episodes went. There was no doubt in Ellsworth’s mind that he had spotted the informal leader.

Once Ellsworth had determined that Nila Pratt was the informal leader, he used that knowledge to help achieve his objectives.

When he was about to come out with a new procedure for the teachers to follow, he quietly checked the idea with Nila Pratt.

If Nila showed reservations about the new procedure, Ellsworth found out what was wrong and altered his plan until Nila would approve. If she liked the plan, Ellsworth knew he was home free. Whether she knew it or not, Nila was helping Ellsworth implement just about anything he had in mind for Longfellow Elementary School. All went smoothly because Ellsworth had been astute enough to find the informal leader in the organization.

The professor of management concluded his lecture on informal leaders, and class was dismissed. The new dean, John Alvarez, walked to his car and drove back to Wilson University. As he was driving, a thunderbolt of thought and insight hit the new dean.

“Great day! The informal leader in my organization is the number-two man, Dr. Irvin Luce, the assistant dean. The secretaries adore him. The program directors are constantly asking him for advice. He is the focal point of conversation groups. I must start treating him the way Ellsworth treated Mrs. Nila Pratt.”

The new dean returned to his office armed with a secret weapon: He knew who the informal leader was. The new dean developed a beautiful rapport with Dr. Irvin Luce and informally consulted him on just about every possible innovation for the evening program. As a result, the entire evening program began to move forward by leaps and bounds, largely because the new dean had been able to find the informal leader in his organization.

Discussion Questions for “Informal Leaders within an Organizationn” MiniCase 14. Mrs. Nila Pratt was the informal leader in the management professor’s illustration, and Dr. Luce, the assistant dean, was the informal leader in the new dean’s organization. Why do certain individuals become the informal leaders in an organization?

There may be many reasons why certain individuals become informal leaders. Informal leaders like Nila Pratt and Dr. Luce have likely been at the organization for a long time. They establish friendly rapports with the other employees.

They will likely display a good degree of expertise in whatever business they are in since many look to them for advice. They also display leadership qualities, albeit informally, such as charisma.

15. Is it ethical for managers to “use” informal leaders in an organization to achieve their objectives?

Students’ answers may vary.

Controversial Issue: Why Isn’t Delegation Working Here?

This can be used in a discussion board or for in-class discussion.

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151 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual One of the purposes for studying organizational structure is to determine what the authority relationships are, what the tasks are, and who is responsible for carrying out those tasks. The following story illustrates what happens when the delegation of responsibility is not given to the person in charge of a group of subordinates.

Billy Wagner was a born salesman. He had worked for several companies over the years as a successful salesman. Several times he had been named salesman of the year.

Billy foresaw that metal buildings were a new frontier, and he began to sell them—metal buildings for farms, small businesses, schools, and churches. Billy covered all of Iowa, and he was quite successful in selling the metal buildings. Business was booming so much in Billy’s territory that the metal-building manufacturer and the construction crews were having a problem keeping up with his sales.

To add to the problem, the original manager of the firm (the woman who had hired Billy) resigned and took a job at an airport.

Her replacement was full of vim, vigor, and vitality and was determined to get the company rolling again, even though there were some logistical problems that caused the firm to fall further and further behind schedule. After talking to many people (but not Billy) in the firm about the lag in schedule, the new manager finally arrived at a solution. He decided to talk to Billy.

“Billy,” the new manager said confidently, “I know how we can keep up with the schedules. We just need to place a little responsibility in some hands that are strong enough and mature enough to handle it. My investigations have led me to conclude that you can handle this assignment. Now, here’s the plan. Once you have sold a metal building and the construction contract is signed, you are responsible for seeing that the building is erected by the completion date specified in the contract.

Understand?”

Billy Wagner thought a moment. He realized this was the kind of challenge that he had always wanted—supreme authority over metal-building delivery. To make sure he understood the new manager, Billy wanted to check one minor item.

“I take it that this means that I’m in charge of the construction crews and can order extra workers and assign overtime as needed, right? And those crews and their straw bosses will know that my word is law, right?”

“Hold on,” the manager choked, “You can’t be in charge of the crews.”

Billy wasn’t through with this argument. “Boss, if I can’t be in charge of the crews and get them moving as I see best, then there’s no way you can hold me responsible for having those buildings up in time.”

These were not words that the new manager wanted to hear. “Now, Billy, you just have to learn how to get along with those crew chiefs, to work with them, and to be cooperative. You just don’t get the point.”

Actually, it was the manager who was not getting the point.

Discussion Questions for “Why Isn’t Delegation Working Here?”

18. What was the organizational problem in this story?

The organizational problem deals with the delegation of authority. Delegation of authority means not only giving tasks to employees but empowering them to make commitments, use resources, and take whatever actions necessary to carry out those tasks. Since Billy cannot efficiently make sure the buildings are done on time without having authority over the crew, the manager is not delegating authority properly.

19. Can someone be responsible for something over which that person does not have authority?

Probably not, or at least not easily. The manager might hold Billy responsible despite Billy’s objections, but if the crews won’t listen to Billy because he does not have authority over them, then there is not much Billy can do to get Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

152 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual the buildings done on time unless he offers some kind of incentive (which he might not have the authority to do either). If it’s not in his power to perform the tasks satisfactorily, then he cannot exhibit responsibility for something that he can’t wield control over.

20. How should the new manager have handled Billy’s request to be in charge, to be able to order extra workers, to assign overtime, and to know that his word was law?

Students may have differing opinions, but if the new manager wants to delegate the responsibility of getting the new buildings done on time, then he must give Billy the resources to do so. If he didn’t want to give up so much authority, perhaps he could have negotiated with Billy in some way to give Billy more control (and hence greater authority over the crews) and yet retain some authority over the situation himself.

Chapter Review Questions 60. Identify four types of departmentalization and give an example of each type.

Departmentalization is grouping jobs into working units usually called departments, units, groups, or divisions.

Functional departmentalization is the grouping of jobs that perform similar functional activities, such as finance, manufacturing, marketing, and human resources. Product departmentalization is grouping jobs around the products of a firm. Geographical departmentalization is grouping jobs by geographic location, such as country, region, or an even smaller area. Customer departmentalization is grouping jobs around the needs of various types of customers, which allows an organization to respond to the needs of each group of customers. (Examples of these departmentalization types will vary according to the examples given by students).

61. Explain the difference between groups and teams.

In a group, two or more individuals communicate with one another, share a common identity, and have a common goal. The purpose of the group is the same as the broader organizational mission, whereas the team has a specific purpose that is defined by the team itself. The leadership roles in the team are shared, and both the team members and the whole team are accountable for the results of their work. In a group, the leadership is clearly focused on one person; thus, each individual is accountable.

A team requires a collective effort and the participation of all team members, two characteristics that are not necessarily required in a group. All teams are groups, but not all groups are teams.

62. What are self-managed work teams and what tasks might they perform that traditionally are performed by managers?

A self-managed work team is a group of employees responsible for an entire work process or segment that delivers a product to an internal or external customer. They might be given the authority to implement work decisions, especially when problems arise in the production process.

63. Explain how delegating authority, responsibility, and accountability are related.

All of these are related, but there is a difference in the meaning of each of these words. Delegation of authority is the assigning of tasks to employees while giving them the power to make commitments, use resources, and take actions necessary to accomplish them. Responsibility is the obligation to carry out assigned tasks satisfactorily. Accountability is the answerability of a subordinate to a superior for the outcome of an assigned task.

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153 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

64. Distinguish between centralization and decentralization. Under what circumstances is each appropriate?

A centralized organization is one in which top-level managers delegate very little authority to lower-level employees.

A decentralized organization is one in which authority is delegated as far down the chain of command as possible. A centralized organization is appropriate when the decisions to be made are risky and when low-level managers are not highly skilled in decision making. Decentralization is appropriate when the organization operates in complex and unpredictable environments.

65. Define span of management. Why do some organizations have narrow spans and others wide spans?

Span of management is the number of subordinates who report to a particular manager. A wide span of management exists when a manager directly supervises a large number of employees. A narrow span of management exists when a manager directly supervises only a few subordinates. The nature of spans of management in a company depends on the physical distance between managers and subordinates, on the managers’ responsibilities other than supervision, and on the degree of interaction required between managers and subordinates. Other factors include the frequency of problems, the competence of subordinates, and the existence of specific operating procedures.

66. Discuss the different forms of organizational structure. What are the primary advantages and disadvantages of each form?

The process of delegation establishes a pattern of authority and accountability, often called bureaucracy, within the organization. Various forms of bureaucracy include line structure, line-and-staff structure, and matrix structure, as well as committees.

A line structure is based on direct lines of authority that extend from the top executive to employees at the lowest level of an organization. This structure provides a clear chain of command, but it also requires managers to possess a wide range of knowledge.

In the line-and-staff structure there is a line relationship between superiors and subordinates, and line departments are directly involved in the operation of the organization. Specialized managers, called staff managers, are available to assist line managers.

The matrix structure involves setting up teams from different departments and creating two or more intersecting lines of authority. The matrix structure improves cross-pollination of ideas but is generally temporary.

67. Discuss the role of the grapevine within organizations. How can managers use it to further the goals of the firm?

The grapevine is an informal channel of communication, separate from management’s formal, official communication channels. Astute managers try to identify informal leaders to gain their support for the organization’s objectives. Managers can use the grapevine to their advantage, feeding it facts to squelch rumors and incorrect information. They can also obtain valuable facts from the grapevine to improve decision making.

68. How have technological advances made electronic oversight a necessity in many companies?

Technological advances as alternatives to face-to-face communication have caused problems as employees face information overload. Electronic oversight is necessary in many companies to ensure that employees use technology appropriately and efficiently.

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154 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 69. Discuss how an organization’s culture might influence its ability to achieve its objectives. Do you think that managers can “manage” the organization’s culture?

When an organization’s culture consists of values shared by all members of the organization, results can be positive as all members work toward shared objectives. Managers can “manage” an organization’s culture by establishing values and rules through authority, partly in organizational and policy manuals, and by example. The manager’s awareness of a company’s culture is management’s strongest tool in dealing with problems and weaknesses.

Connect Exercises Below are the available exercises in Connect for this chapter. Please also see the Connect Content Matrix in your Instructor Resource library for additional details on these exercises (including Learning Objectives, topics, Bloom’s level, AACSB, etc.)

48. Flag Flapping Brewing Company Brews Formula for Success (Case Analysis): Understand how an organization determines how well it makes decisions and responds to problems and influences employees’ attitudes toward their work.

49. Organizational Structure (Click & Drag): Demonstrate your understanding of the line of authority and potential disadvantages of the line structure, line-and-staff structure, multidivisional structure, and matrix structure.

50. Methods of Departmentalization (Click & Drag): Test your understanding of the various types of departmentalization.

51. Differences between Line and Staff Organizations (iSeeit! Video Case): This video shows how each type of employee is crucial in assisting the organization towards its goals.

52. Whole Foods (Video Case): Understand that organizational theory and organizational structure are the foundation of any company.

53. Freshii’s Winning Organization (Video Case): Understand that, as a manager, understanding organizational structure will help lead to success.

54. Organizational Structure (iSeeit! Animated Video Case): Demonstrate your understanding of the different types of organizational structures that are available to organizations to try and create efficiencies across the management function.

55. Virtual Disruption (Manager’s Hot Seat Video Case): Learn how virtual teams are growing in popularity given technological advances; however, working on virtual teams also comes with its own set of challenges.

Class Discussion Questions 18. Explain, using a specific example (perhaps your own future business), how an organizational structure might evolve. How would you handle the issues of specialization, delegation of authority, and centralization? Which structure would you use? Explain your answers.

Students’ answers will vary.

19. Interview the department chairperson in charge of one of the academic departments in your college or university.

Using 7.1 as a guideline, explore whether the professors function more like a group or a team. Contrast what you find here with what you see on your school’s basketball, football, or baseball team.

Students’ answers will vary.

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155 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual You really need to encourage students to have a positive outlook about working with others on a team. At this point, students have been working on their group’s business plan for 6 weeks to 2 months. Surprise the students by walking into class and having them evaluate how well their groups are doing. Have them complete a simple evaluation form of each member’s contribution to date on the business proposal. This is an ideal time for such an activity because they still have plenty of time to resolve any problems the group might be having and still end up with a strong group project.

Video Case: A Freshii Approach to Food and Business Freshii is a restaurant franchise that focuses on fast and healthy food options. With more than 395 locations in 18 countries, the company has a variety of customizable food offerings from burritos and salads to frozen yogurt and smoothies. Freshii takes pride in its flat organizational structure, which it believes lets the company cut excess layers of management and allows for easier communication.

Video Case Discussion Questions 19. How does Freshii’s organizational structure shape its culture?

Freshii aims to have a corporate culture that allows free communication and ideas but isn’t bogged down by extra layers of management, and its organizational structure is a big part of this. The company has seven key departments that are led by executives who have complete ownership of their areas. Freshii’s executive team, including its CEO, works in the same room around one large open table.

Each employee also gets personal attention from management allowing them to find roles they are best suited for and gives them an opportunity to be in a role they care about.

20. In what ways are employees at Freshii empowered to contribute to the company?

Freshii’s flat organizational structure lets the company cut excess layers of management and allows for easier communication. Its flat organizational structure also empowers employees to have more ownership in their segment of the business. Employees are given the power to design and execute their own projects.

21. What effect does Freshii’s franchise model have on its company culture?

Freshii’s franchise partners must embrace the mission of open communication and personal responsibility in order for the company to maintain its unified culture. Still, Freshii empowers franchise owners to try new things and create new offerings to instill innovation.

Team Exercise Students will form groups and assign the responsibility of providing the organizational structure for a company one of your team members has worked for. Was your organization centralized or decentralized in terms of decision making? Would you consider the span of control to be wide or narrow? Were any types of teams, committees, or task forces used in the organization? Report your findings to the class.

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156 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Teamwork Background Think about all the different kinds of groups and teams you have been a member of or been involved with. Here’s a checklist to help you remember them—with “Other”options.

School Groups/Teams:  Sports teams  Cheerleading squads  Musical groups  Hobby clubs  Foreign language clubs  Study groups  Other _____ Community Groups/Teams:  Fund-raising groups  Religious groups  Sports teams  Political groups  Boy/Girl Scout troops  Volunteer organizations  Other _____ Employee Groups/Teams:  Problem-solving teams  Work committees  Project teams  Labor union groups  Work crews  Other _____

Task 1. Of those you checked, circle those that you would categorize as a “really great team.”

2. Examine the following table and circle those characteristics from columns two and three that were represented in your “really great” team experiences.

Indicator:  Members arrive on time?  Members prepared?  Meeting organized?  Members contribute equally?  Discussions help members make decisions?  Any disagreement?  More cooperation or more conflict?  Commitment to decisions?  Member feelings after team decision?  Members support decision afterward?

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157 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Good Team Experience:  Members are prompt because they know others will be.  Members are prepared and know what to expect.  Members follow a planned agenda.  Members give each other a chance to speak; quiet members are encouraged.  Members learn from others’ points of view, new facts are discussed, creative ideas evolve, and alternatives emerge.  Members follow a conflict-resolution process established as part of the team’s policies.  Cooperation is clearly an important ingredient.  Members reach consensus before leaving.  Members are satisfied and are valued for their ideas.  Members are committed to implementation.

Not-so-good Team Experience:  Members drift in sporadically, and some leave early.  Members are unclear what the agenda is.  The agenda is tossed aside, and freewheeling discussion ensues.  Some members always dominate the discussion; some are reluctant to speak their minds.  Members reinforce their belief in their own points of view, or their decisions were made long before the meeting.  Conflict turns to argument, angry words, emotion, blaming.  Conflict flares openly, as well as simmering below the surface.  Compromise is the best outcome possible; some members don’t care about the result.  Members are glad it’s over, not sure of results or outcome.  Some members second-guess or undermine the team’s decision.

Source: Michael D. Maginn, Effective Teamwork, 1994, p. 10. © 1994 Richard D. Irwin, a Times Mirror Higher Education Group Inc. Company.

1. Typically, most people categorize very few of the teams they’ve been involved with as “really great.”

2. Obviously, most—if not all—of the circled items should come from column two.

3. Some ideas that you might want to bring out in the discussion generated from this question are:  Everybody pulls together.  Enthusiasm runs high.  Believe in what you’re doing.  Be passionate about achieving your team’s goals.  There was a clear challenge.  The teams must feel like they can make a difference.  Team members need to take individual responsibility for doing their best.  Team members need to look out for each other and care about each other as individuals.  Have a clearly-defined and clearly-communicated vision or goal for the team—one that everybody on the team can take ownership of.  Establish some guidelines among the team members that include adopting the characteristics of a “Good Team Experience” from the chart.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects:

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158 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 28. Specialization Techniques of Henry Ford 29. A Comparison of Policy Manuals (Employee Handbooks) in Selected Firms

Guest Speaker Suggestions 24. A professor or teacher to talk about organizational structure.

25. A representative from a business firm to speak about changes in organizational structure for that firm.

Teaching Suggestions 36. Start the session with a “writing to learn” exercise. Select three or four of the questions in “Check Your Progress.”

Have students choose one of the three or four selected questions and write their answers. Allot only a few minutes for this writing exercise. Call on volunteers or randomly call on students for answers.

37. Cover desired portions of chapter content using the “Lecture Outline and Notes.” If students have been assigned the chapter as a reading assignment, not every fact in the chapter needs to be given in a lecture. Instead, instructors may prefer to use the “Supplemental Lecture” or “Controversial Issue” material to reinforce the reading assignment.

38. Having students draw organizational charts will help reinforce the characteristics of each of the organizational forms.

After the students have drawn their charts individually, have them compare their drawings in pairs (or possibly in teams).

39. Students should have read the boxed material. Go over the discussion questions in class. Spending time on the discussion questions, the case study, the boxed material, etc., helps students analyze and think about what they have learned.

Chapter 8: Managing Service and Manufacturing Operations Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s highlights. Followup via the Connect exercises is then encouraged to provide a holistic understanding of the chapter. Use the hyperlinked Table of Contents below to jump to different sections of the manual.

Table of Contents Chapter Forecast ......................................................................................................................................................................... 159 Learning Objectives ..................................................................................................................................................................... 159 Key Terms and Definitions ........................................................................................................................................................... 159 Content Outline ........................................................................................................................................................................... 162 Boxed Text Critical Thinking Questions ....................................................................................................................................... 170 Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

159 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Careers Abound // in Operations Management / ....................................................................................................................... 171 Bonus Teaching Resources .......................................................................................................................................................... 172 Chapter Review Questions .......................................................................................................................................................... 174 Connect Exercises ........................................................................................................................................................................ 176 Class Discussion Questions .......................................................................................................................................................... 177 Build Your Business Plan.............................................................................................................................................................. 178 Video Case: How Sweet It Is: Creating Supply Chain Efficiencies at the Cocoa Exchange .......................................................... 178 Team Exercise .............................................................................................................................................................................. 179 Build Your Skills ........................................................................................................................................................................... 179 Term Paper or Project Topics ...................................................................................................................................................... 180 Guest Speaker Suggestions ......................................................................................................................................................... 181 Teaching Suggestions .................................................................................................................................................................. 181

Chapter Forecast Here, we discuss the role of production or operations management in acquiring and managing the resources necessary to create goods and services. Production and operations management involves planning and designing the processes that will transform those resources into finished products, managing the movement of those resources through the transformation process, and ensuring that the products are of the quality expected by customers.

Learning Objectives LO 8-1 LO 8-2 LO 8-3 LO 8-4 LO 8-5 LO 8-6

Define operations management.

Differentiate between operations and manufacturing.

Explain how operations management differs in manufacturing and service firms.

Describe the elements involved in planning and designing an operations system.

Specify some techniques managers may use to manage the logistics of transforming inputs into finished products.

Assess the importance of quality in operations management.

Key Terms and Definitions Capacity The maximum load that an organizational unit can carry or operate Computer-assisted design (CAD) The design of components, products, and processes on computers instead of on paper Computer-assisted manufacturing (CAM) Manufacturing that employs specialized computer systems to actually guide and control the transformation processes Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

160 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Computer-integrated manufacturing (CIM) A complete system that designs products, manages machines and materials, and controls the operations function Continuous manufacturing organizations Companies that use continuously running assembly lines, creating products with many similar characteristics Customization Making products to meet a particular customer’s needs or wants Economic order quantity (EOQ) module A model that identifies the optimum number of items to order to minimize the costs of managing (ordering, storing, and using) inventory Fixed-position layout A layout that brings all resources required to create a product to a central location Flexible manufacturing The direction of machinery by computers to adapt to different versions of similar operations Inputs The resources—such as labor, money, materials, and energy—that are converted into outputs Intermittent organizations Organizations that deal with products of a lesser magnitude than do project organizations; their products are not necessarily unique but possess a significant number of differences Inventory All raw materials, components, completed or partially completed products, and pieces of equipment a firm uses Inventory control The process of determining how many supplies and goods are needed and keeping track of quantities on hand, where each item is, and who is responsible for it ISO 9000 A series of quality assurance standards designed by the International Organization for Standardization (ISO) to ensure consistent product quality under many conditions ISO 14000 A comprehensive set of environmental standards that encourages a cleaner and safer world by promoting a more uniform approach to environmental management and helping companies attain and measure improvements in their environmental performance ISO 19600 Provides guidelines for compliance management that address risks, legal requirements, and stakeholder needs Just-in-time (JIT) inventory management A technique using smaller quantities of materials that arrive “just in time” for use in the transformation process and therefore require less storage space and other inventory management expense Manufacturing The activities and processes used in making tangible products; also called production Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

161 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Material-requirements planning (MRP) A planning system that schedules the precise quantity of materials needed to make the product Modular design The creation of an item in self-contained units, or modules, that can be combined or interchanged to create different products Operations The activities and processes used in making both tangible and intangible products Operations management (OM) The development and administration of the activities involved in transforming resources into goods and services Outputs The goods, services, and ideas that result from the conversion of inputs Process layout A layout that organizes the transformation process into departments that group related processes Product layout A layout requiring that production be broken down into relatively simple tasks assigned to workers who are usually positioned along an assembly line Production The activities and processes used in making tangible products; also called manufacturing Project organization A company using a fixed-position layout because it is typically involved in large, complex projects such as construction or exploration Purchasing The buying of all materials needed by the organization; also called procurement Quality control The processes an organization uses to maintain its established quality standards Routing The sequence of operations through which the product must pass Scheduling The assignment of required tasks to departments or even specific machines, workers, or teams Standardization The making of identical, interchangeable components or products Statistical process control A system in which management collects and analyzes information about the production process to pinpoint quality problems in the production system Supply chain management Connecting and integrating all parties or members of the distribution system in order to satisfy customers Total quality management (TQM) Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

162 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual A philosophy that uniform commitment to quality in all areas of an organization will promote a culture that meets customers’ perceptions of quality

Content Outline The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a section on which CONNECT activities can be used in the chapter. This is created so that you can facilitate in-class or online discussion effectively.

LO 8-1 Define operations management.

LO 8-2 Differentiate between operations and manufacturing.  

Introduction The Nature of Operations o The Transformation Process

PowerPoint Slides

Lecture Outline and Notes: XXXVIII.

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Key terms:  Operations management (OM)  Manufacturing  Production  Operations  Inputs  Outputs

The Nature of Operations Management a. Operations management (OM) refers to the development and administration of the activities involved in transforming resources into goods and services. i. Operations managers oversee the transformation process and the planning and designing of operations systems, managing logistics, quality, and productivity. ii. Quality and productivity have become fundamental aspects of operations management because a company that cannot make products of the quality desired by consumers, using resources efficiently and effectively, will not be able to remain in business. iii. OM has historically been called production or manufacturing. iv. Also, the term “operations” represents an interest in viewing the operations function as a whole rather than simply inputs and outputs. v. Production and manufacturing refer to the physical activities and processes used in making tangible goods and services. These two terms are often used interchangeably. vi. Operations describes the activities—including production—involved in producing both tangible and intangible products. b. The Transformation Process i. The transformation process is the process through which inputs are converted into outputs. (Figure 8.1 & Figure 8.2) 1. Inputs are resources such as labor, money, materials, and energy.

2. Outputs are goods, services, and ideas. ii. 2The transformation process combines inputs in predetermined ways using different equipment, administrative procedures, and technology to create a product. iii. To ensure that the transformation process generates quality products efficiently, operations managers control the process by taking measurements (feedback) at various points in the transformation process, comparing measurements to established standards, and taking corrective action for any deviation.

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163 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual iv. Transformation may take place through one or more processes.

LO 8-3 Explain how operations management differs in manufacturing and service firms. 

Key terms:

Operations Management in Service Businesses

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c.

Operations Management in Service Businesses i. Different types of transformation processes take place in organizations that provide services. ii. Unlike tangible goods, services are effectively actions or performances that must be directed toward consumers who use them. Table 8.1 Characteristics of Services iii. Regardless of the level of customer contact, service businesses strive to provide a standardized process. iv. Nature and Consumption of Outputs 1. Manufacturers produce tangible products, while service providers produce intangible products.

2. The very nature of the service provider’s product requires a higher degree of customer contact.

3. The actual performance of the service typically occurs at the point of consumption.

4. Service providers are often more limited than manufacturers in selecting work methods, assigning jobs, scheduling work, and exercising control over operations.

5. The quality of the service experience is often controlled by a service contact employee. v. Uniformity of Inputs 1. Manufacturers typically have more control over the amount of variability of the resources they use than do service providers.

2. Products of service organizations tend to be more “customized” than those of their manufacturing counterparts. vi. Uniformity of Output 1. Because of the human element inherent in providing services, each service tends to be performed differently.

2. Human and technological elements associated with a service can result in a different day-to-day or even hour-to-hour performance of that service. vii. Labor Required 1. Service providers are generally more labor intensive because of the high level of customer contact, perishability of the output, and high degree of variation of inputs and outputs.

2. A manufacturer is likely to be more capital intensive. viii. Measurement of Productivity 1. For manufacturers, measuring productivity is fairly straightforward because of the tangibility of the output and its high degree of uniformity.

2. For service providers, variation in service requirements from job to job and intangibility of the product make productivity measurement more difficult. ix. Most organizations are a combination of manufacturer and service provider, with both tangible and intangible qualities embodied in what they produce.

1. Subway’s tangible inputs are bread, tomatoes and lettuce, while their outputs are customized sandwiches.

LO 8-4 Describe the elements involved in planning and designing an operations

Key terms:

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164 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual system. 

Planning and Designing Operations Systems o Planning the Product o Designing the Operations Processes o Planning Capacity o Planning Facilities o Sustainability and Manufacturing

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XXXIX.

Standardization Modular design Customization Capacity Fixed-position layout Project organization Process layout Intermittent organizations Product layout Continuous manufacturing organizations Computer-assisted design (CAD) Computer-assisted manufacturing (CAM) Flexible manufacturing Computer-integrated manufacturing (CIM)

Planning and Designing Operations Systems a. Before a company can make a product, it must decide what it will produce for what group of customers, what processes it will use to make the products, and what facilities it needs for production. b. Planning the Product i. Before making a product, a company must find out what consumers want and design a product to satisfy that want. ii. Most companies use marketing research to find out what consumers want. iii. Developing a product can be a lengthy, expensive process. iv. The engineering or research and development department is charged with turning a product idea into a workable design that can be produced economically, as well as efficient production of the product. v. Operations managers plan for the types and quantities of materials needed to produce the product, the skills and quantity of people needed to make the product, and the actual processes through which the inputs must pass. c. Designing the Operations Processes i. Before a firm can begin production, it must determine the appropriate method of transforming resources into the desired product. ii. Often, customers’ specific needs and desires dictate the process. iii. Usually products are designed to be manufactured by one of three processes.

1. Standardization is making identical, interchangeable components or even complete products. a. Standardization speeds up production and quality control and reduces production costs, although a customer might not get exactly what he or she wants.

2. Modular design is the creation of an item in self-contained units, or modules, which can be combined or interchanged to create different products. a. Modular design allows products to be repaired quickly, thus reducing the cost of labor, but the component itself is expensive, raising the cost of repair materials.

3. Customization is making products to meet a particular customer’s needs or

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wants. a. Products produced in this way are generally unique. b. Mass customization is making products to meet the needs and wants of a large number of individual customers 4. Blockchain information technology could alter processes throughout virtually every industry including supply chain, health care, and even online advertising. a. The blockchain is a secure, public database (or ledger) that records all transactions and is spread across multiple computers. d. Planning Capacity i. Capacity refers to the maximum load that an organizational unit can carry or operate.

1. The unit of measurement may be a worker or machine, a department, a branch, or even an entire plant.

2. Maximum capacity can be stated in terms of the inputs or outputs provided. ii. Efficiently planning the organization’s capacity needs is an important process for the operations manager.

1. Capacity levels that fall short can result in unmet demand (lost customers).

2. When there is more capacity than needed, operating costs are driven up needlessly due to unused and often expensive resources.

3. To avoid such situations, organizations must accurately forecast demand and then plan capacity based on these forecasts. iii. Once a capacity decision—such as factory size—has been implemented, it is very difficult to change the decision without incurring substantial costs. e. Planning Facilities i. Many products are produced in factories, but others are produced in stores, at home, or where the product ultimately will be used. ii. Companies must decide where to locate their operations facilities, what layout is best for producing their particular product, and even what technology to apply to the transformation process.

1. Some companies are using both physical and virtual locations. iii. Facility Location 1. Once a facility-location decision has been made and implemented, the firm must live with it due to the high costs involved.

2. When making the facility location decision, the firm must pay careful attention to factors such as proximity to market, availability of raw materials, availability of transportation, availability of power, climatic influences, availability of labor, community characteristics (quality of life), and taxes and inducements.

3. The facility location is complex because it involves the evaluation of many factors, some of which cannot be measured with precision. iv. Facility Layout 1. Facility layout—the arrangement of the physical components of an organization—is complex and can be highly technical.

2. There are three basic layouts used in industry. a. A fixed-position layout has a central location for the basic product, and all the resources required to create the product are brought to the location. A company using a fixed-position layout may be called a project organization because it is typically involved in large, complex projects such as construction. b. The process layout organizes the transformation process into departments that group related processes. Intermittent

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f.

organizations, which create products to customers’ specifications and produce relatively few units of each product, use the process layout. c. The product layout breaks down work into relatively simple tasks assigned to workers positioned along an assembly line. Companies that use this layout are known as continuous manufacturing organizations because once they are set up, they run continuously, creating products with many similar characteristics.

3. The chosen layout should best accommodate the type of activities performed in the facility. For instance, Apple stores are designed to make the most efficient use of space. The layout of the store allows customers to test its products before purchasing. v. Technology 1. Every industry has a basic underlying technology that dictates the nature of its transformation process.

2. Additionally, computers and robots have strongly influenced the operations of many businesses. a. Computer-assisted design (CAD) is the design of components, products, or processes on computers instead of paper. b. Computer-assisted manufacturing (CAM) is the use of computers in manufacturing to guide and control the transformation process. c. Computers are also used to monitor and control the transformation process. d. Flexible manufacturing is a system that uses computers to direct machinery to adapt to different versions of similar operations. e. Robots perform a variety of tasks too difficult, dangerous, or repetitive for humans and are becoming increasingly important in assembly line uses, such as spot welding and painting. f. Computer-integrated manufacturing (CIM) is a complete system that utilizes CAD/CAM, flexible manufacturing, and robotics to design products, manage machines and materials, and control the operations function.

Sustainability and Manufacturing i. Manufacturing and operations systems are quickly being remade to reduce negative impacts on the natural environment. ii. Sustainability deals with conducting activities in such a way as to provide for the long-term well-being of the natural environment, including all biological entities. iii. Issues include pollution of land, air and water; climate change; waste management; deforestation; urban sprawl; protection of biodiversity; and genetically modified foods. iv. Sustainability is increasingly important to stakeholders and can lead to improved profits.

LO 8-5 Specify some techniques managers may use to manage the logistics of transforming inputs into finished products. 

Managing the Supply Chain o Purchasing o Managing Inventory o Outsourcing o Route and Scheduling

Key terms:      

Supply chain management Purchasing Inventory Inventory control Economic order quantity (EOQ) model Just-in-time (JIT) inventory

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management Material-requirements planning (MRP) Routing Scheduling

XL. Managing the Supply Chain a. A major function of operations is supply chain management, which refers to connecting and integrating all parties or members of the distribution system in order to satisfy customers. i. Also called logistics, supply chain management refers to all the activities involved in obtaining and managing raw materials and component parts, managing finished products, packaging them, and getting them to customers. ii. The supply chain integrates firms such as raw material suppliers, manufacturers, retailers, and ultimate consumers into a seamless flow of information and products. b. Procurement i. Purchasing (or procurement) is the buying of all raw materials needed by the organization. ii. The purchasing department aims to obtain items of the desired quality in the right quantities at the lowest possible cost. iii. Not all organizations purchase materials; sometimes, a firm can make materials more economically than an outside supplier. Others lease, rather than buy, equipment. c. Managing Inventory i. Inventory is every raw material, component, completed or partially completed product, and piece of equipment a firm uses. ii. There are three basic types of inventory: 1. Finished-goods inventory includes those products that are ready for sale, such as a fully assembled automobile ready to ship to a dealer.

2. Work-in-process inventory consists of those products that are partly completed or are in some stage of the transformation process.

3. Raw materials inventory includes all the materials that have been purchased to be used as inputs for making other products. iii. Inventory control is the process of determining how many supplies and goods are needed to keep track of quantities on hand, including where each item is and who has responsibility for each item.

1. OM must be closely coordinated with inventory control. iv. Inventory managers spend a great deal of time trying to determine the proper inventory level for each item.

1. The economic order quantity (EOQ) model is an approach to inventory management that identifies the optimum number of items to order to minimize the costs of managing (ordering, storing, and using) them.

2. Just-in-time (JIT) inventory management eliminates waste by using smaller quantities of materials that arrive “just in time” for use in the transformation process, and therefore require less storage space and other inventory management expense. a. One downside to JIT inventory management might be shortages if unforeseen circumstances, such as natural disasters, occur. b. At Rushing Waters Canoe, managing inventory involves finding the right balance between excess inventory and not enough inventory.

It uses just-in-time inventory management to minimize inventory costs and become more efficient.

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168 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual c.

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During the COVID-19 (coronavirus)with the resulting company, shutdowns having only enough inventory to meet current needs created delays in production and hurt the company’s bottom line.

3. Material-requirements planning (MRP) is a planning system that schedules the precise quantity of materials needed to make the product. d. Globalization has put pressure on supply chain managers to improve speed and balance resources against competitive pressures. e. Outsourcing i. Outsourcing has increasingly become a component of supply chain management in operations; it refers to the contracting of manufacturing or other tasks to independent companies, often overseas. (Table 8.2) 1. Many athletic shoe manufacturers, such as Nike, outsource production to China and Vietnam to take advantage of lower labor costs. ii. Companies that hire suppliers must make sure that their suppliers are following company standards of conduct, as failure to do so could lead to criticism of the company. iii. Outsourcing has increasingly been linked with the development of a competitive advantage through improved product quality, speeding up the time it takes products to get to the customer, and overall supply-chain efficiencies.

1. Outsourcing allows companies to free up time and resources to focus on what they do best and to create better opportunities to focus on customer satisfaction. iv. However, outsourcing may create conflict with labor and negative public opinion when it results in U.S. workers being replaced by lower-cost workers in other countries. f. Routing and Scheduling i. Routing is the sequence of operations through which the product must pass.

1. The sequence depends on the product specifications developed by the engineering department of the company. ii. Scheduling is the process of assigning work to be done to departments or even specific machines or persons.

1. A popular scheduling technique is the Program Evaluation and Review Technique (PERT), which evaluates the sequence of activities required to complete a project to find the most efficient or critical path.

2. The path that requires the longest time from start to completion is called the critical path because it determines the minimum amount of time in which the process can be completed. a. Producing a Big Mac involves several steps, including grilling the patties; assembling the ingredients; and placing the Big Mac in its package. If any of the activities on the critical path for production fall behind schedule, the sandwich will not be completed on time, causing customers to wait longer than they usually would. (Figure 8.3)

LO 8-6 Assess the importance of quality in operations management. 



Managing Quality o International Organization for Standardization (ISO) o Inspection o Sampling Integrating Operations and Supply Chain Management

Key terms:     

Quality control Total quality management (TQM) Statistical process control ISO 9000 ISO 14000

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ISO 19600

XLI. Managing Quality a. Quality, like cost and efficiency, is a critical element of operations management because defective products can quickly ruin a firm. i. Quality reflects the degree to which a product meets the demands and requirements of customers.

1. For instance, customers often consider the quality of service of many airlines to be poor due to frequent flights delays, lost baggage, etc.

2. Independent sources such as the J.D. Power & Associates annual initial quality survey can be helpful for companies in measuring the quality of their products. (Figure 8.4) ii. A company has to decide which quality characteristics it considers important and then define those characteristics in terms that can be measured. iii. The Malcolm Baldrige National Quality Award is given to companies that meet rigorous standards of quality. iv. Quality control refers to the processes an organization uses to maintain its established quality standards. v. A method companies may use is statistical process control, where management collects and analyzes information about the production process to pinpoint quality problems. vi. To regain a competitive edge, a number of firms have adopted total quality management (TQM), a philosophy that uniform commitment to quality in all areas of the organization will promote a culture that meets customers’ perceptions of quality.

1. TQM involves coordinating efforts to improve customer satisfaction, increase employee participation and empowerment, strengthen supplier partnerships, and form and foster an organizational culture of continuous quality improvement.

2. Continuous improvement of an organization’s products is built around the notion that quality is free; in contrast, not having high-quality products is expensive.

3. A primary tool of continuous improvement is benchmarking, the measuring and evaluating of the quality of the firm’s goods, services, or processes as compared with the quality produced by the best-performing companies in the industry.

4. TQM should be incorporated throughout the transformation process, and quality control should be viewed as an element of the product itself, rather than as a function of the operations process. b. International Organization for Standardization i. Regardless of whether a company has a TQM program, it must first determine what standard of quality it desires and then assess whether its products meet that standard.

1. Product specifications and quality standards must be set so the company can create a product that will compete in the marketplace.

2. Quality standards can be incorporated into service businesses as well. a. Quality standards for manufacturing might be the thickness of metal for amount of a certain material. b. Service industry standards could be things such as how long a customer waits or how many fries are in an order.

3. The next step is inspection. ii. ISO 9000 is a series of quality assurance standards designed by the International

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Organization for Standardization to ensure consistent product quality under many conditions.

1. The standards provide a framework for documenting how a certified business keeps records, trains employees, tests products, and fixes defects.

2. Certification has become a virtual necessity for doing business in some high-technology businesses. iii. ISO 14000 is a comprehensive set of environmental standards that encourages a cleaner, safer world.

1. Helps create a uniform standard across nations with varying regulations iv. ISO 19600 provides guidelines for compliance management that address risks, legal requirements, and stakeholder needs. c. Inspection i. Inspection reveals whether products meet established quality standards. ii. Some inspection techniques are simple—such as weighing or observation—while others are elaborate. iii. Organizations normally inspect purchased items, work-in-process items, and finished items. iv. The inspection of purchased items and finished items takes place after the fact; the inspection of work-in-process is preventive. d. Sampling i. When inspection procedures are expensive to perform, use elaborate testing equipment, destroy products, and require many hours to complete, it is usually desirable to test just a sample of the output. ii. If the sample passes inspection, the inspector may assume that all the items from the lot would also pass inspection. iii. Sampling will probably be used if tests are destructive to the product. iv. If human life or safety depends on the item, 100 percent inspection is called for.

XLII.Integrating Operations and Supply Chain Management a. Managing supply chains requires vigilance and the ability to make quick tactical decisions. i. Managing partners in the supply chain and operations is important because many stakeholders hold the firm responsible for appropriate conduct related to quality. b. Businesses can manage the risks of global supply chains through the following: i. Adopting a Global Supplier Code of Conduct ii. Encourage compliance and procurement employees to work together to ensure ethical sourcing practices at reasonable prices. iii. Create a diverse supply chain to minimize risks iv. Perform regular audits on suppliers to ensure compliance to standards.

Boxed Text Critical Thinking Questions Sunny Skies Ahead for Weather Insights 22. What are some ways that accurate weather predictions can be used to improve business operations?

Weather insights can create competitive advantages where companies can start to reduce costs when weather strikes and increase revenues. Improving the use of weather data could reduce annual legal, insurance, risk mitigation costs, and operational costs.

23. How do you think weather affects a company’s supply chain?

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171 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Weather can affect shipping and delivery.

24. How can NASCAR use the data from The Weather Company to improve operations and create better customer satisfaction?

NASCAR used The Weather Company’s weather data and weather station at each race to improve race operations and fan engagement. This information helped NASCAR “minimize delays” and improved customer experiences.

Walmart Improved Its Supply Chain with Blockchain 22. What are some ways this new technology will affect business?

Answers will vary but companies have used blockchain technology to track shipping containers around the world, thus improving cargo tracking throughout the supply chain. Blockchain more accurately displays all transactions in the ledger as it updates in real time allowing participants to see valuable information, including the location of the asset and who has it in their possession.

23. How might blockchain technology improve the transparency of the supply chain?

Blockchain permits retailers to track items from beginning to end during the supply chain process. Since blockchain is a secure database that records all transactions and is spread across multiple computers, there is no concern of tampering. Additionally, a user can track an item at any time during the supply chain process. Walmart used blockchain to improve logistics and transparency. It used blockchain for tracking the supply of lettuce during an E.coli outbreak to reassure customers that Dole was not part of the outbreak.

24. What are some of the risks of blockchain technology, according to critics?

Blockchain critics point out that people are still required to manually enter the data into the blockchain, which could result in manipulation. Also, people are concerned hackers and criminals will be able to get into the system. decentralized platform and public access of the technology help mitigate these risks?

Target Aims for Bullseye with Supply Chain Improvements 21. Describe the many ways Target is trying to improve its supply chain in order to compete.

Target invested $5 billion toward improving its supply chain and technology infrastructure in a two-year period, including raising its delivery time standards for suppliers and investing in same-day delivery. Then, Target tested a new distribution strategy in order to make its stores quicker at restocking and distributing to stores and customers. It also acquired a same-day grocery delivery service.

22. Why might changes to its inventory management improve Target’s distribution?

Target’s “replenish cycle” took days, but its new distribution strategy reduces that cycle down to hours.

23. What are some of the risks of adopting a just-in-time approach?

Answers will vary but should include delivery delays, inventory depletion, difficulty of replenishing inventory during a crisis, customer dissatisfaction, etc.

Careers Abound // in Operations Management / What role do supply chain managers play in the success of businesses?

Supply chain managers have a tremendous impact on the success of an organization. These managers are engaged in every facet of the business process, including planning, purchasing, production, transportation, storage and distribution, customer service, and more. Their performance helps organizations control expenses, boost sales, and maximize profits.

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172 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Bonus Teaching Resources This section offers bonus teaching resources for class discussion. This is offered in addition to what’s offered in the M: Business text.

“Statistical Quality Control” MiniCase It seems to make sense that if a firm is going to implement a program of quality control, then it would want to check its products carefully to see that each lived up to whatever standard of quality had been established. This careful scrutiny of every unit of the product is ideal, but in some cases, it is impossible. A firm may be producing so many units of a product that it is not cost efficient to check each item.

The textbook points out that a firm using destructive testing cannot test each item. Take an arsenal, for instance. If the firm tests each round of 50-caliber machine gun ammunition manufactured at the arsenal, then there will be nothing left to ship out to the armed forces.

One way to avoid checking each item is through the use of statistical quality control. In this method, quality control personnel take periodic samples from the production process and test them. The theory dictates that if the samples are chosen in a manner that is sufficiently scientific, then statistical sampling is just as efficient as inspecting the entire population of units of a product.

An example of sampling is illustrated by television surveys of American viewers. A few thousand monitors on TV sets scattered across the nation enable rating services to claim that millions of Americans were watching a particular show at a particular time. Some of the TV sampling activity has come under criticism, and Congressional investigation committees have called in representatives of the rating services that measure America’s viewing habits. Audience surveys are a very serious business when you consider that low-rated networks can lose millions of dollars in advertising revenue. Thus, the sampling techniques of the rating services are very important.

If you are a skeptic about sampling, then you will enjoy the anecdote about the 1948 presidential election. All the learned pollsters, with their scientific sampling methods, picked Thomas Dewey to win the election.

As it turned out, Harry Truman won the election.

The question remains whether statistical quality control is as safe as 100 percent inspection. Some years ago at a quality control (QC) conference, an experienced QC practitioner defended sampling by telling this story: One of the QC veteran’s earliest jobs in the field was in a brewery. For several hours at a stretch, he was to look through a magnifying glass at empty beer bottles coming down an assembly line. The bottles themselves were big, and under a magnifying glass they were gigantic. He checked every bottle that went by—every bottle; 100 percent inspection. As a prank, a colleague placed a large wooden clothespin in one of the empty bottles. When the bottle with the pin inside went through the magnifying-glass inspection location, the QC inspector missed it. The point the QC veteran was making was that with 100 percent inspection, concentration and efficiency can still be lost.

The QC veteran would conclude that when each item in the population is thoroughly checked, fatigue of the inspector becomes a factor. If the sample has a problem, the assembly line can be stopped immediately, and the necessary corrections can be made. Therefore, statistical quality control through sampling can be efficient, less costly, and, if set up properly, effective. Statistical quality control can also be transported to fields outside production of goods. Here’s an example.Mary Witcher is in charge of the administrative section of BW Normantics. Recently, the firm has launched a nationwide search for newly graduated scientific talent. Although Mary Witcher has been on the road making the contacts, a personnel officer, Alicia Williams, has handled all the arrangements for having the candidates visit the facilities of BW Normantics at Crescent Bend, Ohio. Alicia had done a tremendous job of keeping up with some 75 candidates—plane tickets, motel reservations, expense Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

173 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual reports, follow-up correspondence, etc. There were some days when Alicia was seeing to the visits of as many as seven candidates simultaneously, and she was still able to keep up with all of it.

Mary Witcher realized that the demands on Alicia were unrealistic. But at the same time, Mary was responsible for Alicia’s job being done in a proper fashion, so Mary decided to give Alicia a “statistical quality control” spot check. Mary came over to Alicia’s desk and engaged in a friendly talk. Although Alicia was not aware of what was actually happening, she was cooperative. First, Mary said, “Alicia, I’d like to check to see if we informed Dr. Melba Mafferson that she was not selected for a position here. Would you be kind enough to pull her file?”

“Okay. Here it is.”

“Everything seems to be in order except that we have not notified Dr. Mafferson that we are not going to make her an offer, and she was here for an interview some three weeks ago.”

“I’ll get on it right away,” Alicia promised.

“How about the folder on Arlene Corliss?”

“Here you are, Ms. Witcher.”

“This looks fine. She was here last week, and you have notified her that we will not be offering her a position.”

“Anything else, Ms. Witcher?”

“No, that takes care of what I needed. Just as a suggestion, Alicia, you might go through your files and be sure that we have notified each candidate who has come here whether we want to see them further or discontinue contact.”

“Yes, Ms. Witcher.”

A quick sampling of Alicia’s filing system revealed one shortcoming out of two files inspected. From this finding, Mary Witcher concluded that Alicia needed a closer item-by-item check. Statistical quality control is valid, and it can be used beyond the factory floor.

Discussion Questions for “Statistical Quality Control” MiniCase 16. What is the purpose of statistical quality control?

Statistical quality control personnel take periodic samples from the production process and test them. The theory dictates that if the samples are chosen in a manner that is sufficiently scientific, then statistical sampling is just as efficient as inspecting the entire population of units of a product.

17. Is it important how Mary Witcher selected the two files that she “spot checked” in Alicia’s filing system?

Yes, it is important. For instance, Mary asked Alicia about the people that didn’t make it in. Since the communication Alicia was sending would be rejection letters (or emails), it probably wasn’t as high a priority to Alicia as informing those who made it in. Also, Mary selected a woman who was interviewed one week earlier versus a woman interviewed three weeks earlier. The timeliness of the samples was important because Alicia seemed to forget about those who had been interviewed a long time before. This shows that statistical samples should be chosen in such a way as to represent the target population accurately.

Controversial Issue: How Much Robotics Is Too Much?

This can be used in a discussion board or for in-class discussion.

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This is an age of automation and computerization. Marvels are possible in our time, but sometimes certain citizens become frustrated with these modern innovations.

For example, there are people who are annoyed by solicitations via the telephone. Such solicitations are often timed for the dinner hour so that family members will be at home, which doubles the bother. Add to this the automated telephone solicitor.

You answer your phone, and a recording begins to speak. Some react by thinking: “If your firm does not think enough of me as a prospective client to have a human call me, then I absolutely refuse to listen to your message.”

More and more robots are being used in industry, and more and more of the products we consume are partially manufactured by the concept we call robotics.

Certainly, the fact that robots save wages for a firm is considerable motivation to employ them. Also, robots do an excellent job of precise, repetitive jobs. But the question arises of whether robots do as good a job as humans. The experts would say that it depends on the task involved and the quality level of the humans replaced in the process.

Discussion Questions for “How Much Robotics Is Too Much?”

21. Suppose you are traveling down the highway in a new car. Would you gain more comfort and security from the knowledge that your car was carefully assembled by ultra-conscientious and highly skilled artisans or some experimental robots being broken in at the factory?

Students’ answers will vary.

22. Would you react favorably to a doctor being assisted by a robot? How would you like the idea of a robot being involved in an operation on you?

Students’ answers will vary.

23. Would the use of a robot save the patient money? If so, would insurance firms opt for robotics operations all the time to cut costs?

It may save money if it makes the doctor’s job easier and more efficient. Insurance firms may like these cost-cutting measures, but they would likely experience much resistance on the part of stakeholders. Consumers will likely not trust robots as much as human doctors. It could take a long time for such trust to develop, and only if robots prove to be safer and more efficient than human doctors. So, it is not likely that consumers would tolerate insurance firms which insist that something like health be completely robotic operated.

Chapter Review Questions 70. What is operations management?

Operations management is the development and administration of the activities involved in transforming resources into goods and services.

71. Differentiate the terms operations, production, and manufacturing.

Production and manufacturing are used interchangeably to represent the activities and processes used in making tangible products. Operations is a broader term, describing those processes used in the making of both tangible and intangible products.

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175 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 72. Compare and contrast a manufacturer versus a service provider in terms of operations management.

Manufacturers and service providers both must schedule and control operations as well as allocate necessary resources. However, though manufacturers and service providers often perform similar activities, they differ in the following five basic ways: (1) nature and consumption of outputs, (2) uniformity of inputs, (3) uniformity of outputs, (4) labor requirements, and (5) measurement of productivity.

73. Who is involved in planning products?

The functions involved in planning products include research, engineering, and operations management. In larger corporations, these functions may be separate departments; however, in smaller companies, one or two individuals may be responsible for all planning functions. It is important to have every part of a firm involved in planning products to ensure that they not only satisfy customers but also allow a firm to achieve its objectives.

74. In what industry would the fixed-position layout be most efficient? The process layout? The product layout? Use real examples.

A fixed-position layout uses a central location for the basic product, and all resources required to create the product are moved to that location. Students’ examples will vary, but a bridge under construction would be one example of fixed-position layout.

The process or functional layout organizes the transformation process into departments according to the type of work to be done. These organizations are known as intermittent organizations and deal with products of lesser magnitude than product organizations. They are able to create a product to a customer’s specifications and produce relatively few units of each product. Students’ examples will vary, but a factory that engages in printing activities would be one example of fixed-position layout.

A product or line layout requires that the work of creating a product be broken down into activities or tasks requiring relatively short periods of time and be assigned to workers positioned along the line. The product moves from one worker to another and each one in turn performs the required tasks or activities. Organizations using this layout are known as continuous manufacturing organizations because once they are set up, they run continuously, creating products with many similar characteristics. Students’ examples will vary, but a company that makes plastic components would be one example of fixed-position layout.

75. What criteria do businesses use when deciding where to locate a plant?

The following factors are considered for plant location: a.

Proximity to market b.

Availability of raw materials c.

Availability of transportation d.

Availability of power e.

Climatic influences f.

Availability of labor g.

Community characteristics h.

Taxes and inducements 76. What is flexible manufacturing? How can it help firms improve quality?

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176 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual In flexible manufacturing, computers direct machinery to adapt to different versions of similar operations. This can help the firm improve quality because one machine can be programmed to carry out its function for several different versions of an engine. This eliminates the need to shut down the production line to refit the machine.

77. Define supply chain management and summarize the activities it involves.

Supply chain management refers to connecting and integrating all parties or members of the distribution system in order to satisfy customers. It includes all the activities involved in obtaining and managing raw materials and component parts, managing finished products, packaging them, and getting them to customers. Its primary activities include purchasing, managing inventory, and scheduling.

78. Describe some of the methods a firm may use to control inventory.

A firm may use a variety of methods to control inventory including economic order quantity (identifies the optimum number of items to order to minimize the costs of managing them), just-in-time inventory management (eliminates waste by using smaller quantities of materials that arrive “just-in-time” for use), and material-requirements planning (a planning system that schedules the precise quantity of materials needed to make the product).

79. When might a firm decide to inspect a sample of its products rather than test every product for quality?

Whether to inspect 100 percent of the output or only part of it is related to the cost of the inspection process, destructiveness of the inspection process, and the importance of the item to the safety of consumers or others. The greater the cost and the more destructive the inspection process, the more likely the firm is to use sampling techniques. However, the more important an item is to the safety of consumers or others, the more likely the firm is to examine all items.

Connect Exercises Below are the available exercises in Connect for this chapter. Please also see the Connect Content Matrix in your Instructor Resource library for additional details on these exercises (including Learning Objectives, topics, Bloom’s level, AACSB, etc.)

56. Managing Call Centers Globally (Case Analysis): Understand that customer call centers are an important part of customer retention, yet call centers are often outsourced to other companies. Companies are now engaging in homeshoring and Artificial Intelligence (AI) to efficiently meet customer needs.

57. Transformation Process (Click & Drag): Understand that operations management is of critical importance. Operations managers oversee the transformation process and the planning and design of operations systems, managing logistics, quality, and productivity.

58. Transformation Process for Goods and Services (iSeeit! Animated Video Case): This brief video describes the efforts that a business owner goes through when creating a finished good/service to provide for its customers.

59. Scaling-Up an Up-Scale Customer Furniture Business (Case Analysis): Demonstrate your understanding of operations management, including planning operations systems and managing the supply chain.

60. Production in the 21st Century (Video Case): Understand the roles of operations management in delivering products and services in a way that is efficient and effective.

61. GANTT and PERT Charts in Action (iSeeit! Animated Video Case): Demonstrate your understanding of two major production scheduling techniques used by companies.

62. Facility Location and Layout (iSeeit! Animated Video Case): Demonstrate your understanding of the considerations surrounding where to place a business, facility location, and how the business should be physically structured to transform resources into goods and services, facility layout.

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177 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Class Discussion Questions 20. Compare and contrast OM at McDonald’s with that of Honda of America. Compare and contrast OM at McDonald’s with that of a bank in your neighborhood.

Sample answer (not exhaustive): McDonald’s

Honda of America

Local bank

Inputs

Human labor, money, management, energy, cooking oil, meat, condiments, pickles, ketchup, mustard, bread, soft drinks, milk, coffee grounds, juice concentrate, water, potatoes, plastic toys, menus, ice cream cones, wrappers

Human labor, money, management, information and customer data, paper, calculators, knowledge

Equipment

Metal forming equipment, machining equipment, car lifts, robotics, conveyor systems, lubrication equipment, wheel spoke spinning machine, assembly line, welding machines, hydraulic press machines, stamping parts, rotational equipment Assembly line

Human labor at factory, salespeople, money, management, energy, engines, braking systems, steel, glass, door panels, windows, rubber, tires, dashboard needles, transmission gears, steering wheel, seats, air conditioner vents, radios, mirrors, paint Drive-thru equipment (loudspeaker, signs), cash registers, ovens, cutlery, playground equipment, fryer, ice cream machine, coffee maker, soda dispensers, ice makers, shelves, food preparation tables (assembly line) Assembly line

_________________

Finished automobiles

A quality food product and an enjoyable environment

Physical Good Contact with customer (services)

Yes None except at dealerships

Yes Extensive

Control over uniformity of outputs

Large amount of control

Level of standardization

Very standardized although car models might differ

Strong control over consistency of food products; less control over service Some customization as consumers can request varying adjustments to their food products

Financial services that can be customized to the needs of customers Possibly (money) Extensive, including online and in-person (high touch and high tech) Financial services must comply with regulatory requirements, although service may vary Mass customization provides opportunities to adjust financial products to needs of specific customers

Method of manufacturing Output

Teller machines, drive-thru equipment, computers, filing systems, ATM machines, counters, drawers

21. Find a real company that uses JIT, either in your local community or in a business journal. Why did the company decide to use JIT? What have been the advantages and disadvantages of using JIT for that particular company?

What has been the overall effect on the quality of the company’s products or services? What has been the overall effect on the company’s bottom line?

Students’ answers will vary based on the company they choose.

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178 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

22. Interview someone from your local Chamber of Commerce and ask him or her what incentives the community offers to encourage organizations to locate there. (See if these incentives relate to the criteria firms use to make location decisions.)

Students’ answers will vary.

Build Your Business Plan You need to stress to the students the growth in the service industry and the effect this has had on all of them. Sometimes students are confused and view the service industry as replacing the manufacturing industry. There has been a shift in the manufacturing sector of outsourcing and importing which has hurt the labor force. However, students need to understand this is only indirectly related to the growth of the service sector.

What students need to understand is that unemployed workers in the manufacturing industry need to consider making the transition to the service sector. Ask students what preparation would be necessary for the labor force to enter the service sector.

Video Case: How Sweet It Is: Creating Supply Chain Efficiencies at the Cocoa Exchange Looking for a way to create incremental, non-cannibalizing growth, Mars, Incorporated—the world’s largest chocolate company—launched The Cocoa Exchange, a stand-alone subsidiary. The Cocoa Exchange sells exclusive and premium chocolate products directly to consumers through a commission-based sales force under three product lines: Pod & Bean, Dove Signature, and Pure Dark. The Cocoa Exchange’s mission is to create incremental, non-cannibalizing growth for Mars through niche products targeting individual consumers rather than the mass market.

The company accomplishes this by creating supply-chain efficiencies (thanks to its parent company) and using the direct selling business model. Direct selling can be a more relationship-driven, customized form of selling and allows for even greater market segmentation. The Cocoa Exchange is able to source its cocoa beans directly from farmers, just like Mars. The company develops relationships with the farmers to improve their yields and income as well as improve its own supply chain.

The Cocoa Exchange aims to improve conditions for farmers so that they can create a larger supply of cocoa. Mars is working with farmers as well to improve their productivity and economic viability through tripling farm yields in three to five years. By partnering with a humanitarian group called The CARE organization, The Cocoa Exchange helps farmers save money and secure loans.

The Cocoa Exchange embraces the direct selling model and has created a commission-based labor force called “curators” to sell its products through in-house parties. Party attendees can sample a range of products from The Cocoa Exchange and purchase the products they like online.

Video Case Discussion Questions 22. Describe how The Cocoa Exchange benefits from Mars, Incorporated’s supply chain.

The Cocoa Exchange is able to source its cocoa beans directly from farmers, just like Mars. However, purchasing and sourcing can be challenging in the chocolate industry because cocoa only grows in a few places around the world. As a Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

179 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual subsidiary of Mars, Incorporated, The Cocoa Exchange benefits from an established and extensive supply chain where it can secure all the materials needed to create its chocolate products.

23. How does The Cocoa Exchange benefit from building relationships with cocoa farmers?

The Cocoa Exchange develops relationships with the farmers to improve their yields and income as well as improve its own supply chain. Mars is working with farmers to improve their productivity and economic viability with the goal of tripling farm yields in three to five years, thus creating a larger supply of cocoa.

24. Why does the exclusive nature of these products increase engagement in the company’s sales force?

Although students’ answers will vary, many students will mention the premium chocolates and other products are carefully handled so that they arrive fresh and in ”mint" condition. The company also has a unique story with its premium food products, careful sourcing, and initiatives to improve the operations of the rural cocoa farmers.

Team Exercise Students will form groups and assign the responsibility of finding companies that outsource their production to other countries. Questions to ask include: What are the key advantages of this outsourcing decision? Do you see any drawbacks or weaknesses in this approach? Why would a company not outsource when such a tactic can be undertaken to cut manufacturing costs? Students will then report their findings to the class.

Build Your Skills Reducing Cycling Time Background An important goal of production and operations management is reducing cycle time—the time it takes to complete a task or process. The goal in cycle time reduction is to reduce costs and/or increase customer service. Many experts believe that the rate of change in our society is so fast that a firm must master speed and connectivity. Connectivity refers to a seamless integration of customers, suppliers, employees, and organizational, production, and operations management. The use of the Internet and other telecommunications systems helps many organizations connect and reduce cycle time.

Task Break up into pairs throughout the class. Select two businesses (local restaurants, retail stores, etc.) that both of you frequent, are employed by, and/or are fairly well acquainted with. For the first business, one of you will role-play the “manager” and the other will role-play the “customer.” Reverse roles for the second business you have selected. As managers at your respective businesses, you are to prepare a list of five questions you will ask the customer during the role-play. The questions you prepare should be designed to get the customer’s viewpoint on how good the cycle time is at your business. If one of the responses leads to a problem area, you may need to ask a follow-up question to determine the nature of the dissatisfaction.

Prepare one main question and a follow-up, if necessary, for each of the five dimensions of cycle time: 1. Speed—the delivery of goods and services in the minimum time; efficient communications; the elimination of wasted time.

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180 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 2. Connectivity—all operations and systems in the business appear connected with the customer.

3. Interactive relationships—a continual dialog exists among operations units, service providers, and customers that permits the exchange of feedback on concerns or needs.

4. Customization—each product is tailored to the needs of the customer.

5. Responsiveness—the willingness to make adjustments and be flexible to help customers and to provide prompt service when a problem develops.

Begin the two role-plays. When it is your turn to be the manager, listen carefully when your partner answers your prepared questions. You need to elicit information on how to improve the cycle time at your business. You will achieve this by identifying the problem areas (weaknesses) that need attention.

After completing both role-play situations, fill out the accompanying form for the role-play when you were the manager. You may not have gathered enough information to fill in all the boxes.

For example, for some categories, the customer may have had only good things to say; for others, the comments may all be negative. Be prepared to share the information you gain with the rest of the class.

I role-played the manager at (business). After listening carefully to the customer’s responses to my five questions, I determined the following strengths and weaknesses as they relate to the cycle time at my business:

Sources: James Wetherbe, “Principles of Cycle Time Reduction,” Cycle Time Research, 1995, p. iv; Stan Davis and Christopher Meyer, Blur: The Speed of Change in the Connected Economy (Reading, MA: Addison-Wesley, 1998), p. 5.

The goal of this exercise is to help students understand the concept of cycle time and the five dimensions of cycle time: speed, connectivity, interactive relationships, customization, and responsiveness. During the role play, students should be able to define the business activities that are related to the dimensions. The main concern is that students gather enough information to complete all boxes. In some cases, it may be hard for them to determine both strengths and weaknesses. For example, in some categories, the “customer” may be able to identify only positive things, and, in some cases, everything may be negative.

The important thing is for the students to understand the variables that relate to cycle time improvement.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

181 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

30. The Influence of W. Edwards Deming on Modern Quality Control 31. A Study of Just-in-Time Inventory Concepts in American Manufacturing 32. Advantages and Disadvantages of Robots in Manufacturing 33. Utilization of Quality Circles in Organizations

Guest Speaker Suggestions 26. A professor of production and operations management to talk about different production and operations processes.

27. A representative of a manufacturing firm to talk about production and operations management processes.

28. A quality-control manager from a local firm to talk about quality-control techniques, statistical sampling, quality circles, or other quality programs employed at that firm.

29. A software representative to demonstrate CAD or CAM applications. Many of these software representatives will have videos or other visual presentations designed to inform potential users about their products. Some of these demonstration packages would be informative for class use.

30. A representative of a firm that markets industrial robots. As in the case of CAD and CAM software, industrial robot representatives may have videos and visual presentations to provide information about the use of industrial robots.

Teaching Suggestions 40. This chapter offers the instructor an opportunity to relate experiences of a visit to a manufacturing plant, or the instructor may ask students to relate their knowledge of the production processes and facility layout of local manufacturing plants. Using local examples will add interest to the discussion. Use this discussion before proceeding to the chapter lecture.

41. Use the PowerPoint slides to enhance the lecture.

42. Emphasize the boxed material and cases in the textbook. Use “Boxed Text Discussion Questions” and answers, which are provided in this Instructor’s Manual. Comments on the case are also given in this Instructor’s Manual.

43. Review the objectives given at the beginning of the chapter (also given at the beginning of each chapter in this Instructor’s Manual). Have students answer without referring to the “Review Your Understanding” at the end of the chapter.

44. A student tour of a manufacturing facility would be ideal, but time and travel considerations often preclude such plans. An alternative is for the instructor to tour a local manufacturing facility and report back to students the different production and operations processes and layout facilities. The instructor might videotape some of the production and operations processes, giving students a view of a local manufacturing facility.

Chapter 9: Motivating the Workforce Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s highlights. Followup via the Connect exercises is then encouraged to provide a holistic understanding of the chapter. Use the hyperlinked Table of Contents below to jump to different sections of the manual.

Table of Contents Chapter Forecast ......................................................................................................................................................................... 182 Learning Objectives ..................................................................................................................................................................... 182 Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

182 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Key Terms and Definitions ........................................................................................................................................................... 182 Content Outline ........................................................................................................................................................................... 184 Boxed Text Critical Thinking Questions ....................................................................................................................................... 191 Would You Be Good // at Motivating a Workforce? /................................................................................................................. 192 Bonus Teaching Resources .......................................................................................................................................................... 192 Chapter Review Questions .......................................................................................................................................................... 195 Connect Exercises ........................................................................................................................................................................ 197 Class Discussion Questions .......................................................................................................................................................... 197 Build Your Business Plan.............................................................................................................................................................. 198 Video Case: The Container Store’s Secret to Success: Employee Satisfaction ............................................................................ 198 Team Exercise .............................................................................................................................................................................. 199 Build Your Skills ........................................................................................................................................................................... 200 Term Paper or Project Topics ...................................................................................................................................................... 201 Guest Speaker Suggestions ......................................................................................................................................................... 201 Teaching Suggestions .................................................................................................................................................................. 202

Chapter Forecast Because employees do the actual work of the business and influence whether the firm achieves its objectives, most top managers agree that employees are an organization’s most valuable resource. To achieve organizational objectives, employees must have the motivation, ability (appropriate knowledge and skills), and tools (proper training and equipment) to perform their jobs. We examine employees’ needs and motivation, managers’ views of workers, and several strategies for motivating employees. Managers who understand the needs of their employees can help them reach higher levels of productivity and thus contribute to the achievement of organizational goals.

Learning Objectives LO 9-1 LO 9-2 LO 9-3 LO 9-4

Explain why the study of human relations is important.

Summarize early studies that laid the groundwork for understanding employee motivation.

Compare and contrast the human relations theories of Abraham Maslow and Frederick Herzberg.

Investigate various theories of motivation, including Theories X, Y, and Z; equity theory; expectancy theory; and goalsetting theory.

LO 9-5 Describe some of the strategies that managers use to motivate employees.

Key Terms and Definitions Behavior modification Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

183 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Changing behavior and encouraging appropriate actions by relating the consequences of behavior to the behavior itself Classical theory of motivation Theory suggesting that money is the sole motivator for workers Compressed workweek A four-day (or shorter) period in which an employee works 40 hours Equity theory An assumption that how much people are willing to contribute to an organization depends on their assessment of the fairness, or equity, of the rewards they will receive in exchange Esteem needs The need for respect—both self-respect and respect from others Expectancy theory The assumption that motivation depends not only on how much a person wants something but also on how likely he or she is to get it Extrinsic rewards Benefits and/or recognition received from someone else Flextime A program that allows employees to choose their starting and ending times provided that they are at work during a specified core period Goal-setting theory Refers to the impact that setting goals has on performance Human relations The study of the behavior of individuals and groups in organizational settings Hygiene factors Aspects of Herzberg’s theory of motivation that focus on the work setting and not the content of the work; these aspects include adequate wages, comfortable and safe working conditions, fair company policies, and job security Intrinsic rewards The personal satisfaction and enjoyment felt after attaining a goal Job enlargement The addition of more tasks to a job instead of treating each task as separate Job enrichment The incorporation of motivational factors such as opportunity for achievement, recognition, responsibility, and advancement into a job Job rotation Movement of employees from one job to another in an effort to relieve the boredom often associated with job specialization Job sharing Performance of one full-time job by two people on part-time hours Maslow’s hierarchy Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

184 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual A theory that arranges the five basic needs of people—physiological, security, social, esteem, and self-actualization—into the order in which people strive to satisfy them Morale An employee’s attitude toward his or her job, employer, and colleagues Motivation An inner drive that directs a person’s behavior toward goals Motivational factors Aspects of Herzberg’s theory of motivation that focus on the content of the work itself; these aspects include achievement, recognition, involvement, responsibility, and advancement Physiological needs The most basic human needs to be satisfied—water, food, shelter, and clothing Reinforcement theory States that behavior can be strengthened or weakened through the use of rewards and punishment Security needs The need to protect oneself from physical and economic harm Self-actualization needs The need to be the best one can be; at the top of Maslow’s hierarchy Social needs The need for love, companionship, and friendship—the desire for acceptance by others Theory X McGregor’s traditional view of management whereby it is assumed that workers generally dislike work and must be forced to do their jobs Theory Y McGregor’s humanistic view of management whereby it is assumed that workers like to work and that under proper conditions employees will normally seek out responsibility in an attempt to satisfy their social, esteem, and self-actualization needs Theory Z A management philosophy that stresses employee participation in all aspects of company decision making

Content Outline The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a section on which CONNECT activities can be used in the chapter. This is created so that you can facilitate in-class or online discussion effectively.

LO 9-1 Explain why the study of human relations is important.  

Introduction The Nature of Human Relations

Key terms:  

Human relations Motivation

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185 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual    PowerPoint Slides

Lecture Outline and Notes: XLIII.

PPT 9.4

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Morale Intrinsic rewards Extrinsic rewards

The Nature of Human Relations a. Human relations is the study of individual and group behavior in organizational settings; it is concerned with what motivates employees to perform their jobs. i. In business, human relations involves motivating employees to achieve organizational objectives efficiently and effectively. ii. A central question for the human resources manager is: “What motivates employees to perform?” iii. Successful companies provide important lessons about how to treat employees.

Most top managers agree that employees are a company’s most important resource. b. Motivation is an inner drive that directs behavior toward goals. i. A goal is the satisfaction of a need, while a need is the difference between a desired state and an actual state. ii. Motivation explains why people behave as they do; a lack of motivation explains why people avoid doing what they should do. iii. Human relations is concerned with the needs of employees, their goals and how they try to achieve them, and the impact of those needs and goals on job performance. (Figure 9.1) iv. Motivating employees to stay engaged is a key responsibility of management.

(Table 9.2) 1. Engagement involves emotional involvement and commitment by the employee.

2. Being engaged results in carrying out the expectations and obligations of employment by the employee. v. A person who recognizes or feels a need is motivated to take action to satisfy the need and achieve a goal.

1. For example, a salesperson whose performance is far below other salespeople’s performance will likely try to change his or her tactics to improve his or her skills. c. Morale is an employee’s attitude toward his or her job, employer, and colleagues. i. High morale contributes to high levels of productivity, high returns to stakeholders, and employee loyalty.

1. When employees have high morale, motivation is high, and goals are achieved ii. Low morale may cause high absenteeism and turnover.

1. Absenteeism can cost a company as much as 36 percent of its payroll. iii. Many companies offer diverse benefits to boost morale and satisfaction, including involving employees in decision making, showing appreciation for their efforts, and creating a pleasant work environment. iv. Human resources managers can also use benefits as well as daily motivational incentives to increase morale. d. Perceptions of rewards i. An intrinsic reward is the personal satisfaction and enjoyment you feel from attaining a goal. ii. An extrinsic reward is the benefit or recognition you receive from someone else. iii. Intrinsic and extrinsic rewards both increase employee motivation.

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186 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual PPT 9.12

iv. Respect, involvement, appreciation, adequate compensation, promotions, a pleasant work environment, and a positive organizational culture are all morale boosters.

LO 9-2 Summarize early studies that laid the groundwork for understanding employee motivation. 

 Historical Perspectives on Employee Motivation o Classical Theory of Motivation o The Hawthorne Studies

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XLIV.

Classical theory of motivation

Historical Perspectives on Employee Motivation a. From early studies, researchers have attempted to find ways to motivate workers. b. Classical Theory of Motivation i. According to the classical theory of motivation, money is the sole motivator for workers and can lead to increased productivity. ii. Frederick Taylor and Lillian Gilbreth conducted studies of employees who performed specific work tasks, which led to time and motion studies.

1. Taylor believed managers should break down each job into component tasks, determine how best to perform each task, and specify the output for each worker in order to improve productivity.

2. Taylor suggested that managers link a worker’s pay directly to output. He developed the piece-rate system, under which employees were paid a certain amount for each unit they produced.

3. Taylor and most early twentieth-century managers generally felt that money and job security were the primary motivators of employees. iii. Managers are increasingly striving to relate pay to performance in order to motivate employees and boost productivity. However, there are other considerations as well. c. The Hawthorne Studies i. Elton Mayo and Harvard researchers continued Taylor’s work in studies at the Hawthorne Works Plant of the Western Electric Company that sought to identify what physical working conditions in the workplace stimulated employees to be most productive. ii. The Hawthorne studies found that productivity increased regardless of the physical conditions; this phenomenon has been labeled “the Hawthorne effect.” iii. The researchers concluded that social and psychological factors could significantly affect productivity and morale. iv. The Hawthorne experiments marked the beginning of a concern for human relations and motivation in the workplace.

LO 9-3 Compare and contrast the human-relations theories of Abraham Maslow and Frederick Herzberg. 

Key terms:

Theories of Employee Motivation o Maslow’s Hierarchy of Needs o Herzberg’s Two-Factor Theory

Key terms:        

Maslow’s hierarchy Physiological needs Security needs Social needs Esteem needs Self-actualization needs Hygiene factors Motivational factors

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187 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual PPT 9.21

XLV.

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Theories of Employee Motivation a. Maslow’s Hierarchy of Needs (Figure 9.2) i. According to Maslow, an employee is motivated by where he or she is at any given time relative to their needs. ii. Managers should understand their employees’ needs in order to discover what the most appropriate motivators would be at any given time. iii. Psychologist Abraham Maslow arranged humans’ five basic needs into Maslow’s hierarchy in the order in which people strive to satisfy them.

1. Physiological needs are the first to be satisfied and include the needs for the essentials of life—water, food, shelter, and clothing.

2. Security needs relate to protecting oneself from physical and economic harm.

3. Social needs are the needs for love, companionship, and friendship—the desire for acceptance from others.

4. Esteem needs relate to the desire for respect—both self-respect and respect from others. Competition is a form of esteem that motivates people to be more productive.

5. Self-actualization is the desire to be the best one can be. iv. Maslow’s theory maintains that needs at the bottom of the hierarchy must be satisfied before higher-level needs can be met. v. Maslow’s theory also suggests that if lower-level needs are reactivated, the individual will try to satisfy that need rather than higher-level needs. vi. Managers can learn from Maslow’s hierarchy that employees will be motivated to contribute to organizational goals only if they first satisfy their physiological, security, and social needs through their work. b. Herzberg’s Two-Factor Theory (Table 9.2) i. Frederick Herzberg studied various factors relating to the job and their relation to employee motivation and concluded that job factors can be classified into two categories.

1. Hygiene factors relate to the work setting rather than the content of the work and include adequate wages, comfortable working conditions, fair company policies, and job security. These factors do not necessarily motivate employees, but their absence may be a source of dissatisfaction.

2. Motivational factors relate to the content of the work and include achievement, recognition, the work itself, involvement, responsibility, and advancement. They promote higher levels of performance. Their absence may not lead to dissatisfaction, but their presence is likely to motivate people to excel. ii. Herzberg’s motivational factors and Maslow’s esteem and self-actualization needs are similar. iii. The higher-level goals in Maslow’s hierarchy and the motivational factors identified

by Herzberg are important in improving productivity.

LO 9-4 Investigate various theories of motivation, including theories X, Y, and Z; equity theory; expectancy theory, and goal-setting theory. o o o o o

McGregor’s Theory X and Theory Y Theory Z Equity Theory Expectancy Theory Goal-Setting Theory

Key terms:      

Theory X Theory Y Theory Z Equity theory Expectancy theory Goal-setting theory

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188 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual c.

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McGregor’s Theory X and Theory Y. i. Douglas McGregor contrasted two views of management, the traditional view called Theory X, and a humanistic view which he called Theory Y. ii. Theory X managers assume that workers generally dislike work and must be forced to do their jobs.

1. Managers maintain tight control over workers, try to motivate through fear, and make autocratic decisions.

2. Theory X assumes that the average worker prefers to be directed, avoids responsibility, has relatively little ambition, and wants security.

3. Managers who subscribe to Theory X maintain tight control over workers, provide almost constant supervision, try to motivate through fear, and make decisions in an autocratic fashion.

4. Theory X focuses on physiological and security needs and virtually ignores the higher needs discussed by Maslow. iii. Theory Y assumes that workers like to work and will normally seek out responsibility to satisfy their social, esteem, and self-actualization needs.

1. Theory Y managers maintain less control and supervision, do not use fear as a motivator, and are more democratic in decision making.

2. Theory Y assumes people will exercise self direction and self-control to achieve objectives to which they are committed.

3. Theory Y makes the following assumptions about how employees see work: a. The expenditure of physical and mental effort in work is as natural as play or rest. b. People will exercise self-direction and self-control to achieve objectives to which they are committed. c. People will commit to objectives when they realize that the achievement of those goals will bring them personal reward. d. The average person will accept and seek responsibility. e. Imagination, ingenuity, and creativity can help solve organizational problems, but most organizations do not make adequate use of these characteristics in their employees. f. Organizations today do not make full use of workers’ intellectual potential.

4. Theory Y managers address the high-level needs in Maslow’s hierarchy as well as physiological and security needs.

5. Theory Y has gained widespread support and has displaced Theory X. d. Theory Z (Table 9.3) i. Theory Z is a management philosophy that stresses employee participation in all aspects of company decision making. ii. Theory Z was developed by William Ouchi, and it incorporates and adapts many elements of the Japanese approach to management.

1. Managers and workers share responsibilities; the management style is participative, and employment is long term.

2. Some have begun to question Theory Z. 3. Theory Z results in employees feeling organizational ownership, and research has found that these feelings of ownership may produce positive attitudinal and behavior effects for employees. iii. Theory Y and Theory Z are complementary. e. Equity Theory i. According to equity theory, how much people are willing to contribute to an organization depends on their assessment of the fairness, or equity, of the rewards they will receive in exchange.

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189 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual ii. In theory, the rewards an individual receives are proportional to the contribution made to the organization. iii. Each worker regularly develops a personal input-output ratio by taking stock of his or her contribution (inputs) to the organization in time, effort, skills, and experience and assessing the rewards (outputs) offered by the organization in pay, benefits, recognition, and promotions. iv. The worker compares his or her input-output ratio to other employees. If the ratios are close, the worker will feel that he or she is being treated equitably. v. An employee who feels that his or her rewards don’t match his or her contributions (in equity) will probably try to get a raise or leave the organization. vi. Almost all issues involved in equity theory are subjective and can cause problems for managers. vii. Managers should try to avoid equity problems by ensuring that rewards are distributed on the basis of performance and that all employees clearly understand the basis for their pay and benefits. f. Expectancy Theory i. Psychologist Victor Vroom’s expectancy theory assumes that motivation depends not only on how much a person wants something but on the person’s perception of how likely he or she is to get it. ii. A person who wants something and has reason to be optimistic will be strongly motivated. g. Goal-Setting Theory i. Goal-setting theory refers to the impact that setting goals has on performance. ii. Peter Drucker came up with management by objectives, which refers to the need to develop goals that both managers and employees can understand and agree upon.

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LO 9-5 Describe some of the strategies that managers use to motivate employees. 

Strategies for Motivating Employees o Behavior Modification o Job Design o Importance of Motivational Strategies

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XLVI.

Key terms:        

Behavior modification Reinforcement theory Job rotation Job enlargement Job enrichment Flextime Compressed workweek Job sharing

Strategies for Motivating Employees a. Based on the theories of motivation discussed earlier, managers have developed a number of strategies for motivating employees to achieve organizational objectives and for boosting morale and productivity. b. Behavior modification involves changing behavior and encouraging appropriate actions by relating consequences to behavior itself. i. Behavior modification is the most widely discussed application of reinforcement theory, the theory that behavior can be strengthened or weakened through the use of rewards or punishments. ii. The concept of behavior modification was developed by psychologist B. F. Skinner, who showed that reward and punishment can modify behavior. iii. If behavior is positively reinforced, or rewarded, that behavior will tend to be repeated, while behavior that is punished will tend to be eliminated. iv. In the long run, rewarding appropriate behavior will generally be a more effective way to modify behavior.

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c.

Job Design i. Managers have several strategies they can use to design jobs to help improve employee motivation. ii. Job rotation allows employees to move from one job to another to relieve the boredom associated with specialization.(Table 9.4) 1. Job rotation allows workers to undertake a variety of tasks and to learn new skills.

2. One drawback of job rotation is that employees may eventually become bored with all the jobs in the cycle.

3. Job rotation is extremely useful when a person is being trained for a position that requires an understanding of the various units in an organization.

4. Job rotation is also used to cross-train today’s self-directed work teams. iii. Job enlargement involves adding tasks to a job instead of treating each task as a separate job.

1. Job enlargement, like job rotation, was developed to overcome the boredom associated with specialization.

2. Jobs are more satisfying as the number of tasks performed by an individual increases. iv. Job enrichment involves incorporating motivational factors such as recognition, responsibility, and advancement into a job.

1. It gives workers more control and authority over the job.

2. It enhances feeling of responsibility and provides opportunities for growth and advancement. v. Flexible scheduling strategies 1. Managers are using flexible scheduling strategies to meet problems of poor motivation and high absenteeism.

2. Flextime is a program that allows employees to choose their starting and ending times as long as they are at work during a specified core period.

(Figure 9.3) 3. A compressed workweek is a four-day (or shorter) period in which an employee works 40 hours.

4. Job sharing occurs when two people do one job. The company benefits by gaining the skills of two people for one job, often at a lower total salary.

Job sharing gives both people an opportunity to work as well as time for other obligations, such as parenting.

5. Other flexible scheduling strategies are being used. a. One strategy allows full time workers to work part time for a certain period. b. Another allows employees to split their time between the office and home. Some firms allow employees to work at home a few days of the week (sometimes called telecommuting).

6. Usually companies offer flexible work schedules to give more options to employees who are trying to juggle work and family responsibilities.

7. Preliminary findings indicate such plans increase job satisfaction, which, in turn, increase productivity. a. More flexible schedules are associated with healthier lifestyle choices such as increased physical activity and healthier sleep habits. b. However, there may be some downsides. Some have found that working from home limits their career advancement opportunities.

Also, telecommuting may blur the boundaries between office and home.

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d. Importance of Motivational Strategies i. Motivation is a process that affects all the relationships within an organization and influences many areas such as pay, promotion, job design, training opportunities, and reporting relationships. ii. Motivating employees to increase satisfaction and productivity is an important concern for organizations seeking to remain competitive in the global marketplace. iii. The economic environment can change an employee’s motivation.

1. In a slow growth or recession economy, sales can flatten or decrease, and morale can drop because of the need to cut jobs.

2. In the most recent recession, many workers feared losing their jobs and increased the amount they were saving.

3. In good economic times, employees may be more demanding and be on the lookout for better opportunities.

4. New rewards or incentives may help motivate workers in such economies. iv. Table 9.5 shows Companies with Excellent Motivational Strategies, along with the types of strategies they use to motivate employees.

Boxed Text Critical Thinking Questions Burgerville’s Employee Motivation Strategy is Hot Off the Grill 25. Is health care a hygiene factor or a motivational factor?

Healthcare is a hygiene factor since it is a benefit and falls under salary.

26. Burgerville offers development programs to help employees advance. Which need does this meet on Maslow’s hierarchy of needs?

This falls under self-actualization since it helps employees be the “best they can be.”

27. Do Burgerville managers seem to adopt a Theory X approach or a Theory Y approach to managing employees?

Explain your reasoning.

Most students will say that Burgerville managers seem to adopt a Theory Y approach to managing employees since they promote a culture where employees advance. It empowers employees by paying competitively within the industry, and it places high precedence on employee input and feedback.

A Perfect Fit: Patagonia’s Passionate Employees 25. How does Patagonia use training and a fun, informal work environment to encourage employees to support Patagonia’s mission?

Patagonia ensures employees understand and support its mission statement using a mix of in-person training, video training, and online instruction to help employees learn about company expectations. Patagonia also creates excitement for the company’s mission with a fun, informal work environment for employees. For example, it instituted a flextime policy that allows employees to go surfing during the day.

26. Why do you think Yvon Chouinard decided to make his company so focused on employee satisfaction?

New employees are hired based in large part on their passion for the firm’s goals. Yvon Chouinard wanted the firm’s main goal to be improving the planet not pursuing profits. At Patagonia, employees are viewed as important partners toward advancing environmental preservation.

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192 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 27. Do you think that an informal work environment that provides employees freedom to take off during the day will be harmful or helpful in the long run? Why? Answers will vary with some students maintaining that an informal work environment fosters collaboration and dedication that will continue to generate long-term success. Others will contend that in the long run an informal environment does not provide enough structure and accountability and will be harmful.

Shoe-In: Zappos’ Culture Motivates Employees 24. Describe some of the ways Zappos motivates its employees.

Zappos uses motivational factors such as empowerment and strong decision-making power to contribute to employee satisfaction. Zappos strives to make work enjoyable. Motivational factors include achievement and collaboration.

25. Where does employee empowerment fall on Maslow’s hierarchy of needs?

Most students will probably say that empowerment falls under esteem and possibly self-actualization. Esteem needs because employee decision-making is emphasized and self-actualization because the employees are encouraged to be their best selves to positively impact the customers.

26. Why do you think Zappos places such emphasis on employees who will embrace its company culture?

Answers will vary but most students will mention the fact that Zappos is organized as a holacracy.

Would You Be Good // at Motivating a Workforce? / Why are human relations programs important in the workforce?

They are necessary to teach employees about sensitivity to other cultures, religions, and beliefs, as well as for teaching the workforce about the organization so that they understand how they fit into the larger picture. Employees need to appreciate the benefits of working together to make the firm run smoothly, and they also need to understand how their contributions help the firm. In order to stay motivated, most employees need to feel like what they do each day contributes something of value to the firm. Disclosing information and including employees in decision-making processes also will help employees feel valuable and wanted within the firm.

Bonus Teaching Resources This section offers bonus teaching resources for class discussion. This is offered in addition to what’s offered in the M: Business text.

“The Importance of Morale and Esprit de Corps in Management” MiniCase There is a tendency in management literature to compare a company with a military unit. The analogy works well when we are talking of mission, organization, discipline, and control. The military example is especially appropriate when we come to the human relations involved in persuading subordinates to accomplish a goal.

When comparing companies and military units, two terms that are frequently used are morale and esprit de corps. Morale generally refers to an employee’s attitude toward his or her job, employer, and colleagues. An employee with high morale would show signs of happiness, contentment, and pleasure in being at the workplace, and freedom from that level of tension that restricts productive output. A successful firm wants its employees to have high morale.

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Whereas morale focuses on the individual’s attitude, esprit de corps refers to both a sense of cohesiveness within a group and a high level of satisfaction (within individuals) with the goals, status, and potential of the group. Traditionally, we have thought of organizations such as the United States Marine Corps, the French Foreign Legion, the British commandos, and General Patton’s Third Army as units with both high morale and a splendid sense of esprit de corps. A member of such a unit was expected to be extremely proud just to be a member of the group. Rituals developed over many years were calculated to keep morale high, and legends and anecdotes kept a special spirit of camaraderie alive along with a deep devotion to the institution and its missions.

Because such groups place high value on good morale and esprit de corps, the test of a leader within these groups was the degree to which the leader could foster these qualities. Officers and top noncommissioned officers, therefore, became adept at noticing when these qualities were beginning to slip and took quick action to correct the lapse. Here is an example of corrective action taken in the United States Army.

Lieutenant Colonel Roger Brakeson commanded the 700-man 12th Tank Battalion on duty in West Germany. The colonel had noticed around the battalion area some signs of a lapse in morale and esprit de corps. It had come to his attention that some of the enlisted men were contemplating requesting a transfer to another outfit. What especially bothered Colonel Brakeson was the rumor that one of his second lieutenants wanted out. Brakeson’s plan to control the damage was announced to his four company commanders at a special meeting at battalion headquarters: Gentlemen, on Friday we’re going to spruce up our team spirit around here. At 1630 hours, this battalion will stage a military review or parade, and I want every man except the guards and cooks to take part. To make the whole affair special, I’ve engaged a 70-piece military band from Heidelberg toplay as our fine troops pass in review. Prior to that, the band will lead a half-mile parade of our men through the village and onto our official parade ground.

Now, we are going to look sharp. Go back and have your men polish every boot and every tiny item of brass on their uniforms. During the week, have your companies work on close order drill; get them shaped up. Have a white glove inspection of both the barracks and the men. This parade has to be the most advanced spit-and-polish affair we have ever had. Do I make myself clear?

One last item—when the parade is over and your men have marched back to the company areas in formation, do not dismiss them until you have given the company the opportunity to come see you with any complaint about anything or a request for transfer. Gentlemen, that’s all. Dismissed.

The military review preceded by a half-mile parade was a resounding success. The troops looked like brightly painted tin soldiers, their rhythm and swagger as they marched were remarkable, and the 70-piece band inspired the utmost faith in the patriotic military way of life.

As ordered by Colonel Brakeson, each company commander announced that he would be happy to have any complaints brought to his office immediately and that requests for transfer would be honored on the spot. Not one member of the battalion stepped forward with a complaint or a request for transfer. When Colonel Brakeson was informed of this result, he was not at all surprised. He had known for a long time just exactly how many men would step forward—none! Many years of military experience had told him that if a soldier was going to be depressed and ready to transfer, such a phenomenon would not surface after a highly successful and inspiring military review on the parade ground.

That beautiful moment at the end of the parade is hard to maintain, but it is amazing how many elite military units can do it.

There are some firms in the civilian world that can keep their workers at such a high state of morale and esprit de corps. Those firms that do usually have a good bottom-line figure each year. Japanese firms do a good job in this way, often starting each workday with the company song. Sam Walton, deceased founder of Wal-Mart, frequently led workers in company cheers.

All of this demonstrates that workers who can strongly identify with what the group or institution is trying to do will be better able to advance the organization and themselves.

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194 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Discussion Questions for “The Importance of Morale and Esprit de Corps in Management” MiniCase 18. Can you explain why a successful military review and parade would be so effective in raising morale and a sense of esprit de corps?

A successful military review and parade could be very successful in raising morale and esprit de corps for several reasons. First, it would cause the military soldiers to feel appreciated. They would feel a sense of cohesiveness with their comrades and a renewed sense of purpose and pride for what they were doing. Also, in the Colonel Brakeson example, the commanders also gave the soldiers the option of bringing their complaints to them, and the soldiers were assured that their transfer requests would be honored on the spot. This made the soldiers feel like their concerns and wishes would be taken seriously, hence making them feel more involved and valued.

19. Will having a military review and parade maintain morale if there are problems within the organization?

While it may serve to boost morale temporarily, continual problems with the organization will likely render a military review and parade ineffective. Employees and organizational needs will continue not to be met. This emphasizes the importance of not only trying to boost employee morale but also giving employees the chance to express concerns.

Managers should then address those concerns to improve the organization and employee satisfaction.

Controversial Issue: A Second Look at Sinclair’s The Jungle This can be used in a discussion board or for in-class discussion.

Early in the 20th century, Upton Sinclair spent several weeks in “Packingtown,” the part of Chicago in which meat-processing plants were located. His assignment was to write a novel about the plight of processing-plant workers. His writing first appeared as a serial in a periodical called Appeal to Reason and was later printed in book form as The Jungle. The Jungle had an immediate impact, but it was not the impact that the author and his sponsors had expected. Passages concerning the filth in which meat was made captured the nation’s attention and led to some corrective federal legislation. The plight of the workers was lost in the shuffle. Let’s look at these workers in greater detail.

Sinclair’s novel and the resulting legislation attacked the owners/operators of the meat-processing plants for the filthy conditions they allowed to exist. For example, the most graphic passages explained in great detail that the processed meat could contain one or more of the following items: rat poison, rat dung, rats, human tuberculosis germs, bread set out (and poisoned) to catch rats, two-year-old sausages that had been rejected at foreign ports of entry, and human urine. Such conditions were deplorable, and the owners/operators received all the blame.

However, if you reread the graphic passages with an open mind, free from anti-management preconceptions, you may pause to carefully consider the actions of workers who carelessly threw dead rats into vats in which sausage was being prepared and scooped up rat dung and poisoned bread and knowingly threw both into the vats.

Individually, the processing-plant workers were unhappy, dissatisfied, uncomfortable, and depressed—the very essence of low morale. As a group, their actions proved that they did not care about the welfare of the employer or the health of the buying public. These workers were not identifying with the organization and its goals. Rather, it was apparent that the workers hated their employer and gained some fleeting glee from doing things to subvert the employer’s goals.

It was many years after The Jungle was published that working conditions improved to any appreciable degree. Federal law quickly improved cleanliness and product standards, however. The lesson to be learned from this information is that enlightened employers should be aware that worker attitudes can still degenerate—as they did in Packingtown—unless management is ever alert to the welfare of workers.

Discussion Questions for A Second Look at Sinclair’s The Jungle

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195 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 24. Who should be responsible for products that do not meet minimum health standards? The owners/operators? Or the workers?

Likely the blame can be laid on all parties: the workers, operators, and owners. The workers should still bear some responsibility for their actions, as they are not just hurting their employer and the business, but also could be causing harm to the public at large. Also, the operators/owners should be held responsible for the deplorable working conditions that were causing such high employee dissatisfaction. Additionally, one could also argue that operators/owners lacked the proper controls to ensure that the meat was fit to eat; their quest for profits not only led to the deplorable work conditions and an indifference to employee suffering, but also represented a complete disregard for public safety.

25. Was there something in the employer’s actions and attitude that drove the workers to such behavior?

Absolutely. The employers exhibited indifference to their employees’ plight. They allowed the employees to work in horrible work conditions and subjugated them to long work hours because they knew they could get away with it and make more money. If one employee quit or was injured, he or she could easily be replaced. These conditions led to extreme dissatisfaction and depression on the employees’ part, and a lack of concern by management for the sanitation of the meat prompted employees to contaminate the meat whenever possible in an attempt at revenge.

26. What had happened to morale and a sense of group spirit?

Morale and esprit de corps were nonexistent. The horrible work conditions and the indifference and downright selfishness of employers made employees feel useless. Knowing that they could be easily replaced, they had no way to make their concerns heard. Additionally, cohesiveness was severely lacking. In fact, friendships and shared goals among employees were likely discouraged due to the competitive atmosphere. Employees knew they could be easily replaced by those who needed work, so they likely felt little motivation to work with other employees at a job that they hated but nevertheless needed.

Chapter Review Questions 80. Why do managers need to understand the needs of their employees?

Managers need to understand the needs of their employees because in an organizational setting individuals and groups need to be satisfied in order to achieve organizational goals. Human relations is concerned with the needs of employees, their goals, and the impact of these needs and goals on job performance. Social and psychological factors significantly affect productivity and morale. Managers who understand employees’ needs, beliefs, and expectations are most successful in motivating them.

81. Describe the motivation process.

Motivational factors relate to the content of the work and include achievement, recognition, the work itself, involvement, responsibility, and advancement. These factors promote higher levels of performance.

82. What was the goal of the Hawthorne studies? What was the outcome of those studies?

In the Hawthorne studies, Elton Mayo and a team of researchers tried to determine what physical conditions in the workplace, such as light and noise levels, stimulate employees to be most productive.

Their studies revealed that social and psychological factors significantly affect productivity and morale.

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196 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 83. Explain Maslow’s hierarchy of needs. What does it tell us about employee motivation?

Abraham Maslow theorized that human beings have five basic needs: physiological, security, social, esteem, and selfactualization. Maslow’s hierarchy arranged these needs in the order in which people strive to satisfy them. Maslow’s theory suggests that employees will be motivated to contribute to organizational goals only if they are first able to satisfy their physiological, security, and social needs through their work.

84. What are Herzberg’s hygiene and motivational factors? How can managers use them to motivate workers?

Hygiene factors relate to the work setting—not work content—and include adequate wages, comfortable working conditions, fair company policies, and job security. Motivational factors relate to the content of the work and include achievement, recognition, the work itself, involvement, responsibility, and advancement. Managers must make certain that hygiene factors are present or workers will become dissatisfied and possibly leave. They can motivate workers by providing motivational factors.

85. Contrast the assumptions of theory X and theory Y. Why has theory Y replaced theory X in management today?

Theory X assumes that (1) workers do not like work and will avoid it when possible; (2) workers must be coerced, controlled, directed, or threatened with punishment to get them to work toward achievement of organizational goals; and (3) workers prefer to be directed, prefer to avoid responsibility, want security, and have little ambition.

By contrast, theory Y assumes (1) the expenditure of physical and mental effort and work is natural; (2) workers will exercise self direction and self-control in the service of objectives to which they are committed; (3) workers will commit to objectives when they realize that achievement to those objectives will bring about their personal reward; and (4) workers will accept and seek out responsibilities.

Probably the main reason theory Y has supplanted theory X is that managers had determined that theory X management styles did not lead to improved productivity. Also, many organizations have studied the success of the Japanese in worker productivity. The Japanese had long ago dropped theory X management styles.

86. What is theory Z? How can businesses apply theory Z to the workplace?

Theory Z stresses employee participation in all aspects of organizational decision making. This theory includes many elements of the Japanese approach to management. Theory Z is less formal and more personal, work relationships are long term, there is less specialization, there is more group decision making, control is more informal, and managers focus on the worker’s whole life. Businesses wishing to apply theory Z have to change to a more participative, employee-involved, or work-team oriented program. This means dropping old traditional manager employee management styles. For theory Z to work, management must be committed to employee involvement.

87. Identify and describe the job-design strategies.

There are several strategies managers may use to structure jobs to promote employee motivation. a. Job rotation allows employees to move from one job to another in an effort to relieve boredom associated with specialization. b. Job enlargement involves adding tasks to a job instead of treating each task as a separate job. c. Job enrichment involves achievement, recognition, responsibility, and advancement into the job situation. d. Flexible scheduling strategies involve deviations from the traditional 40-hour work week consisting of five 8-hour days with fixed starting and ending times.

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197 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 88. Name and describe some flexible scheduling strategies. How can flexible schedules help motivate workers?

Flexible scheduling strategies include: a. Flextime—allows employees to choose their starting and ending times as long as they are at work during a specified core period. b. The compressed workweek—a four-day (or shorter) period in which an employee works 40 hours. c. Job sharing—when two people do one job.

A business may use flexible scheduling strategies to accommodate the needs of employees (students or parents, for example) as well as to motivate them. Alternative schedules may be needed to survive tough economic times.

89. Why are motivational strategies important to both employees and employers?

Motivation can foster employee loyalty and boost productivity. It affects all relationships within an organization and influences many areas, such as pay, promotion, job design, training opportunities, and reporting relationships.

Motivating employees is important for organizations seeking to remain competitive in the global marketplace.

Connect Exercises Below are the available exercises in Connect for this chapter. Please also see the Connect Content Matrix in your Instructor Resource library for additional details on these exercises (including Learning Objectives, topics, Bloom’s level, AACSB, etc.)

63. Employees Love SAS (Case Analysis): Understand that employees must have the motivation, ability (appropriate knowledge and skills), and tools (proper training and equipment) to perform their jobs in order to achieve organizational objectives.

64. Motivation Theories (Click & Drag): Demonstrate your understanding of each of the five popular theories on employee motivation. Place the statements about each philosophy or theory in the appropriate columns according to the key concepts and managerial implications.

65. Wegman's Food Markets (Case Analysis): Understand that motivating employees to increase satisfaction and productivity is an important concern for organizations seeking to remain competitive in the global marketplace.

66. Maslow's Hierarchy of Needs (iSeeit! Animated Video Case): This short video describes how workers have very similar needs in their work life and in their personal life according to the research of Abraham Maslow.

67. Appletree Answers (Video Case): Understand the need and challenge for managers to determine the right theory to meet employees’ desired external rewards in today’s dynamic workplace.

68. Motivating Employees Beyond the Job Description (Case Analysis): Demonstrate your understanding of the employee motivation and apply these concepts to a scenario frequently faced by managers.

69. Fumbling Management Theory (Manager’s Hot Seat Video Case): Understand that there are multiple perspectives that managers need to keep in mind when making decisions. After studying theory, managers may learn the value of bringing rationality to the decision-making process.

Class Discussion Questions 23. Consider a person who is homeless: How would he or she be motivated and what actions would that person take?

Use the motivation process to explain. Which of the needs in Maslow’s hierarchy are likely to be most important?

Least important?

Motivation involves trying to meet both needs and goals. A person who is homeless would be motivated to find a way to meet his or her physiological needs, such as food and shelter. He or she might be motivated to join a program that offers job training or the chance to work, such as the Goodwill. He or she might also try to get involved with a housing

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198 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual program. In this case, physiological needs would be most important, followed by security needs. Because the person is more concerned with surviving, social, esteem, and self-actualization needs are likely to be the least important.

24. View the video Cheaper by the Dozen (1950) and report on how the Gilbreths tried to incorporate their passion for efficiency into their family life.

Students’ answers will vary.

25. What events and trends in society, technology, and economics do you think will shape management theory in the future?

Students’ answers will vary.

Build Your Business Plan Consider having an open discussion with the students about what their previous employers have used to motivate them. Did it cost the employer much to implement this program? Perhaps it wasn’t money, but time, which is an opportunity cost.

Following a discussion of what students think works and what doesn’t as motivators to employees, challenge the students to be creative when selecting motivating techniques that would work for their business.

Video Case: The Container Store’s Secret to Success: Employee Satisfaction Can you form a successful company by selling containers, boxes, and other storage products? The Container Store has shown that the answer is yes. With more than 10,000 products available, The Container Store sells items such as hanging bins, drawers, trash cans, and other items to help make a hectic life more organized. While there might have been skeptics in the beginning, particularly as the firm started out in a small 1,600 square-foot store, the idea quickly caught on with consumers.

“Word of mouth spread incredibly. It was just the oddest collection of merchandising anybody had ever seen to organize your home and to organize your life. A week into it, we knew we had something,” co-founder and CEO Kip Tindell said.

Yet in addition to its unusual product mix, The Container Store is also unique for its dedication to employees. The retail world can be difficult for employees because of high turnover, different work schedules every week, lower benefits, and constant interaction with people. The turnover rate in the retail industry is about 100 percent. This increases training costs, which can cause companies to decrease the amount of training offered. This trend is reversed at The Container Store. First-year fulltime employees receive 263 hours of training, much higher than the industry average of 10 hours. Employees receive 50 percent more pay than at other retail establishments. Employee turnover at The Container Store is a low 10 percent. For more than a decade, The Container Store has been elected as one of the top 100 companies to work for by Fortune magazine.

Yet the satisfaction that employees feel toward the company is not solely a result of higher pay. According to Frederick Herzberg’s two-factor theory, good workplace conditions can prevent dissatisfaction but do not motivate the employee to go above and beyond what is required of them. As CEO of the company, Kip Tindell realizes that the amount of time and effort an employee gives to the company will determine productivity.

“The first 25 percent for any employee is mandatory. If they don’t do that, they’re going to get fired. But the next 75 percent of an employee’s productivity for any business in the world, I believe, is more or less voluntary. You do more or less of it depending upon how you feel about your boss and your product and your company.”

Therefore, to enhance productivity, the firm has made employee satisfaction a priority. Employees come first, followed by customers, and then shareholders. One of the ways that The Container Store motivates its employees is by creating an open communication culture. Employees are encouraged to approach their managers on any topic. This causes employees to feel as Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

199 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual if the organization cares about them enough to take their concerns seriously. The Container Store also holds several events to show their appreciation of employee efforts. For instance, every February 14, The Container Store holds its “We Love Our Employees” day. Employees are given gifts, love songs are played over loudspeakers, and customers are encouraged to write notes of appreciation to their favorite employees.

Employees also receive many perks for working at The Container Store, and even part-time employees are eligible for health care benefits. Because employees take precedence at The Container Store, the company bases its decisions on what is best for employees even during hard times. During the recession, for instance, The Container Store refused to lay off employees. In addition to benefits, employees have access to all company data, including financial reports.

Does this mean that The Container Store ignores its customers for the sake of its employees? The high-quality customer service that The Container Store offers suggests just the opposite. In fact, the extensive employee training and the company’s values demonstrate its high commitment to customer satisfaction. According to Tindell, the key to great customer service, however, is highly motivated employees.

“We believe that if you take better care of your employees than anybody else, they’ll take better care of the customer than anybody else, and if those two guys are ecstatic, ironically enough, your shareholder’s going to be ecstatic too.”

Sources: “100 Best Companies to Work For 2009,” Fortune, http://money.cnn.com/magazines/fortune/bestcompanies/2009/snapshots/32.html (accessed March 7, 2011); “The Container Store: An Employee-Centric Retailer,” UNM Daniels Fund Business Ethics Initiative, http://danielsethics.mgt.unm.edu/pdf/Container%20Store%20Case.pdf (accessed July 30, 2012).

Video Case Discussion Questions 25. Name some of the hygiene factors at The Container Store.

Hygiene factors at The Container Store include a friendly work environment, pay that is 50 percent better than the industry average, relative job security (The Container Store did not lay off employees due to economic constraints), and extensive training. Although these positive factors will likely keep employees from being dissatisfied with their jobs, they do not necessarily lead to employee satisfaction.

26. Name some of the ways that The Container Store motivates its employees.

The Container Store motivates its employees by perks such as health care, an open communication culture, the ability to look at all of The Container Store’s data, and special events such as “We Love Our Employees” Day. A lack of these motivational factors will not lead to employee dissatisfaction, but will not necessarily translate into motivated employees.

27. Do you believe Tindell’s statement that highly satisfied employees will lead to highly satisfied customers and shareholders?

Students’ answers may vary, but it is likely that many students will agree that happy employees that are more vested in the company are willing to work harder and meet customer needs, leading to customer satisfaction. Highly satisfied customers are more likely to do business with a company, which can increase sales and thereby lead to more satisfied shareholders.

Team Exercise Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

200 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Students will form groups and outline a compensation package that they would consider ideal in motivating an employee, recognizing performance, and assisting the company in attaining its cost-to-performance objectives. They should think about the impact of intrinsic and extrinsic motivation and recognition. They should ask themselves the question: How can flexible scheduling strategies be used effectively to motivate employees? Students will then report their compensation packages to the class.

Build Your Skills Motivating Background Do you think that, if employers could make work more like play, employees would be as enthusiastic about their jobs as they are about what they do in their leisure time? Let’s see where this idea might take us.

Task After reading the “Characteristics of PLAY,” place a √ in column one for those characteristics you have experienced in your leisure time activities. Likewise, check column three for those “Characteristics of WORK” you have experienced in any of the jobs you’ve held.

Discussion Questions 1. What prevents managers from making work more like play?

Many managers believe that people can’t enjoy themselves and get work done at the same time. Work, to them, is serious business. Therefore, they tend not to encourage many of the practices outlined in column four of the chart.

Many of these options also cause some managers to feel as though they have lost control over employees’ behavior because the environment is too loose or because employees have so much say about how, where, and when the work gets done.

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201 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 2. Are these forces real or imagined?

For the most part, these forces are imagined because research supports that there is increased productivity in environments that allow creativity, humor, and other less restrictive behaviors to take place. Obviously, it is possible for everybody to be focused on having fun to the point of not getting the job done. As with everything in life, balance is necessary.

3. What would be the likely (positive and negative) results of making work more like play?

Likely positive results are increased synergy, more creative approaches to solving problems, increased feelings of ownership for what’s going on, greater job satisfaction, and increased productivity. Likely negative results are that controlling bosses will not be able to adapt very well to this environment; without the right kind of leadership, these systems can be misdirected; and not all employees are suited to many of these approaches.

4. Could others in the organization accept such creative behaviors?

It depends on how they perceive the behaviors. Most likely, however, if others in the organization see tangible results coming out of work groups characterized by such creative behaviors, they will be more inclined to accept the behaviors.

Suggestions for Use Before assigning the exercise, you might ask some or all of the following questions to lay the groundwork for the exercise.  

What is your favorite recreational activity you enjoy during your leisure time? Maybe you have a passion for playing tennis, rollerblading, hiking in the mountains, water skiing, snowboarding, golfing, or bicycling.

What is it about yourself that is different when you’re “at play,” doing whatever activity it is you enjoy doing, and when you’re “on the job” performing a task?

[Because I have chosen when to play, what to play, and where to play, there are no pressures, deadlines, or requirements imposed on me by others. The freedom that comes from play often does not exist when I’m “on the job,” so my approach to both tend to be totally different.+



What characteristics does “play” possess that “work” often does not that can make play more appealing than work?

[See column two of the exercise chart of the textbook for some ideas here.]

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 34. Advantages and Disadvantages of Flexible Scheduling 35. Japanese Management 36. Frederick Taylor: Father of Scientific Management 37. B. F. Skinner and Behavior Modification 38. Motivational Factors of Frederick Herzberg 39. Analysis of the lack of human relations in Upton Sinclair’s The Jungle

Guest Speaker Suggestions 31. A human relations professor to speak about the study of human relations, motivation, or job design.

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202 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 32. A representative of a business firm to talk about management styles, team concepts, job design, or flexible scheduling. (If the representative cannot come to class, the instructor may wish to go to the firm and videotape segments of the firm to illustrate the different management styles or team concepts.)

33. A management information systems professor to talk about the potential for “telecommuting.”

Teaching Suggestions 45. Begin the class session with a brief writing assignment. Have students write for a few minutes on the following: Why is the study of human relations important? Call on different students to give their written answers. Use these answers and/or your discussion as a lead-in to the lecture.

46. Use the “Lecture Outline and Notes” and slides to emphasize the main points of the chapter.

47. Discuss the “Check Your Progress” questions in the textbook. To give students additional questions, use “Additional Discussion Questions” available in this Instructor’s Manual.

48. Examine the boxed materials. Questions and answers are provided in this Instructor’s Manual.

49. Have students discuss the relative advantages and disadvantages of Theory X, Theory Y, and Theory Z.

Chapter 10: Managing Human Resources Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s highlights. Followup via the Connect exercises is then encouraged to provide a holistic understanding of the chapter. Use the hyperlinked Table of Contents below to jump to different sections of the manual.

Table of Contents Chapter Forecast ......................................................................................................................................................................... 203 Learning Objectives ..................................................................................................................................................................... 203 Key Terms and Definitions ........................................................................................................................................................... 203 Content Outline ........................................................................................................................................................................... 205 Boxed Text Critical Thinking Questions ....................................................................................................................................... 215 Are You Ready // For a Job in Human Resources? / .................................................................................................................... 216 Bonus Teaching Resources .......................................................................................................................................................... 216 Chapter Review Questions .......................................................................................................................................................... 219 Connect Exercises ........................................................................................................................................................................ 221 Class Discussion Questions .......................................................................................................................................................... 221 Build Your Business Plan.............................................................................................................................................................. 222 Video Case: The Importance of Hollywood Labor Unions ........................................................................................................... 222 Team Exercise .............................................................................................................................................................................. 224 Build Your Skills ........................................................................................................................................................................... 224 Term Paper or Project Topics ...................................................................................................................................................... 226 Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

203 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Guest Speaker Suggestions ......................................................................................................................................................... 226 Teaching Suggestions .................................................................................................................................................................. 226

Chapter Forecast This chapter focuses on the quantity and quality of human resources. First, we look at how human resources managers plan for, recruit, and select qualified employees. Next, we look at training, appraising, and compensating employees, aspects of human resources management designed to retain valued employees. Along the way, we’ll also consider the challenges of managing unionized employees and workplace diversity.

Learning Objectives LO 10-1 Explain the significance of human resource management.

LO 10-2 Summarize the processes of recruiting and selecting human resources for a company.

LO 10-3 Describe how workers are trained and their performance appraised.

LO 10-4 Identify the types of turnover companies may experience.

LO 10-5 Explain why turnover is an important issue.

LO 10-6 Specify the various ways a worker may be compensated.

LO 10-7 Evaluate some of the issues associated with unionized employees, including collective bargaining and dispute resolution.

LO 10-8 Describe the importance of diversity in the workforce.

Key Terms and Definitions Affirmative action programs Legally mandated plans that try to increase job opportunities for minority groups by analyzing the current pool of workers, identifying areas where women and minorities are underrepresented, and establishing specific hiring and promotion goals, with target dates, for addressing the discrepancy Arbitration Settlement of a labor/management dispute by a third party whose solution is legally binding and enforceable Benefits Nonfinancial forms of compensation provided to employees, such as pension plans, health insurance, paid vacation and holidays, and the like Bonuses Monetary rewards offered by companies for exceptional performance as incentives to further increase productivity Boycott An attempt to keep people from purchasing the products of a company Collective bargaining Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

204 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual The negotiation process through which management and unions reach an agreement about compensation, working hours, and working conditions for the bargaining unit Commission An incentive system that pays a fixed amount or a percentage of the employee’s sales Conciliation A method of outside resolution of labor and management differences in which a third party is brought in to keep the two sides talking Development Training that augments the skills and knowledge of managers and professionals Diversity The participation of different ages, genders, races, ethnicities, nationalities, and abilities in the workplace Human resources management (HRM) All the activities involved in determining an organization’s human resources needs, as well as acquiring, training, and compensating people to fill those needs Job analysis The determination, through observation and study, of pertinent information about a job—including specific tasks and necessary abilities, knowledge, and skills Job description A formal, written explanation of a specific job, usually including job title, tasks, relationships with other jobs, physical and mental skills required, duties, responsibilities, and working conditions Job specification A description of the qualifications necessary for a specific job, in terms of education, experience, and personal and physical characteristics Labor contract The formal, written document that spells out the relationship between the union and management for a specified period of time—usually two or three years Labor unions Employee organizations formed to deal with employers for achieving better pay, hours, and working conditions Lockout Management’s version of a strike, wherein a work site is closed so that employees cannot go to work Mediation A method of outside resolution of labor and management differences in which the third party’s role is to suggest or propose a solution to the problem Mentoring Supporting, training, and guiding an employee in his or her professional development Orientation Familiarizing newly hired employees with fellow workers, company procedures, and the physical properties of the company Picketing Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

205 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual A public protest against management practices that involves union members marching and carrying anti-management signs at the employer’s plant or work site Profit sharing A form of compensation whereby a percentage of company profits is distributed to employees whose work helped to generate them Promotion An advancement to a higher-level job with increased authority, responsibility, and pay Recruiting Forming a pool of qualified applicants from which management can select employees Salary A financial reward calculated on a weekly, monthly, or annual basis Selection The process of collecting information about applicants and using that information to make hiring decisions Separations Employment changes involving resignation, retirement, termination, or layoff Strikebreakers People hired by management to replace striking employees; called “scabs” by striking union members Strikes Employee walkouts; one of the most effective weapons of labor unions Title VII of the Civil Rights Act Prohibits discrimination in employment and created the Equal Employment Opportunity Commission Training Teaching employees to do specific job tasks through either classroom development or on-the-job experience Transfer A move to another job within a company at essentially the same level and wage Turnover Occurs when employees quit or are fired and must be replaced by new employees Wage/salary survey A study that tells a company how much compensation comparable firms are paying for specific jobs that the firms have in common Wages Financial rewards based on the number of hours the employee works or the level of output achieved

Content Outline

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206 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a section on which CONNECT activities can be used in the chapter. This is created so that you can facilitate in-class or online discussion effectively.

LO 10-1 Explain the significance of human resource management.   

Introduction The Nature of Human Resource Management The Planning for Human Resource Needs

PowerPoint Slides

Key terms:  Human resources management (HRM)  Job analysis  Job description  Job specification

Lecture Outline and Notes: XLVII.

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The Nature of Human Resources Management a. Human resources management refers to all the activities involved in determining an organization’s human resources needs as well as acquiring, developing, and compensating people to fill those needs. i. Managers try maximizing employee satisfaction while motivating them to productively meet organizational objectives. ii. Human resources management has increased in importance over the last few decades.

1. Once dominated by white men, today’s workforce includes significantly more women, African Americans, Hispanics and other minorities, as well as disabled and older workers. iii. Effective human resources managers are aware of changing employee conditions and use them to increase efficiency and productivity. iv. Every manager in an organization practices some of the functions of human resources management at all times.

XLVIII. Planning for Human Resources Needs a. After determining how many employees and what skills are needed to achieve organizational objectives, a firm must ascertain how many employees it currently has and project how many may be retiring or leaving. b. Current and forecasted employee requirements then enable the manager to determine hiring and qualification requirements. c. Next, a strategy for satisfying human resources needs is developed, which may include outsourcing, automation or the use of temporary workers. d. Job analysis determines, through observation and study, the specific tasks that comprise a job; the skills, knowledge, and abilities needed to perform it; and the job environment.

Managers use job analysis in two ways. i. To develop a job description—a formal, written description of a specific job, including job title, tasks to be performed, relationships with other jobs, physical and mental skills required, duties, responsibilities, and working conditions. ii. To develop a job specification—a description of the qualifications necessary for a specific job in terms of education, experience, personal characteristics, and physical characteristics. iii. Both job descriptions and job specifications are used to develop recruiting materials.

LO 10-2 Summarize the processes of recruiting and selecting human resources for a company.

Key terms: 

Recruiting

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207 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 

Recruiting and Selecting New Employees o Recruiting o Selection o Legal Issues in Recruiting and Selecting

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XLIX.

 

Selection Title VII of the Civil Rights Act

Recruiting and Selecting New Employees a. Recruiting is the formation of a pool of qualified applicants from which management will select employees. i. There are two sources for applicants.

1. Internal sources of applicants are the organization’s current employees.

This approach is relatively inexpensive.

2. External sources are outside the firm. a. External sources consist of newspaper and journal ads, employment agencies, recommendations from current employees, unsolicited applications, online websites, and social networking sites. The Ladders and O*net Online are websites used for recruiting. b. Internships are also a good way to solicit for employees. c. This approach is more expensive than hiring from within. d. Recruiting for entry-level managerial and professional positions is often carried out on university campuses. e. For managerial and professional positions above the entry level, employment agencies or executive search firms (headhunters) are often used. b. Selection is the process of collecting information about applicants and using that information to decide which ones to hire. i. The application is the first stage of the process.

1. The applicant usually fills out an application with information on current salary, reason for seeking a new job, years of experience, availability, and level of interest. A brief interview is sometimes included.

2. The goal at this stage is to get acquainted with the applicants and eliminate those obviously not qualified for the job.

3. The process can be lengthy and expensive but necessary in order to find applicants who can do the work and fit into the firm’s structure and culture.

4. Careful hiring saves the company money it would spend later in recruiting, selecting and training replacement employees.

5. Many companies now accept online applications, and some contain a questionnaire.

6. Applications supply basic information such as name and work history, but they also reveal clues about the applicants. Imaginative responses may reveal creativity and hastily written responses could mean a person who does not pay attention to details. ii. The interview is the second phase of the selection process. The interview provides in-depth information both to the company and to the prospective employee.

1. An interviewee’s questions may be as revealing as their answers a. TABLE 10.1 Most Common Questions Asked during the Interview iii. Testing is the third stage of the selection process.

1. Ability, performance, aptitude, IQ, or personality tests may be given to determine whether an applicant has the necessary skills for a certain kind of work and his/her ability to fit into the firm’s culture. a. Myers-Brigg is used to assess an applicant’s potential for a certain

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208 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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L.

kind of job. b. Interestingly, there does not seem to be any difference between introversion and extroversion in making a good manager.

2. Polygraph (lie detector) tests, once a common tool for evaluating applicants’ honesty, were restricted in 1988 to specific government jobs and jobs involving security or access to drugs.

3. Applicants may also undergo physical examinations to determine their suitability for some jobs.

4. Many companies require applicants to be screened for illegal drug use, but this practice is controversial.

5. Because computer knowledge is so essential for many of today’s current jobs, companies may also test an applicant’s typing skills and knowledge of certain computer programs. iv. Reference checking, the final step, involves verifying educational background and previous work experience.

1. Background checking is important because applicants sometimes misrepresent themselves on their applications or résumés. a. An Internet search is often done to determine social media or other public activities.

2. Many organizations will confirm employment but will not release details about the quality of a previous employee’s work. a. TABLE 10.2 Top Ten Most Common Résumé Lies c. Legal Issues in Recruiting and Selecting i. Legal constraints and regulations are present in almost every phase of the recruitment and selection process, and violations can result in lawsuits and fines. ii. Title VII of the Civil Rights Act of 1964 bans discrimination in employment.

1. The Equal Employment Opportunity Commission (EEOC) is the federal agency set up to enforce Title VII of the Civil Rights Act of 1964 and is specifically charged with increasing job opportunities for women and minorities and with eliminating job discrimination based on race, religion, color, sex, national origin, or handicap.

2. Employers must not impose sex distinctions in job specifications, job descriptions, and newspaper ads.

3. The Civil Rights Act of 1964 also outlaws the use of discriminatory tests for applicants. iii. The Americans with Disabilities Act (ADA) prevents discrimination against disabled persons. iv. The Age Discrimination in Employment Act, passed in 1967 and amended in 1978, specifically outlaws discrimination against people 40 and older and also outlaws policies that require employees to retire beforehand. v. The Equal Pay Act mandates that men and women who do equal work must receive the same wage.

Developing the Workforce a. Orientation familiarizes the newly hired employees with fellow workers, company procedures, and the physical properties of the company. i. It generally includes a tour of the facility, introductions, and the distribution of manuals describing the organization’s various policies. ii. It also involves socializing the new employee into the ethics and culture of the company.

LO 10-3 Describe how workers are trained and their performance appraised.

Key terms:

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  

Training Mentoring Development

b. Training and Development i. Training is teaching employees how to do their specific job tasks.

1. On-the-job-training allows workers to learn by actually performing the tasks of the job.

2. Classroom training teaches employees with lectures, conferences, videotapes, case studies, and web-based training. a. One example is McDonald’s Hamburger University. McDonald’s has expanded its Hamburger University into China to train Chinese students in such areas as restaurant management, leadership development and other skills. b. Some are engaging in virtual training and recruitment using technology such as the virtual world Second Life. Amazon, for instance, uses Second Life for recruiting. ii. Mentoring involves supporting, training, and guiding employees in professional development.

1. Provides employees with more one-on-one interactions.

2. Thought beneficial to employees from underrepresented areas. iii. Development is training that augments the skills and knowledge of managers and professionals. iv. Training and development are also used to improve the skills of employees in their present positions and to prepare them for increased responsibility and job promotions. c. Assessing Performance i. A performance appraisal identifies an employee’s strengths and weaknesses on the job. ii. It has three main objectives: 1. It provides employees with feedback on how they are doing and what they need to do to improve their performance.

2. It provides a basis for determining how to compensate/reward.

3. It provides the organization with information about the quality of its selection, training, and development activities. iii. Performance appraisals may be objective or subjective.

1. Objective assessments are quantifiable.

2. Subjective assessments are used when jobs do not lend themselves to objective appraisals. A ranking system is used to assess various performance factors. a. Productivity and quality are two important performance measurements, but many appraisals also include teamwork as well as financial management. iv. Another performance appraisal method used is the 360-degree feedback system, which provides feedback from a panel that typically includes superiors, peers, and subordinates. v. Whether the appraisal is objective or subjective, it is vital that the manager discuss the results with the employee, so that the employee knows how well he or she is doing on the job.

LO 10-4 Identify the types of turnover companies may experience.

Key terms:

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210 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual LO 10-5 Explain why turnover is an important issue. o

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Turnover Promotion Transfer Separations

d. Turnover, which occurs when employees quit or are fired and must be replaced by new employees, results in lost productivity, fees to recruit new employees, management time devoted to interviewing, and costs for new employees. i. Part of the reason for turnover may be mismatched skill sets, overworked employees as a result of downsizing, and a lack of training and advancement opportunities. ii. Turnover is not always an unhappy occasion when it occurs in the form of promotions or transfers.

1. A promotion is an advancement, or vertical movement, within an organization to a position with increased authority, responsibility, and salary. In some companies, the length of time or service determines who should be promoted.

2. A transfer is a move from one job to another within a company. The transferred employee remains at the same wage and job level.

3. A separation is the departure of the employee from the organization because of resignation, retirement, layoff, or termination. (Table 10.3) a. Employees may be terminated, or fired, for poor performance, violation of work rules, absenteeism, and so on. b. Recent legislation and court decisions require that companies fire employees fairly, for just cause only. Managers should therefore exercise care to warn employees when their performance is unacceptable and may lead to dismissal. c. Usually a function of economic trouble, layoffs are sometimes temporary; employees may be brought back when business conditions improve. d. When layoffs are permanent, sometimes companies will help employees find other jobs or extend benefits while the employees search for new employment.

4. Because of the expense of recruiting and training new employees, wellorganized human resources departments try to minimize losses caused by separations and transfers. a. An exit interview is a survey used to determine why the employee is leaving the organization. This can help the organization identify problems.

LO 10-6 Specify the various ways a worker may be compensated. 

   

Compensating the Workforce o Financial Compensation o Benefits

Key terms:       

Wage/salary survey Wages Commission Salary Bonuses Profit sharing Benefits

LI. Compensating the Work Force a. Designing fair financial compensation plans is important because wages and salaries are a Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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substantial portion of an organization’s expenses. i. Wages that are too high may result in high-priced products, while wages that are too low may harm morale and result in turnover. ii. Designing a fair financial compensation plan is a difficult task. iii. A wage/salary survey tells a company how much compensation comparable firms are paying for jobs that the firms have in common. b. Financial Compensation i. Wages are financial rewards based on the number of hours the employee works or the level of output produced.

1. Time wages are based on the number of hours worked. They are easy to compute but provide no incentive to increase productivity.

2. Minimum wage is a federally mandated minimum amount per hour.

3. Some states and municipalities have a higher mandatory minimum wage.

4. Piece wages are based on the level of output. A major advantage of piece wages is that employees are encouraged to supervise their own activities and to increase output. ii. Commissions are payments to an employee for a fixed amount or a percentage of the employee’s sales. This method motivates employees to sell as much as they can. iii. A salary is a financial reward calculated on a weekly, monthly, or annual basis. This method is associated with white-collar workers and professionals. iv. Other forms of financial compensation: 1. Bonuses are an addition to regular compensation and are given as rewards for exceptional performance.

2. Profit sharing is a distribution of a percentage of company profits to the employees whose work helped generate those profits. a. Employee stock ownership plans (ESOPs) have gained in popularity in recent years. b. Profit sharing can motivate employees to work hard, because increased productivity and sales mean that the profits or stock dividends will increase. c. Benefits i. Benefits are nonfinancial forms of compensation provided to employees, such as pension plans, health insurance, life insurance, sick-leave, holidays, credit union membership, health programs, and childcare.

1. Employer costs for compensation in the U.S. average $34.72 per hour worked. Wages and salaries account for 68%, while benefits account for 31%.

2. Legally required benefits (Social Security, Medicare, federal and state employment insurance and workers’ compensation) account for 7.6% of total compensation. ii. Such benefits increase employee security and, to a certain extent, morale and motivation. iii. A benefit increasingly offered is the employee assistance program (EAP).

1. Most EAPs offer counseling for and assistance with employees’ personal problems that might hurt job performance if not addressed (e.g., drug and alcohol abuse, fitness programs, and so forth).

2. EAPs help reduce costs associated with poor productivity, absenteeism, and other workplace issues by helping employees deal with personal problems that contribute to these issues. iv. Companies try to provide the benefits they believe their employees want, but diverse people may want different things. Some companies use fringe benefit programs to allow employees to choose the benefits they would like, up to a

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212 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual specified amount.

1. Traditional fringe benefits include sick leave, pension plans, health plans, bonuses.

2. Soft benefits (to help achieve a work/life balance) include on-site childcare, spas, food service, and even hair salons.

3. Cafeteria benefits plans allow employees to select the benefits most important to them.

LO 10-7 Evaluate some of the issues associated with unionized employees, including collective bargaining and dispute resolution. 

Managing Unionized Employees o Collective Bargaining o Resolving Disputes

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Key terms:           

Labor union Collective bargaining Labor contract Picketing Strikes Boycott Lockout Strikebreakers Conciliation Mediation Arbitration

LII. Managing Unionized Employees a. A labor union is an employee organization formed to deal with employers for achieving better pay, hours, and working conditions. i. Union workers make significantly ($200 per week) more than nonunion employees. ii. Significant aspects of HRM, particularly compensation, are dictated by union contracts at many companies. b. Although unions provide employees with considerable negotiation power, union growth has slowed in recent years, and prospects for growth do not look good. i. Most blue-collar workers have already been organized. ii. The United States has shifted from manufacturing to a more service economy, further reducing the demand for blue-collar workers. iii. An increased focus on productivity and efficiency has led to more participative management, blurring the line between management and workers. iv. Nonetheless, labor unions have been successful in organizing blue-collar manufacturing, government, and health care workers, as well as smaller percentages of employees in other industries. c. Collective Bargaining (Figure 10.1) i. Collective bargaining is the negotiation process through which management and unions reach an agreement about compensation, working hours, and working conditions for the bargaining unit. ii. The objective of negotiation is to reach agreement about a labor contract—the formal, written document that spells out the relationship between the union and management for a specified period of time.

1. In collective bargaining, each side tries to negotiate an agreement that meets its demands; compromise is frequently necessary.

2. Management negotiates to gain or retain control over employment issues (hiring, firing, standards, schedules, and so forth).

3. Unions focus on contract issues such as magnitude of wages, better pay, holidays, better scheduling, and benefits.

4. Many labor contracts contain a cost-of-living escalator clause (COLA).

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213 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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5. Givebacks are wage or benefit concessions given by employees. d. Resolving Disputes i. Sometimes, labor and management cannot agree on a labor contract. ii. When collective bargaining breaks down, either side may resort to more drastic measures to achieve its objectives. iii. Labor Tactics 1. Picketing is a public protest against management practices with workers marching (often waving anti-management signs and placards) at the employer’s plant.

2. Strikes—employee walkouts—are one of labor’s most effective weapons against management; however, they are a weapon of last resort.

3. A boycott is an attempt to keep people from purchasing a company’s products. iv. Management Tactics 1. A lockout is management’s version of a strike; management actually closes a work site so that employees cannot go to work.

2. Strikebreakers are people hired by management to replace striking employees; they are often called “scabs” by union members. It is often a measure of last resort for management. v. Outside Resolution 1. Outside resolution may be necessary if other means of dispute resolution fail.

2. In such cases, the parties have three choices: a. Conciliation involves the use of a neutral third party, a conciliator, to keep labor and management bargaining. The conciliator’s goal is to get both parties to focus on the issues and prevent negotiations from breaking down. b. Mediation involves using a neutral third party, a mediator, to suggest a solution to the problem. This third party has no formal power over labor or management. c. Arbitration involves bringing in a neutral third party, an arbitrator, to decide how to settle the dispute. An arbitrator’s solution is legally binding and enforceable. d. Generally, arbitration occurs on a voluntary basis; management and labor must agree to it. Sometimes, management and labor submit to compulsory arbitration, in which an outside party (usually the federal government) requests arbitration to head off a prolonged strike.

LO 10-8 Describe the importance of diversity in the workforce. 

 

The Importance of Workforce Diversity o The Characteristics of Diversity o Why Is Diversity Important? o The Benefits of Workforce Diversity o Affirmative Action Employee Relationships and Sexual Harassment Trends in Management of the Workforce

PPT 10.42

Key terms:  

Diversity Affirmative action programs

LIII. The Importance of Workforce Diversity a. The Characteristics of Workforce Diversity (Figure 10.2) i. Diversity refers to the participation of different ages, genders, races, ethnicities,

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214 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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nationalities, and abilities in the workplace. (Table 10.4) ii. Differences can be separated into primary and secondary characteristics of diversity 1. Primary characteristics include age, gender, race, ethnicity, abilities, and sexual orientation.

2. Secondary characteristics of diversity include work background, income, marital status, military experience, religious beliefs, geographic location, parental status, and education.

3. Although defining characteristics as primary or secondary can help enhance our understanding, we must remember that each person is defined by the interrelationships of all characteristics. b. Why Is Diversity Important? i. The U.S. work force is becoming more diverse. Employment of women, African Americans, Hispanics, and other minorities, as well as disabled workers, will continue to rise.

1. By 2044, minorities will make up more than 50% of the U.S. population ii. More and more companies are trying to improve HRM programs to recruit, develop, and retain more diverse employees to better serve their diverse customers. iii. Effectively managing diversity in the work force involves cultivating and valuing its benefits and minimizing its problems. c. The Benefits of Workforce Diversity i. There are a number of benefits to fostering and valuing work-force diversity.

1. More productive use of a company’s human resources.

2. Reduced conflict among employees of different ethnicities, races, religions, and sexual orientations as they learn to respect each other’s differences.

3. More productive working relationships among diverse employees as they learn more about and accept each other.

4. Increased commitment to and sharing of organizational goals among diverse employees at all organizational levels.

5. Increased innovation and creativity as diverse employees bring new, unique perspectives to decision making and problem-solving tasks.

6. Increased ability to serve the needs of an increasingly diverse customer base. ii. As work-force diversity becomes a valued organizational asset, companies spend less time managing conflict and more time accomplishing tasks and satisfying customers. d. Affirmative Action i. Many companies strive to improve their working environments through affirmative action programs, which are legally mandated plans that try to increase job opportunities for minority groups by analyzing the current pool of workers, identifying areas where women and minorities are underrepresented, and establishing specific hiring and promotion goals to resolve the discrepancy. ii. Legislation reinforces affirmative action but prohibits organizations from setting hiring quotas that might result in reverse discrimination.

LIV. Employee Relationships and Sexual Harassment a. Sexual Harassment i. Sexual harassment in the workplace has become one of the biggest ethical and legal challenges facing corporations. ii. Sexual harassment is a term used to describe unwanted behavior anywhere from suggestive remarks to sexual assault. iii. Sexual harassment is a term used to describe unwanted behavior anywhere from suggestive remarks to sexual assault.

LV. Trends in Management of the Workforce

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215 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual a. The latest recession caused many businesses to lay off workers, increase responsibilities of workers they retained, and cut benefits. i. As a result, worker grievances increased. b. New technology is blurring the lines between work time and leisure time. c. It is important for managers to be aware of legal issues regarding workers’ rights.

Boxed Text Critical Thinking Questions Ultimate Software Introduces the Ultimate Human Resource Tool 28. How can companies use Xander to understand and manage their human resources?

Answers will vary but Xander machine learning to analyze employee’s responses to open ended questions to improve responses. It gives real-time feedback from the responses to provide companies with the ability to improve employee experience and performance.

29. What types of HR issues would Xander be particularly useful?

Answers will vary but Xander could help companies gain insights into areas like employee satisfaction. In addition to sentiment, Xander can predict workforce behaviors, such as retention.

30. What are some potential HR issues companies using Xander might need to consider when using the tool to solicit employee responses?

Answers will vary but privacy is certainly a concern.

Pay Day: Employers Choose Bonuses Over raises 28. What are some of the benefits of bonuses for companies and employees?

Bonuses give companies the flexibility to lower costs during economic downturns and reward employees when financial performance is good. Companies have found that cutting bonuses is more favorable than cutting salaries during economic downturns. On the other hand, bonuses can lead to increased compensation for top performers.

Companies can use bonuses to reward top performers they deem as strategically important without having to raise wages for all employees. Bonuses are a great tool to attract top-tier talent.

29. What might be some disadvantages of bonuses for employees?

The biggest downside to bonuses is that they are not guaranteed.

30. Do you think that lowering bonuses to increase salaries for the entire workforce will disincentivize top performers at companies?

Answers will vary.

Women “Lean In” to Leadership 27. Do you think “Lean In” and “Lean In circles” will have a long-term beneficial impact?

Answers will vary.

28. Describe some ways that companies can support women in leadership.

Answers will vary.

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216 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

29. In what ways can both men and women maintain a strong work/life balance?

Answers will vary.

Are You Ready // For a Job in Human Resources? / What is the value of having a diverse workforce, and why does it present challenges to human resources managers?

Diversity is an asset and can help a company keep from having blind spots or harmony in thought, background, and perspective which stifles good team decisions. However, a diverse workforce can present some management challenges.

Human resources management is often responsible for managing diversity training and compliance to make sure employees do not violate the ethical culture of the organization or break the law. Different people have different goals, motivations, and ways of thinking about issues that are informed by their culture, religion, and the people closest to them.

Bonus Teaching Resources This section offers bonus teaching resources for class discussion. This is offered in addition to what’s offered in the M: Business text.

“Firing Employees” MiniCase Chapter 10 deals with the topics of promotions, transfers, and separations. Firing an employee is one aspect of management that most managers hate. Despite all the literature about effective management and motivation, there are still times when an employer has to fire an employee.

Firing is a bit more complicated than might have been the case 70 years ago. At that time, it seemed that all a boss had to do was say: “Charlie, at the end of today’s shift, you’re through here at Murkeeville Car Markers. I’ve put two extra weeks of pay in your pay envelope.” In those days, Charlie didn’t know that he might be able to pursue legal action. Charlie might not have had a union to stand behind him and possibly get the firing decision overturned.

However, Charlie could make things tough for the boss by any number of emotional reactions to being fired. (The same reactions are often replayed today.) Charlie could have broken down and cried, punched his boss in the nose, spread malicious lies about his boss, placed a bomb in company headquarters, or taken any number of other possibly bizarre actions.

Today, an employee, in many cases, will sue an employer over what the employee believes to be an unfair discharge. And very often, there is considerable merit to the employee’s case. Firing an employee is not a routine matter that a manager handles with ease. Because of managers’ lack of daily experience in dismissing people, many firings are bungled badly. And when the fired employee and his or her attorney look over the chain of events involved, it may become clear that established procedures were not followed.

Firing procedures vary from company to company, but here is a list of good suggestions gleaned from the experiences of several firms and their employees.

1. Have adequate documentation before firing. If it is your contention that the employee is a troublemaker, you should be able to back up that contention with written documentation. Many firms (often in conjunction with their unions) have worked out a system in which an employee is given one or two oral reprimands for improper conduct. Although an employee is told orally of his shortcomings, his personnel file also receives a note from the supervisor reading something like: “On May 5, 2002, I had to caution Frank about his continued use of profanity in our day nursery for employees’ children.” After the prescribed number of oral warnings, Frank will receive letters, copies of which will go Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

217 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual into his personnel file. Such a letter could read: “This date, May 30, 2002, your supervisor and four members of the shift (Al Bean, Fred Toker, Amy Wilson, and Lu Thurgen) informed the plant manager that your degree of inebriation was such as to prevent you from performing your regular job. You were sent home. A repeat of this conduct will result in your suspension.”

If it becomes necessary to fire Frank, the manager assigned the unpleasant task will feel bolstered if he or she has a folder on Frank that is crammed with documentation that Frank is indeed a troublemaker. If litigation follows the firing, that folder will be of utmost importance to the firm in defending itself.

2. Have at least one very serious meeting with the person to be fired PRIOR TO the meeting for firing. Several such meetings should take place. This will prevent a firing coming as a complete surprise to the employee. A good manager will make every effort to save the employee’s job, and these preliminary meetings are an effort in that direction. Such a meeting is like a life preserver thrown to a drowning person: “Grab hold and perhaps we can save you.” The trouble is that there will be some employees who will refuse to grab hold. An employer was once told by an employee, as the two met for a second time to discuss the employee’s attitude: “I’m not just going to sit here and take another scolding.” The employer had no choice but to respond: “If you won’t take a scolding, then perhaps you are through here.”

3. Do NOT handle a firing all by yourself. There is something courageous about handling your own firing duties, but such a move is also foolish. Invite a colleague in management to sit with you as you tell the employee of his or her dismissal. Bring along two colleagues if you want. Under no circumstances should you go alone to a firing when the employee will be accompanied by a union official or other colleagues. Different versions of what went on at a firing can develop, and you want a colleague present to verify your version of the incident. Also, if the employee reacts in a manner that is socially irresponsible, it can be a great comfort to know you have support at the scene. Having such support may discourage the employee from losing control of his or her emotions.

4. Keep cool. Although there may have been times when you were so exasperated with the employee in question that you wanted to shout and curse, the firing moment is not the time for your emotional release. You should allow time for as much anger as possible to dissipate. When the ultimate words must be uttered, with as little emotion in your voice as possible, try to cushion the blow. You might try: “So, you see, Frank, it just seems best for you and the company that we come to a parting of the ways. I know this will be a big adjustment, and I am personally sorry that….”

5. Be prepared for anything. Part of keeping cool is being prepared for all possible reactions. Don’t be shocked if Frank starts to shout obscenities at you; expect that and more. If your colleague has never witnessed a firing, then clue him to the fact that the employee may very well erupt emotionally. Assuming that the employee will act professionally is a very dangerous assumption.

It is hoped that those listening to this lecture will never have to fire an employee. Unfortunately, that is a vain hope because managers sometimes encounter employees who are no longer assets to the firm and who must be discharged as quickly and painlessly as possible.

Discussion Questions for “Firing Employees” MiniCase 20. What is the first step for the manager to take before the firing?

The first step is to have adequate documentation before the firing. When an employee acts inappropriately, managers should record the incident(s) with appropriate documentation. Also, since many managers choose to give employees warnings, it helps to document those warnings as well. Appropriate documentation will help bolster the manager’s confidence during the firing, show the logic of the manager’s decision, and aid the company later should the employee try to sue.

21. What reactions may a manager find when firing an employee today?

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218 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Many fired employees try to sue the firm and may succeed if the company cannot prove it had just cause for firing the employee.

22. How many persons should be present during the actual firing of an employee?

The manager/supervisor and one or more of his/her colleagues should be present to verify what went on during the firing and to help keep the process from getting out of control.

Controversial Issue: How Easy Is It to Be an Arbitrator?

This can be used in a discussion board or for in-class discussion.

Unlike mediation and conciliation, arbitration leads to a binding decision that in most cases will settle the issue permanently.

As you can see, an arbitrator must take his or her role very seriously because his or her decision will have a significant impact on people’s lives. An arbitrator does not necessarily pick a middle ground that will satisfy both sides. He or she will carefully consider the facts in the case and then make a ruling; often, such a ruling will grant to one side everything it could have hoped for.

Note to Instructors: Help your students step into the kind of controversy that an arbitrator must deal with. Two sides of a dispute have been sketched below. Bring both sides to the attention of your students and have them decide which kind of directive would settle the impasse in the most fair and equitable manner. The situation could be transformed into a role play by having some students represent each of the sides in the issue and then leaving a student or group of students with the task of arriving at a fair settlement.

Here are the sides to the dispute turned over to an arbitrator.

Management Dillon Haskill reported to work 30 minutes late on April 4. This is not the first time Haskill has been late, and on previous occasions he has been warned that a repeat of this tardiness without a good excuse could mean suspension or dismissal.

When he was tardy on April 4, Dillon Haskill was given yet another warning by his supervisor. After hearing this warning, Haskill became angry and began cursing his supervisor. Haskill had to be restrained by some fellow workers. Because of his habitual tardiness and his attack on his supervisor, Dillon Haskill was dismissed and given three weeks of pay at the end of the April 4 workday.

Labor Dillon Haskill has never been given a written warning that tardiness will not be tolerated. His personnel record in the human resources office will verify this. When Dillon reported for work on April 4, he was met at the door by his supervisor, who began throwing curses at Dillon. When Dillon tried to respond quietly to these taunts, several management personnel (other supervisors) brutally grabbed Dillon from behind. Further, on April 4, there were seven other employees who were later than Dillon, and they received no reprimand, formal or otherwise. It is our contention that Dillon’s supervisor does not like Dillon and is just making serious trouble for him.

It is possible for your students to make a decision using the above information. However, if an arbitrator felt that the above evidence or testimony was incomplete, then he or she would request more data or call in more witnesses to the incident.

Although the two versions of the story differ, it is possible that the versions are merely highly subjective interpretations of what took place. In an effort to make a fair ruling, an arbitrator must often read between the lines in reconstructing just what happened.

Discussion Questions for How Easy Is It to Be an Arbitrator?

27. What should the arbitrator’s decision be? Can there be a compromise in the dispute?

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219 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Students’ answers can vary, as long as they adequately support their responses.

28. Could management avoid some of the problems brought out in this controversy by published policies and rules?

Management could probably have avoided some of these problems by publishing policies and rules. Then Dillon could not have used the excuse that he didn’t know the policies on tardiness. As Dillon claims that other employees were tardier than he was and did not receive reprimands, these policies would also supply written guidelines that all the managers at the company could use to reprimand other employees who were tardy. This would maintain fairness and apply appropriate disciplinary measures to other employees who exhibited similar behavior.

Chapter Review Questions 90. Distinguish among job analysis, job descriptions, and job specifications. How do they relate to planning in human resources management?

Job analysis is observing the specific tasks that make up a job; the skills, knowledge, and abilities needed to perform it; and the job environment. A job description is a formal, written description of a specific job. A job specification is a description of the qualifications necessary for a specific job. Employment analysis establishes the general personnel requirements of the business. Next, managers analyze the jobs within the organization to match the human resources to the available jobs.

91. What activities are involved in acquiring and maintaining the appropriate level of qualified human resources?

Name the stages of the selection process.

Human resources managers are concerned with maximizing employees’ satisfaction and improving their efficiency to meet organizational objectives. Human resources managers are involved with planning and forecasting, recruitment and selection, training and development, and determining compensation. The selection process includes an application, interview, testing, and reference checking.

92. What are the two types of training programs? Relate training to kinds of jobs.

Training is teaching employees how to do their job; development is teaching managers and professionals how to perform their jobs. On-the-job-training allows workers to learn by actually performing the task on the job under the guidance of an experienced employee. Classroom training consists of lectures, conferences, films, case studies, and other classroom teaching techniques to teach employees about a job and its requirements.

93. What is the significance of a performance appraisal? How do managers appraise employees?

The performance appraisal is identifying an employee’s strengths and weaknesses on the job. It is one of the most difficult tasks for managers. It provides employees with feedback on how they are doing and what they need to do to improve their performance. It provides a basis for determining how to distribute rewards. It provides the organization with information about the quality of its selection, training, and development activities.

Appraisals can be objective or subjective. Whether objective or subjective, the manager uses the performance appraisal to discuss the results with the employee.

94. Why does turnover occur? List the types of turnover. Why do businesses want to reduce turnover due to separations?

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220 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Turnovers can occur because they are initiated by the employer or by the employee. Sometimes the turnovers, especially layoffs, are initiated because of economic downturns. The types of turnover include promotions, transfers, and separations. Promotion is advancement to a higher-level job with increased authority, responsibility, and pay. A transfer is a move to another job within the company at essentially the same level and wages. Separations include resignation, discharge, layoff, and retirement. Businesses want to reduce turnover due to separation because selection and training of new employees is an expensive and time-consuming process.

95. Relate wages, salaries, bonuses, and benefits to Herzberg’s distinction between hygiene and motivation factors.

How does the form of compensation relate to the type of job?

Frederick Herzberg’s theory of motivation focused on job factors, as discussed in Chapter 9. Hygiene factors relate to the work setting and include adequate wages, comfortable working conditions, fair company policies, and job security. Motivational factors relate to the content of the work and include achievement, recognition, the work itself, involvement, responsibility, and advancement. It should be obvious to students that adequate wages, salaries, and benefits are necessary hygiene factors for employees.

In general, salaries are associated with white-collar workers such as office personnel, executives, and professional employees. Time-based wages are associated with blue-collar workers, clerks, maintenance personnel, and so forth.

Finally, piece-based wages are associated with skilled craftworkers, while commissions are associated with certain types of sales positions.

96. What is the role of benefits? Name some examples of benefits.

The role of benefits is to attract and help retain employees, increase employee security and, to a certain extent, increase morale and motivation. In addition, utilization of the benefits may keep employees healthy and productive, thereby reducing absenteeism, waste, and turnover. Some examples of benefits include pension plans, holidays, health programs, employee assistance programs, health insurance, and so forth.

97. Describe the negotiation process through which management and unions reach an agreement on a contract.

Collective bargaining is the negotiation process through which management and unions reach an agreement about issues such as compensation, working hours, and working conditions. The union prepares a list of concessions that it wants from management; management defines what it is willing to concede to the union and still maintain a reasonable level of profitability. Management tries to maintain control over work schedules, the hiring and firing of workers, production standards, and other work policies. Unions tend to focus on issues such as magnitude of wages; better pay rates for holidays; overtime; undesirable shifts; scheduling of pay increases; and benefits. After union representatives and management negotiate issues and reach agreement on terms of a contract, union members vote on the contract. If they ratify the contract, it becomes the legally binding agreement for union and management for a specified period.

98. Besides collective bargaining and grievance procedures, what other alternatives are available to labor and management to handle labor disputes?

Both labor and management can use pressure tactics to resolve disputes. Although most labor disputes are handled through collective bargaining or grievance procedures, sometimes management or labor may resort to more drastic measures to achieve their objectives. Labor might use picketing or boycotts. Picketing is a public protest against management practices and involves union members marching—often waving antimanagement signs and placards—at Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

221 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual the employer’s plant or worksite. Boycotts are an attempt to keep people from purchasing the products from a company. The most effective weapon wielded by unions against management is the strike. Striking makes carrying out the normal operations of a business difficult or impossible. A lockout is management’s version of a strike; management actually closes down the workplace so the employees cannot work. Strikebreakers are people hired by management to replace striking employees; they’re sometimes called scabs. Sometimes a third party may be brought in to aid in conciliation, mediation, or arbitration.

99. What are the benefits associated with a diverse workforce?

Some of the benefits of work-force diversity include a more productive use of a firm’s human resources, reduced conflict among employees, increased attention to organizational goals, increased innovation and creativity in decision making and problem solving, and greater ability to serve a diverse customer base.

Connect Exercises Below are the available exercises in Connect for this chapter. Please also see the Connect Content Matrix in your Instructor Resource library for additional details on these exercises (including Learning Objectives, topics, Bloom’s level, AACSB, etc.)

70. Lululemon Selects for Culture Fit (Case Analysis): Demonstrate your understanding of how Lululemon selects new employees based on cultural fit.

71. Burned by the Firewall (Manager’s Hot Seat Video Case): Understand that performance appraisal is crucial because it gives employees feedback on how they are doing and what they need to do to improve their performance. It also provides a basis for determining how to compensate and reward employees, and it generates information about the quality of the firm's selection, training, and development activities.

72. Types of Compensation (Click & Drag): Demonstrate your understanding the different types of compensation and how that compensation is determined.

73. Job Analysis (iSeeit! Animated Video Case): This brief video helps to describe the idea of a job analysis, how one is created, and what it is used for in the human resource management process.

74. Mediation vs. Arbitration (iSeeit! Animated Video Case): This brief video explains how union employees and management solve grievances and other disputes when operating within a collective bargaining agreement.

75. Teach for America (Video Case): This video features Teach for America (TFA), a non-profit training and development organization that seeks to attract qualified volunteers to teach in under-represented and under-performing K-12 schools.

76. Considering Human Resource Management at InPact (Case Analysis): Demonstrate your understanding of human resource management and consider how the different components of human resource management help managers recruit, train, and compensate employees.

77. Working with Unions at Freeman (Video Case): Demonstrate your understanding of the HRM process and union labor.

78. Key Employment Laws (iSeeit! Animated Video Case): Demonstrate your understanding of the laws that govern workers.

Class Discussion Questions 26. Although many companies screen applicants and test employees for illegal drug use, such testing is somewhat controversial. Find some companies in your community that test applicants and/or employees for drugs. Why do they have such a policy? How do the employees feel about it? Using this information, debate the pros and cons of drug testing in the workplace.

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222 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Students’ answers will vary depending upon the company they choose.

27. If collective bargaining and the grievance procedures have not been able to settle a current labor dispute, what tactics would you and other employees adopt? Which tactics would be best for which situations? Give examples.

Most likely students will choose to strike, picket, or boycott. Boycotts may be good for situations where employees are strong enough to band together to make a difference. If the situation is severe enough, employees might even be able to get consumers to join in their cause. Human rights violations might be a good example of a situation where boycotts can be effective. Picketing would be good in situations in which employees need to arouse sympathy for their cause. Situations might include cuts in benefits. Students should realize that strikes are the riskiest and should be used as a last resort. The strikes in Chicago over teacher pay is a good example of a situation where striking might be used.

28. Find some examples of companies that value their diverse workforces, perhaps some of the companies mentioned in the chapter. In what ways have these firms derived benefits from promoting cultural diversity? How have they dealt with the problems associated with cultural diversity?

Students’ answers will vary.

Build Your Business Plan Have students identify how they have learned about jobs they have applied for in the past. What sources work best in your community? Assuming the majority of employees (if not all) they will be hiring will be part-time, ask them in class to go through the steps they need to proceed through to determine the size of their workforce. This will force them to start thinking about how to organize their business.

Video Case: The Importance of Hollywood Labor Unions You might be familiar with unions for teachers or autoworkers. But what about unions for actors, radio artists, and screenwriters? Because we tend to view Hollywood as a glamorous place, we are tempted to view unions as unnecessary for these types of professions. Yet Hollywood unions were, and continue to be, important players in the careers of Hollywood artists.

When actors first became mainstream in the early 20th century, working conditions for the industry included long work weeks and low pay. Studios essentially “owned” their artists, which meant that rival studios would not hire actors or actresses once their contracts ended. Actors were forced to work for the same studio to advance their careers. Negotiations with studios often proved fruitless.

Because strikes can be so disruptive and risky, they are often used as a last resort. Yet, in 1919 the Actors’ Equity Association, a union for theatrical performers, and the American Federation of Labor staged a Broadway strike to protest harsh working conditions. The strike resulted in a five-year contract and promises to improve labor conditions. Although the event happened off Broadway and not in Hollywood, it would inspire other artists to begin forming their own unions.

Working conditions might have improved somewhat for theatrical actors, but radio artists, film actors, and screenwriters still had to bear with hard conditions. For instance, radio artists might do an entire show and then receive only a dollar. Film actors would work around the clock with few (if any) breaks. Screenwriters experienced salary cuts. As individuals, these artists did not have much bargaining power with studios. Realizing that banding together could improve conditions, the Masquers Club (later the Screen Actors Guild of America) was created in 1925. It was followed by the Screenwriters Guild (later renamed the Writers Guild of America) in 1933 and the American Federation of Radio Artists in 1937.

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223 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual It would take lawsuits, strikes, and hardline negotiations for Hollywood artists to receive more rights. This often required artists to take risks such as suspensions or firings in the hope of better treatment. In 1988, the Writers Guild of America organized the longest strike in Hollywood history after disagreements with producers over payments and creative rights. The strike, which lasted five months, was estimated to cost the industry $500 million. Now that working conditions seem to have improved, it might be tempting to discard Hollywood unions as no longer useful. Yet, even today, conflicts often occur between artists and studios. For instance, the Screen Actors Guild of America (SAG) watches to make sure that low-budget actors know their rights and are not exploited by producers. Unequal treatment still happens in the entertainment industry.

For instance, minorities and female actors/actresses still tend to be paid less than Caucasian and male actors. The introduction of new media venues, particularly the Internet, may also warrant additional negotiations.

To address these challenges, many unions are banding together to address mutual concerns in the industry. In 2012, SAG united with the American Federation of Television and Radio Artists (AFTRA). This increases the bargaining power of the combined union. Additionally, Hollywood unions work closely with the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), which represents a federation of labor unions. The merger between SAG and AFTRA creates solidarity in the industry’s unions through the formation of an Industry Coordinating Committee. This allows for coordination of activity among 10 or 12 major unions within the industry.

Although these unions are for movie stars and other artists, the goal is much the same as for other unions across the nation.

As the industry expands, Hollywood unions feel that they must work together to secure benefits for their members while striving to arrive at mutually beneficial agreements with studios, producers, and other stakeholders in the entertainment.

Sources: Actors Equity Association, “Equity Timeline,” Actors Equity, 2006, www.actorsequity.org/aboutequity/timeline/timeline_1919.html (accessed July 30, 2012); Writers Guild of America, West, Inc., “History,” Writers Guild of America, West, 2012, w ww.wga.org/history/timeline.html (accessed July 30, 2012); Jonathon Mandell, “Recalling 1988 Strike,” CBS News, February 11, 2009, www.cbsnews.com/2100-207_162-3447509.html (accessed July 30, 2012); Screen Actors Guild, “History,” SAGAFTRA One Union, 2012, w ww.sag.org/history (accessed July 30, 2012); Richard Verrier, “SAG and AFTRA Members Give Thumbs Up to Merger,” Los Angeles Times, March 30, 2012, http://latimesblogs.latimes.com/entertainmentnewsbuzz/2012/03/sagand-aftra-members-give-thumbs-upto-merger.html (accessed July 30, 2012).

Video Case Discussion Questions 28. Why are Hollywood labor unions considered necessary?

Hollywood labor unions are considered necessary because even today conflicts still arise between Hollywood artists and studios. For instance, the Screen Actors Guild (SAG) of America makes sure that low-budget actors know their rights. Inequalities still exist; for instance, minorities and female actors/actresses still tend to be paid less than Caucasian and male actors. The introduction of new media venues such as the Internet will also likely require negotiations between artists and the entertainment industry.

29. Why is striking often avoided if possible?

Striking is disruptive and risky. The companies can lose lots of money from absenteeism and disruptions, and the strikers take the risk of possibly losing their jobs or ruining their working relationships with their employers. For instance, the 1988 strike by the Writer’s Guild of American cost the industry $500 million. This is why strikes are often used as a last resort.

30. Why do you think unions in the entertainment industry are banding together?

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224 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual By banding together, unions are able to increase their bargaining power and address challenges more effectively.

They can coordinate their activities and work together to create changes that can benefit multiple artists (e.g. screenwriters, actors, etc.) in the entertainment industry.

Team Exercise Students will form groups and go to monster.com and look up job descriptions for positions in business (account executive in advertising, marketing manager, human resources director, production supervisor, financial analyst, bank teller, etc.). They should ask themselves: What are the key requirements for the position that I have been assigned (education, work experience, language/computer skills, etc.)? Does the position announcement provide a thorough understanding of the job?

Was any key information that I would have expected omitted? Students will then report their findings to the class.

Build Your Skills Appreciating and Valuing Diversity Background Here’s a quick self-assessment to get you to think about diversity issues and evaluate the behaviors you exhibit that reflect your level of appreciation of other cultures:

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225 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Task In a small group or class discussion, share the results of your assessment. After reading the following list of ways you can increase your knowledge and understanding of other cultures, select one of the items that you have done and share how it helped you learn more about another culture. Finish your discussion by generating your own ideas on other ways you can learn about and understand other cultures and fill in those ideas on the blank lines below. 

 



Be alert to and take advantage of opportunities to talk to and get to know people from other races and ethnic groups.

You can find them in your neighborhood, in your classes, at your fitness center, at a concert or sporting event—just about anywhere you go. Take the initiative to strike up a conversation and show a genuine interest in getting to know the other person.

Select a culture you’re interested in and immerse yourself in that culture. Read novels, look at art, take courses, see plays.

College students often have unique opportunities to travel inexpensively to other countries—for example, as a member of a performing arts group, with a humanitarian mission group, or as part of a college course studying abroad. Actively seek out travel opportunities that will expose you to as many cultures as possible during your college education.

Study a foreign language.

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226 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual    

Expand your taste buds. The next time you’re going to go to a restaurant, instead of choosing that old familiar favorite, use the Yellow Pages to find a restaurant that serves ethnic food you’ve never tried before.

Many large metropolitan cities sponsor ethnic festivals, particularly in the summertime, where you can go and take in the sights and sounds of other cultures. Take advantage of these opportunities to have a fun time learning about cultures that are different from yours. ________________________________________________________________________________________________ ________________________________________________________________________________________________ ________________________________________________________________________________________________ ________________________________________________________________________________________________

Suggestions for Use After students have completed the self-assessment, ask them to discuss the results either in a small group discussion or in a class discussion. Encourage the students to share their experiences learning about other cultures using the suggested methods provided in the text and to generate some ideas of their own.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 40. The Advantages and Disadvantages of Piece-rate Compensation Plans 41. The Benefits of Providing Child Care or Day Care for Employees 42. Employee Stock Ownership Plans (ESOPs) 43. The Effects of the Age Discrimination in Employment Act (1967)

Guest Speaker Suggestions 34. A human resources management representative from a business firm to speak about different aspects of the selection process, compensation plans, and benefits plans.

35. A representative from the EEOC to speak about how it helps to ban discrimination in employment and how it seeks to increase job opportunities for women and minorities.

36. A representative from a college or university office for students with disabilities to speak about providing opportunities for the handicapped in the workplace.

Teaching Suggestions 50. Review the “Boxed Text Discussion Questions” provided in this Instructor’s Manual. Have students gone over these questions before class? Call on various students for answers.

51. Have students select and complete an exercise from “Get Involved.” Then, at the next session, have them give a brief presentation of their work to the class.

52. Discuss the “Check Your Progress” questions in the textbook. To give students additional questions, use “Additional Discussion Questions,” available in this Instructor’s Manual.

Chapter 11: Customer-Driven Marketing Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

227 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s highlights. Followup via the Connect exercises is then encouraged to provide a holistic understanding of the chapter. Use the hyperlinked Table of Contents below to jump to different sections of the manual.

Table of Contents Chapter Forecast ......................................................................................................................................................................... 227 Learning Objectives ..................................................................................................................................................................... 227 Key Terms and Definitions ........................................................................................................................................................... 228 Content Outline ........................................................................................................................................................................... 230 Boxed Text Critical Thinking Questions ....................................................................................................................................... 237 Do You Have What It Takes // to Get a Job in Marketing? / ....................................................................................................... 238 Bonus Teaching Resources .......................................................................................................................................................... 238 Chapter Review Questions .......................................................................................................................................................... 241 Connect Exercises ........................................................................................................................................................................ 242 Class Discussion Questions .......................................................................................................................................................... 243 Build Your Business Plan.............................................................................................................................................................. 244 Video Case: Marriot: Your Home Away from Home ................................................................................................................... 244 Team Exercise .............................................................................................................................................................................. 245 Build Your Skills ........................................................................................................................................................................... 245 Term Paper or Project Topics ...................................................................................................................................................... 246 Guest Speaker Suggestions ......................................................................................................................................................... 246 Teaching Suggestions .................................................................................................................................................................. 246

Chapter Forecast In this chapter, we focus on the basic principles of marketing. First, we define and examine the nature of marketing. Then we look at how marketers develop marketing strategies to satisfy the needs and wants of their customers. Next, we discuss buying behavior and how marketers use research to determine what consumers want to buy and why. Finally, we explore the impact of the environment on marketing activities.

Learning Objectives LO 11-1 Define marketing.

LO 11-2 Describe the exchange process.

LO 11-3 Specify the functions of marketing.

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228 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual LO 11-4 Explain the marketing concept and its implications for developing marketing strategies.

LO 11-5 Examine the development of a marketing strategy, including market segmentation and marketing mix.

LO 11-6 Describe how marketers conduct marketing research and study buying behavior.

LO 11-7 Summarize the environmental forces that influence marketing decisions.

Key Terms and Definitions Attitude Knowledge and positive or negative feelings about something Buying behavior The decision processes and actions of people who purchase and use products Concentration approach A market segmentation approach whereby a company develops one marketing strategy for a single market segment Culture The integrated, accepted pattern of human behavior, including thought, speech, beliefs, actions, and artifacts Distribution Making products available to customers in the quantities desired; sometimes referred to as “place” because it helps to remember the marketing mix as the “4 Ps” Exchange The act of giving up one thing (money, credit, labor, goods) in return for something else (goods, services, or ideas) Learning Changes in a person’s behavior based on information and experience Market A group of people who have a need, purchasing power, and the desire and authority to spend money on goods, services, and ideas Market orientation An approach that requires organizations to gather information about customer needs, share that information throughout the entire firm, and use that information to build long-term relationships with customers Market segment A collection of individuals, groups, or organizations who share one or more characteristics and thus have relatively similar product needs and desires Market segmentation A strategy whereby a firm divides the total market into groups of people who have relatively similar product needs

Marketing A group of activities designed to expedite transactions by creating, distributing, pricing, and promoting goods, services, and ideas Marketing concept Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

229 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual The idea that an organization should try to satisfy customers’ needs through coordinated activities that also allow it to achieve its own goals Marketing mix The four marketing activities—product, price, promotion, and distribution—that the firm can control to achieve specific goals within a dynamic marketing environment Marketing research A systematic, objective process of getting information about potential customers to guide marketing decisions Marketing strategy A plan of action for developing, pricing, distributing, and promoting products that meet the needs of specific customers Motivation An inner drive that directs a person’s behavior toward goals Multisegment approach A market segmentation approach whereby the marketer aims its efforts at two or more segments, developing a marketing strategy for each Perception The process by which a person selects, organizes, and interprets information received from his or her senses Personality The organization of an individual’s distinguishing character traits, attitudes, or habits Price A value placed on an object exchanged between a buyer and a seller Primary data Marketing information that is observed, recorded, or collected directly from respondents Promotion A persuasive form of communication that attempts to expedite a marketing exchange by influencing individuals, groups, and organizations to accept goods, services, and ideas Reference groups Groups with whom buyers identify and whose values or attitudes they adopt Secondary data Information that is compiled inside or outside an organization for some purpose other than changing the current situation Social classes A ranking of people into higher or lower positions of respect Social roles A set of expectations for individuals based on some position they occupy Target market A specific group of consumers on whose needs and wants a company focuses its marketing efforts Total-market approach An approach whereby a firm tries to appeal to everyone and assumes that all buyers have similar needs Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

230 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Value A customer’s subjective assessment of benefits relative to costs in determining the worth of a product

Content Outline The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a section on which CONNECT activities can be used in the chapter. This is created so that you can facilitate in-class or online discussion effectively.

LO 11-1 Define marketing.

LO 11-2 Describe the exchange process.  

Introduction The Nature of Marketing o The Exchange Relationship

PowerPoint Slides PPT 11.4

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Key terms:  

Marketing Exchange

Lecture Outline and Notes: LVI. Nature of Marketing a. Marketing, a vital part of any business undertaking, is a group of activities designed to expedite transactions by creating, distributing, pricing, and promoting goods, services, and ideas. i. Creates value by allowing individuals and organizations to obtain what they need and want. ii. Other functional areas of the business must be coordinated with marketing decisions. iii. May be the hardest concept for organizations to master as motives are often unclear; few principles can be applied consistently; and markets tend to fragment, each desiring customized products, new value, or better service. iv. What marketing is not: 1. It is not manipulating consumers to get them to buy products they do not want.

2. It is more than selling and advertising; it is a systematic approach to satisfying consumers. b. The Exchange Relationship i. An exchange is the act of giving up one thing in return for something else. ii. Businesses exchange their goods, services, or ideas for money or credit supplied by customers in a voluntary exchange relationship. iii. For an exchange to occur, certain conditions are required.

1. Buyers and sellers must be able to communicate about the “something of value” available to each.

2. Each participant must be willing to give up its respective “something of value” to receive the “something” held by the other. (Figure 11.1) 3. The tangible product itself is often not as important as the image or benefits associated with the product. a. This intangible “something of value” may be capability gained from using a product or the image evoked by it, or even the brand name.

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231 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

LO 11-3 Specify the functions of marketing. o o PPT 11.8

Functions of Marketing Creating Value with Marketing

Value

Functions of Marketing i. A marketer must understand buyers’ needs and desires to determine what products to make available. ii. Selling expedites the exchange process, and marketers view selling as a persuasive activity that is accomplished through promotion. iii. Transporting is the process of moving products from the seller to the buyer. iv. Storing includes warehousing activities. v. Grading refers to standardizing products and displaying and labeling them so that consumers clearly understand their nature and quality. vi. Financing involves arranging credit, which makes the purchase of products possible. vii. Through marketing research, marketers ascertain the need for new goods and services. viii. Risk taking is associated with the chance of loss from marketing decisions that involve the use of resources.

1. Developing a new product creates a chance of loss if consumers do not like it enough to buy it. d. Creating Value with Marketing i. Value is a customer’s subjective assessment of benefits relative to costs in determining the worth of a product. ii. Customer value = customer benefits – customer costs. iii. Customer benefits are anything a buyer receives in an exchange. iv. Customer costs include anything a buyer must give up to obtain the benefits the product provides.

1. Two nonmonetary costs are the time and effort customers expend to find and purchase desired products. v. Customers will seek out benefits based on their experiences and often derive benefits from the act of shopping and selecting products.

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c.

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Key terms:

The Marketing Concept Evolution of the Marketing Concept

Key terms:  

Marketing concept Market orientation

e. The Marketing Concept i. The marketing concept is the idea that an organization should try to satisfy customers’ needs through coordinated activities that allow it to achieve its own goals.

1. The marketing concept guides all marketing activities.

2. According to the marketing concept, a business must find out what consumers need and want and then develop the product that fulfills that need or want.

3. The business must then get the product to the customer.

4. A business must also continually alter, adapt, and develop products that keep pace with changing consumer needs and wants. ii. Determining the true needs of buyers is increasingly difficult because buying

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232 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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motivation is not understood by either the buyer or the organization. iii. Although customer satisfaction is the goal of the marketing concept, a business must also achieve its own objectives; if it does not, it will not survive. iv. To implement the marketing concept, a firm must have good information about what consumers want, adopt a consumer orientation, and coordinate its efforts throughout the entire organization.

1. A breakdown at any point in the organization can result in lost sales, lost revenues, and dissatisfied customers. v. Employees who know how to understand and satisfy customers’ needs and wants are those that focus on ideas, benefits, and other aspects of the product or service.

These employees do not focus on selling the goods or services, but rather on providing value to the customer.

1. For instance, Trader Joe’s attempts to meet consumer demands for highquality food at reasonable prices.

Evolution of the Marketing Concept i. During the Industrial Revolution, new technologies and management ideas made it possible to manufacture products with greater efficiency; demand for manufactured goods was very strong. Companies therefore adopted a production orientation. ii. By the first part of the 20th century, supply caught up with demand, and businesspeople came to believe that personal selling and advertising were the most important activities to increase profits. Companies therefore adopted a sales orientation. iii. The Market Orientation 1. By the 1950s, some businesspeople began to recognize that success required determining what customers want and making products that satisfy those wants rather than making products and then persuading consumers to buy them.

2. A market orientation requires that organizations gather information about customer needs, share that information throughout the entire firm, and use that information to help build long-term relationships with customers.

3. Trying to assess what consumers want is difficult and further complicated by the rate at which trends, fashions, and tastes change. a. For example, the Nissan Leaf meets the needs of consumers who care about the environment and wish to improve their environmental footprint by driving an electric vehicle. b. It is more efficient and less expensive for the company to retain existing customers and even increase the amount of business each customer provides the organization than to find new customers.

4. Most companies are turning to technologies associated with customerrelationship management to help build relationships and boost business with existing customers.

5. Communication remains a major element of any strategy to develop and manage long-term customer relationships. a. Regardless of the medium through which communication occurs, customers should be the drivers of marketing strategy because they understand what they want. b. Customer relationship management systems should ensure that marketers listen to customers in order to respond to their needs and concerns and build long-term relationships.

LO 11-5 Examine the development of a marketing strategy, including market

Key terms:

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233 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual segmentation and marketing mix. 

Developing a Marketing Strategy o Selecting a Target Market o Developing a Marketing Mix

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LVII.

           

Marketing strategy Market Target market Total-market approach Market segmentation Market segment Concentration approach Multisegment approach Marketing mix Price Distribution Promotion

Developing a Marketing Strategy a. A marketing strategy is a plan of action for developing, pricing, distributing, and promoting products that meet the needs of specific customers. i. A marketing strategy consists of two major steps: selecting the target market and developing an appropriate marketing mix to satisfy that target market. b. Selecting a Target Market (Figure 11.2) i. A market is a group who have a need, purchasing power, and desire and authority to spend money on goods, services, and ideas. ii. A target market is a more specific group of consumers on whose needs and wants a company focuses its marketing efforts.

1. Business-to-business marketing involves marketing products to customers who will use the product for resale, direct use in daily operations, or direct use in making other products.

2. Business-to-consumer marketing is marketing that targets the end-use consumer. iii. A target market can either be small or encompass the total market.

1. Some firms use a total-market approach, in which they try to appeal to the entire market and assume that all buyers have similar needs and wants.

This is also known as mass marketing.

2. Most firms use market segmentation and divide the total market into groups of people who have relatively similar product needs.

3. A market segment is a collection of individuals, groups, or organizations that share at least one characteristic and have relatively similar product needs and desires. iv. Market Segmentation Approaches 1. The concentration approach is a market segmentation approach in which a marketer directs one marketing strategy toward a single market segment.

(Porsche uses a concentration approach.)

2. The multisegment approach is a market segmentation approach in which the marketer aims its marketing efforts at two or more segments, developing a marketing strategy for each. (Raleigh Bicycles uses a multisegment approach.) a. Niche marketing is a narrow market segment focus when efforts are on one small, well-defined segment that has a unique, specific set of needs. (Airline marketers have used this strategy.)

3. For a firm to successfully use the concentration or multisegment approach to market segmentation, several requirements must be met such as heterogeneous consumer needs, identifiable and divisible segments,

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234 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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c.

designated comparable segments, profit potential for at least one segment, and the ability to reach the chosen market segment with a particular market strategy. v. Businesses segment markets on the basis of several variables: 1. Demographic—age, sex, race, ethnicity, income, education, occupation, family size, family life cycle, religion, and social class, all characteristics often closely related to customers’ product needs and purchasing behaviors. (Table 11.1) 2. Geographic factors—climate, terrain, natural resources, population density, and subcultural values that influence consumers’ needs and product usage.

3. Psychographic—personality characteristics, motives, and lifestyles.

4. Behavioristic—how consumers’ behavior toward the product affects its use.

Developing a Marketing Mix i. The marketing mix involves four activities that the marketer can control to achieve specific goals within a dynamic marketing environment. (Figure 11.3) 1. The buyer or target market is the central focus of all marketing activities. ii. Product 1. A product is a complex mix of tangible and intangible attributes and includes everything that the buyer receives from an exchange. a. A good is a physical entity you can touch. b. A service is the application of human and mechanical efforts to people or objects to provide intangible benefits to customers. c. An idea is a concept, philosophy, image, or issue.

2. A product has emotional, psychological, and physical characteristics.

3. Almost every purchase or exchange involves consumers trying to maximize benefits and satisfaction and minimize unfavorable attributes.

4. The product is an important variable—often the central focus—of the marketing mix; all other variables must be coordinated with product decisions. iii. Price 1. Price represents the value placed on what is exchanged between a buyer and a seller.

2. Price quantifies value and is the basis of most market exchanges.

3. Price is the key element of the marketing mix because it directly relates to revenue and profits.

4. Price can be changed quickly to stimulate demand or respond to competitors’ actions. iv. Distribution 1. Distribution is the process of making products available in desired quantities. It involves transporting, warehousing, materials handling, and inventory control. a. Redbox does not depend upon traditional brick-and-mortar stores but uses vending machines to distribute its products.

2. It is sometimes referred to as “place” because it helps to remember the marketing mix as the “4 Ps.” 3. Intermediaries, usually wholesalers and retailers, perform many of the activities required to move products efficiently.

4. Eliminating wholesalers and other intermediaries would not do away with the need for the services they provide. v. Promotion 1. Promotion is a persuasive form of communication that attempts to

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235 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual facilitate a marketing exchange by influencing individuals, groups, or organizations to accept the firm’s products.

2. The promotion variable includes advertising, personal selling, publicity, and sales promotion.

3. The aim of promotion is to communicate directly or indirectly with individuals, groups, and organizations to facilitate exchanges.

4. Digital advertising on websites and social media sites is growing.

LO 11-6 Describe how marketers conduct marketing research and study buying behavior.  

Marketing Research and Information Systems o Online Marketing Research Buying Behavior o Psychological Variables of Buying Behavior o Social Variables of Buying Behavior o Understanding Buying Behavior

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LVIII.

Key terms:             

Marketing research Primary data Secondary data Buying behavior Perception Motivation Learning Attitude Personality Social roles Reference groups Social classes Culture

Marketing Research and Information Systems a. Marketing research is a systematic and objective effort to get information about potential customers to guide marketing decisions. i. Such information might include data about the age, income, ethnicity, gender, and educational levels of people in the target market, their preferences for product features, their attitudes toward competitors’ products, and the frequency with which they use products. ii. Marketing research is vital because the marketing concept cannot be implemented without information about customers. It therefore helps to guide marketing decisions. b. A marketing information system is a framework for accessing information about customers from both inside and outside sources. c. Two types of data are usually available to decision makers. i. Primary data are observed, recorded, or collected directly from respondents.

Primary data must be gathered by researchers.

1. Primary data must be gathered by researchers who develop a method to observe phenomena or research respondents.

2. Some methods for marketing research use passive observation of consumer behavior and open-ended questioning techniques. ii. Secondary data are compiled inside or outside the organization for some purpose other than changing the current situation. This type of data is already available in private or public reports. (Table 11.2 Companies with the Best Customer Service) d. Online Marketing Research i. New information technologies are changing the way businesses learn about customers and market products. ii. Virtual testing is a kind of interactive multimedia research that combines sight, sound, and animation to facilitate the testing of concepts, packaging, and design features.

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236 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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iii. Social networking sites are a great way for marketers to obtain information on consumers who are willing to share their opinions on products and companies, to reach new markets, and to gain varied perspectives. iv. Online surveys are becoming an important part of marketing research.

LIX. Buying Behavior a. Buying behavior is the decision processes and actions of people who purchase and use products. i. Marketers analyze buying behavior because a firm’s marketing strategy should be guided by an understanding of buyers ii. For instance, Starbucks hopes to influence buying behavior by offering buyers incentives, such as free coffee or tea if you bring your own cup on Earth Day. b. Psychological Variables of Buying Behavior i. Perception is the process by which a person selects, organizes, and interprets information received from his or her senses. ii. Motivation is an internal force that directs an individual to achieve a goal. iii. Learning brings about a change in a person’s behavior based on information and experience. iv. Attitude is knowledge and positive or negative feelings about something. v. Personality is the organization of an individual’s distinguishing character traits, attitudes, or habits. c. Social Variables of Buying Behavior i. Social factors include social roles, which are a set of expectations for individuals based on some position they occupy. ii. Other social factors include roles, reference groups, social classes, and culture.

1. Reference groups are groups that individuals identify with and whose values or attitudes they adopt.

2. Social classes are determined by ranking people into higher or lower positions of respect.

3. Culture is the integrated, accepted pattern of human behavior, including thought, speech, beliefs, actions, and artifacts.

LO 11-7 Summarize the environmental forces that influence marketing decisions.  The Marketing Environment  Importance of Marketing to Business and Society PPT 11.40

I.

Key terms:

The Marketing Environment (Figure 11.4) a. A number of external forces directly or indirectly influence the development of marketing strategies. i. Political, legal, and regulatory forces—laws and regulators; interpretation of laws; law enforcement and regulatory activities; regulatory bodies, legislators and legislation; and political actions of interest groups. ii. Social forces—the public’s opinions and attitudes toward issues such as living standards, ethics, lifestyles, and quality of life. iii. Competitive and economic forces—competitive relationships, unemployment, purchasing power, and general economic conditions. iv. Technological forces—computers and advances in communications and transportation that improve distribution, promotion, and new product development. b. Marketing environment forces can change quickly and radically, and changes in one may cause changes in others. c. Marketing requires creativity and consumer focus because environmental forces can change quickly and dramatically.

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237 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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d. Although the forces in the marketing environment are sometimes called uncontrollables, a marketing manager can influence some environmental variables to some degree.

II. Importance of Marketing to Business and Society a. While some critics might view marketing as a way to change what consumers want, marketing is essential in communicating the value of products and services. i. For consumers, marketing is necessary to ensure that they get the products they desire at the right places in the right quantities at a reasonable price. ii. For businesses, marketing is necessary in order to form valuable relationships with customers to increase profitability and customer support. b. All organizations—including nonprofits, government institutions, and even people—must reach their target markets, communicate their offerings, and establish high-quality services.

Boxed Text Critical Thinking Questions Virtual Reality Conceals the World, Augmented Reality Improves It 31. How are AR makers trying to overcome obstacles to embrace the marketing concept?

They recognize that to satisfy customer needs, they will need to develop headsets and devices that customers will want to wear. They will have to address the bulkiness, GPS accuracy, and privacy concerns.

32. What type of variables do you think AR marketers are most likely to use to segment the market?

Answers will vary but should include: Demographic, Geographic, Psychographic, and Behavioristic bases.

33. If you were a marketer of new AR headsets, what type of market segmentation approach would you adopt to reach consumer segments? Explain your reasoning.

Answers will vary.

Kraft Heinz Plays Ketchup 31. How are evolving consumer perceptions changing Heinz mayonnaise products?

Since consumes perceive mayonnaise as unhealthy, the company is offering healthier versions of mayo that substitute traditional oil with healthier ingredients and new flavors like roasted garlic and spicy chipotle flavors.

32. Describe how Heinz used consumer interaction as a form of marketing research. What type of data did it collect, primary or secondary?

The company used primary data by asking consumers to vote for whether they wanted new flavors such as Mayochup (a combination of ketchup and mayo) in stores.

33. What type of segmentation variables is Heinz using for its Mayochup advertising?

Heinz advertised in a variety of media targeting different consumer demographics, including foodie, “top-tier lifestyle,” social, and major media outlets.

Ford F-150 Races Ahead 30. Why does a multi-segment approach seem to work for Ford?

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238 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Ford has multiple customer segments, adopting a multi-segment approach that works for the standard truck owner as well as suburbanites resulting in seven different models of its F-150. Its success has resulted in the Ford F150 being the best-selling vehicle worldwide.

31. How do you think knowing its market has allowed Ford to branch off into different markets for its F-150 trucks?

Answers will vary but again knowing its market the company is working to create greener vehicles that provide with other attributes/benefits.

32. What types of segmentation variables does Ford likely use to target different types of consumers?

Answers will vary but should address a multi-segment approach using Demographic, Geographic, Psychographic, and Behavioristic bases.

Do You Have What It Takes // to Get a Job in Marketing? / What skills are necessary in a good marketer?

A good marketer must first of all understand the customer; he or she must also have a strong sense of the current trends in business and marketing. Customer service is vital to many aspects of marketing, so the ability to work with customers and to communicate their needs and wants is important.

Bonus Teaching Resources This section offers bonus teaching resources for class discussion. This is offered in addition to what’s offered in the M: Business text.

“The Selling Function” MiniCase Chapter 11 lists the functions of marketing, and one of these functions is selling. Selling falls into the category of promotion, one of the four aspects of the marketing mix. In the eyes of many observers, selling is a basic foundation on which marketing is based. This lecture looks at two different concepts of selling. The first concept deals with an illustration of a young college graduate in the 1950s who thought she might like to sell insurance for a living. The second concept is shown in a story about a young man just getting started as a life insurance company representative.

A young woman reported to the Chicago office of a large, nationally known insurance firm for an interview and a test. The testing was not to be a measure of intelligence or a monitoring of the woman’s interests and beliefs. It turned out to be a very crude device for determining just how aggressive the woman would be in grabbing people by the lapels and forcing a life insurance policy on them.

The test consisted of 100 questions. Early in the examination, the woman encountered this question: You are planning to sell a life insurance policy to a busy executive in a large metropolitan center. His secretary tells you that he is not in. After hearing this, will you: a. b. c. d.

Accept this information and return another day.

Barge into his inner office anyway.

Persist in making an appointment with the executive for another day.

Try to sell a small life insurance policy to the secretary.

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239 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual The young woman wavered between answers (a) and (c). As she proceeded through the test, the woman found that the very same question was asked nearly 40 times in a slightly different way. Each time, she would opt for the polite response, to make a future appointment or promise to come back another day. When the young woman had completed the test, the administrator told her: “Don’t call us; we’ll call you.

We’ll look over the results of the testing and be in touch with you in a few days.”

That was the 1950s. The woman has yet to hear from that major insurance company. Over the years, she has thought back to what she could have done to pass that test. She came to believe that the answers the company wanted were: “Barge into his office anyway.” That was the response the company must have been looking for. If the woman avoided that answer every time, then it’s easy to understand why the firm never called her back.

Times have changed—so have tests and insurance companies. Chances are very good that the same insurance firm uses a much more sophisticated testing device. It’s also possible that the firm has learned that millions of policies have been sold by field personnel who were not pushy. In defense of the firm, perhaps it was not looking for sales personnel who would actually barge into the executive’s office and sell him or her a policy.

Instead, the firm was looking for people who would possess a degree of persistence that might on rare occasions manifest itself in “barging in.” If that was the company’s true goal, then its test should have been better constructed to measure potential persistence, which may be found in many forms.

Unfortunately, many college students think that successful selling is best represented by the image of the hot-shot salesman who barges through people’s doors. Many college graduates who have that impression do not like the idea of a job in sales.

Today’s firms see sales as a service or educational process. As a salesperson, your job is to teach the prospective customer or client all you can about your product or service. If you teach effectively, you will probably make a sale. Today’s salespeople solve customer problems, not just take their orders. Assuming a firm’s product is competitive with other products, the next place to compete is in sales and customer service.

A service-oriented approach to selling is shown in the story about another insurance company representative. The following is a true story that has been reenacted hundreds, even thousands of times. In the 1920s, Fred Williams was just getting started with a life insurance company. He got an appointment one evening with an old college buddy and the buddy’s wife. Fred began: “You know, Harry, you and I were fraternity brothers at school. I wouldn’t steer you wrong. For small payments a month, you can buy a $20,000 life insurance policy. If something happens to you, Nancy will be awarded the $20,000. If we make the policy out with a double indemnity provision, your death—God forbid that I’m around to see that happen—would leave Nancy $40,000. I’m not here to pressure you. I think you’re a smart young man with a wife, and you both need this protection.”

Harry bought the policy. Tragically, Harry was killed in an auto accident in 1931. Fred Williams brought the widowed Nancy a check for $40,000. A check in that amount in 1931—the Great Depression—was a fortune. As anyone would guess, Nancy was grateful that Fred had come by that night to talk about life insurance protection. In fact, for the next 43 years, Nancy sent a Christmas card to Fred each year, always adding the note: “Thanks, Fred, for what you have meant to our family. God bless you. Nancy.”

Fred never thought of himself as a salesman. He was a life insurance representative with benefits and a service to dispense.

Discussion Questions for “The Selling Function” MiniCase 23. Is an aggressive approach required for successful salespeople today?

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240 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual While it pays for a salesperson to be persistent, people are generally put off by an aggressive approach. Many people are distrustful of salespeople anyway due to their perceptions of salespeople being too aggressive. Today’s salespeople should take a lesson from Harry, treating their jobs as service operations and potential clients as valued customers.

24. Why do many firms today use the job title of “Sales Representative” rather than “Salesperson”?

The word “salesperson” can carry perceptions of untrustworthiness and aggressiveness. The word “sales representative,” on the other hand, sounds more innocuous and implies to customers that they are representing the company and the company’s reputation.

25. How can knowledge of buyer behavior, including the psychological variables of buying behavior, be helpful to a salesperson?

By understanding such important buyer behavior factors such as perception, culture, and attitudes, salespeople can tailor their messages to appeal to the customer, including showing respect for the customer’s feelings and desires.

They can also use the perceptions of people toward the sales profession to dispel negative perceptions and encourage positive perceptions regarding the process.

Controversial Issue: How Do You Feel about Telephone Solicitations?

This can be used in a discussion board or for in-class discussion.

Students in college dormitories may not be as vulnerable to telephone solicitations as families living in their own homes, but students probably have experienced telephone solicitations.

Telephone solicitations, including technological advances such as computerized telephone dialing, have increased. To determine how you react to telemarketing, listen to this list and see which of these aspects you dislike. Number a sheet of paper from one to ten. Place a checkmark beside each number of the statement for which you have a dislike. If the activity mentioned does not bother you, leave a blank after the number.

1.

2.

3.

4.

5.

6.

Calls come at the busiest time in a family’s life—mealtime.

Sales personnel are often crude and pushy and do not take “no” for an answer.

Sales personnel ask personal questions.

Sales personnel call you by your first name as if they have known you for years.

Some callers enlist your participation in a “very short survey,” and the survey turns out to last 20 minutes.

The so-called scientific survey by a national rating service turns out to be a local and amateurish survey for Joe’s Bar and Grill.

7. Some callers are very clearly reading a canned pitch.

8. The caller is a machine.

9. The salesperson definitely insults your intelligence with a stupid question like: “Which hand is the Statue of Liberty holding up?”

10. The salesperson wastes your time with chat about the weather as a way to lead into the sales message.

Take an informal poll to find approximately how many of the statements about telephone solicitations were disliked by students. Most likely, many of the students resent telephone solicitations. Because so many firms are using telemarketing, there must be profit in its use.

Discussion Questions for Knowing Business vs. Knowing the Business 29. Why do organizations use telemarketing? Or why do consumers buy the products or services promoted by telephone solicitations?

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241 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Many organizations use telemarketing because it is profitable (or else they wouldn’t employ something that annoys so many consumers). Telemarketing is a more inexpensive means for taking surveys, and telemarketers can use the telephone to reach people all across the country. People may buy products promoted by telephone solicitation because they like the product, like the salesperson, or just have a hard time saying no.

30. Could organizations use some other form of promotion more successfully?

Possibly, but it depends on the type of product/service being advertised and the target market. Different media may be successfully used for all kinds of different products. Other forms of promotion may be more expensive, however.

31. If telephone solicitation is to be used, how might that solicitation process be made more pleasant for the potential customer and made more effective for the firm using telemarketing?

Students’ answers will vary.

Chapter Review Questions 100.

What is marketing? How does it facilitate exchanges?

Marketing is a group of activities designed to expedite transactions by creating, distributing, promoting, and pricing goods, services, and ideas. Businesses exchange their goods, services, or ideas for money or credit supplied by buyers in a voluntary exchange relationship. Marketing focuses on the many activities—planning, pricing, promoting, and distributing products—that foster exchanges.

101.

Name the functions of marketing. How does an organization use marketing activities to achieve its objectives?

The functions of marketing include buying, selling, transporting, storing, grading, financing, marketing research, and risk taking. Each of these functions helps accomplish marketing objectives.

102.

What is the marketing concept? Why is it so important?

The marketing concept states that an organization should try to satisfy customers’ needs through coordinated activities that also allow it to achieve its own goals. Adoption of the marketing concept is important because it provides the organization with a philosophy of meeting customers’ needs without sacrificing the long run needs of the organization.

103.

What is a marketing strategy?

A marketing strategy is the plan of action for developing, pricing, distributing, and promoting products that meet the needs of specific customers.

104.

What is market segmentation? Describe three target market strategies.

Market segmentation is the process of dividing the total market into groups of people with relatively similar product needs. The three strategies are the total-market approach, concentration approach, and multi-segment approach.

105.

List the variables in the marketing mix. How is each used in a marketing strategy?

The marketing mix involves four variables: product, promotion, price, and distribution. The product is a complex mix of tangible and intangible attributes that provide satisfaction and benefits. Price represents the value placed on an Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

242 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual object in an exchange; it quantifies value and is the basis of most market exchanges. Distribution makes products available in the quantities desired to as many customers as possible while holding total inventory, transportation, and storage costs as low as possible. Promotion is a persuasive form of communication that attempts to facilitate a marketing exchange by influencing individuals, groups, or organizations to accept an organization’s products.

106.

Why are marketing research and information systems important to an organization’s planning and development of strategy?

Marketing research is a systematic and objective effort to obtain information about potential customers in order to guide marketing decisions. A marketing information system establishes a framework for accessing information about customers from sources both inside and outside of the organization. Marketing research and information systems are important to an organization’s planning and developing strategy. They make possible a systematic approach to decision making in marketing.

107.

Briefly describe the factors that influence buying behavior. How does understanding buying behavior help marketers?

Psychological and social variables play a part in buyer behavior. The psychological variables include: (1) perception— the process by which a person selects, organizes, and interprets information received from his or her senses in order to understand it; (2) motivation—an internal force that directs an individual’s behavior to achieve a goal; (3) learning—a change in a person’s behavior caused by information and experience; (4) attitude—knowledge and positive or negative feelings about something; and (5) personality—the organization of an individual’s distinguishing character traits, attitudes, and habits.

Social variables of buyer behavior include the following four factors: (1) social roles—the set of expectations for individuals based on some position they occupy; (2) reference groups—groups with whom individuals identify and whose values or attitudes the individuals adopt; (3) social classes—determined by ranking people into higher or lower positions of respect; and (4) culture—the integrated, accepted pattern of human behavior that includes thought, speech, beliefs, actions, and artifacts. Marketers analyze buying behavior because a firm’s marketing strategy should be guided by an understanding of what, where, when, and how consumers buy.

108.

Discuss the impact of technological forces and political and legal forces on the market.

Technological, political, and legal forces form part of the marketing environment. This environment influences and structures the development of marketing strategy. These forces shape the marketing environment in which the firm operates. Although these forces in the marketing environment are sometimes called uncontrollables, marketing has an opportunity to influence environmental variables.

Connect Exercises Below are the available exercises in Connect for this chapter. Please also see the Connect Content Matrix in your Instructor Resource library for additional details on these exercises (including Learning Objectives, topics, Bloom’s level, AACSB, etc.)

79. Marketing Research: Mystery Shopper (Case Analysis): Understand that mystery shopping has changed as it has taken on an even more prominent role in the implementation of marketing strategy.

80. Marketing: Buying Behavior (Click & Drag): Categorize the buying behavior of two different groups based on the statements about their psychological and social variables.

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243 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 81. The Marketing Environment (Click & Drag): Review the five factors affecting the marketing environment and match the 10 elements with the appropriate factor.

82. McDonald's Market Challenge (Case Analysis): Understand that companies must understand and respond to changing markets in order to remain competitive. This includes effectively engaging in the functions of marketing, identifying the market segment to which the company wants to appeal, and creating a marketing mix that appeals to that market.

83. Marketers Segmentation (iSeeit! Animated Video Case): This short video describes how businesses use market segmentation and target marketing to effectively and efficiently hone in on certain groups of people that would be the most likely to buy their product.

84. The Marketing Mix (iSeeit! Animated Video Case): This brief video explains how a business uses the four Ps (marketing mix) in order to effectively create a product, price it, place it where consumers are able to buy it, and promote it.

85. LEGO: Inspire the Builders of Tomorrow...Girls Included! (Case Analysis): Apply marketing concepts to LEGO's expanded product line aimed at making their products attractive to young girls.

86. National Competition in a Local Market (Manager’s Hot Seat Video Case): Understand that businesses of every size are impacted by multiple sources of competition.

87. Consumer Buying Behavior (iSeeit! Animated Video Case): Demonstrate your understanding of the major influences and differences in consumer buying behavior.

88. The Total Product Offer (iSeeit! Animated Video Case): Demonstrate your understanding of the considerations consumers evaluate when making purchases of products.

Class Discussion Questions 29. With some or all of your classmates, watch several hours of television, paying close attention to the commercials.

Pick three commercials for products with which you are somewhat familiar. Based on the commercials, determine who the target market is. Can you surmise the marketing strategy for each of the three?

Students’ answers will vary depending upon the commercials they choose.

30. Discuss the decision process and influences involved in purchasing a personal computer.

Buying behavior refers to the decision processes and actions of people who purchase and use products. When purchasing a computer, both psychological and social variables are important. Psychological variables include perception, motivation, learning, attitude, and personality. For example, suppose a person is looking for a high-quality computer. He or she might perceive a lower-priced computer to be of lower quality. Perhaps a buyer might be motivated to purchase a tablet computer due to ease of use and storage. The person might have learned from past experiences that a specific brand, such as a Dell, is a high-quality brand. The person’s attitude toward Dell products might be positive (possibly as a result of past experiences, advice from friends, or commercials), which could prompt him or her to buy a Dell. Perhaps the person feels the shape or color of a particular computer matches his or her personality best.

In terms of social factors, a person might be influenced by reference groups, social classes, and culture. A person might use his or her reference group, such as friends or family, to seek recommendations on which computer to buy.

A person might also choose to buy a computer that fits with his or her social class; for instance, a person in the upperclass might choose to purchase a more expensive brand. Culture might not be as important to this decision process.

However, because Apple products are so popular in American culture, a person might choose to purchase a Mac or an iPad. The marketing mix is also important in the decision-making process. A person might have specific criteria that the computer must have in order to purchase it. On the other hand, if the person cannot find the computer in the right color at the store, he or she might choose to purchase another color or type of computer. Those looking for less

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244 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual expensive computers will look for those with a lower price. Finally, the person might also be influenced by promotional materials such as TV commercials or magazine advertisements.

Build Your Business Plan Focusing on your community and posing the questions asked at the end of this chapter in the “Build Your Own Business Plan” section (i.e., Who will be the target market you will specifically try to reach?”), have the students respond to the questions using a new Thai Restaurant that you (hypothetically) are considering opening in your community. This can be an excellent way to have a lively discussion on what the “ability and willingness of the consumers to purchase” really means.

Video Case: Marriot: Your Home Away from Home Marriott’s 19 brands use careful segmentation strategies based on demographic and psychographic variables to determine what its guests want and how best to meet their needs. Marriott uses price and service as a major form of differentiation among its hotels. For instance, it separates its brands using terms like Upper Upscale and Select Service. Marriott also segments its customers based on lifestyle characteristics. The Discoverer category is interested in exploration and experiencing local culture. Marriott’s luxurious Renaissance Hotels targets this market with “local” themes.

One challenge for Marriott is how to market effectively to both baby boomers and millennials. Millennials differ significantly from baby boomers in their hotel preferences. Baby boomers enjoy familiarity and comfort. Millennials desire an unpredictable adventure and are less likely to want to stay at large hotel chains. Marriott partnered with consulting firm Fahrenheit 212, which specializes in marketing to millennials. Additionally, Marriott partnered with IKEA to develop a hotel that is specifically targeted to the millennial traveler.

Video Case Discussion Questions 31. How does Marriott use psychographic and demographic variables to segment the market?

Marriot uses demographic variables to segment guests by age and income. It recognizes that different generations of consumers want different things, so it differentiates between the baby boomer demographic and millennials. It differentiates by income with its Upper Upscale and Select Service. It also uses psychographic variables to classify various lifestyles. It has labeled one segment the “Discoverer” category because this category of consumers is interested in exploration and experiencing local culture. Using different segmentation variables to segment its market allows Marriott to develop hotels and amenities that specifically target certain groups of customers.

32. Why is the Millennial traveler market posing challenges for Marriott and other hotels?

The Millennial traveler market is posing so many challenges for Marriott and other hotels because they differ from the generations that have come before. Although past generations seemed to appreciate comfort and familiarity at hotels, Millennials crave unpredictability and adventure. They are less likely to stay at a large hotel chain. Because these differences are so pronounced, Marriott is investing significant resources and has even hired a marketing research firm to conduct in-depth marketing research into this group.

33. What are some ways that Marriott uses market research to discover what their customers want?

Marriot conducts market research to determine who their customers are and what they desire. They use extensive marketing research to understand cultural or generational changes and adapt its hotels to target these different travelers more effectively. Sometimes this requires Marriott to look to outside firms that specialize in a particular

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245 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual market. For instance, Marriott partnered with consulting firm Fahrenheit 212, which specializes in marketing to millennials, and it partnered with IKEA to develop a hotel that is specifically targeted to the millennial traveler.

Team Exercise Students will form groups and be assigned the responsibility of finding examples of companies that excel in one dimension of the marketing mix (price, product, promotion, and distribution). They will provide several company and product examples and defend why this would be an exemplary case. They will then present their research to the class.

Build Your Skills The Marketing Mix Background You’ve learned the four variables—product, promotion, price, and distribution—that the marketer can select to achieve specific goals within a dynamic marketing environment. This exercise will give you an opportunity to analyze the marketing strategies of some well-known companies to determine which of the variables received the most emphasis to help the company achieve its goals.

Task In groups of three to five students, discuss the examples below and decide which variable received the most emphasis.

A. Product B. Distribution C. Promotion D. Price ___ 1. Starbucks Coffee began selling bagged premium specialty coffee through an agreement with Kraft Foods to gain access to more than 30,000 supermarkets. ___ 2. Skype is a software application that allows consumers to make telephone calls over the web.

Calls to Skype subscribers are free, while calls to land line and mobile phones cost around 2 cents per minute. ___ 3. Amid great anticipation, Apple released its iPad, selling over 3 million within 3 months. The slim tablet computer is a major step forward in reading e-books, watching movies, and playing games. ___ 4. After decades on the market, WD-40 is in about 80 percent of U.S. households—more than any other branded product. Although WD-40 is promoted as a product that can stop squeaks, protect metal, loosen rusted parts, and free sticky mechanisms, the WD-40 Company has received letters from customers who have sprayed the product on bait to attract fish, on pets to cure mange, and even on people to cure arthritis. Despite more than 200 proposals to expand the WD-40 product line and ideas to change the packaging and labeling, the company stands firmly behind its one highly successful and respected original product. ___ 5. Southwest Airlines makes flying fun. Flight attendants try to entertain passengers, and the airline has an impeccable customer service record. Employees play a key role and take classes that emphasize that having fun translates into great customer service.

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246 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

___ 6. Hewlett-Packard offered a $100 rebate on a $799 HP LaserJet printer when purchased with an HP LaserJet toner cartridge. To receive the rebate, the buyer had to return a mail-in certificate to certify the purchase. A one-page ad with a coupon was used in USA Today stating, “We’re taking $100 off the top.” ___ 7. Denny’s, the largest full-service family restaurant chain in the United States, serves more than 1 million customers a day. The restaurants offer the Build Your Own Grand Slam Breakfast for about $5.99, lunch basket specials for $4–$6, and a value menu with prices ranging from $2 to $8.

The correct answer is based on the emphasis of the major activity described in each example.

Answer Key: 1. Distribution (B) 2. Price (D) 3. Product (A) 4. Product (A) 5. Product (A) 6. Promotion (C) 7. Price (D)

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 44. Honda’s Way of Selling Automobiles 45. The Team Concept in Marketing 46. Technology in Marketing Functions 47. How Quality Improvement Has Changed Marketing

Guest Speaker Suggestions 37. A professor of marketing to speak about various facets of marketing.

38. A marketing executive from a local firm to speak about marketing as a career or what is involved in marketing.

39. A representative of a local nonprofit organization to speak about marketing efforts for that organization.

40. A professor to speak about distribution.

41. A professor to speak about promotion.

Teaching Suggestions 53. Review the objectives at the front of the chapter.

54. Use the “Lecture Outline and Notes” with the slides indicated in the margins. The “Supplemental Lecture” and the “Controversial Issue” can be used to reinforce the textbook content.

55. Review “Check Your Progress” and “Additional Discussion Questions and Exercises” that are provided in this Instructor’s Manual.

Chapter 12: Dimensions of Marketing Strategy Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

247 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s highlights. Followup via the Connect exercises is then encouraged to provide a holistic understanding of the chapter. Use the hyperlinked Table of Contents below to jump to different sections of the manual.

Table of Contents Chapter Forecast ......................................................................................................................................................................... 247 Learning Objectives ..................................................................................................................................................................... 247 Key Terms and Definitions ........................................................................................................................................................... 248 Content Outline ........................................................................................................................................................................... 250 Boxed Text Critical Thinking Questions ....................................................................................................................................... 259 Are You Interested // in Becoming a Marketing Manager? / ...................................................................................................... 260 Bonus Teaching Resources .......................................................................................................................................................... 260 Chapter Review Questions .......................................................................................................................................................... 263 Connect Exercises ........................................................................................................................................................................ 265 Class Discussion Questions .......................................................................................................................................................... 266 Build Your Business Plan.............................................................................................................................................................. 266 Video Case: Cutting Edge Quality: Cutco “Knives for Life” .......................................................................................................... 267 Team Exercise .............................................................................................................................................................................. 267 Build Your Skills ........................................................................................................................................................................... 268 Term Paper or Project Topics ...................................................................................................................................................... 269 Guest Speaker Suggestions ......................................................................................................................................................... 269 Teaching Suggestions .................................................................................................................................................................. 269

Chapter Forecast The key to developing a marketing strategy is selecting a target market and maintaining a marketing mix that creates longterm relationships with customers. Getting just the right mix of product, price, promotion, and distribution is critical if a business is to satisfy its target customers and achieve its own objectives (implement the marketing concept).In this chapter, we’ll take a closer look at the four dimensions of the marketing mix—product, price, distribution, and promotion—used to develop the marketing strategy. The focus of these marketing mix elements is a marketing strategy that builds customer relationships and satisfaction.

Learning Objectives Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

248 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual LO 12-1 Describe the role of product in the marketing mix, including how products are developed, classified, and identified.

LO 12-2 Explain the importance of price in the marketing mix, including various pricing strategies a firm might employ.

LO 12-3 Identify factors affecting distribution decisions, such as marketing channels and intensity of market coverage.

LO 12-4 Specify the activities involved in promotion, as well as promotional strategies and promotional positioning.

Key Terms and Definitions Advertising A paid form of nonpersonal communication transmitted through a mass medium, such as television commercials or magazine advertisements Advertising campaign Designing a series of advertisements and placing them in various media to reach a particular target market Branding The process of naming and identifying products Business products Products that are used directly or indirectly in the operation or manufacturing processes of businesses Commercialization The full introduction of a complete marketing strategy and the launch of a product for commercial success Consumer products Products intended for household or family use Direct marketing The use of nonpersonal media to communicate products, information, and the opportunity to purchase via such as mail, telephone, or the Internet Direct selling The marketing of products to ultimate consumers through face-to-face sales presentations at home or in the workplace Discounts Temporary price reductions often employed to boost sales Exclusive distribution The awarding by a manufacturer to an intermediary of the sole right to sell a product in a defined geographic territory Generic products Products with no brand name that often come in plain, simple packages and carry only their generic name Integrated marketing communications The process of coordinating the promotion mix elements and synchronizing promotion as a unified effort Intensive distribution A form of market coverage whereby a product is made available in as many outlets as possible Labeling The presentation of important information on the package

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249 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Manufacturer brands Brands initiated and owned by the manufacturer to identify products from the point of production to the point of purchase Marketing channel A group of organizations that moves products from their producer to customers; also called a channel of distribution Materials handling The physical handling and movement of products in warehousing and transportation Packaging The external container that holds and describes the product Penetration price A low price designed to help a product enter the market and gain market share rapidly Personal selling Direct, two-way communication with buyers and potential buyers Physical distribution All the activities necessary to move products from producers to customers—inventory control, transportation, warehousing, and materials handling Price skimming Charging the highest possible price that buyers who want the product will pay Private distributor brands Brands, which may cost less than manufactured brands that are owned and controlled by a wholesaler or retailer Product line A group of closely related products that are treated as a unit because of similar marketing strategy, production, or end-use considerations Product mix All the products offered by an organization Promotional positioning The use of promotion to create and maintain an image of a product in buyers’ minds Psychological pricing Encouraging purchases based on emotional rather than rational responses to the price Publicity Nonpersonal communication transmitted through the mass media but not paid for directly by the firm Pull strategy The use of promotion to create consumer demand for a product so that consumers exert pressure on marketing channel members to make it available Push strategy An attempt to motivate intermediaries to push a product down to their customers Quality The degree to which a good, service, or idea meets the demands and requirements of customers Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

250 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Reference pricing A type of psychological pricing in which a lower-priced item is compared to a more expensive brand in hopes that the consumer will use the higher price as a comparison price Retailers Intermediaries that buy products from manufacturers (or other intermediaries) and sell them to consumers for home and household use rather than for resale or for use in producing other products Sales promotion Direct inducements offering added value or some other incentive for buyers to enter into an exchange Selective distribution A form of market coverage whereby only a small number of all available outlets are used to expose products Test marketing A trial minilaunch of a product in limited areas that represent the potential market Trademark A brand that is registered with the U.S. Patent and Trademark Office and is thus legally protected from use by any other firm Transportation The shipment of products to buyers Warehousing The design and operation of facilities to receive, store, and ship products Wholesalers Intermediaries who buy from producers or from other wholesalers and sell to retailers

Content Outline The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a section on which CONNECT activities can be used in the chapter. This is created so that you can facilitate in-class or online discussion effectively.

LO 12-1 Describe the role of product in the marketing mix, including how products are developed, classified, and identified.   

Introduction The Marketing Mix Product Strategy o Developing New Products o Classifying Products o Product Line and Product Mix o Product Life Cycle o Identifying Products

Key terms:           

Test marketing Commercialization Consumer products Business products Product line Product mix Branding Trademark Manufacturer brands Private distributor brands Generic products

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Lecture Outline and Notes: LX. The Marketing Mix a. The key to developing a marketing strategy is maintaining the right marketing mix that satisfies the target market and creates long term relationships with customers. b. The marketing mix involves product, price, promotion, and distribution. c. The marketing mix is the part of the marketing strategy that involves decisions regarding controllable variables. d. Successful companies offer at least one dimension of value that surpasses all competitors in the marketplace in meeting customer expectations. e. Successful companies must also maintain acceptable, and if possible, distinguishable differences in the other dimensions as well.

LXI. Product Strategy a. A product is a good, service, or idea containing tangible and intangible attributes that provide satisfaction and benefits. i. Remember that thousands of products are introduced each year but very few succeed. ii. A firm can take considerable time to get a product ready for the market; it took more than 20 years for the first photocopier, for example. iii. Sometimes a product or idea is shelved, only to be returned to later. b. Developing New Products (Figure 12.1) i. Before introducing new products, a business must follow a multistep process. ii. Idea Development 1. New ideas can come from marketing research, engineers, and outside sources.

2. New ideas can also come from customers, brainstorming, and intracompany incentives. a. New ideas can even create a company. While attending Yale, Fred Smith studied a mathematical discipline called topolog. Realizing the potential efficiencies of connecting all points on a network through a central hub, Smith used what he learned to create FedEx. iii. New Idea Screening 1. In this phase, a marketing manager should look at the organization’s resources and objectives and assess the firm’s ability to produce and market the product.

2. Important considerations are consumer desires, the competition, technological changes, social trends, and political, economic, and environmental considerations.

3. Most new product ideas are rejected during the screening stage because they seem inappropriate or impractical for the organization. iv. Business Analysis 1. Business analysis is a basic assessment of a product’s compatibility in the marketplace and its potential profitability.

2. The most important question relates to market demand—how the product will affect the firm’s sales, costs, and profits. v. Product Development 1. In this stage, the firm develops a prototype that should reveal the intangible attributes as perceived by the consumer.

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2. Product development is often expensive, and few product ideas make it to this stage. vi. Test Marketing 1. Test marketing is a trial minilaunch of a product in limited areas that represent the potential market. (Figure 12.2) 2. It allows a complete test of the marketing strategy in a natural environment, giving the organization the opportunity to discover weaknesses and eliminate them before the product is fully launched.

3. Because test marketing requires significant resources and expertise, market research companies like ACNielsen can assist firms in test marketing their products. vii. Commercialization 1. Commercialization is the full introduction of a complete marketing strategy and the launch of a product for commercial success.

2. During this stage, the firm gears up for full-scale production, distribution, and promotion. c. Classifying Products i. How a product is used and why it is purchased determines how a product is classified. ii. Consumer products are purchased for household or family use; they are not intended for any purpose other than daily living.

1. Convenience products are bought frequently, without a lengthy search, and often for immediate consumption. Consumers spend little time in planning where to buy the product and usually take any available brand.

2. Shopping products are purchased after the consumer has compared competitive products. Price, features, quality, style, service, and image all influence buyers’ decisions.

3. Specialty products are products that the consumer makes a special effort to obtain. They are purchased less often, and consumers are unwilling to accept a substitute. iii. Business products are used directly or indirectly in the operation or manufacturing processes of businesses.

1. Raw materials are natural products that usually require additional processing for use in production.

2. Major equipment covers large, expensive items used for production purposes.

3. Accessory equipment is used for production, office, or management purposes and does not become part of the final product.

4. Component parts are finished items, ready to be assembled into the final product.

5. Processed materials are things that are used directly in production or management operations but are not readily identifiable as component parts.

6. Supplies are materials that make production, management, and other operations possible.

7. Industrial services include financial, legal, marketing research, janitorial, and exterminating services. d. Product Line and Product Mix (Figure 12.3) i. A product line is a group of closely related products that are treated as a unit because of similar marketing strategies and production or end-use considerations. ii. A product mix is all the products offered by the organization. e. Product Life Cycle (Figure 12.4) i. Like people, products are born, grow, and eventually die. ii. Some products have very long lives, and others are comparatively short lived. (Table

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12.1) iii. In the introductory stage, consumer awareness and acceptance are limited; sales start at zero, and profits are negative (3D televisions). iv. During the growth stage, sales increase at a rapid rate, and profits peak and start to decline.

1. Competing firms become aware that the product has achieved some success, which may result in their entry into the market.

2. The firm tries to strengthen its position in the market. v. In the maturity stage, industry sales continue to increase, peak, and then decline.

Severe competition and heavy marketing expenses characterize this stage. vi. During the decline stage, sales, and profits decline (landline phones, VCRs).

1. Certain models may be eliminated, and marketing expenditures may be cut.

2. Plans must be made to phase out the declining product and introduce new ones to take its place. vii. It should be noted that products do not always go one way in the life cycle; some products can rebound back into the growth stage.

Identifying Products i. Branding, packaging, and labeling can be used to identify or distinguish one product from other products. ii. Branding (Table 12.2) 1. Branding is the process of naming and identifying products. a. A brand is a name, term, symbol, design, or combination that identifies and distinguishes a product. b. The brand name is the part of the brand that can be spoken and consists of letters, words, or numbers. c. A brand mark is the part of the brand that is a distinctive design. d. A trademark is a brand that is registered with the U.S. Patent and Trademark Office and is legally protected from use by any other firm. Protecting a brand name is important in maintaining a brand identity. (Xerox and Kleenex are now synonymous with the product.)

2. There are two main categories of brands. a. Manufacturer brands are brands initiated and owned by the manufacturer to identify products from the point of production to the point of purchase. b. Private distributor brands are middleman or store brands owned and controlled by a wholesaler or retailer. c. In addition, there are generic products, which have no brand name at all.

3. Companies use two basic approaches to branding multiple products. a. Each product within a company’s product mix is given its own brand name (Warner-Lambert). b. In family branding, each of a firm’s products is branded with the same name or at least part of the name (Gillette, Sara Lee).

4. Companies may react differently to domestic vs. foreign brands. iii. Packaging 1. Packaging is the external container that holds and describes the product.

2. The packaging influences consumers’ attitudes and their buying decisions.

3. A package can perform several functions, including protection, economy, convenience, and promotion. iv. Labeling 1. Labeling is the presentation of important information on the package.

2. Content, nutritional information, safety precautions, and instructions are the

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254 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual kinds of information contained on labels. a. For instance, as concern for the environment grows, many companies are developing products with more eco-friendly ingredients, from recycled paper to biodegradable chemicals. Labels transfer that information to the consumer. v. Product Quality 1. Quality reflects the degree to which a good, service, or idea meets the demands and requirements of customers.

2. The level of quality is the amount of quality that a product possesses, and the consistency of quality depends on the product maintaining the same level of quality over time.

3. Quality of service is difficult to gauge because it depends on customers’ perceptions of how well the service meets or exceeds their expectations.

4. Quality is judged by customers, not service providers. (Table 12.3) LO 12-2 Explain the importance of price in the marketing mix, including various pricing strategies a firm might employ. 

Pricing Strategy o Pricing Objectives o Specific Pricing Strategies

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Key terms:     

Price skimming Penetration price Psychological pricing Reference pricing Discount

LXII.Pricing Strategy a. Price is the value placed on the object involved in an exchange between a buyer and seller.

(Figure 12.5) i. Buyers’ interest in price stems from their expectations about the usefulness of a product or the satisfaction they may derive from it. ii. Price is a key element in the marketing mix because it relates directly to the generation of revenue and profits. iii. For most products, the quantity demanded goes up as the price goes down, and vice versa. iv. Consumers vary in their response to price: some focus solely on the lowest price, while others consider quality or the prestige associated with a product and its price. v. The product’s perceived value in the marketplace added to the production costs help determine price. vi. Price is probably the most flexible variable in the marketing mix. b. Pricing Objectives i. Four common pricing objectives are: 1. maximization of profits and sales 2. boosting market share 3. maintaining the status quo 4. survival c. Specific Pricing Strategies i. Pricing strategies provide guidelines for achieving the company’s pricing objectives and overall marketing strategy. ii. Pricing New Products a. Setting the correct price is critical: the right price leads to profitability, but the wrong price may kill the product. b. There are two basic approaches to setting the base price for a new product. i. Price skimming is charging the highest possible price that

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255 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual buyers who want the product will pay. ii. Penetration pricing is a low price designed to let a product enter the market and gain market share rapidly. iii. Penetration pricing is less flexible; it is more difficult to raise a penetration price than to lower a skimming price. iv. Netflix used a penetration pricing strategy of offering rentals at prices much lower than the average rental store gaining substantial market share. iii. Psychological pricing is a policy designed to encourage purchases based on emotional rather than rational responses to the price.

1. Even/odd pricing ($9.99 rather than $10) is an example of psychological pricing.

2. Symbolic/prestige pricing creates an image of high quality. iv. Reference pricing is a type of psychological pricing in which a lower-priced item is compared to a more expensive brand in hopes that the consumer will use the higher price as a comparison price v. Temporary price reductions, or price discounts, are often employed to boost sales.

1. Quantity discounts reflect the economies of purchasing in large volumes.

2. Seasonal discounts are used to stimulate purchases of products out of season.

3. Promotional discounts attempt to improve sales by advertising price reductions on selected products to increase customer interest.

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LO 12-3 Identify factors affecting distribution decisions, such as marketing channels and intensity of market coverage. 

Distribution Strategy o Marketing Channels o Logistics Management o Intensity of Market Coverage o Importance of Distribution in a Marketing Strategy

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LXIII.

Key terms:            

Marketing channel Retailers Direct marketing Direct selling Wholesalers Intensive distribution Selective distribution Exclusive distribution Physical distribution Transportation Warehousing Materials handling

Distribution Strategy a. Marketing Channels i. A marketing channel is a group of marketing organizations that directs the flow of products from producers to consumers. ii. Middlemen, or intermediaries, are organizations that bridge the gap between the producer and the ultimate user of the product.

1. Retailers buy products to sell to consumers rather than for resale or use in producing other products.

2. By bringing together an assortment of products from competing producers, retailers create place utility (a convenient shopping location), time utility (convenient hours of operation), and ownership utility (the risk of ownership).

3. Retailing usually occurs in a store, but it can also occur through the Internet, vending machines, mail-order catalogs, and entertainment.

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4. Today, there are too many stores competing for too few customers, so competition is intense. Table 12.4 profiles general merchandise in the United States. iii. Direct marketing is the use of nonpersonal media to communicate products, information, and the opportunity to purchase via media such as mail, telephone, or the Internet. iv. Direct selling involves the marketing of products to ultimate consumers through face-to-face sales presentations at home or in the workplace. v. Wholesalers generally buy from producers or other wholesalers and sell to retailers.

1. Wholesalers are extremely important because of the marketing activities they perform. (Table 12.5) 2. Although it is true that wholesalers can be eliminated, their functions must be passed on to some other intermediary or even the consumer.

3. Wholesalers help consumers and retailers by buying in large quantities, then selling to retailers in smaller quantities. By stocking an assortment of goods, wholesalers match products to demand. vi. Supply Chain Management 1. Creates alliances between channel members to improve distribution channel relationships among manufacturers and intermediaries.

2. Includes all organizations involved in moving products from the producer to the ultimate consumer.

3. Goes beyond traditional members to include all organizations involved in moving products 4. Focus shifts from selling to the next level to one of selling products through the channel vii. Channels for Consumer Products 1. Please refer to Figure 12.6 in the book when discussing consumer product channels.

2. Services are usually distributed through the most direct marketing channel because they are produced and consumed simultaneously. viii. Channels for Business Products 1. Most businesses purchase products, not services.

2. Most business products (especially expensive or complex ones) are sold through direct marketing channels because of the higher level of assistance and communication with the producer.

3. Business products may be distributed through channels employing wholesaling intermediaries such as industrial distributors and / or manufacturer’s agents. b. Logistics Management i. Physical distribution is all the activities needed to move products from producer to consumer. ii. Transportation, the shipment of products to buyers, is an essential part of distribution.

1. Five major modes of transportation are used to move products. a. Railroads offer the least expensive transportation for many products. b. Trucks have greater flexibility than railroads, can handle freight quickly and economically, can deliver door-to-door, and have more flexible packaging requirements than ships or airplanes. c. Air transport is expensive, but it offers a high degree of dependability and speed. d. Shipping by waterways is the least expensive and slowest form of transportation.

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c.

e. Pipelines are important for moving heavy, bulky liquids such as petroleum products, natural gas, semi-liquid coal, and certain chemicals.

2. Factors affecting the selection of a mode of transportation include cost, capability, reliability, and availability. iii. Warehousing involves designing and operating facilities to receive, store, and ship products.

1. Companies can use their own private warehouses or lease space in public warehouses.

2. Warehousing is important because it makes products available for shipment to match demand at different geographic locations. iv. Materials handling is the physical handling and movement of products in warehouse operations and transportation.

Intensity of Market Coverage i. Intensity of market coverage relates to the number and variety of product outlets; it depends on the behavior of customers and the nature of the target market and competition. ii. Intensive distribution makes a product available in as many outlets as possible. This type of distribution is usually used for convenience goods. iii. Selective distribution uses only a small portion of all available outlets. It is used most often for products for which consumers

LO 12-4 Specify the activities involved in promotion, as well as promotional strategies and promotional positioning. 



Key terms: 

Promotion Strategy o The Promotion Mix o Promotion Strategies: To Push or to Pull o Objectives of Promotion o Promotional Positioning Importance of Marketing Strategy

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LXIV.

        

Integrated marketing communications Advertising Advertising Advertising campaign Personal selling Publicity Sales promotion Push strategy Pull strategy Promotional positioning

Promotion Strategy a. The role of promotion is to communicate with individuals, groups, and organizations to facilitate an exchange directly or indirectly. i. It encourages marketing exchanges by attempting to persuade individuals, groups, and organizations to accept goods, services, and ideas. ii. It is used not only to sell products but also to influence opinions and attitudes toward an organization, person, or cause. b. The Promotion Mix i. Advertising, personal selling, publicity, and sales promotion are called the promotion mix because a good promotion program results from carefully selecting and blending these elements. ii. The process of coordinating the promotion mix elements and synchronizing promotion as a unified effort is called integrated marketing communications. iii. Advertising is a paid form of nonpersonal communication transmitted through a mass medium.

1. An advertising campaign involves designing a series of advertisements and

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placing them in various media to reach a particular target audience. a. A product’s features, uses, and benefits affect the content of the campaign message and individual ads. b. Characteristics of the people in the target audience also influence both content and form, as do an advertising campaign’s objectives and platform.

2. Advertising media, both print and electronic, are the vehicles or forms of communication used to reach a desired audience.

3. Infomercials—large blocks of radio or television airtime featuring a celebrity or upbeat host talking about and demonstrating a product—have evolved as an advertising method. iv. Personal selling is direct, two-way communication with buyers and potential buyers.

1. Personal selling is the most flexible of the promotional methods.

2. There are three distinct categories of salespersons: order takers, creative salespersons, and support salespersons.

3. In general, personal selling is a six-step process: a. Prospecting—identifying potential buyers. b. Approaching—using a referral or calling on a customer without prior notice to determine interest in a product. c. Presenting—getting the prospect’s attention with a demonstration. d. Handling objections. e. Closing—asking the prospect to buy the product. f. Follow-up—checking customer satisfaction with the purchased product. v. Publicity is nonpersonal communication transmitted through the mass media, but the firm does not directly pay for this communication.

1. Publicity is mainly informative (which differs from advertising, which is informative, persuasive, or both).

2. Most companies have a public relations department trying to gain favorable publicity and minimize negative publicity.

3. Publicity describes what a firm is doing, what products it is launching, or other newsworthy information, but seldom calls for action, which differs from advertising.

4. The mass media willingly carry publicity because they believe it has a general public interest, but most publicity appears once in the mass media and is not repeated (unlike advertising).

5. While advertising costs the firm money, publicity is free.

6. Publicity is extremely important when communication focuses on a company’s activities and products and is directed at interest groups, current and potential investors, regulatory agencies, and society in general.

7. A variation of traditional advertising is buzz marketing, in which marketers attempt to create a trend or acceptance of a product through publicity. a. Companies seek out trend setters in a community and get them to “talk up” their product, which is viewed as more credible than paid communication.

8. A related concept is viral marketing, which describes the concept of getting Internet users to pass on ads and promotions to others. vi. Sales promotion involves direct inducements offering added value or some other incentive for buyers to enter into an exchange.

1. The major tools of sales promotion are store displays, premiums, samples and demonstrations, coupons, contests and sweepstakes, refunds, and trade shows.

2. Sales promotion stimulates customer purchasing and increases dealer

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e.

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effectiveness in selling products.

3. It is used to enhance and supplement other forms of promotion.

Promotion Strategies: To Push or Pull (Figure 12.7) i. In developing a promotion mix, marketers must decide whether to fashion a mix that pushes or pulls the product. ii. A push strategy is used to motivate middlemen to push the product down to their customers. iii. With a pull strategy, promotion creates consumer demand for the product so that consumers will exert pressure on marketing channel members to make the product available. iv. Exclusive use of advertising denotes a pull strategy, while personal selling to marketing channel members indicates a push strategy. A company can also use a combination of the two.

Objectives of Promotion i. The marketing mix will vary depending on a company’s objectives ii. Promotion is only one element and must be tied to organizational objectives 1. Typical objectives are stimulating demand, stabilizing sales, or informing, reminding, and reinforcing consumers.

Promotional positioning uses promotion to create and maintain an image of a product in buyers’ minds that persuades them to buy. It is a natural result of market segmentation.

Importance of Marketing Strategy Marketing creates value through the marketing mix Creating an effective marketing mix requires carefully integrating the marketing mix into an effective marketing strategy.

Firms that develop an effective marketing mix gain competitive advantages Advantages often come when a company excels at one or more elements of the marketing mix Companies must monitor demand and adapt the marketing mix when needed

Boxed Text Critical Thinking Questions The Secret to Trader Joe’s Private Label 34. Which elements of the marketing strategy does Trader Joe’s seem to particularly excel at?

Trader Joe’s seems to excel at the distribution and product strategies. It focuses on inventory control and a focused, quality product line.

35. What advantages do private distributor brands offer over manufacturer and generic brands?

The private-label products prevent the company from relying too heavily on any one supplier, and as a result, Trader Joe’s can offer lower prices than rivals.

36. Describe how Trader Joe’s distribution strategy helps to save on costs.

Inventory control has been a key advantage in reducing costs and focusing on a limited number of quality products.

The company employs product developers who travel the world looking for the best product/price combinations.

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260 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 34. Describe the distribution benefits a large retailer like American Dream offers consumers.

The size of American Dream can help convince the consumers of the value of coming to its stores rather than just ordering online. Its vast number of stores will offer a number of products in one place (place utility) available when consumers want them (time utility).

35. With physical retailers declining as online shopping grows, what are some ways American Dream plans to differentiate itself from competitors?

American Dream goes beyond just merchandise and food courts, with a water park, an indoor ice rink, and artificial ski slope. It is both a shopping and an entertainment venue.

36. Explain what the marketing channel looks like for American Dream.

Answers will vary.

Drinkfinity Goes Bust 33. Why do you think PepsiCo used a direct distribution channel to sell its Drinkfinity beverages in the United States?

Answers will vary but most students will probably mention product differentiation.

34. What value did Drinkfinity beverages offer consumers to offset the higher price?

Drinkfinity was a more environmentally friendly product.

35. Why do you think Drinkfinity failed?

Answers will vary but most students will focus on price.

Are You Interested // in Becoming a Marketing Manager? / What factors have made the job of marketing manager more challenging in recent years?

While a career in marketing can be rewarding, marketers agree that the job is getting tougher. Many advertising and marketing executives say the job has gotten more demanding in the past 10 years, viewing their number one challenge as balancing work and personal obligations. Other challenges include staying current on industry trends or technologies, keeping motivated, and measuring success.

Bonus Teaching Resources This section offers bonus teaching resources for class discussion. This is offered in addition to what’s offered in the M: Business text.

“Prolonging the Life Cycle of a Product” MiniCase This is the story of a comedian and some of the techniques he used to survive many years in show business. At the end of the tale, identify what there is in his life story that illustrates a point from this chapter in your textbook.

In the early years of the 20th century, Nathan Birnbaum decided that he wanted to spend the rest of his life in show business.

The nation, in those days, did not have radio, television, or talking movies, and one of the premier forms of diversion for the overworked American public was vaudeville. Several times a day in theaters of major cities across the nation, vaudeville performers would come on-stage and pursue their craft in front of generally appreciative audiences. Sometimes the vaudeville Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

261 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual acts would share time with a silent movie or two; that gave the performers a break. The performers included singers, dancers, stand-up comedians, jugglers, acrobats, magicians, animal trainers, trapeze artists, and musicians.

Nathan Birnbaum fancied himself a stand-up comedian, and he was able to get bookings in theaters in smaller cities like Albany, Akron, Peoria, and Wilkes-Barre. It wasn’t like playing the Palace Theater in New York, but he made a living.

Looking back on those days, Nathan admits that he probably was not the greatest comedian on the vaudeville circuit, and there were managers who would agree with that assessment. As a consequence, once Nathan had played a theater, the manager was often less than enthusiastic about bringing Nathan back a second time. Despite this managerial reluctance, Nathan had two things working in his favor. First, Nathan would tour the nation over a period as long as two years before having to go back to a manager and ask for a spot as a comedian. Maybe the manager would forget how bad Nathan was.

Second, because most of the bookings were handled by mail (rather than a personal audition), Nathan could use a different name when negotiating a new contract for a two-week appearance in Oshkosh, for example. True, when Nathan arrived in person, the manager might discover the ruse, but a contract was a contract, and Nathan would have his two weeks’ employment.

Switching names would work for only so long, so Nathan added a partner. He lined up an attractive young lady to feed him straight lines. The audience liked her straight lines so much (and did not laugh at Nathan’s jokes) that Nathan changed the act—giving the humor to his partner and becoming the straight man himself. The act was off and running. The couple moved from vaudeville to a long career in radio.

Radio was the king of entertainment for many years, but it too faded, and people stopped tuning in to radio networks to hear comedians. At about this point, Nathan and his partner, who was now his wife, performed in a situation comedy for the newest medium—television. By the time TV came along, Nathan and his wife had a grown son who was worked into the comedy series, and it was very popular for quite a few years.

Then tragedy struck. Nathan’s partner of so many years died. Not only was Nathan now a widower, but he was again alone as a performer. Entertainment did not forget Nathan, however. He did some standup comedy routines here and there and appeared on his share of talk shows, keeping his face in front of the news cameras. Then he began making movies. By now, he was able to play just what he was—an old man.

This exposure in suitable screen vehicles led to all sorts of other bookings, as many as Nathan wanted. It should come as no surprise to your class to reveal that back in the old vaudeville days when Nathan used all those fake names, one of the names was “George Burns.”

Now, the question is: What does this story have to do with the marketing mix? What George Burns was trying to do through all those years was prolong the life cycle of a product known as George Burns, comedian.

Large firms may accomplish the same thing by declaring a product as “new and improved,” or make the product in “7 new and exciting exotic flavors.” George Burns extended the product life cycle but altered the product as it went along. Among his devices were 1.

2.

3.

4.

5.

6.

New names.

New partner.

Switch to radio.

Switch to television.

Switch to movies.

Switch to talk shows and “age” material.

Let’s use George for one more illustration. At the end of the decline stage, the company takes its product off the market.

There were thousands of people in vaudeville who did not survive in entertainment. Finding no work in the entertainment industry, these people virtually took themselves off the market in entertainment and entered other fields. The same fate Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

262 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual would have faced Nathan if he had not found Gracie Allen, his partner and wife. More than any other factor, Gracie Allen prevented George Burns from taking his unique product off the market. What a lucky break for us all!

Discussion Questions for “Prolonging the Life Cycle of a Product” MiniCase 26. Was George (Nathan Birnbaum) Burns successful in stretching the product life cycle?

Yes, he was successful. In this case, his “product” was his acting and comedic ability. Burns was not only able to prolong the product life cycle, he also was able to turn a mediocre product (as his original act wasn’t very popular) into a smash hit by partnering with his future wife and adapting his comedy from vaudeville to radio to television and eventually to movies.

27. What stage of the product life cycle would you say George Burns was in during the final years of his life?

George Burns was most likely in the maturity cycle. His popularity likely dimmed down some since he entered television and movies, but he was still receiving many bookings and receiving praise even till the end of his life.

28. If a firm is to prolong the life cycle of a product, what steps must be taken?

The firm could try to adapt its product to meet new market conditions or appeal to consumers in different ways. They may try to “revamp” the product, putting in new features and marketing a new and improved product. Whatever the firm chooses, however, they should take a lesson from George Burns: they must adapt to changing market needs and customer demands.

Controversial Issue: How Dare They Stop Our Ball Game?

This can be used in a discussion board or for in-class discussion.

It has been done in the past, and chances are good that it is still being done—stopping professional football games for the insertion of a commercial. Upon learning of this, people have one of at least two possible reactions—one favoring the practice and one condemning it.

A first reaction might well be that no advertiser has the right to stop a sports event. The networks that broadcast these games are to remain uninvolved observers and must not interfere with the progress of the sporting event in any way. A time-out may be called by only three parties—each of the two teams participating in the game and the officials. The idea that a TV director has the right to relay signals to the playing surface as a way to insert a commercial is a corruption of a great national pastime—professional football. The question arises of whether, at some future time, a director could say that the game is too uneven and, as a way to increase viewer interest, the officials should tell one team to let the other score. Or whether, if the Kansas City Chiefs should pass more often, a director could relay instructions to that effect to their coach.

On the other hand, one needs to keep in mind that the television networks have paid millions of dollars for the rights to broadcast football games. The networks knew they could afford to pay for the rights as long as they could sell advertising time to large national sponsors, and to sell time to such sponsors requires plenty of slots for commercials. A part of the agreement between the National Football League and the networks is that there will be sufficient moments in each game for commercials. If the regular flow of the game does not provide enough such moments, then the National Football League has agreed that the networks may stop action.

A further defense of the networks’ action might well be the fact that a successful National Football League is considered by some to be a product of television. Ask older people how much people outside NFL cities knew of professional football before the advent of television. The marriage of TV and professional football has been good for both parties.

Discussion Questions for How Dare They Stop Our Ball Game?

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263 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 32. Should the networks be able to interrupt professional football games?

Students’ responses will vary.

33. What are the benefits of advertising for the television viewers? For the National Football League?

One could argue that an advantage to television viewers is the ability to watch the game on major television networks. As networks would not be able to afford to buy the rights to broadcast football games without the money from selling advertising time to large national sponsors, they probably would not be able to televise the games. The National Football League gets the advantage of having their games broadcast to their millions of fans, spreading the knowledge of the teams and the sport to millions of households.

34. If advertising was not permitted, what would be the alternative for football fans across the nation?

Students’ responses will vary.

Chapter Review Questions 109.

What steps do companies generally take to develop and introduce a new product?

Introducing a new product involves a six-step process: (1) idea development, (2) screening new ideas, (3) business analysis, (4) product development, (5) test marketing, and (6) commercialization.

110.

What is the product life cycle? How does a product’s life cycle stage affect its marketing strategy?

Product life cycle refers to the life of a product in the marketplace. Like people, products are born, and they grow, mature, and eventually die—that is, they are pulled from the market. The four stages of the product life cycle are introduction, growth, maturity, and decline.

A marketer must perform different tasks for each life cycle stage of a product. In the introductory stage, consumer awareness and acceptance are limited. Thus, buyers must be made aware of the fact that the product exists and offers benefits. In the growth stage, competing firms become aware that the product has achieved some success and may make decisions to enter the market. During the growth stage, the firm tries to strengthen its position in the market by emphasizing benefits in identifying market segments that want these benefits. The maturity stage is characterized by severe competition and heavy expenditures for marketing expenses. New competitors emphasize improvements and differentiation of the product. A company may have to introduce new brand extensions. This is done to maintain a large market share. During the decline stage, sales continue to fall rapidly. As profits drop, firms may eliminate certain models or items. Plans must be made for phasing out the product and introducing new products to take its place.

111.

Which marketing mix variable is the most flexible? Why? Price is the most flexible variable in the marketing mix. Although it may take years to develop a product, establish channels of distribution, and design and implement promotion, a product’s price may be set and changed in a few minutes.

112.

Distinguish between the two ways to set the base price for a new product.

Price skimming is setting the highest possible price that buyers will pay. This method allows a company to generate revenue to offset research and development costs and guards against setting a price that does not cover expenses. It Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

264 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual is easier to lower prices on a successful product than it is to raise them. However, the high price and quick profits may attract competitors into the market, lowering profits.

By contrast, a penetration price is a low price designed to let a product enter the market and gain market share rapidly. This policy is less flexible than price skimming because it is more difficult to raise a penetration price than it is to lower a skimming price. Penetration pricing is used most often when it is suspected that competitors will enter a market soon after a product has been introduced. Penetration pricing allows the marketer to gain a large market share and discourage competitors from entering the market. It is most appropriate when demand is highly elastic.

113.

What is probably the least flexible marketing mix variable? Why? Distribution is probably the least flexible marketing mix variable. Distribution decisions are among the least flexible marketing mix decisions because they involve committing resources and establishing contractual relationships. They are difficult or impossible to change.

114.

Describe the typical marketing channels for consumer products.

There are four basic marketing channels for consumer products: a. Channel A moves the product from the producer directly to the consumer. b. In Channel B, the product moves from the producer, to a retailer, to the consumer. c. In Channel C, the product goes from the producer, to a wholesaler, to a retailer, to the consumer. d. Channel D moves the product from the producer to an agent, to a wholesaler, to a retailer, to the consumer.

115.

What activities are involved in physical distribution? What functions does a warehouse perform?

Physical distribution includes all the activities necessary to move products from producers to customers—inventory control, transportation, warehousing, and materials handling.

Warehousing involves the design and operation of facilities to receive, store, and ship goods. Warehousing makes products available for shipment to match demand at different geographic locations.

116.

How do publicity and advertising differ? How are they related?

Advertising is paid for by an identified sponsor and is usually directed to a mass market. The seller has complete control over this form of promotion. Publicity is often viewed as being part of a public relations program, a broad set of communication activities designed to maintain favorable relations between an organization and the public.

Advertising messages tend to be informative, persuasive, or both; publicity is mainly informative. Advertising is often designed to have an immediate impact or to give specific information to persuade a person to act. Publicity usually describes what a firm is doing and the type of products that are being launched, or it offers other newsworthy information that is not a call for action. When using advertising, the organization must pay for media time. A company may spend money to release information to the press or to call a news conference, but this is not paying for media time. Therefore, people outside the organization shape the message—either positively or negatively. Advertising can be directed and repeated a number of times; most publicity appears in the mass media once and is not repeated.

117.

What does the personal selling process involve? Briefly discuss the process.

Personal selling is a process of informing potential buyers and persuading them to purchase a product. For most salespeople, personal selling is a six-step process: prospecting, approaching, presenting, answering objections, closing, and following up. The following is a brief description of each step in the personal selling process.

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265 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 1.

2.

3.

4.

5.

6.

Prospecting is identifying potential buyers.

Approaching involves referrals or cold canvassing to call on potential customers.

Presenting is making a presentation to get the prospect’s attention and to persuade the prospect to buy.

Handling objections, or reasons for not buying the product, may be done before or as soon as problems arise.

Closing is asking the prospect to buy the product.

A good salesperson will follow up on a successful sale to make sure that the customer is satisfied with the product.

118.

List the circumstances in which the push and pull promotional strategies are used.

In developing a promotion mix, marketers must decide whether to fashion a mix that pushes or pulls the product.

When using the push strategy, the marketer attempts to motivate these middlemen to push the product down to their customers. In contrast, a pull strategy uses promotion to create consumer demand for a product so that the consumers exert pressure on marketing channel members to make the product available. Consumers create a pull for the product by requesting it from their retail outlet. A company can use either strategy, or it can use a variation or combination of the two. The allocation of promotional resources to various marketing mix elements probably determines which strategy will be used.

Connect Exercises Below are the available exercises in Connect for this chapter. Please also see the Connect Content Matrix in your Instructor Resource library for additional details on these exercises (including Learning Objectives, topics, Bloom’s level, AACSB, etc.)

89. Steps in Developing New Products (Click & Drag): Understand that a firm can take considerable time to get a product ready for the market. Before introducing a new product, a business must follow a multi-step process.

90. Types of Promotions (Click & Drag): In this activity, categorize the promotional activities of a national toy manufacturer and a community bookstore by type of promotion.

91. Xbox: Playing the Pricing Game (Case Analysis): When Microsoft, an industry leader, introduced Xbox into the market, it did so at an initial loss. This case looks at why Microsoft chose to do this and its long-term marketing strategy.

92. The Product Life Cycle (iSeeit! Video Case): This short video describes how products move through the product life cycle of introduction, growth, maturity, and decline.

93. Integrated Marketing Communications (iSeeit! Animated Video Case): This short video describes how the promotional mix can be used to promote a business in order to help attract new customers and increase profits.

94. SXSW (Video Case): Understand that business today, with the increased use of electronics and social media, are extending their promotional activity to less expensive, yet still effective, forms of promotions.

95. Blair Family Sporting Goods - Keeping the Business Alive (Case Analysis): Demonstrate your understanding of the Marketing Mix by applying marketing components to a small business dilemma.

96. Product Development – Steps Towards Success (iSeeit! Animated Video Case): Demonstrate your understanding of the product development process that is used to identify new products to serve current or new markets, to increase profitability.

97. Types of Distribution – Which Path is Right for You? (iSeeit! Animated Video Case): Demonstrate your understanding of the channel of distribution, and how businesses need to select the distribution strategy that will be the most beneficial to them.

98. Dunkin' Donuts and the 4Ps (Video Case): Demonstrate your understanding of the how marketing principles can be used to maintain success even when there is intense competition.

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266 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Class Discussion Questions 31. Pick three products you use every day (in school, at work, or for pleasure—perhaps one of each). Determine what phase of the product life cycle each is in. Evaluate the marketer’s strategy (product, price, promotion, and distribution) for the product and whether it is appropriate for the life cycle stage.

Product Coca-Cola

Life Cycle Stage Maturity

Apple iPad

Growth

Pontiac vehicle

Decline

Marketing Strategy Heavily advertising; looking into expanding into different countries or continents such as Africa, which is requiring the firm to build factories and distribution systems; releasing smaller sizes of product and experimenting with different formulas in response to health concerns; expanding into other product lines such as juices Releasing a new “improved” iPad each year; generating substantial word-ofmouth marketing before release; pricing iPads high; distributing in Apple stores and some retailers; many parts of iPad are made in Chinese factories to take advantage of lower labor and materials costs; making known benefits such as latest advances in technology Phased out by GM; now sold by individual owners; prices likely to be lower as they are used models

32. Design a distribution channel for a manufacturer of stuffed toys.

Sample Distribution Channel: Producer: Creates stuffed animals  Wholesaler: Stores stuffed animals and ships to various toy retailers  Retailer: Displays and sells stuffed animals to consumers  Consumer: Buys stuffed animals OR Producer: Creates stuffed animals  Sells on internet  Consumer: Buys stuffed animals 33. Pick a nearby store and briefly describe the kinds of sales promotions used and their effectiveness.

Students’ answers will vary.

Build Your Business Plan Encourage students to consider developing a short survey instrument to ascertain demand for their business, especially if the business will primarily serve the needs of college students. The questionnaire could help them determine how much college students are willing to spend on a particular product category and how far they are willing to travel to obtain or experience the product/service.

As far as setting the final price, have students identify a local business they perceive is too high priced. What you want to do is uncover the real reason students have this perception. This will help the students realize how important perception and the image of the establishment are to the customer.

Using the example suggested in the Instructor’s manual for Chapter 11, have the students suggest ideas for special opening events for your new Thai Restaurant that will not drain them financially. How will they spread the “word of mouth” for this new establishment?

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267 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Video Case: Cutting Edge Quality: Cutco “Knives for Life” Cutco began manufacturing knives in Olean, New York, in 1949 when Alcoa Corp and Case Cutlery formed a joint venture to begin creating high-quality cutlery. Since 1949, Cutco has used a direct sales channel. In 1981, Vector was founded in Philadelphia as the sales division. Cutco is proud of its history and heritage as an American knife manufacturer. Quality and fair treatment of employees and the community are first and foremost the priorities for the company. Cutco’s knife blades are made from a high carbon stainless steel, which goes through a 3-stage heat treatment process to ensure that blades can take a sharp edge, maximize their resistance to corrosion, and won’t snap under pressure.

Cutco is now one of the few American cutlery companies to keep manufacturing in the U.S. In an unparalleled commitment to American jobs and American-made knives, Cutco purchased the fabricating equipment for its stainless table knives and insourced the product into its own factory in Olean after its supplier went bankrupt.

The driver of the Cutco distribution model is direct selling primarily using college students to sell its products. It has begun to experiment with different sales methods. For example, Cutco has opened 16 retail locations since 2005 in order to give existing customers a place to service their knives while allowing potential customers a place to view and handle its products.

The stores also offer more than 100 kinds of kitchen cutlery products in addition to its knives such as utensils, kitchen shears, flatware, cookware, and a full line of sporting knives.

Video Case Discussion Questions 34. How has Cutco used quality to differentiate its products?

Cutco emphasizes quality in its promotions emphasizing that it is an American-made product. All Cutco knives come with a “Forever Guarantee” that allows customers to have their knives serviced for free, regardless of when the knives were purchased, so the knives can be passed from generation to generation. All other flatware is made outside the U.S. 35. How does Cutco add value to its products through the “Forever Guarantee”?

The “Forever Guarantee” permits the customer to not only keep and use the product for their lifetime but value is added because the knives can be passed on to the next generation.

36. Does the direct selling channel help position Cutco’s high-quality knives in the marketplace?

Since personal selling is generally used to sell more expensive products. Cutco’s high quality will appear to be a “good fit” since personal selling is the most flexible of the promotional methods. The Cutco sales representatives will have an opportunity to communicate specific information about the product that might trigger a purchase. Finally, only personal selling can zero in on a prospect and attempt to persuade that person to make a purchase.

Team Exercise Students will form groups and search for examples of convenience products, shopping products, specialty products, and business products. They should discuss how these products are marketed. Students will provide examples of any ads that they can find to show examples of the promotional strategies for these products. They will then report their findings to the class.

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268 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Build Your Skills Analyzing Motel 6’s Marketing Strategy Background Made famous through the well-known radio and TV commercials spoken in the distinctive “downhome” voice of Tom Bodett, the Dallas-based Motel 6 chain of budget motels is probably familiar to you. Based on the information provided here and any personal knowledge you may have about the company, you will analyze the marketing strategy of Motel 6.

Task Read the following paragraphs; then complete the questions that follow.

Motel 6 was established in 1962 with the original name emphasizing its low-cost, no-frills approach. Rooms at that time were $6 per night. Today, Motel 6 has more than 760 units, and the average nightly cost is $49.99. Motel 6 is the largest companyowned and operated lodging chain in the United States. Customers receive HBO, ESPN, free morning coffee, and free local phone calls, and most units have pools and some business services. Motel 6 has made a name for itself by offering clean, comfortable rooms at the lowest prices of any national motel chain and by standardizing both its product offering and its operating policies and procedures.

The company’s national spokesperson, Tom Bodett, is featured in radio and television commercials that use humorous stories to show why it makes sense to stay at Motel 6 rather than a pricey hotel. In appealing to pleasure travelers on a budget as well as business travelers looking to get the most for their dollar, one commercial makes the point that all hotel and motel rooms look the same at night when the lights are out—when customers are getting what they came for, a good night’s sleep.

Motel 6 location sites are selected based on whether they provide convenient access to the highway system and whether they are close to areas such as shopping centers, tourist attractions, or business districts.

1. In SELECTING A TARGET MARKET, which approach is Motel 6 using to segment market?

A) Concentration approach, B) multisegment approach 2. In DEVELOPING A MARKETING MIX, identify in the second column of the table what the current strategy is and then identify any changes you think Motel 6 should consider for carrying it successfully through the next five years.

Marketing Mix Variable a. Product b. Price c. Distribution d. Promotion

Current Strategy

5-Year Strategy

Answer Key: 1. B (pleasure travelers on a budget; business travelers looking to get the most for their dollar) 2. Here are some possible answers: Marketing Mix Variable a.

Product

Current Strategy Clean, comfortable rooms.

5-Year Strategy In appealing to business travelers, Motel 6 should provide rooms that keep pace with the increased dependence of business travelers on communication technology.

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269 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual b.

Price

c.

Distribution

d.

Promotion

The lowest price of any national motel chain.

Motel 6 location sites are selected based on whether they provide convenient access to the highway system and whether they are close to areas such as shopping centers, tourist attractions, or business districts.

The company’s national spokesperson, Tom Bodett, is featured in radio and television commercials that use humorous stories to show why it makes sense to stay at Motel 6 rather than a pricey hotel.

This strategy should continue to work well for them for the next five years.

It makes sense to continue constructing new sites at places where people need overnight lodging. Motel 6 should look for opportunities to provide low-cost lodging in high-traffic recreational and entertainment areas (theme parks, casinos, ski resorts, etc.) where lodging might normally be higher.

Explore other avenues for advertising— the Internet and other forms of electronic communication.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 48. The Importance of Generic Products in the Marketplace 49. The Success or Failure of New Products 50. A Comparison of Research and Development for Japan and the United States 51. A Comparison of Major Modes of Transportation in your city or geographical area

Guest Speaker Suggestions 42. A representative from a local firm to speak on any of the following topics: a. Research and Development b. Product Line and Product Mix c. Branding, Packaging, and Labeling d. Test Marketing 43. A representative of a distribution center to speak about the distribution process 44. A representative of a wholesaler or other marketing intermediary to talk about the way his or her organization performs marketing functions

Teaching Suggestions 56. Cover the chapter content by using “Lecture Outline and Notes” and slides or transparency masters indicated in the left margins.

57. “Check Your Progress” is especially helpful for understanding the concepts of this chapter. To save time, these questions could be assigned as an outside assignment in which students will write answers or be prepared to answer in class. “Additional Discussion Questions and Exercises” are provided in this Instructor’s Manual.

58. As time permits, use the discussion of boxed material.

59. Check off each of the objectives given at the beginning of the textbook.

60. Have students view the video case.

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270 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Chapter 13: Digital Marketing and Social Networking Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s highlights. Followup via the Connect exercises is then encouraged to provide a holistic understanding of the chapter. Use the hyperlinked Table of Contents below to jump to different sections of the manual.

Table of Contents Chapter Forecast ......................................................................................................................................................................... 270 Learning Objectives ..................................................................................................................................................................... 271 Key Terms and Definitions ........................................................................................................................................................... 271 Content Outline ........................................................................................................................................................................... 272 Boxed Text Critical Thinking Questions ....................................................................................................................................... 278 What Does It Mean // to Be a Digital Marketer? / ...................................................................................................................... 279 Bonus Teaching Resources .......................................................................................................................................................... 280 Chapter Review Questions .......................................................................................................................................................... 282 Connect Exercises ........................................................................................................................................................................ 284 Class Discussion Questions .......................................................................................................................................................... 284 Build Your Business Plan.............................................................................................................................................................. 285 Video Case: Should Employees Use Social Media Sites at Work? ............................................................................................... 285 Team Exercise .............................................................................................................................................................................. 287 Build Your Skills ........................................................................................................................................................................... 287 Term Paper or Project Topics ...................................................................................................................................................... 288 Guest Speaker Suggestions ......................................................................................................................................................... 289 Teaching Suggestions .................................................................................................................................................................. 289

Chapter Forecast The Internet and information technology have dramatically changed the environment for business. Marketers’ new ability to convert all types of communications into digital media has created efficient, inexpensive ways of connecting businesses and consumers and has improved the flow and the usefulness of information. In this chapter, we first provide some key definitions related to digital marketing and social networking. Next, we discuss using digital media in business and digital marketing. We look at marketing mix considerations when using digital media and pay special attention to social networking. Then we focus on digital marketing strategies—particularly new communication channels like social networks— and consider how consumers are changing their information searches and consumption behavior to fit emerging technologies and trends. Finally, we examine the legal and social issues associated with information technology, digital media, and e-business.

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271 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Learning Objectives LO 13-1 Recognize the increasing value of digital media and digital marketing in strategic planning.

LO 13-2 Demonstrate the role of digital marketing in today’s business environment.

LO 13-3 Show how digital media affect the marketing mix.

LO 13-4 Illustrate how businesses can use different types of social networking media.

LO 13-5 Explain online monitoring and analytics for social media.

LO 13-6 Identify legal and ethical considerations in digital media.

Key Terms and Definitions Blogs Web-based journals in which writers can editorialize and interact with other Internet users Digital marketing Uses all digital media, including the Internet and mobile and interactive channels, to develop communication and exchanges with customers Digital media Electronic media that function using digital codes via computers, cellular phones, smartphones, and other digital devices that have been released in recent years e-business Carrying out the goals of business through utilization of the Internet Identity theft When criminals obtain personal information that allows them to impersonate someone else in order to use their credit to access financial accounts and make purchases Omni-channel retailing A type of retail that integrates the different methods of shopping available to consumers (e.g., online, in a physical store, or by phone) Online fraud Any attempt to conduct fraudulent activities online Podcast An audio or video file that can be downloaded from the Internet with a subscription that automatically delivers new content to listening devices or personal computers Viral marketing A marketing tool that uses a networking effect to spread a message and create brand awareness. The purpose of this marketing technique is to encourage the consumer to share the message with friends, family, co=workers, and peers Wiki Software that creates an interface that enables users to add or edit the content of some types of websites

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272 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Content Outline The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a section on which CONNECT activities can be used in the chapter. This is created so that you can facilitate in-class or online discussion effectively.

LO 13-1 Recognize the increasing value of digital media and digital marketing in strategic planning.  

Introduction Growth and Benefits of Digital Communication

PowerPoint Slides PPT 13.4

  

E-business Digital media Digital marketing

Lecture Outline and Notes: LXVI.

PPT 13.6

PPT 13.7

Growth and Benefits of Digital Communication a. An e-business involves carrying out the goals of business through the use of the Internet b. Digital media are electronic media that function using digital codes via computers, cellular phones, smartphones, and other digital devices that have been released in recent years. c. Digital marketing uses digital media to develop communications and exchanges with customers d. The Internet has created opportunities for businesses to create relationships with consumers, to target markets more precisely, and to reach previously inaccessible markets worldwide. e. The Internet also facilitates business transactions, allowing companies to network with manufacturers, wholesalers, retailers, suppliers, and outsource firms to serve customers more quickly and efficiently. f. Digital marketing has 5 key characteristics: addressability, interactivity, accessibility, connectivity, and control. (Table 13.1)

LO 13-2 Demonstrate the role of digital marketing in today’s business environment. 

Key terms:

Key terms:

Using Digital Media in Business

PPT 13.9

I.

Using Digital Media in Business a. Digital media have created new ways of doing business and shopping. i. Fast communication ii. Real-time exchanges iii. More interactive iv. Comparison shopping easier v. Easier to conduct marketing research and advertise b. Digital markets are more similar to traditional markets than they are different. c. With more firms conducting business over the Internet, there is a need to control access to their digital communication systems to ensure worker productivity. d. The Internet has lowered the cost of communication and transactions i. Industries where the cost of business and customer transactions were traditionally high have benefitted the most from the Internet. e. Digital media can also improve communication within and between businesses. i. Yet controlling employee access to digital media is becoming a problem as many employees waste work time engaging in digital media.

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273 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual LO 13-3 Show how digital media affect the marketing mix. 

Digital Media and the Marketing Mix o Social Media Marketing

PPT 13.10

PPT 13.11

PPT 13.12

PPT 13.13

PPT 13.14

PPT 13.15

Key terms: 

Omni-channel retailing

II. Digital Media and the Marketing Mix a. There are some key differences between digital media and traditional media as pertains to the marketing mix: i. Communications are richer, faster, and more interactive ii. Companies can reach target markets more easily, affordably, and quickly iii. They help marketers utilize new resources in seeking out and communicating with customers b. Digital media let marketers and customers easily share information through e-mail, mobile phones, social networking, wikis, media sharing sites, podcasts, blogs, videoconferencing, and other technologies. c. Achieving the right marketing mix remains essential. (Figure 13.1) i. Product considerations 1. Connectivity of digital media creates opportunities for businesses to add services and to enhance product benefits.

2. Some products are only available via digital media.

3. The Internet can make it easier to anticipate consumer needs—but competition makes quality products and service offerings more important than ever. ii. Distribution considerations 1. The Internet is a new distribution channel.

2. Processing orders electronically reduces inefficiencies, costs, and redundancies while increasing speed.

3. Shipping times and costs are an important element in attracting customers. iii. Promotion considerations 1. Promotion is one of the best applications for digital media a. It increases brand awareness. b. It takes advantage of social networks or virtual worlds to form relationships and generate positive publicity about products c. Thanks to online promotion, consumers can be more informed now than ever, including reading consumer-generated content before making purchasing decisions.

2. Consumer consumption patterns are changing, and marketers must adapt their promotional efforts to meet them iv. Pricing considerations 1. Price is the most flexible element of the marketing mix.

2. Digital marketing can enhance products’ value by providing extra benefits like service, information, and convenience.

3. Discounts and promotions can be quickly communicated using digital media.

4. Deal websites allow consumers to compare prices of products. d. Social Media Marketing i. Social media marketing involves obtaining communications with consumers through social media sites. Social media marketing enables firms to promote a message and create online conversations through multiple platforms.

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274 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual LO 13-4 Illustrate how businesses can use different types of social networking media.   

Types of Consumer-Generated Marketing and Digital Media Using Digital Media to Reach Consumers Using Digital Media to Learn about Consumers

PPT 13.16

PPT 13.18

PPT 13.19

PPT 13.20

Key terms:    

Blog Wiki Viral marketing Podcast

III. Types of Consumer-Generated Marketing and Digital Media a. Digital media are more consumer-driven than traditional media. Two factors have sparked the increase in consumer-generated information. i. Increased tendency for consumers to publish their thoughts, opinions, and reviews of products via blogs and other digital media. ii. Consumers tend to trust other consumers over corporations. b. Social Networks i. A social network is a web-based meeting place for friends, family, co-workers, and peers that lets users create a profile and connect with other users for a variety of purposes.

1. Are valuable to marketers as a means of building relationships with customers, providing product information, and learning about consumer needs.

2. As online social networking expands in popularity, marketers are using the venue to contact new target markets.

3. An important question is how social media are adding value to the economy. However, it may be too early to assess the exact economic contribution of social media to the entire economy. ii. It is estimated that today’s adults spend approximately 2.5 hours per day on social networking sites. (Table 13.2) iii. As social networks evolve both marketers and the owners of social networking sites are realizing the opportunities such networks offer. iv. Facebook 1. Became the largest social networking site in the world in 2008.

2. Facebook users create profiles, which they can make public or private, and then search the network for people with whom to connect.

3. Appeals to a broad demographic, making it a great resource for marketers. a. Users can become a fan of products and companies by clicking on the “Like” button.

4. Social networking sites are useful for relationship marketing, or the creation of relationships that mutually benefit the marketing business and the consumer.

5. Companies are utilizing relationship marketing through Facebook to help consumers feel more connected to their products and gain publicity. v. Twitter 1. Is a hybrid social networking and micro-blogging site.

2. Twitter asks one question: “What’s happening?’ Members can post answers of up to 140 characters.

3. Twitter is often used to answer customer questions or concerns and to post updates. vi. Snapchat 1. The mobile app, launched in 2011, allows users to send messages and disappearing photos and videos to friends. vii. YouTube 1. Purchased by Google for $1.65 billion.

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2. YouTube allows users to upload and share videos worldwide. viii. TikTok 1. TikTok is a video-sharing platform that specializes in short-form mobile video.

2. Unlike other video platforms, TikTok encourages users to build off of other user’s content. ix. LinkedIn 1. LinkedIn is the top networking site for businesses and business professionals. c. Blogs and Wikis i. Blogs (web-logs) are web-based journals through which authors can editorialize and interact with other Internet users.

1. Three-fourths of Internet users read blogs.

2. Blogs give consumers power because companies cannot control what bloggers write. a. Negative blog posts can damage a company’s reputation, but positive blog posts can enhance it.

3. Some firms are using their own blogs to answer concerns or defend their reputations. a. Smart companies are using blogs to build enthusiasm for their products and create relationships with consumers. ii. Wikis are websites where users can add or edit content of posted articles.

1. Wikipedia is the most famous wiki.

2. Monitoring wikis can give corporations a better idea of how consumers feel about their company or products.

3. Some organizations use wikis as an internal tool for complex projects. d. Media Sharing i. Media sharing sites are more limited in scope in how companies can interact with consumers and tend to be more promotional than reactive. ii. Their popularity provides the potential to reach a global audience of consumers. iii. Video sharing sites 1. Allows anyone who wishes to upload videos to the Internet to do so.

2. YouTube is the most popular, but hundreds of other video sharing sites exist. iv. Photo Sharing 1. Photo sharing sites present marketers with the opportunity to market themselves visually by displaying snapshots of company events, company staff, and/or company products.

2. Instagram has surpassed Flickr as the most popular photo-sharing site.

3. Pinterest is a photo sharing bulletin board site that combines photo sharing with elements of bookmarking and social networking. v. Podcasting 1. Podcasts are audio or video files that can be downloaded from the Internet via a subscription that delivers content to listening devices or personal computers. a. Podcasts are convenient, giving users the ability to listen or view content when and where they choose.

2. Podcasts are a good tool for reaching the 18- to 34-year-old demographic. a. Podcasts are becoming extremely popular and can be viewed on tablets, laptops, and smartphones. e. Mobile Marketing i. Consumers increasingly do their business and shopping on their mobile devices and smartphones.

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1. E-commerce on smartphones is expected to rise.

2. The most important feature of apps is the convenience and cost savings they offer the consumer. ii. Some of the more common marketing tools on mobile devices include: 1. SMS messages 2. Multimedia messages 3. Mobile advertisements 4. Mobile websites 5. Location-based networks (e.g. Foursquare) 6. Mobile applications a. Mobile applications (apps) are software programs that run on mobile devices and give users access to certain content. (Figure 13.2) f. Applications and Widgets i. Applications are adding an entirely new layer to the marketing environment, the majority of Americans now own smartphones. ii. The most important feature of apps is the convenience and cost savings they offer to the consumer.

1. Certain apps allow consumers to scan a product’s barcode and then compare it with the prices of identical products in other stores. iii. To remain competitive, companies are using mobile marketing to offer additional incentives to consumers (QR scanning app) IV. Using Digital Media to Reach Consumers a. While consumers use digital media to access more product information, marketers can use the same sites to get better and more targeted information about the consumer—often more than they could gather through traditional marketing venues. b. As in traditional marketing, digital marketers must know their target market. i. Marketers must focus on the changing social behaviors of consumers, the ways in which they gather and use information, and the way the Internet is enabling them to get involved in the marketing process. ii. Mobile payments are gaining traction.

1. The Google Wallet and Apple Pay apps allow shoppers to tap their phones at the point of sale for the transaction to be registered.

2. Square provides smartphone swiping devices for credit cards.

3. Bitcoin is a virtual currency that can be used to make payment via a smartphone.

4. The popularity of mobile payments will depend largely on whether companies will adopt this payment system. iii. Widgets are small bits of software on a website, desktop, or mobile device that perform a simple service.

1. Marketers may use widgets to display news headlines, clocks, or games on their web pages.

2. Widgets downloaded to a user’s desktop can update the user on the latest company or product information, enhancing relationship marketing between companies and their fans.

3. Can be used to personalize web pages, alert users to the latest company information, and spread awareness of the company’s products. c. By analyzing rich site traffic data, marketers can better understand their customers and measure the effectiveness of their marketing efforts. d. TABLE 13.2 Google Analytics i. Real time Data updates are live so you can see pageviews, top social traffic, top referrals, top keywords, top active pages, and top locations in real time. ii. Audience reports provide insight into demographics, interests, geography,

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behavior, mobile use, and more. iii. Acquisition In-bound traffic is monitored through acquisition reports, allowing you to compare traffic from search, referrals, e-mail, and social media. e. Behavior Use RSS feeds. Add tags to web pages or photos. “Vote” for websites online. i. Conversions Google Analytics allows users to set goals and objectives to monitor web conversions, like signing up for an e-mail newsletter or completing a purchase.

V. Using Digital Media to Learn about Consumers i. Digital media can be great resources for conducting market research, gathering information about consumers, and asking customers about their preferences. ii. Crowdsourcing involves using communities of interested consumers to gather input and feedback for marketing purposes. iii. Online forums can be a good place to gather consumer feedback 1. Online reviews are estimated to influence the buying decisions of approximately 90% of U.S. consumers.

2. In the case of negative feedback, digital media allow companies to directly ask consumers what can be done to improve.

3. Despite the ease and obvious importance of online feedback, many companies do not yet take full advantage of the digital tools at their disposal.

LO 13-5 Explain online monitoring and analytics for social media.

Key terms:

LO 13-6 Identify legal and ethical considerations in digital media.

 

 

Identity theft Online fraud

Legal and Social Issues in Internet Marketing Digital Media’s Impact on Marketing

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VI. Legal and Social Issues in Internet Marketing a. The extraordinary growth of information technology, the Internet, and social networks has generated many legal and social issues for consumers. (Figure 13.3) i. The U.S. Federal Trade Commission (FTC) compiles an annual list of consumer complaints related to the Internet and digital media. b. Privacy i. Shopping on the Internet allows companies to track consumers on a personal level without their knowledge (something that is not as much of a problem in stores). ii. Cookies are often used to track information on the Web. 1. Can be used in a positive way to customize services 2. Consumers have the option of turning off cookies on their computers, but the potential for misuse has left many consumers uncomfortable with this technology. iii. Due to consumer concerns over privacy, the Federal Trade Commission is considering developing regulations that would better protect consumer privacy by limiting the amount of consumer information that businesses can gather online.

1. One proposed solution is a “do not track” bill.

2. Web advertisers see the potential for additional Internet regulation as a threat. They are attempting to engage in self-regulation, such as a do-nottrack icon, to stave off unfavorable Internet regulation. c. Identity theft occurs when criminals obtain personal information that allows them to impersonate someone else in order to access financial accounts and make purchases. i. Security breaches are a serious threat to organizations and individuals. ii. Phishing is using a familiar website to deceive people into divulging private information.

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iii. The National Fraud Center wants financial institutions to implement new technologies such as digital certificates, digital signatures, and biometrics to decrease identity theft. d. Online fraud includes any attempt to conduct fraudulent activities online, such as by deceiving consumers into releasing personal information. i. Cybercriminals are increasingly using online social networking sites and other digital media to commit fraud—either to damage a company’s reputation or to gather private information from consumers. ii. Consumers must always be careful what information they give when online, and only give out credit card numbers on trusted and secure sites. iii. Credit card fraud is a major type of fraud that occurs online. One way to tackle credit card fraud is for banks to use a pin number when doing online transactions. e. Intellectual Property and Other Illicit Activity i. Can be ideas and creative materials, songs, movies, books, electronics, etc. ii. Is generally protected by patents and copyrights, but these can be hard to enforce in a global marketplace.

1. IP theft is a problem that has grown in the digital age with sites like YouTube, and illegal software downloads are on the rise. iii. Many consumers rationalize the illegal sharing of digital content.

1. Piracy and illegal sharing cost the industry billions annually. iv. Illicit online marketing is becoming a serious issue for law enforcement throughout the globe.

1. Websites that deal in illegal drugs are looking increasingly legitimate.

2. Knockoffs of popular goods seized annually by federal agents are valued at over $1 billion.

VII. Digital Media’s Impact on Marketing a. To be successful in business, you need to develop a strategic understanding of how digital marketing can make your business more efficient and productive. b. Businesses accustomed to traditional marketing media can find the transition to digital marketing challenging, but it is necessary to remain competitive. i. The correct blend of traditional and new digital media in the marketing mix can require time and careful consideration. ii. Future marketing career opportunities will require a solid knowledge of digital and traditional marketing media.

Boxed Text Critical Thinking Questions Insta-Scam: Brands Crack Down on Influencer Fraud 37. What problems do advertisers have when paying influencers by their amount of social media followers?

Because popular social media users called influencers or micro-influencers are mainly paid by the number of social media followers they have, influencers have an incentive to inflate their numbers.

38. How can advertisers use social media to advertise more effectively?

To advertise more effectively, advertisers may choose a better metric to assess effectiveness. Social media engagement in which influencers are paid based off the amount of interaction users had with their post may be more effective.

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279 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 39. What kind of tools could social media sites build to prevent fraud?

Advertisers, such as Unilever, have called on social media platforms to crack down on fraudulent behavior and urged the industry to be cautious when using social media influencers.

The Music Industry Gets a Tune Up 37. How does music streaming display the digital characteristics of marketing, such as greater accessibility and connectivity?

More consumers are paying for music-streaming services to get greater access to music and avoid listening to advertisements.

38. Describe how music streaming utilizes the marketing mix.

Music streaming provides a vast number of products (music selections) instantly (without the need for a physical location or intermediary) at a low price. For about $10 month, users can purchase a paid subscription to a streaming service and gain access to thousands of songs. Promoting these services are simple with Internet advertising.

39. What ethical issues do you think might occur as music streaming continues to increase?

Answers will vary but students need to support their answer.

Fake Out: Amazon Kicks Counterfeits to the Curb 36. What types of legal and social issues in Internet marketing do counterfeit products create on e-retailing sites?

Amazon’s simple process for listing products has created an onslaught of counterfeit listings that make it difficult for consumers to distinguish what is real.

37. What responsibility do e-retailers like Amazon have to consumers in ensuring the items sold on their sites are authentic?

Most consumers and manufacturers think that e-retailers have a responsibility to prevent fraud. E-tailers are taking measures to fight the fakes. Amazon requires third-party sellers to provide proof they are licensed to sell items from Adidas, Asics, Hasbro, Nike, and Samsung. Additionally, the company committed $400 million to invest in personnel and machine learning tools to fight fraud and abuse.

38. As e-retailers like Alibaba grow in global popularity, what additional challenges do you think e-retailers will face regarding the sale of counterfeit products on their sites?

Answers will vary but students need to support their answer.

What Does It Mean // to Be a Digital Marketer? / Why is it essential for marketers to know what digital media are available and how to best utilize them?

Digital media are the way of the future and are rapidly changing how people communicate, how they shop, and even what they buy. Companies that do not understand this risk losing competitive advantage over others that do. On the other hand, marketers who are well-versed in both traditional and new digital media will be well-positioned competitively. These marketers will be able to conduct effective market research, communicate with hard-to-reach demographics, interact with consumers, and deliver customers the products and services that they want and need in a timely and efficient manner.

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280 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Bonus Teaching Resources This section offers bonus teaching resources for class discussion. This is offered in addition to what’s offered in the M: Business text.

“Privacy Concerns in a Digital Age” MiniCase Privacy in a digital era is a concern for all people and all organizations. With technology constantly advancing, it is difficult for regulators to keep up with the changes. This leaves holes in the regulatory framework and creates opportunities for cybercriminals to take advantage of unwitting victims.

Compounding the problem is the slow eroding of the lines between public and private spheres. Online social networking sites help people to stay connected, but it also has made users (especially younger users) feel increasingly comfortable with the idea of posting private information on the Internet. Many people have blogs now, post their every move on Twitter, and keep detailed profiles on Facebook and other social networking sites. Many users do not realize the risks involved in posting private information. From receiving unsolicited sales calls to identity theft, privacy issues on the Internet are serious and growing.

Adding fuel to the fire are cutting-edge online businesses like Facebook. Facebook revealed a new feature in late 2010 called Facebook Places that allowed users to input where they were at any given time. The feature was available through the iPhone, but iPhone subscribers could tag their friends (who may not have iPhones) and identify where they were located too. The American Civil Liberties Union (ACLU) was concerned about the ramifications of this product, further citing that it was difficult to opt out of using it if your friends sought to tag you and your location. The ACLU was also concerned about the likelihood that third parties would be able to access the Places information available through Facebook. If your friend had tagged you, the other apps that he or she had in their iPhone might be able to access the information as well.

Facebook assured concerned consumers that its security measures were of the highest standard, and that there were few opportunities for Places to be misused by third parties. Facebook suffered a series of problems and criticisms regarding its privacy settings in 2010 and has taken many steps to simplify them. Facebook claimed that its only aim in releasing Places was to allow people to connect in a new, fun, social way. Nevertheless, critics say that Facebook has not done enough. Places was discontinued the next year. However, Facebook’s privacy mishaps were not over. The Federal Trade Commission recently mandated that Facebook have annual privacy audits performed for the next 20 years after it was ruled that Facebook had misled users about some of the ways it collects information as well as making some information public that users thought would remain private.

While many young people may think nothing of divulging personal information while online, security experts and others are worried about privacy on Facebook. Location-based tools let users know where you are via online social networking sites. It also lets the world know when you are not home. Paris Hilton and other celebrities were robbed repeatedly in late 2009. Once apprehended, the thieves admitted that they were able to track when the celebrities were out of their homes through tweets.

When Hilton tweeted that she was out at a party or out on vacation, the thieves knew that they had a window of opportunity during which they could break into her home.

These information-sharing technologies are not all bad, however. They have allowed marketers to better target important markets, as well as opened up new avenues of communication between businesses and consumers. Digital technologies have helped businesses and individuals connect and stay in touch in ways that were unthinkable even 15 years ago. In many ways, they have changed how people interact, the kinds of products people want to consume, and how businesses conduct research and marketing activities. In this way, Facebook and other companies like it have created new and positive opportunities for businesses to succeed in an increasingly fast-paced and competitive business environment.

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281 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Sources: Jenna Wortham, “New Facebook Location Feature Sparks Privacy Concerns,” New York Times, August 18, 2010, http://bits.blogs.nytimes.com/2010/08/18/new-facebook-location-feature-sparks-privacy-concerns/ (accessed November 4, 2012); “Facebook Just Killed Places,” Gizmodo, http://gizmodo.com/5833712/facebook-just-killed-places (accessed November 4, 2012); Somini Sengupta, “F.T.C. Settles Privacy Issue at Facebook,” The New York Times, November 29, 2011, http://www.nytimes.com/2011/11/30/technology/facebook-agrees-to-ftc-settlement-on-privacy.html?_r=0 (accessed November 4, 2012); Tony Romm, “Facebook slapped by FTC with privacy audits,” Politico, November 29, 2011, http://www.politico.com/news/stories/1111/69316.html (accessed November 4, 2012).

Discussion Questions for “Privacy Concerns in a Digital Age” MiniCase 29. Why does the Internet create so many privacy issues?

The Internet and other digital technologies have grown so rapidly that adequate regulations and protections are nearly impossible. By the time laws and regulations are passed, technology has changed again, and people are no longer fully protected. Cybercriminals have developed sophisticated technologies and methods for obtaining private information, from addresses to social security numbers to bank accounts.

30. Why did Facebook Places have so many people concerned about privacy?

Facebook Places was a feature that users could use through their iPhones. It allowed people to post where they were at any given time. They could also tag their friends, therefore alerting the Facebook community to their whereabouts.

Critics like the ACLU voiced concerns over how readily accessible this information was. They believed that Facebook had stepped over a privacy line that should not have been crossed with Places. They were concerned about privacy ramifications involved with allowing Facebook and iPhone users to post their whereabouts. Facebook Places was discontinued a year later.

31. What do you think companies can do to help ensure that their customers and stakeholders are protected from cybercriminals who might seek to obtain private information?

Students’ answers will vary.

Controversial Issue: Net Neutrality This can be used in a discussion board or for in-class discussion.

The concept of “net neutrality” is that companies that provide Internet service should treat all content the same. A small blog should be treated the same as a corporate website, YouTube, or any other kind of content. Net neutrality has been a central concept behind the egalitarian nature of the Internet in that everyone’s content is equal in the eyes of service providers.

However, this idea has come under threat in a debate over whether Internet providers should be allowed to give preferential treatment to their own content or content providers who pay extra for a faster connection. If allowed, this system would create a two-tier system wherein Internet providers’ preferred content received faster download speeds and preferential treatment over the rest of the content on the Web. It would benefit the largest Internet provider companies by giving them a way to increase revenues and to choose preferential content.

Google and Verizon came out with an alternative proposal that would benefit them as major producers of smartphones and other wireless devices. The two companies proposed that net neutrality remain for wired connections (i.e. home computers), but that the two-tiered system be allowed for wireless connections. Opponents of this suggestion cite the increasing prevalence of wireless connections over wired ones. Even in their homes, people increasingly have access to wireless Internet connections. Opponents of this proposal further worry that, if Internet providers are allowed to pick and choose which content will receive preferential access, they will also be able to block content espousing controversial or dangerous ideas.

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282 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Fueling this debate was a notable court defeat. The Federal Communications Commission (FCC) has upheld the notion of net neutrality, but the District of Columbia U.S. Court of Appeals ruled that it does not have the authority to force broadband providers to uphold the neutrality of the Internet. Comcast had brought the FCC to court and the ruling represented a huge victory for the cable and Internet giant. Since the ruling, the FCC has been scrambling for ways to regulate the Internet in order to ensure fairness. The issue regained urgency with the Google and Verizon proposal, with organizations and individuals coming out strongly in favor for or against it.

The issue of net neutrality has divided corporations, with AT&T and other large companies supporting the idea of a two-tier system and Facebook backing net neutrality. Many argue that it is not fair to force people and organizations to pay for preferential access to a system that has been equally open to everyone up to this point. In many ways, having a paid fast lane and a slow lane would defeat the purpose of the Internet as a vast repository of information available for anyone who wants to contribute.

Discussion Questions for Net Neutrality 35. What is net neutrality? Why are companies divided on whether it is a good idea?

The concept of “net neutrality” is that companies that provide Internet service should treat all content the same.

Users should have equal access to all content at the same connection speeds. Generally, companies that are major Internet or wireless device providers are the organizations who are in favor of undoing the net neutrality system. This is bound to be a controversial topic, with many court cases to come, for years.

36. Why is net neutrality such a controversial issue right now? How might it affect businesses that market on the Internet?

Net neutrality is a controversial idea right now because corporations are seeking to undo it in favor of a fast lane and slow lane system wherein content providers would have to pay Internet providers premium rates in order to be placed in the fast connection group. If net neutrality is not upheld and a two-tier system is put in place, chances are good that larger companies with more money to spend on the higher access speed will benefit from the new system.

This will create a disadvantage for small businesses that cannot afford to pay the premium price for the faster access speed.

37. What do you think about the idea of net neutrality? Should the Internet stay neutral, or should Internet providers be allowed to create a tiered system?

Students’ answers will vary, but they should be able to explain their answers.

Chapter Review Questions 119.

What is digital marketing?

Digital marketing uses all digital media, including the Internet and mobile and interactive channels, to develop communication and exchanges with customers.

120.

How can marketers utilize digital media to improve business?

Marketers can use new digital media to improve marketing research, to communicate with consumers and stakeholders, to reach new target markets, and to receive feedback about new products and services. Digital media are more interactive than traditional media, allowing marketers to improve their efforts and to reach new target markets.

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283 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 121.

Define accessibility, addressability, connectivity, interactivity, and control. What do these terms have to do with digital marketing?

Accessibility, addressability, connectivity, control, and interactivity are the five characteristics of digital media that differentiate them from traditional marketing media (see Table 13.1). Accessibility allows consumers to find information about competing products, prices, and reviews and become more informed about a firm and the relative value of its products. Addressability is the ability of a business to identify customers before they make purchases.

Connectivity is the use of digital networks to provide linkages between information providers and users. Interactivity allows customers to express their needs and wants directly to the firm in response to its communications. Finally, control involves consumers’ ability to regulate the information they receive via the Internet and the rate and sequence of their exposure to that information.

122.

What is e-business?

E-business simply means carrying out the goals of business through utilization of the Internet.

123.

How is the Internet changing the practice of marketing?

There are many correct responses to this question, as it is very open-ended. The Internet has increased the speed of communications, has made marketing a more interactive practice between marketers and consumers, and has given consumers a voice and therefore more power to either criticize or praise products and services. The Internet has taken away some power from established marketing firms, even allowing fans in some instances to create popular advertising campaigns and ads. However, it has also allowed marketers to improve their market research efforts and to broaden their reach into new target markets. In some ways, the Internet has leveled the playing field and has provided small businesses with opportunities they did not have before.

124.

What impact do digital media have on the marketing mix?

Digital media change how marketers should approach the marketing mix somewhat, but the marketing mix remains as essential as ever. There are a few key differences when using digital media in the marketing mix. First, digital media make customer communications richer, faster, and interactive. Second, digital media help companies reach new target markets more easily, affordably, and quickly than ever before. Finally, digital media help marketers utilize new resources in seeking out and communicating with customers. One of the most important benefits of digital marketing is the ability of marketers and customers to easily share information.

125.

How can businesses utilize new digital and social networking channels in their marketing campaigns?

Consumers spend more time on social networking sites than they do on email, and more than three-fourths of Internet users read blogs. These numbers point to the pervasiveness of online social media and the importance for marketers in harvesting this potentially powerful tool. Students’ answers may vary as to how marketers can use new digital media in their marketing campaigns. They must explain their answers.

126.

What are some of the privacy concerns associated with the Internet and e-business? How are these concerns being addressed in the United States?

A major privacy concern related to the Internet is the ability to track people’s usage and even purchasing patterns on the individual level. The Internet allows businesses (and cybercriminals) to access large amounts of data on consumers and other users. This information, many believe, violates what should be basic rights to privacy. The regulatory system has not been able to keep up with advances in technology and therefore has not been a sufficient

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284 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual safeguard for consumers. The government is considering legislation such as a “do not track” bill to limit what kinds of information online companies can collect without user consent.

127.

What is identity theft? How can consumers protect themselves from this crime?

Identity theft occurs when criminals obtain personal information that allows them to impersonate someone else in order to use their credit to access financial accounts and make purchases. Consumers can never completely protect themselves against identity theft. However, they can be careful about the type of information that they divulge and the types of websites that they frequent when online. For instance, consumers should only do online shopping at trusted and secure sites. They should also watch out for Internet scams such as phishing, whereby con artists counterfeit a well-known website and send out e-mails directing victims to it and then trick them into revealing their personal information.

128.

Why do creators want to protect their intellectual property? Provide an example on the Internet where intellectual property may not be protected or where a copyright has been infringed.

Intellectual property is important for creators because it is a source of competitive advantage and revenues. If innovations are not protected by IP laws, then competitors will take away market share and profits from the organization or individual that invested all the time and money into research and development. Without intellectual property protection, there is little incentive to engage in researching and innovating because it is a risky, timeconsuming, and expensive endeavor with little reward. Students’ examples will vary.

Connect Exercises Below are the available exercises in Connect for this chapter. Please also see the Connect Content Matrix in your Instructor Resource library for additional details on these exercises (including Learning Objectives, topics, Bloom’s level, AACSB, etc.)

99. Benefits of Digital Communication (Click & Drag): Demonstrate your understanding digital media and digital marketing, demonstrate the role of digital marketing and social networking in today's business environment, and to illustrate how businesses can use different types of social networking media.

100.

Consumer-Generated Marketing and Digital Media (Click & Drag): Demonstrate your understanding of how businesses can use different types of social networking media.

101.

Digital Media and the Marketing Mix (Click & Drag): Demonstrate your understanding of how businesses can use digital media to affect the marketing mix.

102.

The Digital Marketing Mix (Click & Drag): Demonstrate your understanding of how businesses can use digital media and social media to affect the marketing mix.

103.

NASCAR Turns to Social Media (Case Analysis): Demonstrate your understanding of how NASCAR uses social media to promote their business.

104.

ABC Utility Adopts Social Media Marketing (Case Analysis): Apply digital marketing and social media knowledge to a business situation.

105.

Developing New Products at Domino’s (Video Case): Demonstrate your understanding of how digital marketing and social media can be used in marketing.

Class Discussion Questions Students’ answers will vary for all of the questions in this exercise. In order for students to learn from one another, assign this as homework and then have students share and discuss their responses with the class the next day.

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285 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 34. Amazon.com is one of the most recognized e-businesses. Visit the site (www.amazon.com) and identify the types of products the company sells. Explain its privacy policy.

Amazon.com sells videos, books, music, games, toys, clothing, jewelry, appliances, pet supplies, electronics, and even food. The Amazon Security & Privacy policy discusses customer rights and supplier responsibilities. The Conditions of Use are for users who want to buy products through Amazon.com and covers IP items such as trademarks, patents, and copyrights. The Amazon.com Privacy Notice discusses the rights of users, such as safe shopping, user privacy regarding information that is shared, Amazon.com updates, ways to unsubscribe, and information concerning personal notification services. It provides answers that detail some of the issues consumers might be most concerned about, such as cookies, third-party advertisers, and the type of personal information that Amazon.com collects. The Supplier Code describes ethical standards for those who supply products to Amazon.com.

35. Visit some of the social networking sites identified in this chapter. How do they differ in design, audience, and features? Why do you think some social networking sites like Facebook are more popular than others?

Students’ answers will vary depending upon which sites they view.

36. It has been stated that digital technology and the Internet are to business today what manufacturing was to business during the Industrial Revolution. The technology revolution requires a strategic understanding greater than learning the latest software and programs or determining which computer is the fastest. Leaders in business can no longer delegate digital media to specialists and must be the connectors and the strategists of how digital media will be used in the company. Outline a plan for how you will prepare yourself to function in a business world where digital marketing knowledge will be important to your success.

This question would work well as a group activity. Divide the class into groups of no more than six people, and have them develop the plan together.

Build Your Business Plan In this exercise, students will consider whether it is feasible to market a particular product on the Internet, how to overcome obstacles in digitally marketing the product, and the best way to engage in digital marketing for a successful marketing campaign. Most companies today utilize digital media in some fashion—be it in marketing campaigns, promotions, or marketing research. Many companies even utilize the Internet to raise awareness about causes such as sustainability, resource conservation, and maintaining a healthy lifestyle. Once students have selected the product or service for which they are going to develop a business plan, allow them some time to do some research (either in class or outside of class as homework). They should assemble some information on how that product is currently being marketed (for products that already exist), or how it should be marketed (for products that do not exist).

If students pick a product that is not already marketed digitally, have them ask and answer the question: Why is this the case? Encourage them to think about what they, as marketers, might be able to do to help their chosen company develop a new marketing campaign utilizing digital media.

For students who chose to invent a product, have them outline the marketing mix. Remind them that they must keep in mind every element of the marketing mix because digital media are more similar than different to traditional media.

Video Case: Should Employees Use Social Media Sites at Work?

As Facebook and other social media sites have gained popularity and expanded, managing their use at work has become an increasingly hot topic. Studies on the use of social media in the workplace conflict over how much it inhibits productivity.

Should employees be allowed to access social media at work? Many offices have banned access to the Facebook site. The results are as mixed as the research. A National Business Ethics Survey (NBES) revealed that 11 percent of employees who Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

286 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual engage in social networking are “active” social networkers who spend 30 percent or more of the workday on social networking sites. Many managers are conflicted as to whether this constitutes enough of a problem to be banned outright.

Another study conducted by Nucleus Research (an IT research company) revealed a 1.5 percent loss of productivity for businesses allowing social media access. It found that 77 percent of Facebook users used the site during work for as much as two hours a day; 87 percent of those surveyed admitted they were using social media sites to waste time. NBES also found that active social networkers were more likely to find certain questionable behaviors to be acceptable, such as criticizing the company or its managers on social networking sites. Procter & Gamble realized that many of its employees were using social networking sites for nonwork purposes. Its investigations revealed that employees across the company were watching an average of 50,000 five-minute YouTube videos and listening to 4,000 hours of music on Pandora daily.

However, an outright ban could cause problems. Some younger employees have expressed that they do not want to work for companies without social media access; they view restricting or eliminating access like removing a benefit. Employees at companies with an outright ban often resent the lack of trust associated with such a move and feel that management is censuring their activities. Other employees who use Facebook during their lunch hours or break times may feel that they are being punished because of others’ actions.

Additionally, Procter & Gamble uses YouTube and Facebook extensively for marketing purposes. Banning these sites would disrupt the firm’s marketing efforts.

An Australian study indicates that employees taking time out to pursue Facebook and other social media were actually 9 percent more productive than those who did not. Brent Coker, the study’s author and University of Melbourne faculty member, says people are more productive when they take time to “zone out” throughout the workday. Doing so can improve concentration. Coker’s study focused on those using less than 20 percent of the workday on such breaks, which is less than the amount of time “active” social networkers spend on these sites.

Some companies actually encourage employees to use social networking as part of their integrated marketing strategy. In fact, not having a social media page such as Facebook or LinkedIn might be seen as a missed opportunity for marketing the firm.

Even the law industry is starting to use social media on a more daily basis. One study of the top 50 highest ranked laws firms in the country determined that 64 percent use Facebook and 90 percent are on Twitter. Approximately 80 percent post something every day or once a week. Although larger law firms tend not to use social media as effectively as smaller law firms, the use of social media to interact with clients is clearly gaining throughout the industry.

Despite the benefits that companies have received from allowing their employees to use social media, many companies have gone ahead with social media bans. Procter & Gamble has restricted the use of Netflix and Pandora, but not Facebook or YouTube. Companies all need to ask, “Can management use social media to benefit the company?” If so, it may be more advantageous to take the risks of employees using social media for personal use if they can also be encouraged to use social networks to publicize their organizations, connect with customers, and view consumer comments or complaints. By restricting social media use, companies may be forfeiting an effective marketing tool.

Sources: “Social Media at Work—Bane or Boon?” CNN, March 8, 2010, www.cnn.com/2010/LIVING/worklife/03/08/cb.social.media.banned/index.html (accessed July 31, 2012); Emily Glazer, “P&G Curbs Employees’ Internet Use,” The Wall Street Journal, April 4, 2012, http://online.wsj.com/article/SB10001424052702304072004577324142847006340.html (accessed July 31, 2012); Ethics Resource Center, 2011 National Business Ethics Survey ® : Ethics in Transition (Arlington, VA: Ethics Resource Center, 2012); Miral Fahmy, “Facebook, YouTube at Work Make Better Employees: Study,” Reuters, April 2, 2009, www.wired.com/techbiz/media/news/2009/04/reuters_us_work_internet_tech_life (accessed May 5, 2010); Sharon Gaudin, “Study: Facebook Use Cuts Productivity at Work,” Computer World, July 22, 2009, www.computerworld.com/s/article/9135795/Study_Facebook_use_cuts_productivity_at_work (accessed May 5, 2010); Sharon Gaudin, “Study: 54% of Companies Ban Facebook, Twitter at Work,” Computer World, October 6, 2009, Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

287 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual www.computerworld.com/s/article/9139020/Study_54_of_companies_ban_Facebook_Twitter_at_work (accessed May 5, 2010).

Video Case Discussion Questions 37. Why do you think results are so mixed on the use of social networking in the workplace?

Because this is an opinion question, students’ answers will vary. A large part of the problem may have to do with the different ways that people work. Some people are not as productive when faced with distractions. Others may actually benefit from occasional breaks from their work and will work faster and more efficiently if allowed short mental ‘time-outs’ throughout the day. Rather than focusing on the number of hours employees spend on Facebook, many companies might be better off asking how they might use this digital medium to enhance its own marketing objectives.

38. What are some possible upsides to utilizing social media as part of an integrated marketing strategy, especially in digital marketing?

Upsides to incorporating sites like Facebook into an integrated marketing strategy are keeping employees happy because they get to use Facebook at work, connecting with consumers, and conducting low-cost or free market research. Social networking sites can also be a great means of publicizing a company, product, or service.

39. What are the downsides to restricting employee access to social networking sites?

Many young workers expect to be able to use Facebook and other digital media while at work. The Internet has become such a large part of these workers’ everyday lives that they may be dissatisfied and disgruntled when not allowed access to social networking while on the job. Across-the-board bans can signal a lack of trust to employees and may adversely affect the organizational culture. It is a delicate balance between signaling to employees that they are trusted and encouraging them to be the most productive workers they can be. Additionally, completely banning social networking sites might cause the company to miss out on important digital marketing opportunities. This is why Procter & Gamble banned Pandora and Netflix but not YouTube or Facebook.

Team Exercise Students will develop a digital marketing promotion for a local sports team, using Twitter, Facebook, and other social networking media to promote ticket sales for next season’s schedule. In their plan, they should provide specific details and ideas for the content they would use on the sites. Also, they will need to describe how they would encourage fans and potential fans to go to their site. They will need to consider how they would use digital media to motivate sports fans to purchase tickets and merchandise and attend games.

Build Your Skills Planning a Digital Marketing and Social Networking Site Background Many companies today utilize new digital media in a way that reflects their images and goals. They can also help to improve customer service, loyalty, and satisfaction while reaching out to new target markets. Companies use these sites in a variety of

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288 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual ways, sometimes setting up Facebook pages or Twitter accounts to gather customer feedback, to promote new products, or even to hold competitions.

The U.S. economy has experienced many ups and downs in recent decades, but e-commerce has been an area that has continued to grow throughout economic ups and downs. Many dot-com companies and social networking sites have risen and collapsed. Others, such as Amazon.com, eBay, Facebook, and Twitter have not only survived, but thrived. Many that succeed are “niche players”; that is, they cater to a very specific market that a brick-and-mortar business (existing only in a physical marketplace) would find hard to reach. Others are able to compete with brick-and-mortar stores because they offer a wider variety of products, lower prices, or better customer service.

Many new digital media outlets help companies compete on these fronts. As a manager of Biodegradable Packaging Products Inc., a small business that produces packaging foam from recycled agricultural waste (mostly corn), you want to expand into ebusiness by using digital media to help market your product. Your major customers are other businesses and could include environmentally friendly companies like Tom’s of Maine (natural toothpaste) and Celestial Seasonings (herbal tea). Your first need is to develop a social networking site or blog that will help you reach your potential customers. You must decide who your target market is and which medium will attract it the best.

Task Plan a digital media marketing campaign using online social networking sites, blogs, or another digital media outlet using the template below.    

Social networking/blog/other site: _______________________________________ Overall image and design of your site: ____________________________________ Strategy for attracting followers to your site: _______________________________ Potential advertising partners to draw in more customers: ____________________

Students will assume the role of a manager at Biodegradable Packaging Products Inc., a small business that produces packaging foam from recycled agricultural waste (mostly corn). The company wants to expand into e-business by using digital media to help market its product. Major customers are other businesses and could include environmentally friendly companies like Tom’s of Maine (natural toothpaste) and Celestial Seasonings (herbal tea). Students will first need to develop a social networking site or blog that will help them reach their potential customers. They must decide who their target market is and which medium will attract them the best.

The task will involve planning a digital media marketing campaign using online social networking sites, blogs, or another digital media outlet based on the template provided.    

Social networking/Blog/other site: _______________________________________ Overall image and design of your site: ____________________________________ Strategy for attracting followers to your site: _______________________________ Potential advertising partners to draw in more customers: ____________________

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 52. How to measure the effectiveness of Facebook or Twitter as a marketing tool.

53. Are digital media really more effective at reaching target markets than traditional media?

54. How the marketing mix changes when using digital media versus traditional media.

55. How have companies altered their approaches to advertising in the age of digital marketing?

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289 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Guest Speaker Suggestions 45. An executive or representative from a local business that has experienced success using digital marketing.

46. A marketing professor who can discuss in greater detail the changing business climate and increase in the use of digital media.

47. A young entrepreneur who has utilized digital media and the Internet while seeking to get his/her business off the ground.

48. A local blogger who has managed to turn his/her blog into a profitable business.

Teaching Suggestions 61. Instructors may want to grab the class’s attention by starting with some viral ads from the Internet (easily found on YouTube or many corporate websites).

62. Have students spend part of class researching digital marketing campaigns for a company of their choice.

63. Have students break into small groups to discuss how they would approach creating a digital marketing campaign.

Make sure to reinforce the importance of the marketing mix.

Chapter 14: Accounting and Financial Statements Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s highlights. Followup via the Connect exercises is then encouraged to provide a holistic understanding of the chapter. Use the hyperlinked Table of Contents below to jump to different sections of the manual.

Table of Contents Chapter Forecast ......................................................................................................................................................................... 290 Learning Objectives ..................................................................................................................................................................... 290 Key Terms and Definitions ........................................................................................................................................................... 290 Content Outline ........................................................................................................................................................................... 293 Boxed Text Critical Thinking Questions ....................................................................................................................................... 301 Would You Make // a Good Accountant? / ................................................................................................................................. 302 Bonus Teaching Resources .......................................................................................................................................................... 303 Chapter Review Questions .......................................................................................................................................................... 305 Connect Exercises ........................................................................................................................................................................ 306 Class Discussion Questions .......................................................................................................................................................... 307 Build Your Business Plan.............................................................................................................................................................. 308 Video Case: Goodwill Industries: Accounting in a Nonprofit ...................................................................................................... 308 Team Exercise .............................................................................................................................................................................. 310 Build Your Skills ........................................................................................................................................................................... 310 Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

290 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Term Paper or Project Topics ...................................................................................................................................................... 311 Guest Speaker Suggestions ......................................................................................................................................................... 312 Teaching Suggestions .................................................................................................................................................................. 312

Chapter Forecast Accounting, the financial “language” that organizations use to record, measure, and interpret all of their financial transactions and records, is very important in business. This chapter explores the role of accounting in business and its importance in making business decisions. First, we discuss the uses of accounting information and the accounting process. Then, we briefly look at some simple financial statements and accounting tools that are useful in analyzing organizations worldwide.

Learning Objectives LO 14-1 Describe the different uses of accounting information.

LO 14-2 Demonstrate the accounting process.

LO 14-3 Examine the various components of an income statement in order to evaluate a firm’s “bottom line.”

LO 14-4 Interpret a company’s balance sheet to determine its current financial position.

LO 14-5 Analyze financial statements, using ratio analysis, to evaluate a company’s performance.

Key Terms and Definitions Accounting The recording, measurement, and interpretation of financial information Accounting cycle The four-step procedure of an accounting system: examining source documents, recording transactions in an accounting journal, posting recorded transactions, and preparing financial statements Accounting equation Assets = liabilities + owners’ equity Accounts payable The amount a company owes to suppliers for goods and services purchased with credit Accounts receivable Money owed the company by customers or clients who have promised to pay for products at a later date Accrued expenses Is an account representing all unpaid financial obligations incurred by an organization Annual report A summary of a firm’s financial information, products, and growth plans for owners and potential investors Asset utilization ratios Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

291 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Ratios that measure how well a firm uses its assets to generate each $1 of sales Assets A firm’s economic resources, or items of value that it owns, such as cash, inventory, land, equipment, buildings, and other tangible and intangible things Balance sheet A “snapshot” of a company’s financial position at a given moment Budget An internal financial plan that forecasts expenses and income over a set period of time Cash flow The movement of money through a business on a daily, weekly, monthly, or yearly basis Certified management accountants (CMAs) Private accountants who, after rigorous examination, are certified by the Institute of Management Accountants and who have some managerial responsibility Certified public accountant (CPA) An individual who has been state certified to provide accounting services ranging from the preparation of financial records and the filing of tax returns to the complex audits of corporate financial records Cost of goods sold The amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies Current assets Assets that are used or converted into cash within the course of a calendar year; also called short-term assets Current liabilities A firm’s financial obligations to short-term creditors, which must be repaid within one year; also called short-term liabilities Current ratio Current assets divided by current liabilities Debt to total assets ratio A ratio indicating how much of the firm is financed by debt and how much by owners’ equity Debt utilization ratios Ratios that measure how much debt an organization is using relative to other sources of capital, such as owners’ equity Depreciation The process of spreading the costs of long-lived assets such as buildings and equipment over the total number of accounting periods in which they are expected to be used Dividends per share The actual cash received for each share owned Double-entry bookkeeping A system of recording and classifying business transactions that maintains the balance of the accounting equation Earnings per share Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

292 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Net income or profit divided by the number of stock shares outstanding Expenses The costs incurred in the day-to-day operations of an organization Gross income (profit) Revenues minus the cost of goods sold required to generate the revenues Income statement A financial report showing the profitability of a firm over a period of time—month, quarter, or year Inventory turnover Sales divided by total inventory Journal A time-ordered list of account transactions Ledger A book or computer file with separate files for each account Liabilities Debts a firm owes to others Liquidity ratios Ratios that measure the speed with which a company can turn assets into cash to pay off short-term debt Managerial accounting The internal use of accounting statements by managers in planning and directing the organization’s activities Net income The total profit (or loss) after all expenses, including taxes, have been deducted from revenue; also called net earnings Owners’ equity Equals assets minus liabilities and reflects historical value Per share data Data used by investors to compare the performance of one company with another on an equal, per share basis Private accountants Accountants employed by large corporations, government agencies, and other organizations to prepare and analyze its financial statements Profit The difference between what it costs to make and sell a product and what a customer pays for it Profit margin Net income divided by sales Profitability ratios Ratios that measure the amount of operating income or net income a firm is able to generate relative to its assets, owners’ equity, and sales Quick ratio (acid test) Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

293 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual A stringent measure of liquidity that eliminates inventory Ratio analysis Calculations that measure an organization’s financial health Receivables turnover Sales divided by accounts receivable Return on assets Net income divided by assets Return on equity Net income divided by owners’ equity; also called return on investment (ROI) Revenue The total amount of money received from the sale of goods or services, as well as from related business activities Statement of cash flows Explains how the company’s cash changed from the beginning of the accounting period to the end Times interest earned ratio Operating income divided by interest expense Total asset turnover Sales divided by total assets

Content Outline The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a section on which CONNECT activities can be used in the chapter. This is created so that you can facilitate in-class or online discussion effectively.

LO 14-1 Describe the different uses of accounting information.  

Introduction The Nature of Accounting o Accountants o Accounting or Bookkeeping? o The Uses of Accounting Information

Key terms:        

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Lecture Outline and Notes: LXVII.

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Accounting Certified public accountant (CPA) Private accountants Certified management accountants (CMAs) Managerial accounting Cash flow Budget Annual report

The Nature of Accounting a. Accounting is the recording, measurement, and interpretation of financial information.

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i. Large numbers of people, both within and outside businesses, use accounting tools to evaluate organizational operations. ii. The Financial Accounting Standards Board has been establishing standards of financial accounting and reporting in the private sector since 1973. iii. Scandals happen when accounting firms fail to follow generally accepted accounting principles, or GAAP. iv. Today, the Public Company Accounting Oversight Board establishes rules, requirements, and policies for accounting firms and businesses. b. Accountants are the people who prepare accounting information. i. Public Accountants 1. Certified public accountants (CPAs) are individuals who have been certified by the state in which they practice to provide accounting services ranging from the preparation of financial records and the filing of tax returns to complex audits of corporate financial records.

2. Certification gives a public accountant the right to express, officially, an unbiased opinion regarding the accuracy of a client’s financial statements.

3. Most are either self-employed or members of large public accounting firms, although some work for smaller second-tier firms. (Table 14.1) 4. Ethical accountants are more important than ever after a series of financial scandals in the early 21st century. a. Sarbanes-Oxley made accounting firms separate their consulting and auditing businesses and punished corporate executives with potential jail sentences for inaccurate, misleading, or illegal accounting statements. b. However, only five years later, the financial crisis occurred, partially due to questionable lending practices and investments based on risky financial instruments. c. The Dodd-Frank Act was passed to strengthen the oversight of financial institutions, limiting the types of assets commercial banks can buy; the amount of capital they must maintain; and the use of derivative instruments such as options, futures, and structured investment products.

5. A growing area for public accounts is forensic accounting, which involves analyzing financial documents in search of fraudulent entries or financial misconduct. These individuals are sometimes called fraud examiners. a. Forensic accountants have been used since the 1930s but are now being rapidly added by many auditing firms. b. The Association of Certified Fraud Examiners, which certifies certified fraud examiners (CFEs), has grown to more than 75,000 members. ii. Private Accountants 1. Private accountants are employed by corporations, government agencies, and other organizations to prepare their financial statements.

2. Private accountants may become certified management accountants by passing a rigorous examination; they have some degree of managerial responsibility. c. Accounting or Bookkeeping? i. Although the terms accounting and bookkeeping are often used interchangeably, they should not be confused. ii. Bookkeeping is narrower and more mechanical than accounting and is typically limited to the routine, day-to-day recording of business transactions. iii. Bookkeepers require less training than accountants. iv. Accountants, on the other hand, usually complete course work beyond their four-

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and five-year accounting degrees so they can not only record financial information, but understand, interpret, and develop sophisticated accounting systems necessary to classify and analyze complex financial information. d. The Uses of Accounting Information (Figure 14.1) i. Many business failures can be linked to ignorance of the information contained in financial statements.

1. Likewise, most business successes can be traced to informed managers who understand the consequences of their decisions. ii. Managers and owners use financial statements for internal and external purposes. iii. Internal Uses 1. Managerial accounting refers to the internal use of accounting statements by managers in planning and directing the course of the organization.

2. Cash flow is the movement of money through a business on a daily, weekly, monthly, or yearly basis. a. It is not uncommon for even successful companies to struggle making payments because of inadequate cash flow. One common reason for a cash crush is poor managerial planning.

3. A budget is an internal financial plan that forecasts expenditures and revenues over a set period of time. a. While most companies prepare master budgets for the entire firm, many also prepare budgets for smaller divisions, departments, product lines, or even projects. b. “Top-down” master budgets begin at upper management and filter down, while “bottom up” budgets start at the department or project level and are combined at the CEO’s office. c. The major value of a budget lies in its breakdown of cash inflows and outflows. iv. External Uses 1. Managers also use accounting statements to report the financial performance of a business to outside organizations. a. Such statements are used for filing income taxes, obtaining credit from lenders, and reporting results to a firm’s stockholders.

2. These financial statements become the basis for the information provided in a corporation’s official annual report, a summary of the firm’s financial information, products, and growth for stockholders and potential investors. a. The single most important component of an annual report is the signature of a certified public accountant attesting that the required financial statements are an accurate reflection of the underlying financial conditions of the firm; those that meet these conditions are called audited. b. The primary users of audited financial information are government agencies, stockholders and potential investors, and lenders, suppliers, and employees.

3. Countries such as Greece and even states such as California and Illinois are experiencing debt overload, which came to the forefront during the financial crisis.

4. A corporation’s stockholders use financial statements to evaluate the return on their investment and the overall quality of the firm’s management team. a. Poor performance often results in changes in top management.

5. Banks and other lenders look at financial statements to determine a company’s ability to meet current and future debt obligations if a loan or

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296 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual credit is granted.

LO 14-2 Demonstrate the accounting process. 

The Accounting Process o The Accounting Equation o Double-Entry Bookkeeping o The Accounting Cycle

LXVIII. PPT 14.19

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Key terms:        

Assets Liabilities Owners’ equity Accounting equation Double-entry bookkeeping Accounting cycle Journal Ledger

The Accounting Process a. Accounting Equation i. Assets are a firm’s economic resources or items of value that it owns. ii. Liabilities are debts the firm owes to others. iii. Owners’ equity is assets minus liabilities and includes all of the funds that have ever been contributed to the company that never have to be paid back.

1. For instance, the owners’ equity portion of Rendezvous Barbecue in Memphis includes the money the owners have put into the firm iv. Accounting equation: Assets = Liabilities + Owners’ equity. b. Double-entry bookkeeping is the system of recording and classifying business transactions in accounts that maintain the balance of the accounting equation. (Figure 14.2) i. To keep the accounting equation in balance, each business transaction must be recorded in two separate accounts. ii. Most organizations not only classify transactions as assets, liabilities, or owners’ equity, but further break them down to provide more specific information. c. The accounting cycle is the process of collecting, recording, and analyzing raw data, and it occurs constantly through the business’s life (see Figure 14.3). i. Step One: Examine Source Documents. This includes all source documents, such as checks and receipts that provide evidence of transactions. ii. Step Two: Record Transactions. Transactions are recorded in a journal, a timeordered list of transactions in which each transaction is assigned to a particular account. iii. Step Three: Post Transactions 1. Transactions are then posted to a general ledger, a book or computer program with separate files for each asset, liability, or owners’ equity account.

2. At the end of the accounting period (usually yearly, but sometimes quarterly or monthly), a summary of the balances of all the accounts in the general ledger, called a trial balance, must be prepared. iv. Step Four: Prepare Financial Statements. The information from the trial balance is used to prepare financial statements, such as the balance sheet, income statement, and other documents.

1. In the case of public corporations and certain other organizations, a CPA must attest, or certify, that the organization followed generally accepted accounting principles in preparing the financial statements.

2. When the statements are complete, the books are “closed,” and the accounting cycle begins anew for the next accounting period.

LO 14-3 Examine the various components of an income statement in order to

Key terms:

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297 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual evaluate a firm’s “bottom line.” 

Financial Statements o The Income Statement

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LXIX.

       

Income statement Revenue Cost of goods sold Gross income (profit) Profit Expenses Depreciation Net income

Financial Statements a. The physical results of the accounting process are financial statements—the income statement, the balance sheet, and the statement of cash flow. i. Manufacturing firms, service providers, and nonprofit organizations each use a different set of accounting principles or rules upon which the accounting profession has agreed; these are sometimes referred to as generally accepted accounting principles (GAAP). ii. Many accounting concepts go by more than one name. Each country has a different set of rules the businesses within that country must follow; most use International Financial Reporting Standards. iii. Moreover, certain concepts have more than one name. For examples, sales and revenues are used interchangeably, as are profits, income and earnings. (Table 14.2) iv. Not all financial statements follow precisely the same format; one size does not fill all. b. The income statement is a financial statement showing the profitability of a firm over a period of time. (Tables 14.3 and 14.4) i. Other names for the income statement include profit and loss (P&L) statement or an operating statement. ii. The income statement indicates the firm’s profitability or income, which is derived by subtracting the firm’s expenses from its revenues. iii. Revenue 1. Revenue is the total amount of money received (or promised) from the sale of goods or services, as well as from other business activities such as rental of property and investments. a. Nonbusiness entities typically obtain revenues through donations and/or grants.

2. Cost of goods sold (CGS) is the amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies. (CGS = Beginning inventory + Interim purchases - Ending inventory.)

3. Gross income or profit is equal to revenues minus the cost of goods sold. iv. Expenses are the costs incurred in the daily operation of a business.

1. There are three common expense accounts shown on income statements. a. Selling, general, and administrative expenses include advertising and sales salaries, salaries of executives and staff, and the costs of owning and maintaining the general office. Included in this category is a special type of expense known as depreciation, the process of spreading the costs of long-lived assets over the total number of accounting periods in which they are expected to be used. b. Research, development, and engineering expenses include scientific, engineering, and marketing personnel and the

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298 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual equipment and information used to design and build prototypes and samples. c. Interest expenses include the direct costs of borrowing money. v. Net income is the profit (or loss) after all expenses, including taxes, have been deducted from revenue.

1. Most companies present the current year’s results along with the previous two years’ income statements to permit comparison of performance from one period to another. vi. Temporary Nature of Income Statement Accounts 1. Companies record amounts in the revenue and expense accounts during an accounting period 2. Gross profit, earnings before interest and taxes, and net income result from information from the revenue and expense accounts 3. At the end of each accounting period, the dollar amounts in all the revenue and expense accounts are moved into a “Retained Earnings” account, one of the owners’ equity accounts.

4. This shifting of dollar values from the revenue and expense accounts allows the firm to begin the next accounting period with zero balances in those accounts.

5. When a corporation elects to pay dividends, it decreases the cash account (an asset category) as well as a capital account (an owners’ equity category).

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LO 14-4 Interpret a company’s balance sheet to determine its current financial position. o o

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The Balance Sheet The Statement of Cash Flows

c.

Key terms:      

Balance sheet Current assets Accounts receivable Current liabilities Accounts payable Accrued expenses

The balance sheet presents a “snapshot” of a company’s financial position at a given moment. (Tables 14.5 and 14.6) i. The balance sheet takes its name from its reliance on the accounting equation: it assets must equal liabilities plus owners’ equity. ii. The balance sheet presents an accumulation of all the company’s transactions since it began. iii. Assets 1. Asset accounts are listed in descending order of liquidity—how easily they can be converted into cash.

2. Current assets, also called short-term assets, are those that are used or converted into cash within a year; they include cash, temporary investments, accounts receivable (money owed the company by its customers who have promised to pay at a later date), and inventory. a. Accounts receivable usually includes an allowance for bad debts that management does not expect to collect.

3. Long-term (fixed) assets represent a commitment of organizational funds for at least one year, and include long-term investments, plants and equipment, and intangible assets such as “goodwill.” a. Following long-established traditions, items on the balance sheet are listed on the basis of their original cost less accumulated

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depreciation, rather than their present values. iv. Liabilities 1. Current (short-term) liabilities include a firm’s financial obligations to short-term creditors, which must be repaid within a year; long term liabilities have longer repayment terms.

2. Accounts payable are amounts owed to a company’s suppliers for goods and services purchased with credit.

3. Other liabilities include wages earned by employees but not yet paid and taxes owed to the government.

4. These accounts may be consolidated into an accrued expense account representing all unpaid financial obligations incurred by the firm. v. Owners’ equity represents the owners’ contributions to their business along with income retained to finance continued growth and product development.

1. Owners’ equity accounts vary according to type and class of stock issued.

2. Each type of stock is represented by a separate owners’ equity account, called contributed capital. d. The statement of cash flows explains how the company’s cash changed from the beginning of the accounting period to the end. (Table 14.7) i. Many investors and other users of financial statements want more information about a firm’s cash flow to better understand its financial health. ii. The change in cash is explained through details in three categories.

1. Cash from operating activities is calculated by combining the changes in the revenue accounts, expense accounts, current assets accounts, and current liability accounts.

2. Cash from investing activities is calculated from changes in the long-term of fixed asset accounts.

3. Cash from financing activities is calculated from changes in the long-term liability accounts and the contributed capital accounts in owners’ equity.

LO 14-5 Analyze financial statements, using ratio analysis, to evaluate a company’s performance. 



Ratio Analysis: Analyzing Financial Statements o Profitability Ratios o Asset Utilization Ratios o Liquidity Ratios o Debt Utilization Ratios o Per Share Data Importance of Integrity in Accounting

Key terms:                   

Statement of cash flows Ratio analysis Profitability ratios Profit margin return on assets Return on equity Asset utilization ratios Receivables turnover Inventory turnover Total asset turnover Liquidity ratios Current ratio Quick ratio (acid test) Debt utilization ratios Debt to total assets ratio Times interest earned ratio Per share data Earnings per share Dividends per share

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LXX.Ratio Analysis: Analyzing Financial Statements a. Ratio analysis refers to calculations that measure an organization’s financial health, bringing the information from the balance sheet and income statement into sharper focus. i. A ratio is one number divided by another with the result showing the relationship between the two numbers. ii. Financial ratios are used to weigh and evaluate a firm’s operating performance. iii. The results of the ratio computation should be compared to other companies in the same industry and to the company’s own past record. iv. It answers two questions: 1) How much did the firm gain/loss? and 2) How much is the firm currently worth on historical values found on the balance sheet? b. Profitability ratios measure how much operating income or net income a firm is able to generate relative to its assets, owners’ equity, and sales. i. Profit margin = Net income/Sales; it shows the overall percentage profits earned by the company 1. The higher the profit margin, the better the cost controls within the company and the higher the return on every dollar of revenue. ii. Return on assets = Net income/Total assets; it shows how much income the firm produces for every dollar invested in assets. iii. Return on equity = Net income/Owners’ Equity; it shows how much income is generated by each $1 the owners have invested in the firm.

1. Stockholders are always concerned with how much money they will make on their investment, and they frequently use the return on equity ratio as one of their key performance yardsticks. c. Asset utilization ratios measure how efficiently a firm uses its assets to generate one dollar in sales. Managers can use asset utilization ratios to pinpoint areas of inefficiently in their operation. i. Receivables turnover = Sales/Accounts receivable; it indicates how many times a firm collects its accounts receivable in one year.

1. It also demonstrates how quickly a firm is able to collect payments on its credit sales, and no payments means no profit. ii. Inventory turnover = Sales/Total Inventory; it indicates how many times a firm sells and replaces its inventory over the course of a year.

1. A high inventory turnover ratio may indicate great efficiency but may also suggest the possibility of lost sales due to insufficient stock levels. iii. Total asset turnover = Sales/Total assets; it measures how well an organization uses all of its assets in creating sales. It indicates whether a company is using its assets productively. d. Liquidity ratios measure the speed with which a company can turn its assets into cash to pay off short-term debt. i. High liquidity ratios may satisfy a creditor’s need for safety, but ratios that are too high may indicate that the organization is not using its current assets efficiently. ii. Current ratio = Current assets/Current liabilities. iii. Quick ratio (acid test) = Current assets - Inventory/Current liabilities.

1. By eliminating inventory, the least liquid current asset, the quick ratio test measures how well an organization can meet its current obligations without resorting to the sales of its inventory. e. Debt utilization ratios indicate how much debt the company is using relative to other sources of capital. i. Debt financing is riskier than equity as it demands a monthly payment regardless of profitability. In addition, recessions affect heavily indebted firms far more than those financed through equity.

1. Most companies tend to keep debt-to-asset levels below 50 percent. ii. Debt to total assets ratio = Total debt/Total assets; it indicates how much of the

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301 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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firm is financed by debt and how much by owners’ equity. iii. Times interest earned ratio = Operating income/Interest expense; it is a measure of the safety margin a company has with respect to the interest payments it must make to its creditors.

1. A low times interest earned ratio indicates that even a small decrease in earnings may lead the company into financial straits.

Per share data is used by investors to compare the performance of one company with another on an equal basis. i. Earnings per share = Net income/Number of shares outstanding.

1. Diluted earnings per share equals net income divided by the number of shares outstanding but diluted. Diluted shares include potential shares that could be issued due to the exercise of stock options or the conversion of certain types of debt into common stock. ii. Dividends per share = Dividends paid/Number of shares outstanding. Dividends result in double taxation.

Industry Analysis i. Trends in the ratios over an appropriate time period should be considered. ii. Industry ratios are commonly used as a comparative measure. iii. Ratios of other firms in a specific industry provide data for comparative purposes so that performance can be evaluated.

1. Example 1: Between 2011 and 2013, Microsoft’s revenues grew only 11% while Google’s revenues grew 58%. However, Microsoft dominates Google on the profitability ratios, generating a higher profit margin, return on assets, and return on equity ratios.

Importance of Integrity in Accounting Banks and financial institutions manipulated their accounts Repurchase agreements were a common way of removing liabilities from the books i. Assets/Liabilities are transferred to another entity with the promise of buying them back later On the other hand, strong compliance to accounting principles creates trust among stakeholders.

It is most important to remember that integrity in accounting processes requires ethical principles and compliance with both the spirit of the law and professional standards in the accounting profession.

Boxed Text Critical Thinking Questions Holding Ernst & Young Accountable 40. Why are the assurance services that Ernst & Young provides so important?

Assurance or auditing is one of the major building blocks of effective capital markets as it provides confidence and integrity in companies’ financial statements.

41. Ernst & Young offers assurance services and advisory services. What limitations did Sarbanes-Oxley place on accounting firms regarding how they offer these services?

Sarbanes-Oxley made accounting firms separate their consulting and auditing businesses and punished corporate executives with potential jail sentences for inaccurate, misleading, or illegal accounting statements.

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302 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 42. Considering the accounting scandals of the early 20th century, do you believe it is advisable to have so much accounting power consolidated in four large accounting firms? Why or why not?

Answers will vary but students need to support their answer.

Artificial Intelligence Transforms Accounting Intelligence 40. Describe some of the advantages of AI to the accounting industry.

AI will increase time savings, reduce errors, and aid compliance. In turn, this will allow accountants to spend time on more meaningful tasks, while AI can cover tasks like data entry.

41. GL.ai, the AI system adopted by PricewaterhouseCoopers, helps identify anomalies in its clients’ general ledger systems. Why do you think this is important?

Answers will vary but students need to support their answer and discuss that AI should increase a company’s productivity.

42. If AI can take over basic accounting tasks such as data entry, do you think this will improve the services accountants offer to their customers? Why or why not?

Again, answers will vary but students need to support their answer.

Women in Accounting: Gender Equality Isn’t Adding Up 39. What are some reasons women might not be as represented among the partners or principals of the Big Four accounting firms?

Women are not being assigned to as many large clients as men which makes promotion to partner or principal more difficult. Additionally, the corporate culture makes it more difficult for women to balance family and work.

40. Describe the corporate culture at the Big Four accounting firms. What might be done to make it more family friendly?

Big Four firms are known to have very competitive cultures, requiring long hours. Women are still the primary childcare providers which makes “work/life” balance more difficult.

41. Do you think accounting firms should work to create a better work/life balance for employees with families, or should accountants expect to work long hours and make sacrifices if they choose to work for the Big Four?

Answers will vary but students need to support their answer.

Would You Make // a Good Accountant? / Do you like numbers and finances? Are you detail oriented, a perfectionist, and highly accountable for your decisions?

If so, accounting may be a good field for you. If you are interested in accounting, there are always job opportunities available no matter the state of the economy. Accounting is one of the most secure job options in business. Of course, becoming an accountant is not easy. You will need at least a bachelor’s degree in accounting to get a job, and many positions require additional training. Many states demand coursework beyond the 120 to 150 credit hours collegiate programs require for an accounting degree. If you are really serious about getting into the accounting field, you will probably want to consider getting your master’s in accounting and taking the CPA exam.

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303 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Bonus Teaching Resources This section offers bonus teaching resources for class discussion. This is offered in addition to what’s offered in the M: Business text.

“The Annual Report” MiniCase The textbook indicates that one of the disadvantages of the corporate form of ownership is the need for disclosure of information. The text further points out that most of this information is disseminated through the annual report. Here are some observations on that document.

Although most corporate annual reports resemble slick magazines, they are more than just a journalistic effort. Most annual reports contain rather detailed financial statements, but they are also more than just an assemblage of accounting documents. An annual report often appears to be used only to impress stockholders and prospective stockholders, but it is more than company propaganda. Although annual reports seem to be good examples of printing and graphic work, the publishing of annual reports is not left to printers and graphic artists alone; control of the annual report is exercised by the highest administrative chair in the corporation’s hierarchy. In short, the annual report is many documents rolled into one. Let us consider the functioning of three key aspects of a typical annual report from a large corporation.

Financial Statements Even the most modest annual report contains a balance sheet and income statement. A statement of changes in financial position and a statement of retained earnings will be included. More elaborate reports may contain a number of additional financial documents that the board of directors feels will enhance the annual report. These statements follow accepted and traditional accounting procedures and, in almost every case, have been audited by a highly responsible and prestigious accounting firm that does not want its name attached to any accounting materials that are not proper. Therefore, when a company has bad news to report to its shareholders, this bad news is usually very hard to hide in the financial statements.

Such news is hidden only from those people who are not adept at reading accounting data.

To learn the most from a set of accounting documents in an annual report, it is important to read the footnotes. Financial analysts say that the footnotes reveal more about a company’s health than the rest of the annual report combined.

The So-Called Factual Narrative Most annual reports contain quite a few pages of straightforward narrative about the company’s operations for the year in question. Although these comments are meant to be informative rather than persuasive, they will normally convey the positive side of the picture. Often this narrative explains much of what is contained in the accounting documents. In such cases, a person not familiar with the conventions of traditional accounting may find the narrative offers accounting information in a more digestible format.

Normally, the narrative will contain full-color photographs that are as striking and as technically perfect as any original.

Beautiful photographs of corporate facilities and products lend a dash of inspiration to the report. Exotic pictures of the corporation’s installations in far-flung corners of the globe are especially popular, as are elegant portraits of the corporation’s top executives. The latter are usually commissioned studio portraits in which each person is groomed immaculately, the very picture of success.

Even in a bad year, the factual narrative leaves the reader confident that the firm will surmount all of its problems and remain a viable economic force for many years to come.

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304 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

For some stockholders in the corporation, the message from the chairman of the board is the keystone of the annual report.

Certainly, the chairman wants to present a positive view of what the company has been through in the year in question. At the same time, however, he or she wants to establish a reputation for credibility. So, when the chairman makes observations on the year, he or she is careful to tell the truth.

This desire for credibility does not mean that a top corporate executive will refrain from strongly emphasizing the bright spots in an otherwise gloomy picture. Net sales are down over the previous period, but perhaps personnel costs are also lower.

Total debt is up, but perhaps total debt in the industry as a whole is up more. It often falls to the chairperson of the board to bring out those bright aspects that show that the firm is doing well.

Some chairpersons always begin their messages with the phrase, “I am very happy to report…” Some use that opening regardless of how the company is doing—such a chairperson is doing a poor job of establishing a reputation for frankness and credibility.

Marketing classes often stress that part of effective advertising is making a buyer happy with his or her purchase after the sale. This is accomplished by ads and commercials that emphasize the benefits of having a particular car, shampoo, pie, or burger. In a sense, the corporate annual report follows this line of thought. A good annual report should make the stockholder happy and content to remain a part of the corporate family.

Discussion Questions for “The Annual Report” MiniCase 32. What are the three key aspects of a typical annual report from a large corporation?

The three key aspects include the financial statements, factual narrative, and chairperson’s message.

33. How does the chairperson of the board use the annual report as a sales message to stockholders or potential stockholders?

The chairperson tries to paint the company in a positive light, even if there is bad news to report. The chairperson should maintain credibility by telling the truth, but he or she will strongly emphasize the good points and company accomplishments in the past year. In this respect, the chairperson is using his/her message almost as a sales pitch to attract stockholders.

34. What is the physical layout of the annual report? What type of printing and typography is used?

The annual report usually sports beautiful and professional photographs of company facilities, products, and the top officials of the company (dressed their best). They often resemble slick magazines and may contain additional financial information to add detail and appear more professional. Annual reports are not just left to printers alone but are also handled by the highest administrative chair in the corporation.

Controversial Issue: Can You Really Play Games with Ratios?

This can be used in a discussion board or for in-class discussion.

Ratio analysis can be a very important ingredient in financial analysis. And the textbook explains how various ratios can provide fresh, new insights.

But it must be remembered that sets of figures can be tampered with to present varying pictures of a firm’s financial health.

Even if there is no intention to mislead stockholders or some other constituency, sometimes, among financial statements, one situation getting worse can make another situation look better.

Here are some examples of how ratios can fool you. A rule of thumb on the current ratio (current assets divided by current liabilities) is that 2 to 1 (or two times) is good. Suppose a firm has current assets of $400,000 and current liabilities of $300,000. By dividing $300,000 into $400,000, you arrive at a current ratio of 1.33—not very good. Just before this ratio is to Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

305 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual be shown to stockholders, the finance officer is able to borrow $200,000 of long term funds and use these funds to pay off $200,000 of the current liabilities. If you calculate the current ratio with $100,000 divided by $400,000, it is 4 to 1 (or four times). That’s quite an improvement in the current ratios, but a deterioration of the long-term debt situation.

Speaking of long-term debt, let’s see how a deterioration of debt and retained earnings pictures can improve return on equity.

First, here is a greatly simplified version of the liabilities and equities side of a balance sheet for a company experiencing some financial difficulties.

Total debt Common stock Retained earnings

$2,700,000 $2,000,000 $2,000,000 $6,700,000

For this first year, the firm made a net profit of $80,000. Since total equity is $4,000,000, that income is a return on equity of .02 or 2 percent. The firm wants to pay a 15 percent return to its common stockholders. To do this, the board feels it is best to borrow $300,000 in order to make payment of a cash dividend. This means at the end of next year, the right side of the simple balance sheet will look like this: Total debt Common stock Retained earnings

$3,000,000 $2,000,000 $1,700,000 $6,700,000

Although the loan of $300,000 provided the cash with which to make the dividend payments, the payment of dividends comes out of retained earnings. If the next year the firm has a net income of $80,000, the return on equity goes up to .0216 or 2.16 percent—even though the debt is higher and retained earnings are lower.

Discussion Question for Can You Really Play Games with Ratios?

38. As these examples have indicated, games can be played with figures and ratios. What are some other quirks in the system?

Some other quirks in the system that are worth investigating include the following: high and unhealthy receivables can make the current ratio look great; high and unhealthy inventories can make a current ratio look great; a high inventory turnover can look good, but it may be a sign that stocks of merchandise are running too low; total asset turnover can look good because a firm does not have enough assets to accomplish its mission.

Chapter Review Questions 129.

Why are accountants so important to a corporation? What function do they perform?

Accountants are important because they analyze and interpret financial information to determine if the organization is using its funds efficiently and to make plans for increasing profits. Accountants develop systems that summarize all transactions into comprehensive financial statements.

130.

Discuss the internal uses of accounting statements.

Financial statements may be used internally for planning and directing the course of the organization. Monitoring cash flow is one important area. Financial statements are also important in the preparation of budgets for the firm.

131.

What is a budget?

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306 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual A budget is an internal financial statement that projects revenues and expenditures for a given period of time. They may be applicable to an individual segment of the firm or the firm as a whole. Their major value is the analysis of inflows and outflows.

132.

Discuss the external uses of financial statements.

The main external use is to report the financial performance of the business to outside organizations. This may include filing taxes, obtaining credit, and reporting results to shareholders and analysts.

133.

Describe the accounting process and cycle.

The accounting process involves the accounting equation and double entry bookkeeping. The accounting equation is Assets = Liabilities + Owners’ equity. Double-entry bookkeeping is a system of recording and classifying business transactions in accounts that maintain the balance of the accounting equation.

134.

The income statements of all corporations are in the same format. True or false? Discuss.

False. Different types of firms (service, manufacturing, financial, etc.) use their own accounting principles, for which the profession has agreed. These are called generally accepted accounting principles (GAAP). One way in which the format differs is in the slightly different terminology used in the financial statements.

135.

Which accounts appear under “current liabilities”?

The accounts that appear under “current liabilities” are those that reflect financial obligations that must be repaid within one year. Those accounts include accounts payable and accrued expenses.

136.

Together, the income statement and balance sheet answer two basic questions. What are they?

The income statement answers the question of the firm’s profitability, and the balance sheet answers the question of how much the firm is currently worth.

137.

What are the five basic ratio classifications? What ratios are found in each category?

The five basic ratio classifications and the ratios they contain are: a. Profitability ratios—profit margin, return on assets, return on equity. b. Asset utilization ratios—receivables turnover, inventory turnover, total asset turnover. c. Liquidity ratios—current ratio, quick ratio. d. Debt utilization ratio—debt to total assets, times interest earned. e. Per share data—earnings and dividends per share.

138.

Why are debt ratios important in assessing the risk of the firm?

Debt utilization ratios are critical to assessing the risk of the firm because a high debt level and interest obligations can threaten the existence of the firm. The more assets are financed by debt, the higher the risk level of the firm.

Connect Exercises Below are the available exercises in Connect for this chapter. Please also see the Connect Content Matrix in your Instructor Resource library for additional details on these exercises (including Learning Objectives, topics, Bloom’s level, AACSB, etc.)

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307 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 106.

Coca-Cola Accused of Channel Stuffing (Case Analysis): Understand that, while maintaining and even increasing short-run profits is desirable, the failure to plan sufficiently for the future can easily lead an otherwise successful company to insolvency and bankruptcy court.

107.

Types of Financial Statements (Click & Drag): Place the statements about the financial situation of a company in the chart based on the type of financial statement and the profitability of the company.

108.

The Accounting Cycle (Click & Drag): The manager of Anna's Flowers is bookkeeping at the end of the current accounting period. Match her process to each step of the accounting cycle.

109.

The Accounting Cycle (iSeeit! Animated Video Case): This short video describes how a small business prepares the information used in the accounting cycle.

110.

Catching Up on Financials for Board Oversight (Case Analysis): Demonstrate your understanding of basic concepts associated with GAAP and apply the concepts in a broad level to an organization.

111.

Financing the Shirt on Your Back: Threadless (Video Case): Apply accounting and financial concepts to an entrepreneurial business.

112.

Accounting and Financial Ratios (iSeeit! Animated Video Case): Demonstrate your understanding of the information needed to create financial ratios.

113.

Accounting and Financial Statements (iSeeit! Animated Video Case): Demonstrate your understanding of the information in the three major financial statements.

Class Discussion Questions 37. Go to the library or the Internet and get the annual report of a company with which you are familiar. Read through the financial statements, then write up an analysis of the firm’s performance using ratio analysis. Look at data over several years and analyze whether the firm’s performance is changing through time.

Sample student answer (not exhaustive): Acme Company

Return on Assets Return on Equity Quick Ratio Current Ratio Total Asset Turnover Receivables Turnover Inventory Turnover Times Interest Earned

2017 13.79 73.43 .98 1.21 .93

2016 13.33 64.94 .98 1.19 .9

2015 12.29 74.37 1.13 1.36 .88

2016 10.7 58.66 .95 1.15 .9

3.7

3.63

3.52

3.67

22.51

21.79

20.01

21.61

73.77

65.76

55.23

48.3

We can see that Acme’s return on assets, return on equity, and times interest earned generally increased in the past four years. The other ratios seemed to fluctuate a bit more during certain years, but all the ratios are higher in 2011 than 2008. This means that Acme is earning a higher return on assets and equity and is experiencing a higher turnaround on receivables. It also seems to be replacing its inventory a bit more than 2008 and seems to be doing better in using its total assets to generate sales. It is also doing a better job with its abilities to turn assets into cash as seen by its current ratio and quick ratio. However, note that the quick ratio is less than one; this might indicate that Acme may experience a little bit of trouble meeting obligations without selling its inventory. This is lower than its quick ratio in 2009 (but higher than the quick ratio of 2008).

While students might want to say that Acme is doing well because its ratios have improved, they must also realize that these ratios—although showing some improvement—mean little without comparing them to similar companies Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

308 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual in the industry. If the ratios of all the other companies are higher, than they might reveal that Acme is underperforming, despite its improvement in the past four years. Then again, the exact opposite could be true. It is also hard to determine whether, for instance, a quick ratio less than 1 is bad for the industry. Industries differ in terms of liquidity, inventory, etc. While lower values in one industry might be problematic, they might be perfectly acceptable in another industry. (For example, industries with lots of inventory would have higher inventory turnover and possibly a lower quick ratio depending upon its assets and liabilities.) Finally, it is interesting that in 2008 the nation was still in the midst of the recession. Hence, it seems likely that Acme’s (and other companies’) financial ratios would improve. Students might want to go back even further to get a good snapshot of the company’s health over time.

38. Form a group of three or four students to perform an industry analysis. Each student should analyze a company in the same industry, and then all of you should compare your results. The following companies would make good group projects: Automobiles: Fiat Chrysler, Ford, General Motors Computers: Apple, Hewlett-Packard Brewing: MillerCoors, Molson Coors, the Boston Beer Company Chemicals: Du Pont, Dow Chemical, Monsanto Petroleum: Chevron, ExxonMobil, BP Pharmaceuticals: Merck, Lilly, Amgen Retail: Sears, JCPenney, Macy’s, The Limited Students’ answers will vary depending on which industry they choose. Yahoo! Finance is a good resource to compare the financial ratios of companies to competitors, including the market leaders for that industry. For instance, a student who chose Chevron would find that the company had a return on equity of .91%. Students could compare this to the industry leader in the return on equity category, which is ExxonMobil at 7.45%. By comparing their results for the different companies and then seeing how these compare to the highest performance leader in the industry, students might get a better idea of how ratio analysis works.

Source: Yahoo! Finance, http://finance.yahoo.com/ (accessed May 12, 2016).

Build Your Business Plan For this chapter, perhaps by using the Thai Restaurant example, ask the students what the expenses will be to start this new business. As they provide answers, write them on the board so students can visualize the scope of expenditures. A key discussion should revolve around whether they should buy or lease the building and equipment. Assuming they make the latter choice, they need to consider what type of lease (flat rate, straight percentage, combination) would be best for their new business.

Given the industry the students are developing plans for, have them identify reasons businesses fail in this industry. What are they going to do to try and prevent their business from being just another statistic?

Video Case: Goodwill Industries: Accounting in a Nonprofit Goodwill Industries International Inc. consists of a network of 165 independent, community-based organizations located throughout the United States and Canada. The mission of this nonprofit is to enhance the lives of individuals, families, and communities “through learning and the power of work.” Local Goodwill stores sell donated goods and then donate the proceeds to fund job training programs, placement services, education, and more. Despite its nonprofit status, Goodwill

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309 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual establishments are in many ways run similar to for-profit businesses. One of these similarities involves the accounting function.

Like for-profit firms, nonprofit organizations like Goodwill must provide detailed information about how they are using the donations provided to them. Indeed, fraud can occur just as easily at a nonprofit organization as for a for-profit company, making it necessary for nonprofits to reassure stakeholders that they are using their funds legitimately. Additionally, donors want to know how much of their donations is going toward activities such as job creation and how much is going toward operational and administrative expenses. It sometimes surprises people that nonprofits use part of the funds they receive for operational costs. Yet such a perspective fails to see that nonprofits must also pay for electricity, rent, wages, and other services.

“We have revenue and support for the revenue pieces, and then we have direct and indirect expenses for our program services, and then we have G and A, general administrative services. And we have what’s called the bottom line, or other people call net profit. We have what’s called net change in assets. The concept is pretty much the same as far as accounting,” says Jeff McGraw, CFO of Goodwill.

Goodwill creates the equivalent of a balance sheet and income statement. Yet because Goodwill is a nonprofit entity, its financials are known by the names statement of financial position and statement of activities. These financials have some differences compared to financial statements of for-profit companies. For instance, Goodwill’s statement of financial position does not have shareholder’s equity but instead has net assets. The organization’s financials are audited, and stakeholders can find the firm’s information in form 990 through Goodwill’s public website (form 990 is the IRS form for nonprofits).

Because Goodwill sells goods at its stores, the company must figure in costs of goods sold. In fact, most of the organization’s revenue comes from its store activities. In the most recent year, the retail division or sale of donated goods and contributed goods generated $3.53 billion. The contracts division generated $636 million, which provides custodial, janitorial, and lawn maintenance service contracts to government agencies. Grants from foundations, corporations, individuals, and government account for $148 million. The fact that Goodwill is able to generate much of its own funding through store activities and contracts is important. Many nonprofits that rely solely on donated funds find it hard to be sustainable in the long run, particularly during economic downturns.

Remember that even though nonprofits are different from for-profits, their financial information must be accurate. This requires nonprofit accountants to be meticulous and thorough in gathering and analyzing information. Like all accountants, accountants at Goodwill record transactions in journals and then carefully review the information before it is recorded in the general ledger. The organization uses trial balances to ensure that everything balances out, as well as advanced software to record transactions, reconcile any discrepancies, and provide an idea of how much cash the organization has on hand.

Finally, Goodwill uses ratio analysis to determine the financial health of the company. For instance, the common ratio allows Goodwill to determine how much revenue it brings in for every dollar it spends on costs. The organization also uses ratio analysis to compare its results to similar organizations. It is important for Goodwill to identify the best performers in its field so that it can generate ideas and even form partnerships with other organizations. By using accounting to identify how best to use its resources, Goodwill is advancing its mission of helping others.

Source: Goodwill website, www.goodwill.org (accessed July 31, 2012).

Video Case Discussion Questions 40. What are some similarities between the type of accounting performed at Goodwill and accounting at for-profit companies?

Similarities include the fact that Goodwill must generate the equivalent of a balance sheet and income statement; determine costs and expenses, such as cost of goods sold and general and administrative expenses; ensure the accuracy of their financial information with audits; and perform ratio analysis to determine which organizations are Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

310 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual the best performers in the industry. Additionally, many elements of the accounting process are the same. All Goodwill transactions must be recorded in journals, carefully reviewed, recorded in the general ledger, and make use of trial balances and computer software to ensure accuracy.

41. What are some differences between the type of accounting performed at Goodwill and accounting at for-profit companies?

Some differences include the names that Goodwill calls the balance sheet and the income statement; they are referred to as “statement of financial position” and “statement of activities.” As a nonprofit, Goodwill does not have shareholder’s equity but rather tabulates its net assets. It submits a different form to the IRS (Form 990). Although the emphasis is different (there is no owner’s equity because of the firm’s nonprofit status), many of the same accounting principles are the same as for-profit companies.

42. How can Goodwill use ratio analysis to improve its operations?

Ratio analysis can be used to determine the financial health of a company. In so doing, the company can measure how it is doing compared to past results and toward similar organizations and determine where it might need to improve certain areas. Additionally, it is able to use the ratio analyses of similar companies to determine a benchmark for best results. Goodwill can identify those “best companies” and perhaps use their example to come up with ideas for how to improve its own operations. Finally, Goodwill might pursue partnerships with these organizations to achieve common goals of helping those in their communities to find employment and meet other needs.

Team Exercise Students can look at websites such as Yahoo! Finance (http://finance.yahoo.com/), under the company’s ‘key statistics’ link, to find many of its financial ratios, such as return on assets and return on equity. Have each member of the students’ teams look up a different company. They should explain why they think there are differences in the ratio analysis for these two ratios among the selected companies.

Build Your Skills Financial Analysis Background The income statement for Western Grain Company, a producer of agricultural products for industrial as well as consumer markets, is shown below. Western Grain’s total assets are $4,237.1 million, and its equity is $1,713.4 million.

Consolidated Earnings and Retained Earnings Year Ended December 31 (Millions) Net sales Cost of goods sold Selling and administrative expense Operating profit

2010 $6,295.4 2,989.0 2,237.5 1,068.9

Interest expense Other income (expense), net

33.3 (1.5)

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311 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Earnings before income taxes Income taxes Net earnings (Net earnings per share) Retained earnings, beginning of year Dividends paid Retained earnings, end of year

1,034.1 353.4 680.7 $2.94 3,033.9 (305.2) $3,409.4

Task Calculate the following profitability ratios: profit margin, return on assets, and return on equity. Assume that the industry averages for these ratios are as follows: profit margin, 12 percent; return on assets, 18 percent; and return on equity, 25 percent. Evaluate Western Grain’s profitability relative to the industry averages. Why is this information useful?

Answers Profit margin = net earnings – 680.7 = 10.81% (sales 6,295.4) Return on assets = net earnings = 680.7 = 16.07% (assets 4,237.1) Return on equity = net earnings – 680.7 = 39.73% (equity 1,713.4) Comparison of Western Grain Ratios with the Industry

profit margin return on assets return on equity

Western Grain 10.81% 16.07% 39.73%

Industry 12% 18% 25%

Difference -1.19% -1.93% 14.73%

A comparison of the profitability ratios shows that Western Grain has a lower profit margin, which indicates that Western is not operating as efficiently as the average firm in the industry. The lower return on assets indicates that Western does not generate as much profit per $1 of assets as the average firm in the industry. This could be due to inefficient asset utilization or because Western has high equipment costs compared to the industry. By comparing these ratios, Western should be able to determine areas for improvement in performance.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 56. Accounting as a Profession 57. History of Accounting Education 58. Effects of Computers in Accounting 59. The Requirements of Certified Public Accountants (in your state) 60. The Certification and Functions of Certified Management Accountants (CMAs)

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312 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Guest Speaker Suggestions 49. A public accountant or a certified public accountant to address aspects of the job.

50. A private accountant to address aspects of the job.

51. An accounting professor to speak about accounting responsibilities, auditing, etc.

52. A representative of a firm with responsibility for the physical layout of the annual report.

53. A professor to speak about ethical concerns and issues in accounting.

Teaching Suggestions 64. This chapter is not intended to cover all accounting principles but to give students an insight into accounting and the information statements developed by accountants. In addition, many of the terms used by accountants in financial statements are basic to interpreting and analyzing companies. Rather than pure memorization of terms, students should understand the overall concepts of the chapter.

65. Present the lecture using “Lecture Outline and Notes” and slides planned for the chapter.

66. Get copies of different annual reports for the class to look over. Sometimes companies will give educational institutions copies of old annual reports. Many are downloadable from the Internet. The questions for the “Supplemental Lecture” can be used when looking at actual copies of annual reports.

67. To help students understand the objectives of the chapter, go over “Check Your Progress” at the end of the chapter.

Include questions from “Additional Discussion Questions and Exercises” given in this Instructor’s Manual.

Chapter 15: Money and the Financial System Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s highlights. Followup via the Connect exercises is then encouraged to provide a holistic understanding of the chapter. Use the hyperlinked Table of Contents below to jump to different sections of the manual.

Table of Contents Chapter Forecast ......................................................................................................................................................................... 313 Learning Objectives ..................................................................................................................................................................... 313 Key Terms and Definitions ........................................................................................................................................................... 313 Content Outline ........................................................................................................................................................................... 315 Boxed Text Critical Thinking Questions ....................................................................................................................................... 323 Do You Want a Career // in Financial Systems or Banking? /...................................................................................................... 324 Bonus Teaching Resources .......................................................................................................................................................... 324 Chapter Review Questions .......................................................................................................................................................... 327 Connect Exercises ........................................................................................................................................................................ 328 Class Discussion Questions .......................................................................................................................................................... 329 Build Your Business Plan.............................................................................................................................................................. 329 Video Case: Crowdfunding: Loans You Can Count On................................................................................................................. 329 Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

313 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Team Exercise .............................................................................................................................................................................. 330 Build Your Skills ........................................................................................................................................................................... 330 Term Paper or Project Topics ...................................................................................................................................................... 331 Guest Speaker Suggestions ......................................................................................................................................................... 332 Teaching Suggestions .................................................................................................................................................................. 332

Chapter Forecast From Wall Street to Main Street, both overseas and at home, money is the one tool used to measure personal and business income and wealth. We begin our discussion with a definition of money and then explore some of the many forms money may take. Next, we examine the roles of the Federal Reserve Board and other major institutions in the financial system. Finally, we explore the future of the finance industry and some of the changes likely to occur over the course of the next several years.

Learning Objectives LO 15-1 Define money, its functions, and its characteristics.

LO 15-2 Describe various types of money.

LO 15-3 Specify how the Federal Reserve Board manages the money supply and regulates the American banking system.

LO 15-4 Compare and contrast commercial banks, savings and loan associations, credit unions, and mutual savings banks.

LO 15-5 Distinguish among nonbanking institutions such as insurance companies, pension funds, mutual funds, and finance companies.

LO 15-6 Analyze the challenges ahead for the banking industry.

Key Terms and Definitions Automated clearinghouses (ACHs) A system that permits payments such as deposits or withdrawals to be made to and from a bank account by magnetic computer tape Automated teller machine (ATM) The most familiar form of electronic banking, which dispenses cash, accepts deposits, and allows balance inquiries and cash transfers from one account to another Brokerage firms Firms that buy and sell stocks, bonds, and other securities for their customers and provide other financial services Certificates of deposit (CDs) Savings accounts that guarantee a depositor a set interest rate over a specified interval as long as the funds are not withdrawn before the end of the period—six months or one year, for example Checking account Money stored in an account at a bank or other financial institution that can be withdrawn without advance notice; also called a demand deposit Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

314 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Commercial banks The largest and oldest of all financial institutions, relying mainly on checking and savings accounts as sources of funds for loans to businesses and individuals Credit cards Means of access to preapproved lines of credit granted by a bank or a finance company Credit controls The authority to establish and enforce credit rules for financial institutions and some private investors Credit union A financial institution owned and controlled by its depositors, who usually have a common employer, profession, trade group, or religion Debit card A card that looks like a credit card but works like a check; using it results in a direct, immediate, electronic payment from the cardholder’s checking account to a merchant or third party Discount rate The rate of interest the Fed charges to loan money to any banking institution to meet reserve requirements Electronic funds transfer (EFT) Any movement of funds by means of an electronic terminal, telephone, computer, or magnetic tape Federal Deposit Insurance Corporation (FDIC) An insurance fund established in 1933 to insure individual bank accounts Federal Reserve Board (the Fed) An independent agency of the federal government established in 1913 to regulate the nation’s banking and financial industry Finance The study of how money is managed by individuals, companies, and governments Finance companies Businesses that offer short-term loans at higher rates of interest than banks Insurance companies Businesses that protect their clients against financial losses from certain specified risks (death, accident, and theft, for example) Investment banker Underwrites new issues of securities for corporations, states, and municipalities Monetary policy Means by which the Fed controls the amount of money available in the economy Money Anything generally accepted in exchange for goods and services; also called currency Money market accounts Accounts that offer higher interest-rates than standard bank rates but with greater restrictions Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

315 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Mutual fund An investment company that pools individual investor dollars and invests them in large numbers of well-diversified securities Mutual savings banks Financial institutions that are similar to savings and loan associations but, like credit unions, are owned by their depositors National Credit Union Association (NCUA) An agency that regulates and charters credit unions and insures their deposits through its National Credit Union Insurance Fund Open market operations Decisions to buy or sell U.S. Treasury bills (short-term debt issued by the U.S. government) and other investments in the open market Pension funds Managed investment pools set aside by individuals, corporations, unions, and some nonprofit organizations to provide retirement income for members Reserve requirement The percentage of deposits that banking institutions must hold in reserve Reward cards Credit card that carries a benefit to the user Savings accounts Accounts with funds that usually cannot be withdrawn without advance notice; also known as time deposits Savings and loan associations (S&Ls) Financial institutions that primarily offer savings accounts and make long-term loans for residential mortgages; also called “thrifts”

Content Outline The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a section on which CONNECT activities can be used in the chapter. This is created so that you can facilitate in-class or online discussion effectively.

LO 15-1 Define money, its functions, and its characteristics.  

Introduction Money in the Financial System o Functions of Money o Characteristics of Money

PowerPoint Slides

 

Finance Money

Lecture Outline and Notes: LXXII.

PPT 15.4

Key terms:

Money in the Financial System a. Finance is the study of money—how it’s made, how it’s lost, and how it’s managed. b. Money (or currency) is anything generally accepted in exchange for goods and services. i. Many things have served as money: salt, cattle, and precious metals.

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316 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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1. Most of these materials were limited-supply commodities that had their own value to society. ii. “IOUs,” slips of paper that could be exchanged for a specified supply of the underlying commodity, developed later. iii. Finally, fiat money is paper money not readily convertible to a precious metal, such as gold; it did not gain full acceptance until the 1930s. c. Functions of Money i. Money serves as a medium of exchange, making it easier for people to buy and sell goods and services and reducing the need for barter—the trading of one product or service for another of similar value.

1. Bartering was inefficient because it was not always divisible and can be complicated in multiple-party transactions. ii. Money serves as a measure of value, or a common standard for the value of all goods and services. iii. Money acts as a store of value, or as a way to maintain the value of accumulated wealth until it is needed to purchase goods or services.

1. Unfortunately, the value of stored money is directly dependent on the health of the economy. Inflation and deflation are both problematic for the economy (discussed in more detail later). d. Characteristics of Money i. Acceptability 1. To be effective, money must be readily acceptable as a way to pay for goods and services and settle debts.

2. Acceptability is probably the most important characteristic of money: People must believe in and trust the value of what they use as money. ii. Divisibility 1. To facilitate exchanges, money must be easily divided into smaller units of value. iii. Portability 1. For money to function as a medium of exchange, it must be easily moved and carried.

2. For most societies, paper money and metal coins satisfy this need. iv. Stability 1. Money must be stable and maintain its declared face value.

2. Stability allows people who wish to postpone purchases and save their money to do so without fear that it will decline in value, as during periods of inflation.

3. Instability destroys confidence in a nation’s money, and it will ultimately lose acceptability. v. Durability 1. Because it is in continuous use, money must be durable in order to maintain stability and acceptability. (Table 15.1) vi. Difficulty to Counterfeit 1. Money must be difficult to duplicate illegally in order to maintain stability and acceptability.

2. Because modern technology makes it easier to counterfeit paper money, most nations employ special papers and other techniques to thwart counterfeiting.

3. Interestingly, although coins are much harder to counterfeit, it costs more to make pennies and nickels than their face value! (Table 15.2)

LO 15-2 Describe various types of money.

Key terms:

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317 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual o

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Types of Money

      

Checking account Savings accounts Money market accounts Certificates of Deposit (CDs) Credit cards Reward cards Debit card

e. Types of Money i. Paper money and coins are the most visible types of money, but there are many others. ii. A checking account (also called a demand deposit) is money stored in an account that can be withdrawn without advance notice.

1. One way to withdraw funds is by writing a check, a written order to a financial institution to pay the indicated individual or business the amount specified from funds on deposit. As legal instruments, checks serve as a substitute for currency and are preferred due to their low risk. (Figure 15.1) 2. A NOW (Negotiable Order of Withdrawal) account is an interest-bearing checking account. iii. Savings accounts, also called time deposits, are funds in an interest-earning account that usually cannot be withdrawn without advance notice and/or have limits on the number of withdrawals per period. They are not usually used for transactions. iv. Money market accounts are similar to interest-bearing checking accounts but with more restrictions.

1. Generally, in exchange for higher interest rates, the owner of a money market account can write only a limited number of checks each month, and there may be a restriction on the minimum amount of each check. v. Certificates of deposit are savings accounts that guarantee a depositor a set interest rate but require the funds to be left in the financial institution for a specified period.

1. If you withdraw funds early from a CD, you may face a substantial financial penalty. vi. Credit cards allow you to promise to pay at a later date by using preapproved lines of credit granted by a bank or finance company.

1. They are a popular substitute for cash because of their convenience, easy access, and acceptance around the world.

2. Credit cards allow cardholders great flexibility in paying off their purchases.

3. Credit cards may be issued by banks, travel and entertainment companies, and retail store chains.

4. Credit card interest rates can be very high and consumer credit card debt is a major cause for concern. Credit cards are one of the most expensive ways to borrow money (although some people choose to pay off their credit card debt monthly).

5. Reward cards are credit cards that carry benefits to the user. Many organizations such as Delta and ExxonMobil offer branded cards that award users points every time they use the card. These points can later be redeemed for rewards.

6. The Card Accountability Responsibility and Disclosure (Credit CARD) Act of 2009 limits the ability of card companies to raise interest rates, limits young adults’ access to credit cards, gives people more time to pay off bills,

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318 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual and made clearer due dates mandatory on statements. vii. A debit card looks like a credit card but works like a check; use of a debit card results in a direct, immediate, electronic payment from the cardholder’s checking account to a merchant or third party. viii. Traveler’s checks, money orders, and cashier’s checks are other forms of “near money” that can be exchanged for cash or products. ix. Credit card fraud: more and more computer hackers have managed to steal credit card information and either use the information for Internet purchases or making a card exactly the same as the one stolen. Losses on credit card theft run into the billions.

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LO 15-3 Specify how the Federal Reserve Board manages the money supply and regulates the American banking systems. 

The American Financial System o The Federal Reserve System

PPT 15.15

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LXXIII.

Key terms:  Federal Reserve Board  Monetary policy  Open market operations  Reserve requirement  Discount rate  Credit controls

The American Financial System a. The Federal Reserve System i. The guardian of the American financial system is the Federal Reserve Board, established by Congress in 1913 as an independent government agency responsible for regulating the banking and financial industry.

1. The Federal Reserve System is organized into 12 geographical regions.

(Figure 15.2) 2. The Federal Reserve Board is the chief economic policy arm of the United States. ii. The Federal Reserve Board has four major responsibilities: 1. To control the money supply with monetary policy.

2. To regulate financial institutions.

3. To manage regional and national check clearing procedures.

4. To supervise the federal deposit insurance of commercial banks belonging to the Federal Reserve System. iii. Monetary Policy 1. Monetary policy refers to the Fed’s methods of controlling the amount of money available in the economy. (Table 15.3) 2. Monetary policy is necessary to balance the supply of and demand for money to minimize economic fluctuations (inflation/deflation).

3. The Fed fine-tunes the money supply with four basic tools. a. Open market operations are the buying and selling of U.S. Treasury bills and other investments in the open market by the Federal Reserve Board. i. This tool is the most commonly employed. ii. To expand the supply of money, the Fed buys securities. iii. To decrease the supply of money, the Fed sells securities. b. The second major tool is the reserve requirement, the percentage of deposits that the Fed requires banks to hold in reserve; these cannot be loaned to businesses or individuals. i. Changes to the reserve requirements will change how much banks will lend. Because the reserve requirement has such a powerful effect on the money supply, the Fed

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319 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual does not change it often.

The third tool is the discount rate, the interest rate the Federal Reserve charges for money it lends to any banking institution to meet reserve requirements. i. The Fed is the “lender of last resort” to these institutions. ii. When the Fed wants to expand the money supply, it lowers the discount rate; when it wants to decrease the money supply; it raises the discount rate. iii. Japan and Europe have been using negative interest rates since 2014. iv. There has been no evidence that negative interest rates have had the desired impact in Europe. d. The final tool available to the Fed is credit controls—the authority to establish and enforce credit rules for financial institutions and some private investors. (Figure 15.3) iv. Regulatory Functions 1. The second responsibility of the Fed is to regulate member banking institutions.

2. The Fed establishes and enforces banking rules that affect monetary policy and competition between banks.

3. It determines which non-banking activities (brokerage services, leasing, and insurance) are appropriate and which should be prohibited among banks.

4. The Fed can also approve or disapprove mergers between banks and the formation of bank holding companies.

5. Surprise annual bank inspections are conducted by examiners. v. Check Clearing 1. The Fed provides national check clearing for almost all checks drawn on a bank in one city and presented for deposit at a bank in a second city. The Fed also clears local checks.

2. The Check Clearing for the 21st Century Act (Check 21 Act) allows banks to clear checks electronically by presenting an electronic image of the check.

Because of this, checks can often be processed in a day. vi. Depository Insurance 1. The Fed is responsible for supervising the federal insurance funds that protect the deposits of member institutions.

PPT 15.21

c.

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LO 15-4 Compare and contrast commercial banks, savings and loan associations, credit unions, and mutual savings banks. o

PPT 15.25

Banking Institutions

Key terms:  Commercial banks  Savings and loan associations (S&Ls)  Credit union  Mutual savings banks  Federal Deposit Insurance Corporation (FDIC)  National Credit Union Administration (NCUA)

b. Banking Institutions i. Many banks are hybrids in that they perform two or more functions that were traditionally separated in the banking industry of the past. ii. Commercial banks are the largest and oldest of all financial institutions and rely

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320 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

iii.

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iv.

v.

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vi.

mainly on checking and savings accounts as their major source of funds for loans to businesses and individuals.

1. Banks today offer a number of services: consumer loans, credit cards, safedeposit boxes, trusts, and securities.

2. Legislation permits commercial banks to offer insurance and investment banking products as well. This has placed U.S. banks on the same competitive footing as European banks.

3. Banks are increasingly merging, even across international borders. The most recent financial crisis and recession accelerated consolidation.

4. High-risk banking and financial activities that contributed to the financial crisis caused the government to pass the Dodd-Frank Act. This Act imposed two major regulations on banks: a. Raised the required capital banks had to hold on their balance sheet b. Limited certain kinds of high-risk activities Savings and loan associations (S&Ls) are financial institutions that primarily offer savings accounts and make long-term loans for residential mortgages.

1. S&Ls, also called “thrifts,” have undergone a metamorphosis in recent years after having almost collapsed during the 1980s.

2. Today they compete directly with commercial banks by offering many types of services.

3. Many S&Ls merged with commercial banks.

Credit unions are financial institutions owned and controlled by their depositors, who usually have a common employer, profession, trade group, or religion.

1. At a credit union, a savings account is usually called a share account, while a checking account is usually called a share draft account.

2. Credit unions offer a wide variety of financial services comparable to commercial banks.

Mutual savings banks are financial institutions similar to savings and loan associations except that they are owned by the depositors.

1. Found in New England but are becoming more popular in other parts of the country as some S&Ls have converted to mutual savings banks.

Insurance for Banking Institutions 1. The Federal Deposit Insurance Corporation (FDIC) was created in 1933 to provide an insurance fund that insures individual bank accounts.

2. Should a member bank fail, its depositors can recover all of their funds, up to $250,000.

3. Savings and loan associations accounts were insured by the Federal Savings and Loan Insurance Corporation (FSLIC) until it became insolvent with the large-scale thrift failures in the 1980s. It has since merged with the FDIC. 4. The National Credit Union Association (NCUA) is an agency that regulates and charters credit unions and insures their deposits.

5. These funds are intended to make people feel more secure about their savings so that they won’t panic and withdraw them during a crisis; their effectiveness seems to have been proven during the many bank failures during the 1980s and 1990s. a. Large bank failures occurred once again during the most recent recession. More than 474 banks have failed between 2009 and 2014. While the future may yet bring unfortunate surprises, most depositors go to sleep every night without worrying about the safety of their savings.

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321 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual LO 15-5 Distinguish among nonbank institutions such as insurance companies, pension funds, mutual funds, and finance companies. o o

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Nonbanking Institutions Electronic Banking

c.

Key terms:  Insurance companies  Pension funds  Mutual fund  Brokerage firms  Investment banker  Finance companies  Electronic funds transfer (EFT)  Automated teller machine (ATM)  Automated clearinghouse (ACHs)

Nonbanking Institutions (Table 15.4) i. Diversified firms: Recently, a number of traditionally nonfinancial firms have moved into the financial field.

1. General Motors, Ford, and General Electric are examples 2. Many of these have been unsuccessful—it is best to “stick to what you know.” ii. Insurance companies are businesses that protect their clients against financial losses from certain specified risks in exchange for a fee. iii. Pension funds are managed investments set aside by individuals, corporations, unions, and some nonprofit organizations to provide retirement income for members.

1. Individual Retirement Accounts (IRAs) are a type of private pension fund set up by individuals to provide for their retirement needs; taxes on the interest earned are deferred until withdrawal upon retirement.

2. The Roth IRA is similar to a traditional IRA, but the interest is tax-free upon retirement because investors do not deduct their contributions at the time they are made.

3. Most corporations provide some kind of pension plan for their employees.

4. Social Security, the largest pension plan, is a public fund. The federal government collects Social Security funds from payroll taxes from employers and deducts them from employees’ paychecks. iv. Mutual funds pool investors’ funds and invest them in securities.

1. Because of the large numbers of people investing in any one mutual fund, the funds can afford to invest in hundreds or thousands of securities at any one time, minimizing the risks of any single security that does not do well.

2. Mutual funds provide professional financial management for people who lack the time and/or expertise to invest in particular securities.

3. Money market funds invest in short-term debt securities issued by governments and large corporations. v. Exchange-traded Funds Exchange-traded funds (ETFs) 1. ETFs similar to mutual funds in that they invest in a pool of assets.

2. The difference is that the assets in the fund duplicate a stock market index such as the Standard and Poor’s 500, the Dow Jones Industrials, or the Russell 2000. vi. Brokerage firms and Investment Banks 1. Brokerage firms buy and sell stocks and bonds for their customers and provide other financial services.

2. Investment bankers underwrite new issues of securities for corporations,

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322 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual states, and municipalities a. The new issue is called a primary market because the sale of securities is for the first time. After the first sale, the securities trade in the secondary markets by brokers. vii. Finance companies are businesses that offer short-term loans at substantially higher rates of interest than banks; they are often a lender of last resort for individuals and businesses with less than sterling credit. d. Electronic Banking i. Electronic funds transfer (EFT) is the transfer of funds by means of an electronic terminal, telephone, computer, or magnetic tape. The most commonly used EFTs are automated teller machines, automated clearinghouses, and home banking systems, ii. Automated teller machines (ATMs) are the most familiar form of electronic banking and dispense cash, accept deposits, transfer funds from one account to another, and display a customer’s account balance through portable machines accessed through ATM networks worldwide. (Table 15.5) iii. Automated clearinghouses (ACHs) permit payments such as direct deposits or withdrawals to be made to and from a bank account by magnetic computer tape.

1. ACHs permit direct deposits, now used by many companies and the federal government.

2. The advantages of direct deposits for individuals include convenience, safety, and potential interest earnings.

3. The advantages for businesses include decreased check-processing expenses and increased employee productivity. iv. Online banking gives customers access to a growing number of financial services 1. People can utilize banking services through home computers, laptops, PDAs, and smartphones.

2. Increasingly sophisticated transactions can be carried out online.

3. Computers and telecommunications technology have revolutionized world commerce. a. Consumers and small businesses can now make a bewildering array of financial transactions at home or on the go 24 hours a day. b. Computers and handheld devices have made online banking convenient. However, hackers have stolen millions from banking customers by tricking them into visiting websites and downloading malicious software that gives the hackers access to their passwords.

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LO 15-6 Analyze the challenges ahead for the banking industry. 

Key terms:

Future of Banking LXXIV.

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Future of Banking a. Rapid advances in technology are forcing the banking industry to change. i. More services than ever are available electronically and online. b. Fed Response to Crisis i. Due to the financial crisis that began in 2007 and again with the crisis brought about by the COVID-19 pandemic in 2020, the Federal Reserve took unprecedented actions. ii. Many large banks had a shrinking capital base. iii. The Troubled Asset Relief Program had to step in and buy up $250 billion of senior

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323 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

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preferred shares of bank securities. iv. Most large banks either needed to take a cash infusion from the U.S. Treasury or sell preferred stock to the Treasury. v. The government didn’t want to signal to the financial community which banks were strong and which were weak to avoid a panic. vi. During this period, the Fed took the unprecedented actions of buying up troubled assets from the banks and lending money at the discount window to nonbanks such as investment banks and brokers. vii. The Fed also began paying interest on reserves banks kept at the Fed. c. The future of the banking system is in the hands of the U.S. Congress. i. The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed with the intent to eliminate the ability of banks to create this type of problem in the future. d. Shadow Banking refers to companies performing banking functions of some sort that are not regulated by banking regulators e. Peer-to-Peer lenders like Prosper, a company that matches investors and borrowers with loans between $2000 and $35,000 f. Other funding by Internet websites such as GoFundMe and Kickstarter help people raise funds for things as diverse as health care issues to creative projects in art, film, games, and music

Boxed Text Critical Thinking Questions COVID-19: Saving Makes Cents 43. Why do you think Americans chose to save their stimulus funds rather than spend them?

Many Americans held the money for precautionary reasons. The Federal Deposit Insurance Corporation assured consumers and companies that banks would be safe, adding more protections. This led to banks acting as a refuge for jittery consumers and companies intending to wait out the shutdown.

44. Why did the rise in savings contribute to the growth of the largest banks?

The sharp rise in savings by both consumers and corporations led to the continued growth of the largest banks. There were $1.8 trillion in deposits in the first quarter of 2020 alone, with more than 50 percent going to JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup.

45. What are some of the reasons banks chose not to borrow from the Fed’s Paycheck Protection Program?

Though PPP loans had a low interest rate of 0.35 percent, non-interest-bearing accounts made up approximately 30 percent of all deposits at the top four banks, giving the banks an even cheaper alternative for funding.

The Federal Reserve Leans on BlackRock 43. What type of nonbanking institution is BlackRock?

BlackRock offers funds, products, insights, resources, and professionals to help people invest intelligently and effectively.

44. Is BlackRock a threat to the broader financial system? Why or why not?

Answers will vary but students need to support their answer.

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324 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

45. Why are ETFs attractive to risk-averse investors?

The diversified nature of these funds lowers the risk because the investment is not dependent on a single company like a traditional stock. Combined with low fees, ETFs are popular for risk-averse investors.

Digging into the Digital Wallet 42. Do you think digital wallets will revolutionize electronic banking and in-store transactions?

Answers will vary but students need to support their answer but most students will answer that digital wallets will have a tremendous impact.

43. How do you think digital wallets will affect traditional banks?

Again, answers will vary but students need to support their answer. Many wallet apps have the added convenience of storing loyalty cards, plane tickets, and event tickets which will probably force traditional banks to respond.

44. What are some of the risks of digital wallets? What can be done to mitigate these risks?

Many consumers are concerned about the risk of identity theft and many businesses do not have the technology to accept these types of payments.

Consumers can add an additional layer of protection is to use multi- or two-factor authentication on their mobile device.

Do You Want a Career // in Financial Systems or Banking? / Why are internships a good way to try out an industry before going into it as a career?

Just because classes in a certain field are interesting does not mean that you will enjoy working in that industry. Internships provide hands-on, real-world experience with jobs that you are interested in applying for after graduation. They are a lowstakes way to try on different fields until you find one that fits. Internships also are a great way to network and build up valuable connections before you get out into the working world. They also signal to future employers that you are interested in learning and working hard and are willing to take extra steps to be successful.

Bonus Teaching Resources This section offers bonus teaching resources for class discussion. This is offered in addition to what’s offered in the M: Business text.

“The Federal Reserve System” MiniCase The Federal Reserve System monitors the nation’s money supply and tries to exert some influence over it. The exact nature of the relationship between the money supply and inflation is best treated by a panel of learned economists and will be explored in depth in your economics classes. Our mission in this lecture is to discuss three ways in which the Federal Reserve (often called the Fed) tries to alter the money supply.

Reserve Requirement One of several roles of the Federal Reserve System is to regulate commercial banks that have elected to affiliate themselves with the system. One facet of this control is setting the reserve requirement. As you know, banks maintain accounts for Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

325 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual depositors and also lend funds to borrowers. This arrangement works well for commercial banks as long as loaned funds earn more interest for the bank than the bank pays out in interest to the savings and checking customers. The difference is called the spread. A bank earns revenues by lending money. However, the bank’s eagerness to earn might drive it to lend so generously that there might be little cash on hand to allow the bank to perform the services expected by savings and checking customers. The Fed has stepped in to control this eagerness by requiring a commercial bank to keep a percentage of its funds in ready reserve for cash emergencies that might arise.

This reserve requirement can be changed by the Fed as it wishes. Raising the reserve requirement means that commercial banks will be forced to hold larger reserves and thus will be less able to release funds into the economy. Lowering the requirement means that banks have more money and can thus release more funds into the economy. Turning the reserve “spigot” on or off affects the amount of money in circulation.

Discount Rate Our Federal Reserve System is often called the banks’ bank. This means that when a commercial bank has banking needs, it can turn to the Fed. If a commercial bank needs to borrow funds beyond an overnight period, it may borrow from the Fed. The interest rate the Fed will charge such a commercial bank is called the discount rate. If a commercial bank seeks to help a customer with a financing problem and borrows funds for that purpose from the Fed, the interest rate the bank charges its customer will reflect the discount rate the Fed has charged the commercial banks. If the Fed raises the discount rate, that increase will be passed on to the commercial bank’s customer. Such an increase can discourage borrowing, and limiting borrowing can cut down on funds going into the nation’s money supply. On the other hand, lowering the discount rate will make banks more capable of lending “cheap” money, thus adding to the money supply.

In other nations, commercial banks at various times have had to lean very heavily on the lending generosity of their central bank. (Our central bank is the Fed.) However, in the United States, commercial banks have many other sources from which to borrow. Altering the discount rate in the United States may not have the impact on lending that other nations would experience, but altering the discount rate has a major impact in an unofficial way. When the Fed raises the discount rate, it is a signal to the financial community and to the securities markets that higher interest rates are coming. We use the term unofficial because it is often not the discount rate that leads or initiates movements of interest rates.

Open Market Operations Many economists believe that open market actions are the Fed’s most significant and effective tactic. The Federal Open Market Committee of the Federal Reserve System (known as the FOMC) meets on a regular basis and decides what moves to make in securities issued by the United States Treasury Department.

If it is decided, for example, that the Fed should sell millions (or even billions) of dollars of Treasury bonds on a given day, this action will draw millions of dollars out of the economy, thus reducing the money supply. On the other hand, if it is decided that the Fed should buy millions of dollars of Treasury bonds on a given day, this action will draw bonds out of the hands of individuals and institutions and put dollars back into the economy. If the Fed bought millions of dollars of bonds twelve market days in a row, a considerable sum of dollars would be put into the economy.

Although the Fed’s methods discussed in this lecture can have an effect on the size of the money supply, changes in the money supply cannot be considered a foolproof method for controlling inflation. Just how much it helps is a matter for discussion by economists.

Discussion Questions for Walmart Supercenters MiniCase 35. How does the Federal Reserve System control the money supply?

The Federal Reserve System can control the money supply through the reserve requirement, the discount rate, and open market operations. The Feds can control how much a bank can lend by altering the bank’s reserve requirement—how much of the bank’s funds it must keep in reserve to perform services expected of checking and Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

326 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual savings customers. When the Feds loan money to commercial banks, it charges interest from the banks called the discount rate. The banks then pass this interest rate onto the customer who borrows from the bank. The Fed also buys or sells Treasury bonds, which either draws millions of dollars out of the economy (through selling) or into the economy (through buying).

36. Why is the Fed sometimes called the “banks’ bank”?

The Fed is sometimes called the “bank’s bank” because commercial banks can borrow from the Fed.

Controversial Issue: Does Insurance for Banking Institutions Reward Reckless Decisions of Institutions and Depositors?

This can be used in a discussion board or for in-class discussion.

The Federal Deposit Insurance Corporation (FDIC) was established in 1933 to help protect deposits. In the early 1930s, nearly 4,000 banks failed. Many banks failed because of depositor “runs” on banks, when huge numbers of depositors demanded their money at the same time. Many financially sound and prudently run banks experienced runs when rumors of a bank failure caused people to panic and withdraw their deposits.

Congress established the Federal Deposit Insurance Corporation (FDIC) to protect individual depositors but also to restore confidence in the banking system. All federal banks must be insured by the FDIC. Banks, such as state banks, that are not members of the Federal Reserve System may be covered under FDIC. Today, the FDIC insures depositors up to $250,000 for each account. The Federal Savings and Loan Insurance Corporation (FSLIC) was established soon after the FDIC to extend the same protection to depositors in savings and loan associations.

The news media widely reported the savings and loan failures of the 1980s, many of which were caused by the collapse of the real estate and construction industries, particularly in Texas and California. As developers and managers of real estate and construction companies were unable to repay their loans, many savings and loans or banks had financial difficulties or failed.

Most of their depositors, protected by the FDIC or FSLIC, were repaid up to $250,000 per account. The FSLIC did not have enough money to pay all depositors of failed S&Ls, and thus the FSLIC was combined with the FDIC, the insurer of bank deposits. In 1989 Congress created the Resolution Trust Corporation (RTC) to oversee the bailout and disposition of failed savings and loans institutions. At a cost of hundreds of billions of dollars, the RTC cleaned up the industry and then was dissolved in 1998.

Because of the crisis in the 1980s, especially with savings and loan associations, and because of continued financial difficulties of some banking institutions, critics have suggested that the insurance plans themselves may have contributed to some of these problems.

How can insurance designed to protect depositors be a problem? Currently, depositors can have separate accounts insured up to $250,000. With confidence that an account insured by the FDIC will be paid in case of institution failure, many individuals have placed money in risky or shaky financial institutions. Evidence suggests that weak savings and loans often offered higher rates of interest to attract depositors. Even with rumors of S&Ls’ financial difficulties, depositors were attracted by the higher interest rates. When the weak savings and loan institutions collapsed, the depositors were repaid.

In some cases, financially strong banks are protesting that the system rewards inept or imprudent banks.

Those institutions that charted a more conservative course by paying lower interest rates or by being more selective in granting loans feel that bailing out some institutions is rewarding poor management decisions. Likewise, the argument can be made that depositors who stayed with more conservative banks are actually paying for the depositors who opted for higher returns with risky banks.

Should depositors have some responsibility? Some in the banking industry have suggested two ways to deal with depositor responsibility that might enhance wiser consumer choices of banking institutions: (1) insuring individuals up to a total of $250,000 per person—not each account held by an individual, or (2) requiring some type of deductible feature whereby the Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

327 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual first $10,000 or $20,000 would not be covered in case of a bank failure. With depositors realizing that deposits would not be covered 100 percent, perhaps they would be more selective in choosing a bank.

As the banking industry deals with the failures of the past decade, the issue of insurance and protection for depositors will continue to be debated. At issue is not just depositor protection but confidence in the banking system.

Discussion Questions for Does Insurance for Banking Institutions Reward Reckless Decisions of Institutions and Depositors?

39. Should all depositor accounts be protected up to $250,000?

Students’ answers will vary.

40. Why is it wise to provide insurance for bank deposits?

It is wise to provide insurance for bank deposits so that depositors will not panic and remove all of their money from banks at once. This widespread panic helped to create the Great Depression. To avoid this panic, bank customers must have an incentive to trust the banking industry and not panic and pull out their funds whenever a financial crisis appears likely to occur. With insurance for bank deposits, depositors will have a guarantee that they will be compensated somewhat for savings losses.

Chapter Review Questions 139.

What are the six characteristics of money? Explain how the U.S. dollar has those six characteristics. a. Acceptability—the dollar is acceptable as payment for goods and services and settlement of debts. b. Divisibility—money must be divisible into small units to facilitate exchanges. The dollar is divisible into pennies, nickels, dimes, and quarters. c. Portability—money must be easily transported. The dollar is lightweight and folds easily. d. Durability—dollars last an average of eighteen months and can be folded thousands of times. e. Stability—the dollar is reasonably stable. A dollar will buy a dollar’s worth of goods and services today or next week. f. Difficulty of counterfeiting—the dollar is extremely difficult to counterfeit because of the paper and ink used in printing.

140.

What is the difference between a credit card and a debit card? Why are credit cards considerably more popular with U.S. consumers?

A credit card allows consumers to make purchases and pay for them over time, at a specified interest rate. With a debit card, the amount of a purchase is immediately deducted from the consumer’s account, if enough funds are available. Credit cards are considerably more popular with U.S. consumers because they allow instant financing of purchases and are generally accepted around the world. Debit cards, however, are beginning to grow in popularity because of their convenience.

141.

Discuss the four economic goals the Federal Reserve must try to achieve with its monetary policy.

The Fed must promote stable, long-term economic growth; high levels of employment; stable prices; and a balance of international payments. It does this by controlling the money supply, regulating financial institutions, managing

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328 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual regional and national check clearing procedures, and supervising federal deposit insurance of commercial banks belonging to the Federal Reserve System.

142.

Explain how the Federal Reserve uses open market operations to expand and contract the money supply.

The open market activities used to expand the money supply involve the Fed buying government securities. More money is placed in circulation because the Fed pays cash for the securities. The Fed contracts the money supply by selling government securities. Money is transferred from the buyers’ accounts into the Federal Reserve account, thus reducing the supply of money.

143.

What are the basic differences between commercial banks and savings and loans?

Although both institutions offer checking accounts, savings accounts, and make loans, commercial banks loan mainly to individuals and businesses, and savings and loans mainly make mortgage loans.

144.

Why do credit unions charge lower rates than commercial banks?

Credit unions charge lower rates because they are owned by their members and operated for them. Commercial banks must return a significant return on investment for their shareholders, whereas credit union members, who are the owners, prefer to get their returns in the form of higher interest rates on accounts and lower rates on loans.

145.

Why do finance companies charge higher interest rates than commercial banks?

Finance companies charge higher rates because they are usually a lender of last resort for customers whose other options have been exhausted. They assume a higher risk level and compensate by charging a higher interest rate.

146.

How are mutual funds, money market funds, and pension funds similar? How are they different?

Mutual funds, money market funds, and pension funds are similar in that each type of fund pays interest based on the performance of a portfolio of securities. In addition, individual investors do not select the specific securities in which the investment is made. The portfolio is managed for the investor and may include a wide variety of securities.

Money market funds, however, focus on investment in short-term securities and function more like specialized checking accounts. Finally, unlike mutual funds and money market funds, pension funds are generally not accessible (without penalty) until the investor retires.

147.

What are some of the advantages of electronic funds transfer systems?

Advantages of electronic funds transfer include greater security, greater efficiency and convenience, and lower costs in completing financial transactions.

Connect Exercises Below are the available exercises in Connect for this chapter. Please also see the Connect Content Matrix in your Instructor Resource library for additional details on these exercises (including Learning Objectives, topics, Bloom’s level, AACSB, etc.)

114.

Iraqi Currency (Case Analysis): Understand that money serves three important functions: as a medium of exchange, a measure of value, and a store of value.

115.

Types of Money (Click & Drag): Categorize both the features and uses of the various forms by each type of money.

116.

Financial Institutions' Characteristics (Click & Drag): Understand that both banking and non-banking institutions work together to frame the financial system.

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329 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 117.

Effects of the Federal Reserve (Click & Drag): Categorize both the effects on money supply and economic activity by the monetary tools used to create each effect.

118.

The Federal Reserve (iSeeit! Animated Video Case): This short video describes what the Federal Reserve is and how it uses its activities to help regulate the economy.

119.

Making Money Work for Molly's Meal Maker (Case Analysis): Demonstrate your understanding of money and financial systems and apply that understanding to a business scenario that you could encounter in your career.

120.

Financial Tools – Employer-Sponsored Retirement Accounts (iSeeit! Animated Video Case): Demonstrate your understanding of the retirement account options available to employers and individuals who desire to save for retirement.

Class Discussion Questions 39. Survey the banks, savings and loans, and credit unions in your area, and put together a list of interest rates paid on the various types of checking accounts. Find out what, if any, restrictions are in effect for NOW accounts and regular checking accounts. In which type of account and in what institution would you deposit your money? Why? Students’ answers will vary depending upon their locations.

40. Survey the same institutions as above, this time inquiring as to the rates asked for each of their various loans.

Where would you prefer to obtain a car loan? A home loan? Why? Students’ answers will vary depending upon their locations.

Build Your Business Plan Have students estimate the revenues for the first three months of operation of the Thai Restaurant. This will force them to think of what the average bill will be for lunch and/or dinner, and how many times the tables will turn over for each meal.

Students should look for competitor information to help them answer these questions. Review Table 14.4 with them and make sure they understand all that is involved in putting together an income statement.

At this point, students should be in the final stages of their written business plan and are beginning to plan and organize their oral presentations. Tell the students they should look at the judges as possible investors for their business. Remind them that they need to capture and hold the audience’s attention in the oral presentation.

Video Case: Crowdfunding: Loans You Can Count On Kiva, a nonprofit organization that accepts donations to crowdfund loans around the world was founded in 2005 when Premal Shah recognized that small business owners in developing countries didn’t have access to funding. Kiva takes donations on its site from people around the world who can donate a minimum of $25 for specific projects. Money is then given to recipients who are expected to pay back the loan over a set period of time. Kiva now backs thousands of loans each week at a variety of price points and has surpassed $1 billion in loans. Most Kiva loans go to help recipients build inventory or buy assets that will improve their productivity.

Even though Kiva does not have to follow many traditional banking regulations, the company must comply with regulations imposed by countries around the world that they are operating in. Developing countries often have poor regulations that increase costs for Kiva and complicate the loan process.

Kiva started operating in the U.S. in 2010 when it recognized a need for a nontraditional loan financing system. Kiva now aims to aid those who can’t secure a traditional loan in the United States through its existing crowdfunded loan system.

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330 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Kiva chooses to crowdfund loans instead of using donations since Kiva believes that lending is a more effective way to combat poverty. By lending, recipients will have a stable and ongoing source of capital for their business. Loan recipients can also use their Kiva loans as a credit history in order to try and secure loans with traditional financial institutions. Kiva uses the reinvested money that is paid back to fund other projects. Thanks to its innovative take on crowdfunding loans, Kiva is able to reach those in need all around the world. Donors can give money and then reinvest paid back loans into other projects.

Because of Kiva’s nontraditional structure, it is able to avoid many banking regulations. However, Kiva continues faces many challenges due to different government regulations and infrastructures.

Video Case Discussion Questions 43. Explain the benefit of awarding loans instead of donations.

The benefits of awarding loans are: loan recipients will have a stable and ongoing source of capital for their business.

They can also use their Kiva loans as a credit history in order to try and secure loans with traditional financial institutions. Because of the payback structure of Kiva’s loans, Kiva is able to reinvest money that is paid back to fund other projects.

44. What are the differences between Kiva and more traditional financial institutions?

Kiva is an example of “shadow banking,” where a company performs banking functions, like awarding loans, but is not a traditional banking institution and is not encumbered by traditional banking regulations. Lenders like Kiva, known as peer-to-peer lenders, create a human connection. By using crowdfunding on the Internet to award loans to broader audiences, Kiva has found a way to innovate in the financial loan industry.

45. What challenges does Kiva currently face, and what future challenges could it face?

Kiva faces many challenges due to different government regulations and infrastructures include complying with regulations imposed by countries around the world that they are operating in. Developing countries often have poor regulations that increase costs for Kiva and complicate the loan process. These countries have very poor financial infrastructure systems, which is another challenge that Kiva has to overcome when trying to fund those in need.

In the future, Kiva must continue to monitor regulations in multiple countries and pay close attention to how governments view shadow banking.

Team Exercise Mutual funds pool individual investor dollars and invest them in a number of different securities. Students will go to http://finance.yahoo.com/ and select some top-performing funds using criteria such as sector, style, or strategies. They will assume that their group has $100,000 to invest in mutual funds. Each group will select five funds in which to invest, representing a balanced (varied industries, risk, etc.) portfolio. Students will then defend their selections.

Build Your Skills Managing Your Money Background

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331 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual You have just graduated from college and have received an offer for your dream job (annual salary: $35,000). This premium salary is a reward for your hard work, perseverance, and good grades. It is also a reward for the social skills you developed in college doing service work as a tutor for high school students and interacting with the business community as the program chairman of the college business fraternity, Delta Sigma Pi. You are engaged and plan to be married this summer. You and your spouse will have a joint income of $60,000, and the two of you are trying to decide the best way to manage your money.

Task Research available financial service institutions in your area, and answer the following questions.

1. What kinds of institutions and services can you use to help manage your money?

2. Do you want a full-service financial organization that can take care of your banking, insurance, and investing needs or do you want to spread your business among individual specialists? Why have you made this choice?

3. What retirement alternatives do you have?

Author’s Note: This exercise is designed to have students research available financial services in the local area. This chapter provides the professor with a good opportunity to ask someone from the local financial community to speak to the class about the issues posed in this question. The answers for questions 1 and 2 are based on chapter material. The answer to question 3 is not covered in the text but is designed to help students understand that it is never too early to start financial planning for retirement.

1. There are a wide variety of banking and nonbanking institutions that can help individuals manage money. Banking institutions include commercial banks, savings and loans, and mutual savings banks. Nonbank institutions include insurance companies, pension funds, mutual funds, brokerage firms, and finance companies. While non-financial firms such as General Electric Capital exist, they specialize in financing large businesses rather than individuals.

2. Each of the institutions mentioned in the answer to the first question has traditionally specialized in limited products.

For example, savings and loans primarily made housing loans, brokerage firms primarily sold securities to the public, and insurance companies sold life, property, and casualty insurance. However, in the past few decades, a consolidation of financial services has been taking place. NationsBank and BankAmerica merged to create Bank of America. Citibank and Travelers merged to create Citigroup, a financial conglomerate that can participate in almost any financial transaction. Merrill Lynch, known only as a brokerage firm by many, can not only buy and sell securities, but also sells insurance and provides credit cards, check writing privileges against money market accounts, pension fund services, and retirement planning. Answers to the question of whether to have many specialized providers or one provider of financial services will vary, of course. Considerations in making such a decision should include cost (which may be lower with the one-stop approach), privacy, time, and the knowledge base of the individual. As evidenced by recent mergers, the trend is to provide full-service, one-stop financial shopping to consumers.

3. Student research should include information on Social Security. Discussion could center on whether students feel Social Security alone will provide for their retirement and if not, alternative strategies they may use for retirement planning. Research should also include information about Individual Retirement Accounts and comparisons of traditional versus Roth IRAs. Traditional IRAs allow up to $3,000 in annual contributions (depending on income) with the contribution deductible from taxable income. When the income is withdrawn, it is taxed at ordinary tax rates.

Roth IRAs allow investors to contribute after-tax dollars into the retirement account. Funds invested in a Roth IRA grow tax-free, and income withdrawn at retirement is not taxable. Clearly, the Roth IRA is more advantageous to young people. Students may also find information about 401K retirement plans. To provide a real-life example, professors may wish to explain the retirement plan utilized by their university.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

332 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

61. History of Banking in the United States 62. Electronic Fund Transfer Systems 63. Security Concerns with Automated Teller Machines (ATMs) 64. A Study of Major Credit Card Companies 65. Social Security: The United States’ Largest Pension Plan

Guest Speaker Suggestions 54. A representative from any one of the following institutions: commercial bank, savings and loan association, credit union, or mutual savings bank. The representative can speak about the activities of that particular institution.

55. An official from the local Social Security Administration office to speak about funding and benefits of Social Security.

Teaching Suggestions 68. Start out by having the class read an article related to banking that you select from The Wall Street Journal, Financial Times, The New York Times, or a similar publication. Have students discuss with the person sitting next to him/her how this article relates to the chapter content.

69. Use the “Lecture Outline and Notes” to review chapter content. The slides are indicated in the left margin.

70. The “Supplemental Lecture” provides additional material about the Federal Reserve System, and the “Controversial Issue” focuses on some issues involved in the banking crisis.

71. Cover “Class Discussion Questions” in class. Also, Exercise 1 would be appropriate for class discussion. “Additional Discussion Questions and Exercises” are given in this Instructor’s Manual.

72. Exercise 2, a survey of banks, savings and loans, and credit unions in your area, could be used as a group project.

Different members could survey different institutions and then pool information for a group report.

Chapter 16: Financial Management and Securities Markets Use this Instructor’s Manual to facilitate class discussion and incorporate the unique features of the text’s highlights. Followup via the Connect exercises is then encouraged to provide a holistic understanding of the chapter. Use the hyperlinked Table of Contents below to jump to different sections of the manual.

Table of Contents Chapter Forecast ......................................................................................................................................................................... 333 Learning Objectives ..................................................................................................................................................................... 333 Key Terms and Definitions ........................................................................................................................................................... 333 Content Outline ........................................................................................................................................................................... 335 Boxed Text Critical Thinking Questions ....................................................................................................................................... 342 What Is It Like to Work // in Financial Management or Securities? / ......................................................................................... 343 Bonus Teaching Resources .......................................................................................................................................................... 343 Chapter Review Questions .......................................................................................................................................................... 345 Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

333 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Connect Exercises ........................................................................................................................................................................ 347 Class Discussion Questions .......................................................................................................................................................... 347 Build Your Business Plan.............................................................................................................................................................. 348 Video Case: Tom and Eddie’s: Fed through Nontraditional Channels......................................................................................... 348 Team Exercise .............................................................................................................................................................................. 348 Build Your Skills ........................................................................................................................................................................... 349 Term Paper or Project Topics ...................................................................................................................................................... 351 Guest Speaker Suggestions ......................................................................................................................................................... 351 Teaching Suggestions .................................................................................................................................................................. 352

Chapter Forecast In this chapter, we look at both short- and long-term financial management. First, we discuss the management of short-term assets, which companies use to generate sales and conduct ordinary day-to-day business operations. Next, we turn our attention to the management of short-term liabilities, the sources of short-term funds used to finance the business. Then, we discuss the management of long-term assets such as plants, equipment, and the use of common stock (equity) and bonds (long-term liability) to finance these long-term corporate assets. Finally, we look at the securities markets, where stocks and bonds are traded.

Learning Objectives LO 16-1 Describe some common methods of managing current assets.

LO 16-2 Identify some sources of short-term financing (current liabilities).

LO 16-3 Summarize the importance of long-term assets and capital budgeting.

LO 16-4 Specify how companies finance their operations and manage fixed assets with long-term liabilities, particularly bonds.

LO 16-5 Explain how corporations can use equity financing by issuing stock through an investment banker.

LO 16-6 Describe the various securities markets in the United States.

Key Terms and Definitions Bonds Debt instruments that larger companies sell to raise long-term funds Capital budgeting The process of analyzing the needs of a business and selecting the assets that will maximize its value Commercial certificates of deposit (CDs) Certificates of deposit issued by commercial banks and brokerage companies, available in minimum amounts of $100,000, which may be traded prior to maturity

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334 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Commercial paper A written promise from one company to another to pay a specific amount of money Dividend yield The dividend per share divided by the stock price Eurodollar market A market centered in London for trading U.S. dollars in foreign countries Factor A finance company to which businesses sell their accounts receivable—usually for a percentage of the total face value Floating-rate bonds Bonds with interest rates that change with current interest rates otherwise available in the economy Investment banking The sale of stocks and bonds for corporations Junk bonds A special type of higher-interest-rate bond that carries higher inherent risks Line of credit An arrangement by which a bank agrees to lend a specified amount of money to the organization upon request Lockbox An address, usually a commercial bank, at which a company receives payments in order to speed collections from customers Long-term (fixed) assets Production facilities (plants), offices, and equipment—all of which are expected to last for many years Long-term liabilities Debts that will be repaid over a number of years, such as long-term loans and bond issues Marketable securities Temporary investments of “extra” cash by organizations for up to one year in U. S. Treasury bills, certificates of deposit, commercial paper, or Eurodollar loans Over-the-counter (OTC) market A network of dealers all over the country linked by computers, telephones, and teletype machines Primary market The market where firms raise financial capital Prime rate The interest rate that commercial banks charge their best customers (usually large corporations) for short-term loans Retained earnings Earnings after expenses and taxes that are reinvested in the assets of the firm and belong to the owners in the form of equity Secondary markets Stock exchanges and over-the-counter markets where investors can trade their securities with others Secured bonds Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

335 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Bonds that are backed by specific collateral that must be forfeited in the event that the issuing firm defaults Secured loans Loans backed by collateral that the bank can claim if borrowers do not repay them Securities markets The mechanism for buying and selling securities Serial bonds A sequence of small bond issues of progressively longer maturity Trade credit Credit extended by suppliers for the purchase of their goods and services Transaction balances Cash kept on hand by a firm to pay normal daily expenses, such as employee wages and bills for supplies and utilities Treasury bills (T-bills) Short-term debt obligations the U. S. government sells to raise money Unsecured bonds Debentures, or bonds that are not backed by specific collateral Unsecured loans Loans backed only by the borrower’s good reputation and previous credit rating Working capital management The management of short-term assets and liabilities

Content Outline The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a section on which CONNECT activities can be used in the chapter. This is created so that you can facilitate in-class or online discussion effectively.

LO 16-1 Describe some common methods of managing current assets.  

Introduction Managing Current Assets and Liabilities o Managing Current Assets

Key terms:        

PowerPoint Slides

Working capital management Transaction balances Lockbox Marketable securities Treasury bills (T-bills) Commercial certificates of deposit (CDs) Commercial paper Eurodollar market

Lecture Outline and Notes:

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336 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual LXXV.

Managing Current Assets and Liabilities a. Current assets include cash, investments, accounts receivable, and inventory. b. Current liabilities are short-term debt obligations—accounts payable, wages payable, taxes payable, and notes (loans) payable. c. Current and short-term assets are often used interchangeably. d. Short-term financial management is sometimes called working capital management because current assets and liabilities continually flow (“work”) through the organization. e. Managing Current Assets i. The goal of financial managers who manage current assets is to maximize the returns on those assets. ii. Managing Cash 1. Effective cash flow—the movement of money through an organization—is a crucial element facing any financial manager.

2. Transaction balances are cash kept on hand by a business to pay normal daily business expenses.

3. To accelerate the collection of payments from customers, companies may have customers send payments to a lockbox, an address for receiving payments that are collected by the bank and credited to the business’s account. a. The bank can then start clearing the checks and get the money into the company’s checking account much more quickly than if the payments had been submitted directly to the company.

4. Larger firms may use electronic funds transfer to speed up collections and cash flow.

5. Companies generally want to collect cash quickly but pay it out slowly. a. When companies use electronic funds transfers between buyers and suppliers, the speed of collections and disbursements increases to one day. iii. Investing Idle Cash. (Table 16.1) 1. When cash comes in faster than it is needed to pay bills, companies may invest the “extra” cash for short periods 2. Marketable securities are temporary investments of extra cash for up to one year in U.S. Treasury bills, certificates of deposit, commercial paper, or Eurodollar loans.

3. U.S. Treasury bills (T-bills) are short-term debt obligations of the U.S. government. a. Issued weekly, these bills carry maturities of between one week and one year. They are considered risk free because the U.S. government will not default on its debt.

4. Commercial certificates of deposit (CDs) are issued by commercial banks and brokerage firms, are available in minimum amounts of $100,000, and may be traded prior to maturity.

5. Commercial paper is a written promise from one company to another to pay a specific amount of money. a. Because commercial paper is backed only by the name and reputation of the issuing company, sales of commercial paper are restricted to only the largest and most financially stable companies. b. During the recession, nobody wanted to rely on commercial paper, requiring the Fed to take action.

6. The eurodollar market is a market for trading U.S. dollars in foreign countries. a. Investors have a chance to earn a slightly higher rate of return

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337 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual with just a little more risk than U.S. Treasury bills. iv. Managing Accounts Receivable 1. Each credit sale represents an account receivable—a payment owed to a business from credit customers.

2. Many firms offer discounts on purchases if they pay the invoice early.

3. Discounts make cash flow through the firm faster, but they also reduce profitability.

4. Profitability of accounts receivable is affected by the type of customer to which a business extends credit.

5. Information on company credit ratings is provided by credit bureaus, credit-rating agencies such as Dun and Bradstreet and industry trade groups. v. Optimizing Inventory 1. The object is to minimize the firm’s investment in inventory without experiencing production cutbacks as a result of critical materials shortfalls or lost sales due to insufficient finished goods inventories.

2. Optimal inventory levels are determined in part by the method of production.

3. RFID tags are becoming a popular way for companies to manage their inventory.

4. Because customers may switch to a competitor when their needs are not met, inventory shortages can be as much of a drag on potential profits as too much inventory.

LO 16-2 Identify some sources of short-term financing (current liabilities). o

Managing Current Liabilities

f.

Key terms:      

Trade credit Line of credit Secured loans Unsecured loans Prime rate Factor

Managing Current Liabilities i. Accounts Payable 1. Accounts payable is money an organization owes to suppliers for goods and services.

2. Trade credit, the most widely used and important source of short-term financing, is credit extended by suppliers for the purchase of their goods and services. a. Most suppliers offer trade discounts to businesses that pay their bills early. b. Failure to take such discounts can add up to a substantial loss. ii. Bank Loans 1. Banks provide both large and small businesses short-term funds in the form of loans or lines of credit.

2. A line of credit is an arrangement by which a bank agrees to lend a specified amount of money to the organization upon request—provided that the bank has the required funds to make the loan.

3. Secured loans are backed by collateral that the bank can claim if the borrower does not repay the loan.

4. Unsecured loans are backed only by the borrower’s good reputation and

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338 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual previous credit rating.

5. The principal is the amount of money a business borrows; interest is the percentage of the principal that the bank charges for use of the money it loans.

6. The prime rate is the interest rate banks charge their best customers for short-term loans. iii. Nonbank Liabilities 1. Insurance companies, pension funds, money market funds, and other financial institutions also make short-term loans to businesses.

2. Some companies sell their accounts receivable to a finance company called a factor, which gives the selling organizations cash and assumes responsibility for collecting accounts.

3. Additional nonbank liabilities that must be efficiently managed to ensure maximum profitability are taxes owed to the government and wages owed to employees.

LO 16-3 Summarize the importance of long-term assets and capital budgeting. 

Managing Fixed Assets o Capital Budgeting and Project Selection o Assessing Risk o Pricing Long-term Money LXXVI.

Key terms:  

Long-term (fixed) assets Capital budgeting

Managing Fixed Assets a. Long-term (fixed) assets are those assets expected to last for many years, such as plants and equipment. i. Leasing is one approach for companies who do not have the funds to purchase expensive buildings or equipment.

1. A capital lease is a long-term contract and shows up on the balance sheet as an asset and a liability.

2. An operating lease is a short-term cancelable lease and does not show up on the balance sheet. b. Capital Budgeting and Project Selection i. Capital budgeting is the process of analyzing the needs of business and selecting the assets that will maximize its value. ii. The capital budget is the amount of money budgeted for investment in long-term assets. iii. It does not end with the selection, purchase, and use of an asset; all assets and projects must be continually reevaluated to ensure they remain compatible with the firm’s needs. iv. Budgeting is not an exact process and managers must be flexible when new information is available. c. Assessing Risk (Figure 16.1) i. Every investment carries some risk, with international investments carrying more risk ii. Must consider economic and political climate.

1. Stability and competitive nature of the marketplace. a. Pharmaceutical companies face many risks with new projects.

They spend millions of dollars developing new drugs without knowing if the drug will pass FDA approval. b. Dramatic changes in the marketplace are not uncommon. iii. Long duration projects or assets are riskier.

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339 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual 1. The longer a project or asset is expected to last, the greater its potential risk because it is difficult to predict how long it will last before it wears out or becomes obsolete.

2. Buying rather than repairing new machinery is riskier. d. Pricing Long-Term Money i. There is a limited supply of funds available for investment.

1. The returns on any project must cover not only the costs of operating the project but also the interest expenses for the debt used to finance its operation.

2. The most efficient and profitable companies can attract the lowest-cost funds because they have a reputation for less risk.

3. Inefficient and high-cost companies must pay higher costs to attract suppliers of funds.

4. New companies have a strong motivator to use financial resources wisely because they will, over time, reduce the costs of their funds and increase profit. ii. New firms tend to enter industries with greatest rewards for success 1. Competition intensifies and drives down profit potential LO 16-4 Specify how companies finance their operations and manage fixed assets with long-term liabilities, particularly bonds. 

Financing with Long-Term Liabilities o Bonds: Corporate IOUs o Types of Bonds

LXXVII.

Key terms:       

Long-term liabilities Bonds Unsecured bonds Secured bonds Serial bonds Floating-rate bonds Junk bonds

Financing with Long-term Liabilities a. Two ways of financing to acquire fixed assets include equity financing and debt financing. b. Long-term liabilities are debts that will be repaid over a number of years, such as long-term loans and bond issues. i. Financing with long-term liabilities is a type of debt financing ii. Many firms acquire debt by borrowing money from pension funds, mutual funds, or life insurance funds. iii. Companies that rely too heavily on debt can get into difficulty should the economy falter. c. Bonds: Corporate IOUs i. A bond is a debt instrument that a company sells to raise long-term funds. ii. Bonds are issued by corporations, public utilities, nonprofit corporations, and federal, state, and local governments. iii. Most bonds can be transferred from one owner to another in a bond market. iv. The bond contract, or indenture, sets forth all the terms of agreement between the lender and the bond issuer, including: 1. The face value—the initial value of the bond.

2. The maturity date—the date the bond owner receives the face value of the bond along with the final interest payment. (Table 16.2) 3. The coupon rate—the guaranteed percentage of face value that the company will pay to the bond owner every year.

4. Other important areas such as repayment methods, interest payment dates, procedures to be followed in case of failure to make payments,

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340 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual conditions for early repayment, and any collateral conditions. d. Types of Bonds i. Unsecured bonds are debentures, or bonds not backed up by specific collateral. ii. Secured bonds are bonds in which the issuing company pledges specific assets to bondholders as a guarantee should it be unable to make the interest and principal payments. iii. Serial bonds are a sequence of small bond issues of progressively longer maturity. iv. Floating-rate bonds have coupon rates that change with current interest rates. v. A junk bond offers higher rates of return than other bonds but at higher risk because of the greater likelihood of default.

LO 16-5 Explain how corporations can use equity financing by issuing stock through an investment banker.  

Financing with Owners’ Equity Investment Banking

Key terms:     

Retained earnings Dividend yield Primary market Secondary market Investment banking

LXXVIII.

Financing with Owners’ Equity a. Owners’ equity is the owners’ investment in an organization. b. Sole proprietors and partners own all or a part of their businesses outright. i. Their equity includes the money and assets they have brought into their ventures. c. Common stock, the single most important source of capital for most new companies, represents ownership in a corporation that gives the stock owners voting rights. (Table 16.3) i. The par value is the dollar value of a stock printed on the stock certificate. ii. The market value is the current market price of the common stock. iii. The difference between a stock’s par value and its offering price is called capital in excess of par. d. Preferred stock gives owners preference in the distribution of the company’s profits, but not voting privileges. The primary advantage of owning preferred stock is that it is a safer investment than common stock. e. When a company has profits left over after paying expenses and taxes, it can retain some or all of the earnings to invest in corporate expansion or pay out some of the earnings to stockholders in the form of dividends. i. Retained earnings are retained and reinvested in the assets of the firm; they belong to the owners in the form of equity. ii. When the board of directors distributes some of a company’s profits to the owners, it issues them cash payments called dividends. iii. The dividend yield is the dividend per share divided by the stock price. (Table 16.4) iv. Not all companies pay dividends.

LXXIX. Investment Banking a. A company that needs more money may be able to obtain financing by issuing stock. i. When a company issues stock for the first time, it is called a new issue. ii. A company that offers its stock to the public for the very first time is said to be going public, and the sale is called an initial public offering. b. New issues are sold directly to the public and to institutions through the primary market, the market where firms raise financial capital. c. Secondary markets are stock exchanges where investors trade their securities with other investors rather than the company that issued the stock or bonds. d. Investment banking is the sale of stocks and bonds for corporations. i. Investment bankers can help “iron out the details” in mergers by helping the firms Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

341 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual come up with an appropriate price.

LO 16-6 Describe the various securities markets in the United States. 

The Securities Markets o Stock Markets o The Over-the-Counter Market o Measuring Market Performance LXXX.

Key terms:  

Securities markets Over-the-counter (OTC) market

The Securities Markets a. Securities markets provide: i. The mechanism for buying and selling securities. ii. Liquidity—the ability to turn securities into cash. iii. Secondary markets permit the trading of previously issued securities. iv. Secondary market trades may take place on organized exchanges or in what is known as over-the-counter markets. b. Stock Markets i. Formerly exchanges were divided into organized exchanges and over-the-counter markets. ii. NYSE and NASDAQ are now publicly traded companies (previously were not-forprofit organizations).

1. Both exchanges merged with electronic exchanges for cheaper and faster trading than floor trading.

2. NASDAQ was traditionally an electronic market. c. The over-the-counter (OTC) market is a network of dealers all over the country linked by computers, telephones, and Teletype machines. i. Mostly consists of penny stocks, other small stocks, and illiquid bank stocks ii. NASDAQ is no longer considered an OTC market because it is now classified as an exchange. d. Measuring Market Performance (Figure 16.2) i. There are a variety of averages and indexes available for comparison purposes.

1. An index compares current stock prices with those in a specified base period.

2. An average is the average of certain stock prices. ii. Many investors follow the activity of the Dow Jones Industrial Average to see whether the stock market has gone up or down. 30 companies currently make up the Dow. (Table 16.5) iii. Recognizing financial bubbles can be difficult in the enthusiastic atmosphere of rising markets. (Table 16.6) 1. The most recent recession was partly precipitated by a crash of a housing bubble. a. The Dow Jones Industrial Average gained 10 times from August 1982 to the beginning of 2000. This was the Internet bubble, and they are difficult to see until they burst. b. Before the housing bubble burst in October 2007, the Dow Jones hit an all-time high.

2. The Federal Reserve and the Federal government acted quickly to bail out failing institutions—staving off a potentially worse recession.

3. Investors must be well-informed to make sound financial decisions.

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342 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Boxed Text Critical Thinking Questions Bird Scooters Fly onto the Scene 46. How is Bird financing the business?

Bird secured funding through a number of well-known private equity groups like Sequoia Capital, Index Ventures, and Greycroft.

47. Name some of Bird’s current assets. What liabilities does it have?

Bird would have the normal current assets: cash, accounts receivable, and short-term investments.

The liabilities would include accounts payable to the “chargers” who gather the scooters and return them to service, possible accounts payable to Segway for the scooters.

48. One challenge Bird has faced involves safety issues because the scooters do not come with helmets. How do you think this issue might affect future funding for Bird?

Answers will vary but students need to support their answer.

Willing to Lose: Young Investors Day Trade During the COVID-19 Lockdown 46. Why do you think that Robinhood is so popular with young investors?

Answers will vary but most students will mention the fact that the trades are commission free and permits fractional share purchases.

47. What do professional and institutional investors think about Robinhood investors?

Institutional investors have suggested that while the generation of Robinhood investors might have short-term success, buying these types of companies on the hope that they will survive is not the way to build a portfolio in the long run. Given the amount of “real-time” data available to professionals, it is very hard for amateurs to be successful in the long-term.

48. What is the “Odd Lot Theory,” and does it make any sense to you?

The Odd Lot Theory goes that small investors are prone to making emotional decisions and they buy at market tops and sell at market bottoms. Answers will vary as to whether it makes sense to an individual student.

Cashing in On New Technologies in Finance 45. In what type of markets does Fidelity operate?

Fidelity is in asset management, mutual funds, it was the first financial firm to offer electronic funds transfer for money market funds. Fidelity has been investigating cutting-edge digital technology like virtual reality, cryptocurrency, and blockchain.

46. Describe how Fidelity has been a pioneer in applying new technology to finance.

The company was the first financial firm to offer electronic funds transfer for money market funds. Its innovation center, the Fidelity Center for Applied Technology, spends $2.5 billion on technology innovation a year.

47. Do you believe cryptocurrency and block-chain technology will be the next major stage in financial securities trading and investments? Why or why not?

Answers will vary but students need to support their answer.

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343 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

What Is It Like to Work // in Financial Management or Securities? / A lot of these job cuts came in response to the subprime lending fallout and subsequent bank failures such as Bear Stearns, which alone lost around 7,000 employees. All of these people had to look for new jobs in new organizations, increasing the competitive level in a lot of different employment areas. For young jobseekers with relatively little experience, this may result in a great deal of frustration. On the other hand, the job market for finance majors will have to recover and rebuild with new employees. Uncertainty results in hiring freezes and layoffs, but leaves firms lean and ready to grow when the cycle turns around, resulting in hiring from the bottom up.

Bonus Teaching Resources This section offers bonus teaching resources for class discussion. This is offered in addition to what’s offered in the M: Business text.

“The Dow Jones Industrial Average” MiniCase The editorial page of each issue of The Wall Street Journal indicates that the publication was first published in 1889. It was shortly after that date that the founders of the Journal—three young men named Dow, Jones, and Bergstresser—wanted a quick way to convey to market watchers just what the market was doing.

The solution was to select a small group of representative common stocks traded on the New York Stock Exchange and follow their movements. They decided to add up the values of these representative stocks and divide by the number of stocks to arrive at an arithmetic mean or “average” of those values. Thus, the Dow Jones Industrial Average was born.

Before long, it seemed wise to split up the list and put it into categories—industrials, transportation, and utilities. After various adjustments down through the years, the industrials list numbered 30 stocks in the 1920s. To get a figure for the Dow Jones Industrial Average, they took the prices of 30 representative stocks, added them up, and divided by 30.

That seemed simple enough, but a complication began to intrude. From time to time, a firm whose stock was in the Dow Jones Industrial 30 would undergo a stock split. When a firm splits its stock, a notice goes to a stockholder saying, “You now hold a share of our stock that is worth around $100 in the market. Send that stock certificate back to us, and we’ll issue you in its place two shares having a value of around $50 each in the market.” This would be a 2-for-1 stock split.

Such a stock split would immediately alter the market price of a share of stock and therefore distort the Dow Jones Industrial Average. So, the personnel who calculated the average ignored all stock splits of firms in the Dow Jones Industrial 30. This approach was followed until 1928. By this time, ignoring stock splits had created a mathematical nightmare. So, the personnel figuring the average immediately recognized all stock splits. When this happened, it was agreed that the changing of the method must not change the figure for the average. The average could be changed only by market activity.

The way to let all those stock splits be reflected in prices of the 30 without the average being tilted was to alter the divisor used in calculating the average. By altering the divisor in the proper way, it was possible to add up all these new split prices and still get the same average.

Here’s how it works. The following is a list of firms that could be called the Dow Jones Industrial Five, as of 1928. Figures are market values:

General Company Erickson Tire

25 10

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344 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual Bluehills Emerson Tarkington Co. Spells Cargo

12 6 10 63

63 / 5 = 12.6

After a stock split of Bluehills Emerson, the list became: General Company Erickson Tire Bluehills Emerson Tarkington Co. Spells Cargo

25 10 6 (a 2-for-1 split) 6 10 57

57 / 5 = 11.4 But a stock split should not be allowed to distort the average. The Dow Jones personnel used algebraic methods to arrive at a divisor that will produce the old answer with the new data. That divisor turned out to be 4.5238095. Dividing the new divisor into the new total of 57 gives the following: 57 / 4.5238095 = 12.6 In 1928, when the Dow Jones personnel changed their procedure, the divisor went from 30 (in the 30 stocks) to around 15. At that moment, the Dow Jones Industrial Average ceased being an average and became an index. Ever since 1928, every time that a stock split has occurred or a member of the Dow Jones Industrial 30 has been changed, the divisor has been altered.

Just as the divisor is revised, so is the list of industrials. The list is supposed to include representative stocks. If a given firm’s stocks are not typical of the market as a whole, then that firm may be replaced. When the Manville Company went into bankruptcy procedures, it was dropped from the list. When Chrysler began running into grave danger, it was dropped.

Conversely, much earlier, when IBM began to take off like a rocket, some observers thought that this surge was the reason IBM was dropped from the list. IBM later returned when it appeared to have plateaued.

Although there have been those who might question the capability for accuracy of a small sample of 30 stocks in comparison to the broader indexes, the Dow Jones Industrial Average is probably the best known and most often quoted stock market yardstick.

Discussion Questions for “The Dow Jones Industrial Average” MiniCase 37. Why can’t the Dow Jones Industrial Average remain the same as the 1928 DJ Industrial Average?

Numerous stock splits made calculating the Dow Jones Industrial average a mathematical nightmare.

38. Would it be better to use the average of all stocks traded on a given exchange, such as the New York Stock Exchange Index?

Students’ answers will vary.

39. Why do investors follow the indexes and averages of the stock market?

Performance measures—averages and indexes—are very important to many different people. They not only indicate the performance of a particular securities market but also provide a measure of the overall health of the economy.

Many people follow the DJ Industrial average to see if stock prices have gone up or down.

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345 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Controversial Issue: The Historical Struggle: Sales Manager vs. Credit Manager This can be used in a discussion board or for in-class discussion.

The current chapter in your textbook has pointed out that careful handling of accounts receivable is a must for a successful firm that sells on credit. As in so many aspects of finance, the precarious equilibrium is the secret of astute management, and when that equilibrium is allowed to deteriorate, there will be problems for the firm. In most firms, there are two opposing forces that influence the optimum point of balance. Those forces are the credit manager and the sales manager.

The credit manager is charged with seeing that the firm does not extend credit to bad risks. The credit manager has at his or her disposal a whole arsenal of devices to determine and ensure the creditworthiness of those who want to charge items at the store. The credit manager knows that the way to avoid risk altogether is to demand cash for all purchases. This way no one would default on payments because there would be no payments to worry about, only an up-front, before-delivery lump-sum payment by the customer to the store. Much as he or she may want to ignore the fact, the credit manager knows that such a pure, risk-free environment will greatly discourage sales. So, the credit manager allows credit contracts for those people who have evidence that they can pay on time and completely. The problem is that the credit manager tends to interpret that evidence in a manner slightly different from that of his antagonist in this financial drama—the sales manager.

The sales manager might approach a client by saying, “Out of work now, Mr. Cline? But those relief payments are coming in regularly, aren’t they? Good. Then you can easily afford $50 monthly payments on this sofa. Sign here, and we’ll have our truck deliver the sofa to your house today. Thanks for the business.”

You can imagine how the credit manager would react when he interviews Mr. Cline and sees the firm is expecting $50 a month from a relief recipient. The credit manager will refuse credit to Mr. Cline—and the sales manager will hit the ceiling.

“No credit; what are you talking about? Aren’t you credit people playing on our team? How can we make sales if you people turn everyone down?”

Successful firms stress to both credit and sales staff that both are important elements and that striking a fair balance does not mean defeat for either side but a victory for the firm.

Discussion Questions for The Historical Struggle: Sales Manager vs. Credit Manager 41. Can you devise strategies for the two viewpoints in a firm to live together harmoniously?

Students’ answers will vary. They must explain and support their strategies, however.

42. How can both the sales manager and credit manager learn to appreciate each other’s responsibilities?

Students’ answers may vary. One possible way, however, would be for the firm to stress the importance of both and encourage lots of communication between the two managers. By communicating their side, each manager may be able to explain his or her position to the other in a practical, rather than a defensive, manner.

Chapter Review Questions 148.

Define working capital management.

Working capital management is the management of current assets and current liabilities. The term is used because the current accounts continually flow through the firm and are said to be working.

149.

How can a company speed up cash flow? Why should it?

Cash flow may be speeded up through the following: Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

346 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual a. Lockboxes—with lockboxes, funds are sent to a local post office box and cleared through a local bank. The funds are available more quickly than if they were sent directly to the company. b. Electronic funds transfer—computer and communications lines are used to transfer funds immediately, speeding up cash flow.

150.

Describe the various types of marketable securities. a. Treasury bills are short-term debt obligations of the federal government. They are issued weekly, may have a maturity of up to one year, and are perhaps the safest investment. b. Commercial certificates of deposit are issued by commercial banks and brokerage companies, are available in minimum amounts of $100,000, and may be traded prior to maturity. c. Commercial paper is a written promise from one company to another to pay a specific amount of money. d. Some companies invest extra cash in international markets such as the Eurodollar market, a market for trading U.S. dollars in foreign countries.

151.

What does it mean to have a line of credit at a bank?

A line of credit is an agreement between a bank and a business in which the bank agrees to loan a specified amount to the business whenever it needs the money, as long as the bank has funds to lend.

152.

What are fixed assets? Why is assessing risk important in capital budgeting?

Fixed, or long-term, assets are those assets expected to last for many years. Examples include production facilities (plants), offices, and equipment. Assessing risk is important in capital budgeting because it allows for more informed project investment decision making. That is, decision makers can use estimated returns on investments and the likelihood that the returns will be realized when deciding between competing capital expenditures. For example, a high return project may have such high risk that realizing a return is unlikely, making the investment undesirable.

Without risk assessment, the project’s high return makes the project appear desirable.

153.

How can a company finance fixed assets?

Two common choices of financing fixed assets exist for organizations wishing to make capital expenditures. The organization can attract new owners (equity financing), and/or it can take on long-term liabilities (debt financing).

Debt financing includes long-term bank loans and corporate bond issues.

154.

What are bonds and what do companies do with them?

A bond is a debt security that a company sells to raise long-term funds. The bond is a certificate, much like an IOU, that represents the company’s debt to the bondholder. Organizations issue bonds to finance long-term capital investment projects.

155.

How can companies use equity to finance their operations and long-term growth?

Companies may sell partial ownership (equity) of the organization in the form of stocks to individuals wishing to invest. Each share represents a portion of the organization’s total equity. By expanding its equity base through stock issues, an organization is able to raise funds for long-term capital expenditures.

156.

What are the functions of the securities markets?

Securities markets provide the mechanism for buying and selling securities for both corporations and governments.

The securities markets provide liquidity to investors through the secondary market.

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347 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

157.

What were some of the principle causes of the most recent recession?

There are a number of different causes for the most recent recession. One of the early causes was a housing bubble that began to burst in 2007 and into 2008. Subprime mortgages and dubious lending practices were largely blamed for that occurrence. Complicated financial tools like derivatives and unethical accounting practices allowed firms to take excessive risks and become over-leveraged with debt without investors noticing. While the recession was the worst since the Great Depression, many experts believe it could have been even worse if the federal government had not taken swift action to bail out troubled organizations and to prop up the economy while it recovered.

Connect Exercises Below are the available exercises in Connect for this chapter. Please also see the Connect Content Matrix in your Instructor Resource library for additional details on these exercises (including Learning Objectives, topics, Bloom’s level, AACSB, etc.)

121.

Capital Budgeting (Click & Drag): Demonstrate your understanding of how to decide and prioritize spending of a capital budget.

122.

Hershey Foods: May Melt Your Heart (Case Analysis): Demonstrate your understanding of ownership of public corporations.

123.

Financing Splenda Drives Revenues (Case Analysis): Demonstrate your understanding of capital budgeting through Splenda’s entry and growth in the food-sweetener market.

124.

Equity and Debt Financing (iSeeit! Animated Video Case): Gain a better understanding of the difference between debt and equity financing.

125.

Financing New Machinery for Solar Cell Production (Case Analysis): Demonstrate your understanding of financing options to help manage cash flow.

126.

Budgets and Forecasts (iSeeit! Animated Video Case): Demonstrate your understanding of the information required to make a forecast and budget, and why these tools are helpful to the overall financial health of a business.

127.

Stocks and Bonds (iSeeit! Animated Video Case): Demonstrate your understanding of stocks and bonds and the advantages and disadvantages of each.

Class Discussion Questions 41. Using your local newspaper or The Wall Street Journal, find the current rates of interest on the following marketable securities. If you were a financial manager for a large corporation, which would you invest extra cash in? Which would you invest in if you worked for a small business?

Student answers will depend upon when they conduct this research. a. b. c. d. e. f.

Three-month T-bills Six-month T-bills Commercial certificates of deposit Commercial paper Eurodollar deposits Money market deposits

42. Select five of the Dow Jones Industrials from Table 16.5 in the textbook. Look up their earnings, dividends, and prices for the past five years. What kind of picture is presented by this information? Which stocks would you like to have owned over this past period? Do you think the next five years will present a similar picture?

Students’ answers will vary depending upon the companies they choose. More than likely, because these companies experienced a recession in the past five years, causing many companies’ stock prices and earnings to decrease, the next five years will likely not be similar.

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348 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Build Your Business Plan An approach to this chapter would be for students to assume that business is an initial success (oh, if wishes were horses, all beggars would ride!). Involve the students in a discussion of what they should do with their money. Should they re-invest it in the business? Pay off new equipment early? Try to impress on them that many businesses are seasonal or experience declining profits during an economic decline and they need to be prepared for it. Those who fail to plan, plan to fail!

Video Case: Tom and Eddie’s: Fed through Nontraditional Channels With the motto “We Put Good Taste in Everything We Do,” Tom &amp; Eddie’s—a line of gourmet burger restaurants in the Chicago area—was launched in 2009. The owners of Tom &amp; Eddie’s, former McDonald’s executives Tom Dentice and Ed Rensi, both agree that access to cash was a major issue. The men believed their gourmet burger idea would be a success, but they knew banks at the time were reluctant to lend to small businesses. They ended up using their own money to finance the business and took on another partner. They also hired Brian Gordon, who they knew from McDonald’s, to be the restaurant’s CFO. It was difficult to earn a profit initially. Tom and Eddie struggled with the high cost of commodities, so they struggled to keep profit and loss under control. Today, however, Tom and Eddie’s is a success with three restaurants. Tom and Eddie’s has overcome a number of obstacles, including a recession when banks were not lending to small business.

Video Case Discussion Questions 46. Why was it difficult to open a new business in 2009? How did the owners of Tom and Eddie’s overcome this obstacle?

It was difficult to open up a new business in 2009 because it was the middle of the Great Recession. Banks were reluctant to loan money to new businesses that had not proven themselves. Tom and Eddie overcame these obstacles by using their own money to finance the initial restaurant.

47. Describe some ways the restaurant exhibited strong financial management in the early days of its operations.

Tom and Eddie used their own money to finance the initial restaurant and they hired Brian Gordon, who they knew from McDonald’s, to be the CFO. The founders recognized that they needed someone with strong skills in financial management for things like operating expenditures, inventory control, and daily operational costs. Under Gordon’s leadership, the firm was able to focus on immediate expenses and use trade credit to help with costs. They also decided to use a that already existed rather than building their own restaurant because it would cut down on costs significantly.

48. What are some of the costs involved with closing a business location that does not earn enough money?

Costs involved include having to pay off all debts (including unpaid rent), laying off employees, moving equipment and furniture, and any other costs associated with shuttering a physical location. There is also a significant cost in time because managers must oversee this process.

Team Exercise Students will compare and contrast financing with long-term liabilities, such as bonds versus financing with owner’s equity, typically retained earnings, common stock, and preferred stock. They will then form groups and suggest a good mix of longterm liabilities and owner’s equity for a new firm that makes wind turbines for generating alternative energy and would like to grow quickly.

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349 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Build Your Skills Choosing Among Projects Background As the senior executive in charge of exploration for High Octane Oil Co., you are constantly looking for projects that will add to the company’s profitability—without increasing the company’s risk. High Octane Oil is an international oil company with operations in Latin America, the Middle East, Africa, the U.S., and Mexico. The company is one of the world’s leading experts in deep-water exploration and drilling, producing 50 percent of its oil in the United States, 25 percent in the Middle East, 5 percent in Africa, 10 percent in Latin America, and 10 percent in Mexico. You are considering six projects from around the world.

Project 1—Your deep-water drilling platform in the Gulf of Mexico is producing at maximum capacity from the Valdez oil field, and High Octane’s geological engineers think there is a high probability that there is oil in the Sanchez field, which is adjacent to Valdez. They recommend drilling a new series of wells. Once commercial quantities of oil have been discovered, it will take two more years to build the collection platform and pipelines. It will be four years before the discovered oil gets to the refineries.

Project 2—The Brazilian government has invited you to drill on some unexplored tracts in the middle of the central jungle region. There are roads to within 50 miles of the tract and British Petroleum has found oil 500 miles away from this tract. It would take about three years to develop this property and several more years to build pipelines and pumping stations to carry the oil to the refineries. The Brazilian government wants 20 percent of all production as its fee for giving High Octane Oil Co. the drilling rights or a $500 million up-front fee and 5 percent of the output.

Project 3—Your fields in Saudi Arabia have been producing oil for 50 years. Several wells are old, and the pressure has diminished. Your engineers are sure that if you were to initiate high-pressure secondary recovery procedures, you would increase the output of these existing wells by 20 percent. High pressure recovery methods pump water at high pressure into the underground limestone formations to enhance the movement of petroleum toward the surface.

Project 4—Your largest oil fields in Alaska have been producing from only 50 percent of the known deposits. Your geological engineers estimate that you could open up 10 percent of the remaining fields every two years and offset your current declining production from existing wells. The pipeline capacity is available and, while you can only drill during six months of the year, the fields could be producing oil in three years.

Project 5—Some of High Octane’s west Texas oil fields produce in shallow stripper wells of 2,000- to 4,000-foot depths.

Stripper wells produce anywhere from 10 to 2,000 barrels per day and can last for six months or 40 years. Generally, once you find a shallow deposit, there is an 80 percent chance that offset wells will find more oil. Because these wells are shallow, they can be drilled quickly at a low cost. High Octane’s engineers estimate that in your largest tract, which is closest to the company’s Houston refinery, you could increase production by 30 percent for the next 10 years by increasing the density of the wells per square mile.

Project 6—The government of a republic in Russia has invited you to drill for oil in Siberia. Russian geologists think this oil field might be the largest in the world, but there have been no wells drilled and no infrastructure exists to carry oil if it should be found. The republic has no money build the infrastructure but if you find oil, it will let you keep the first five years’ production before taking its 25 percent share. Knowing that oil fields do not start producing at full capacity for many years after initial production, your engineers are not sure that your portion the first five years of production will pay for the infrastructure they must build to get the oil to market. The republic also has been known to have a rather unstable government, and the last international oil company that began this project left the country when a new government demanded a higher than originally agreed-upon percentage of the expected output. If this field is in fact the largest in the world, High Octane’s supply of oil would be ensured well into the 21st century.

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350 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Task 1. Working in groups, rank the six projects from lowest risk to highest risk.

2. Given the information provided, do the best you can to rank the projects from lowest cost to highest cost.

3. What political considerations might affect your project choice?

4. If you could choose one project, which would it be and why?

5. If you could choose three projects, which ones would you choose? In making this decision, consider which projects might be highly correlated to High Octane Oil’s existing production and which ones might diversify the company’s production on a geographical basis.

This series of questions is designed to get students to examine the factors that influence risk, return, and the expenditure of money on a capital budgeting project. Questions 1 and 3 examine risk; question 2 examines cost; and questions 4 and 5 examine the ability to diversify risk by taking on more than one project. It is clear that there is risk involved in finding oil. Is the probability of finding oil high or low? There is a cost factor that creates a risk return tradeoff. Can High Octane find oil cheaply or not, and how much oil can be found per dollar of expenditure? Obviously, students will be unable to perform specific calculations, and there will be differences of opinion. Another factor is how much revenue High Octane keeps and how much it has to share with partners. Time represents another risk. How long will High Octane have to wait to get oil out of the ground? The faster the oil is out of the ground, the faster drilling/exploration expenses can be recovered. There is also political risk and currency risk with the Brazilian and Russian projects. Students should be reminded that these risks are inherent in emerging economies.

1. The professor should not be too concerned about the actual ranking because there is not enough data given to rank in a quantitative sense. Rankings will vary based on assumptions the students make. One possible answer (lowest to highest risk) is: Project 3 – The oil is already there and being produced. This has the highest probability of producing oil in the least amount of time.

Project 5 – The oil is in the ground, and an 80 percent chance of finding more oil in adjacent tracts is a very high probability, and thus, low risk.

Project 4 – The pipeline already exists, and the oil would get to the refinery at least one year earlier than oil from the Gulf of Mexico.

Project 1 – The petroleum engineers say there is a high probability of finding oil in the Sanchez field given that the Valdez field is producing in commercial quantities. It will take about four years to get the oil to refineries once the oil is discovered. If it takes two years and pipelines have to be built, the expense of this project is probably higher than the Alaska project.

Project 2 – The Brazilian project is more risky because the infrastructure has to be built, there is not as high a probability of finding oil as in the first four projects, and the time to get the oil out of the jungle could be five or six years. In addition, the Brazilian government wants a fee plus a share of the output. Unless High Octane finds a big field, the risk/return tradeoff is higher than the other four countries. Because this drilling would occur in a new area in a foreign country, there is also some political risk.

Project 6 – The Russian government is quite unstable, and drilling conditions in Siberia are worse than Alaska. The Siberian government has no money to help build the infrastructure. High Octane has to bear all the risk, and Siberia wants 25 percent of the production. Even though these fields may be the largest in the world, the probability of a return on investment is not as high as with the other projects.

2.Ranked lowest to highest cost: Projects 3 and 5 would have the lowest costs. Some students may argue that project five could have the lowest cost.

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351 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Project 4 would have lower costs than Project 1 because the pipeline and infrastructure already exist.

Project 1 involves building a pipeline and gathering station in the Gulf of Mexico. Deep water drilling is also more expensive than land-based drilling.

Project 2 involves building an infrastructure of pipelines, pumping stations, and roads in the jungle. Getting material and supplies into the Brazilian jungle would increase costs, as would housing and feeding the drilling crew.

Project 6 would be high cost because all of the infrastructure would have to be built, and the freezing Siberian conditions would make the cost of the infrastructure more expensive than that of Brazil.

Some students may argue that costs would be lower in Brazil and Russia because of exchange rates. Unfortunately, this would only apply to wages because almost all drilling equipment and infrastructure would probably be imported, and the transportation expense might negate the wage advantage.

3.The fact that Russia (project 6) has had an unstable government and only a limited history of capitalism is certainly a political consideration. Brazil (project 2) has had unstable governments and foreign exchange problems, but it is a democracy with capitalism. There is the risk of political unrest in the Middle East, and Saudi Arabia (project 3) is located in that volatile region of the world. There are even political risks in the U.S. (projects 1, 4, and 5), but probably the environmental issues of drilling in the Alaskan wilderness and the potential pollution from oil spills from deep sea drilling would be greater considerations.

4.This question is difficult to answer without knowing project costs and capital availability. Most students will probably pick the lowest cost, lowest risk projects—3 or 5—depending upon their estimate of costs and potential probabilities of finding oil. Some may prefer project 3 over 5 because they feel that the quantity of oil in Saudi Arabian fields will be greater than that of the stripper wells in West Texas.

5.Clearly, the first four projects are highly correlated to High Octane’s existing production capabilities, and projects 5 and 6 are not. If the firm wants to diversify the geographical location of its oil resources, it might consider either Russia or Brazil.

If High Octane wants to diversify its oil output, it should consider taking Brazil and any of the other two projects but avoid Russia. High Octane would certainly have to consider the costs and expected revenue of each project before actually making the decision.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 66. The Importance of Electronic Funds Transfer for Businesses 67. The Eurodollar Market 68. Functions of the Corporate Financial Manager 69. Investing in U.S. Treasury Bills

Guest Speaker Suggestions 56. A financial manager of a local company to speak about financial management of the firm.

57. A representative of a firm dealing in marketable securities, such as U.S. Treasury bills.

58. A banking official to discuss commercial certificates of deposits.

59. A stockbroker or investment banker to discuss different aspects of stocks and bonds.

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352 Ferrell, M: Business 7e Chapter 1 Instructor’s Manual

Teaching Suggestions 73. The “Class Discussion Questions” exercises at the end of the chapter would make a good out-of-class assignment. As an alternative for Exercise #1, the instructor may bring copies of The Wall Street Journal to class and have teams determine the rates of interest as a collaborative endeavor.

74. Assemble students into teams so that they can work on the Team Exercise at the end of the chapter.

75. Present a lecture using the “Lecture Outline and Notes” with slides to reinforce major points.

76. Have students take the Chapter 16 Online Quiz and then discuss their answers.

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