Solution Manual For Business Essentials, Global Edition, 14th edition Ronald J. Ebert Ricky W. Griff

Business Essentials Instructor's Resource Manual Joseph Cooke Business Essentials 14th Edition Global Edition

Ronald J. Ebert Ricky W. Griffin

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

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

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

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

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

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

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

LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity Description Time Limit 1. Icebreaker: What Do You Students assess their level of 20 min.

Know About Business? knowledge about business and set their own learning goals for the class.

2. Up for Debate: Comparing Teams of students discuss types of 25 min.

Economic Systems economic systems.

Students consider how parts of the 3. Small Group Discussion: external environment affect businesses Scanning the Environment 30 min. and industries.

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

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

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

1.

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

2.

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

3.

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

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

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

2.

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

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3.

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

4.

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

5.

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

6.

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

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

Time Limit: 20 minutes

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

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

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

Economists focus on five factors of production: 1.

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

2.

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

3.

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

4.

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

5.

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

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

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QUICK QUESTIONS ●

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

●

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

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

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

1.

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

2.

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

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

3.

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

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

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

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

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

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

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

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

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

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

1.

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

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

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

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

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

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

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

1.

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

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

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

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

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

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

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QUICK QUESTION 

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

HOMEWORK Supply and Demand!

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

At-Home Completion Time: 1 to 1.5 hours

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

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

1.

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

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

2.

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

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

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

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

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

3.

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

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a.

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

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

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

1.

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

2.

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

3.

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

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

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

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

Use In-Class Activity 3: Small Group Discussion: Scanning the Environment Time Limit: 25 minutes

HOMEWORK Supply and Demand Now is a good time to assign Application Exercise 1-10 from the end-of-chapter materials as homework. This assignment asks students to pick a product or service to determine how supply and demand operate in the real world.

At-Home Completion Time: 1–2 hours

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

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

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

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

D.

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

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

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

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

Time Limit: 20 minutes What to Do: 1.

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

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

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

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

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

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

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

Time Limit: 30 minutes What to Do: 1.

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

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

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

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

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

Time Limit: 25 minutes What to Do: 1.

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

2.

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

3.

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

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

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

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

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1-1 Enterprising people can spot promising opportunities. What do they need to do when they have spotted them?

Enterprising businesspeople can succeed if they spot a promising opportunity and then develop a good plan for capitalizing on it. In general, a business opportunity involves supplying goods or services that consumers need or want—especially when no one else is supplying them or if existing businesses are doing so inefficiently or inadequately. (Learning Objective 1, AACSB – reflective thinking) 1-2. Labor is usually referred to as human resources. Aside from physical work, what else does this include?

Aside from physical work, labor also includes both the physical and intellectual contributions that people make while engaged in economic production. A business uses the skills, opinions, sense of judgment, and expertise of individuals in helping the organization complete a range of activities, and not just their physical abilities. The rewards these individuals receive are commensurate with what they bring to the organization. (Learning Objective 3 – AACSB – application of knowledge) 1-3.

What are the laws of demand and supply?

The law of demand states that buyers will purchase (demand) more of a product when its price decreases and less of it when its price increases. The law of supply is that producers will offer more of a product for sale (supply) as its price rises and less of it as its price falls. (Learning Objective 4 – AACSB – application of knowledge) 1-4. When output grows more quickly than population, what usually follows?

The output per capita—the quantity of goods and services per person—increases when output exceeds population. This means that more goods and services (that people want) are available.

Consequently, people in this economic system experience a high standard of living. ‘Standard of living’ refers to the total quantity and quality of goods and services that people can purchase with the currency used in their economic system. (Learning Objective 5 – AACSB – application of knowledge)

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

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

Similarly, give an example of a situation in which a shortage led to increased prices. What eventually happened in each case? Why? Answers will vary; however, any clearance sale illustrates the concept of surplus driving down prices. The classic example of a shortage is scalpers selling event tickets at inflated prices. A specific example is Nike’s new releases of Air Jordan shoes, in very limited numbers, creating heightened interest and intense demand initially. In both cases, the market eventually determines a price at which all the supply can be sold. (Learning Objective 1-3—AACSB—application of knowledge) 1-7. Using your country as an example, explain how the balance of trade and national debt have a direct impact on the finances or growth of a country’s economy.

While answers may vary, students should be able to identify that a country’s balance of trade measures the relative difference in economic value between its exports and imports. A negative balance indicates that the country is spending more on imports than it is earning from exports— money is leaving the country, directly impacting domestic businesses. For exporters, this means that they are not performing well overseas.

For example, according to the Observatory of Economic Complexity (OEC), Pakistan’s main exports are house linens, rice, men’s suits, knitted goods, and refined petroleum, with their principal markets in the United States, Germany, China, the UAE, and the United Kingdom.

Though Pakistan ranks as the 41st largest global economy in terms of GDP, it is only 66th largest in terms of exports (although it is the 49th largest for imports). These figures suggest that Pakistan does not have a trade surplus and suffers a trade deficit. This means its current account balance is negative, which can have negative effects on its economy in terms of GDP growth and economic development. In turn, the declining GDP rate has led to a decrease in the standard of living among Pakistanis, with a ranking of 155th globally in terms of GDP per capita. Pakistan’s economy relies on imports from China and fluctuating oil prices from exporters such as Kuwait, Saudi Arabia, and the UAE. National debt is usually a measure of government spending. It is the difference between the funds that the government receives via taxes and levies and the amount it actually spends on services, infrastructure, and other expenditures. In order to reduce national debt, a government must increase taxes and other levies. This means that consumers may have less money to spend. Conversely, a drop in national debt implies that the status quo is being maintained or that, perhaps, there has been a tax reduction. (Learning Objective 4 – AACSB – application of knowledge) 1-8. How are the overall economic goals of stability and growth related? Can they be reconciled to each other? If so, how?

A nation’s economic growth can be measured through its aggregate output, resulting standard of

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living, GDP, and productivity. Economic stability, on the other hand, refers to the condition in which the amount of money available in an economic system and the quantity of goods and services produced in it are growing at the same rate. Growth is involved in both, thus resolving the apparent inconsistency. (Learning Objective 1-4—AACSB—reflective thinking)

APPLICATION EXERCISES 1-9. Identify businesses or industries in your country that demonstrate the characteristics of perfect competition, monopolistic competition, oligopoly, and monopoly. To what extent does the government get involved in regulating aspects of the economy and ensuring that there is sufficient competition across the sectors? What more could they do in order to ensure varied and healthy levels of competition?

Answers will vary, but students should be able to identify examples, in their own countries, of each of the four types of competition. Most economies will have different market conditions and degrees of competition. Perfect competition is rare since there are no truly dominant players in the market. Monopolistic competition is more common and is based on the concept of differentiation.

Oligopolies exist in many markets where a few relatively large or dominant businesses control most of the market share. Monopolies are rarer but are often found in state-run services and utilities and in markets where private organizations acquire former state-owned enterprises. (Learning Objective 3 – AACSB – application of knowledge) 1-10. Interview a business owner or senior manager. Ask this individual to describe the following things: (1) how broad the competition is in the market in which they operate, (2) what the relative strength of the key competitors is, and (3) how they would rank their own company in terms of competitive strength.

Answers will vary, but students should recognize that each market has its own dynamics and levels of competition. Some business owners may identify certain competitors as the leading competition, even though other businesses may consider these competitors to be less significant in the market.

Each market will have a range of differently sized businesses. For example, a technology-based market is likely to have relatively few competitors. The individual will have a broad awareness of the market, its key players, its changes, and how it is currently developing. This awareness will help them be alert to new changes, particularly with regard to the relative strength and position of their own business compared to those of their key competitors. (Learning Objective 3 – AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 1-11 TO 1-14 (Learning Objectives 1-2 and 1-3—AACSB—interpersonal relations and teamwork, analytical thinking, application of knowledge) Groups should consider domestic business environment, global business environment, technological environment, political-legal environment, sociocultural environment, and economic environment when identifying three trends that will create business opportunities.

The student should answer the following questions: 1-19 © 2025 Pearson Education, Ltd. All rights reserved.

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

TEAM EXERCISE: TOO MANY CHOICES 1-15 TO 1-18 (Learning Objective 1-3 – AACSB – interpersonal relations and teamwork, analytical thinking, application of knowledge) Background Information Assume that you are the owner of a busy sandwich bar at a university campus. There are four other concessions in the central hub where your kiosk is located. The normal price for a sandwich and a large drink is $10. The other concessions offer similar options from $9.5 to $12. You have just read a flyer distributed by one of the other concessions announcing that they are launching a customer loyalty program: if customers collect four stickers in a given week, their fifth meal will be free. You note that the concession is advertising their lunch packages for $12.50. This means that one of their regular customers will net them $50 per week. This is exactly the same as your pricing across a five-day week. The problem for you is that the loyalty program will lock in potential customers.

Team Activity Assemble a group of four or five people. Each group should develop a general strategy for responding to the competitors’ price and promotional changes. Be sure to consider the following factors: ● ● ●

How price changes affect the demand for your product The number of competitors selling the same or a similar product The methods you can use—other than price—to attract new customers and retain current customers.

Follow-up Questions 1-15. What form of competition best characterizes this market?

1-16. Develop specific pricing strategies based on each of the following situations: ● A month after introducing the promotion, the competitor increases their daily average price to $13.50. ● Two of the other concessions launch a joint venture promotion offering the same deal as the competitor; customers can collect stamps from either concession to claim a free meal. ● The fourth concession drops their lunch menu average price to $8.50. ● After two months the fourth concession closes; there are rumors that a national chain is interested in the concession.

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● All five concessions, including you, are noticing that sales are down. You discover that someone has set up a street-food mobile canteen outside the campus.

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

1-18. How can a company compete on a non-price basis and still retain or grow market share?

The main point of this exercise is to analyze price, supply, and demand, as well as the ways in which non-price methods of competition can be used in order to secure or grow market share.

Based on their analysis of the situation and the various factors to be considered, the team members will have different perspectives on the options. Students will probably focus on supply and demand, the external business environment, competition, and so on, while determining which option will generate the most profit and provide economic stability in the given scenario.

EXERCISING YOUR ETHICS: EMPTY STORE (Learning Objective 1-2 and 1-3 – AACSB – ethical understanding and reasoning, reflective thinking) The Situation You are the owner of a retail store in a small town. The store has been owned by your family for three generations. Originally, your great grandfather sold fruit and vegetables from the premises, but after he died, the store has been leased or rented out to a succession of small business owners.

Given the location of the store, none of the businesses has lasted for more than about five years.

The Dilemma The last tenant of the store closed down nearly eighteen months ago with their rental payments in arrears. They disappeared overnight and left the building in a very bad state of repair. It has already cost you a considerable amount of money (roughly half the sum you would have received for a year’s rent) to repair the shop. You are paying taxes on the store, and it has suffered three breakins over the past four months; piping was stolen, and a fire was started in the storeroom.

You have tried to find a suitable tenant for the property, but so far, you have failed. Several other stores in the immediate area are also empty. You have dropped your rental charges by 20 percent to attract tenants, but no one is interested so far. The property is not really suitable for conversion to domestic use either.

You have been approached by a charity that wants to run a drop-in clinic in the store. They cannot afford to pay rent, but they have promised to ensure that the property is not damaged. There will be staff on the premises 24 hours a day, so break-ins are unlikely.

You need to decide whether to give the charity a short-term six-month free lease.

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QUESTIONS TO ADDRESS 1-19. What are the roles of supply and demand in this scenario?

In this case, there is no demand from a paying tenant for the premises. The property costs you money and is unlikely to generate returns. Since there are other empty properties in the area, there is an oversupply. At best, this would drive down rents.

1-20. What are the underlying ethical issues?

The underlying ethical issues include the following facts: although you are helping the charity by providing them with a free space, you are also benefiting from having the property kept safe and maintained. However, your refusal to charge rent for your property could impact the rent that other property owners in the area can charge.

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

Answers will vary, but students may acknowledge that the option to provide the lease is a good short-term solution to the problem. It also involves making a valuable contribution to the community. An alternative is setting up your own business in the store, assuming that you have the time, inclination, and skills to do so.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Students should focus on barriers to entry such as economies of scale. For instance, the big shoe companies can order more raw materials at lower prices and have the ability to outsource production to countries with lower wages. Students should identify several strategies for new shoes 1-23 © 2025 Pearson Education, Ltd. All rights reserved.

designs, such as selling the design to one of the big companies or starting a crowdfunding site to raise capital.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Description Students share their views on business ethics.

Students discuss how ethical norms affect ethical judgments.

Students discuss varying opinions on ethics training as a class.

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Time Limit 20 min.

15 min.

20 min.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

QUICK QUESTIONS 

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



What are some examples of conflicts of interest?

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

Time Limit: 20 minutes

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

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

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

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

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

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

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

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

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

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

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

QUICK QUESTION 

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

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

At-Home Completion Time: 30 minutes

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

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

Controlling pollution is a significant challenge for contemporary business.

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

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

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

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

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

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

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

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

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

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

QUICK QUESTIONS 

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



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

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

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

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

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

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

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

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

KEY TEACHING TIPS 

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



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



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

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

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



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



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

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

At-Home Completion Time: 1 hour

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

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

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

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

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

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

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

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

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

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

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

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

QUICK QUESTION 

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

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

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

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

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

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

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

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

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

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

C. Evaluating Social Responsibility To make sure their efforts are producing the desired benefits, any business that is serious about social responsibility must apply the concept of control to social responsibility. Many organizations now require all employees to read their guidelines or codes of ethics and then

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sign a statement agreeing to abide by it. A business should also evaluate how it responds to instances of questionable legal or ethical conduct. More formally, an organization may actually evaluate the effectiveness of its social responsibility efforts. Additionally, some businesses occasionally conduct a corporate social audit, a formal and thorough analysis of the effectiveness of a firm’s social performance.

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

QUICK QUESTIONS 

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



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

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

Time Limit: 20 minutes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 2-1. What are the three ways in which managerial ethics may be classified?

The three ways are: behavior towards employees, behavior towards the organization, and behavior towards other economic agents. (Learning Objective 1 – AACSB – analytical thinking, application of knowledge) 2-2. When making decisions, who are the stakeholders that a business should consider, and what are those stakeholders’ primary interests?

Stakeholders include customers, employees, investors, suppliers, and the firm’s local and international communities. Most businesses should be concerned with all stakeholder groups, although areas of emphasis may differ for individual businesses. Students should identify interests such as:  Customers: quality, price, delivery, fairness and honesty.  Employees: fairness, inclusion, dignity, basic human needs  Investors: proper accounting procedures, appropriate financial performance information, protection of rights  Suppliers: delivery schedules, pricing, payment  Local and international communities: impact, involvement, environmental and ethical responsibility (Learning Objective 2-2—AACSB—application of knowledge) 2-3. What are the five key elements that a business needs to address in order to claim that they have green marketing credentials?

The five key areas that a business needs to address are the production process, product modification, carbon offsets, packaging reduction, and sustainability. (Learning Objective 3 – AACSB – analytical thinking) 2-4. What are the four basic approaches to social responsibility?

The four basic approaches to social responsibility are:  Obstructionist: Does as little as possible to promote social responsibility.  Defensive: Meets minimal legal requirements regarding social responsibility.  Accommodative: Exceeds minimum requirements only by special request.  Proactive: Actively seeks opportunities to contribute to the social environment.

(Learning Objective 2-4—AACSB—application of knowledge)

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2-5. Describe the obstructionist approach to social responsibility with an example.

The obstructionist approach to social responsibility involves doing as little as possible by denying or covering up violations. The 2013 horse meat scandal in Europe is a prime example of this. Many companies were aware that horse meat had been mixed with beef and pork, and they concealed this fact. (Learning Objective 4 – AACSB – analytical thinking) QUESTIONS FOR ANALYSIS 2-6. In the context of organizations, what is ethical compliance, and in which type of organization are you most likely to find it?

Answers will vary, but students should comment that ethical compliance is the extent to which the members of an organization follow basic ethical (and legal) standards of behavior.

Organizations have increased their efforts to achieve and enhance ethical compliance by providing training in ethics and developing guidelines and codes of conduct. Many of them also establish formal ethics committees that might review proposals for new projects, help evaluate new hiring strategies, or assess new environmental protection plans. These committees might also serve as peer review panels to investigate allegations of ethical misconduct by employees. Organizations that could be exposed to criminal, reputational, or regulatory risks need to pay attention to their ethical compliance, especially companies that operate in markets or industries that may have a reputation for, or examples of, corrupt practices. (Learning Objective 6 – AACSB – application of knowledge) 2-7. Large businesses and organizations play an important role in society. Should they have any meaningful influence on government and decision-makers? Like most other businesses, these ones also employ people, pay taxes, make charitable donations, and provide products and services, but should that be the extent of their involvement?

Student answers will vary and may focus on the specific relationships between large organizations and the government in their own country. Large organizations often seek to influence their governments in a variety of different ways; some do so overtly and others are more subtle. In some countries, the influence is harmful and corrupt; in others, it is more transparent, with a sense of partnership between the organizations and the government.

(Learning Objective 5 – AACSB – application of knowledge, ethical understanding and reasoning) 2-8. How can a government regulate businesses indirectly? How might such an approach operate? Does indirect regulation work?

Students are likely to have differing views. A government can indirectly influence the social responsibility efforts of organizations through its tax codes. It incentivizes organizations to spend on socially responsible projects by allocating tax breaks or imposing tax penalties.

(Learning Objective 5 – AACSB – application of knowledge, ethical understanding and reasoning)

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

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

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

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

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

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

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

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

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

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

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

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

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

EXERCISING YOUR ETHICS: NAVIGATING REMOTE WORKING (Learning Objective 2-1, 2-2, 2-4, and 2-5 – AACSB – analytical thinking, application of knowledge, ethical understanding and reasoning) The Situation You work as a research consultant for a large multinational organization. You work from home.

Having worked in this position for several years, you have a positive and trusting relationship with your manager. Initially, you found the work interesting and challenging. However, recently, you have found that you are quick to complete the tasks assigned to you and have spare time during work hours. You are easily distracted and take lengthy breaks from work, doing household chores, browsing random websites, and using social media.

The Dilemma You are approached by a competitor organization to take up some freelance assignments. This will involve you using your employer’s IT equipment and company time. The freelance assignments pay well, and they will help you develop skills and build connections that may lead to future opportunities. Following a discussion with your friend—who warns you of the serious consequences of your choice—you decide to accept the offer for freelance work.

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QUESTIONS TO ADDRESS 2-19. Describe the ethical issues resulting from your decision. Be specific and clear.

Answers will vary. The ethical issues involve honesty, conflict of interest, and possibly confidentiality. There are also concerns about the cost to the organization, since employees who do not find their jobs challenging tend to show lower levels of productivity and creativity and are more likely to quit.

2-20. What would you do in this situation? Would you take up the freelance assignment?

The decision in this situation is subjective and may be influenced by ethical norms. In making up their minds, students may refer to a model of ethical judgment-making. They may place themselves in the scenario and think about ethical norms and related issues of utility, rights, justice, and caring.

2-21. How do the use of written codes of conduct and the introduction of an ethics program at the organization demonstrate top management’s commitment to ethical business practices?

The use of written codes of conduct announces the business’s commitment to act in an ethical manner. Core principles and values of such codes should include trust, respect, integrity, teamwork, and flexibility. Also, an increasing number of organizations are providing ethics training for employees, thus demonstrating a commitment by their top managements to ethical business practices.

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

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

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

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

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

Answers will vary.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Description

1. Icebreaker: The Role of Small Business

Students discuss the role of small business in their communities.

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

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

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

6. Class Discussion: Conjuring Up Profits?

Time Limit

15 min.

30 min.

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

20 min.

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

45 min.

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

30 min.

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

30 min.

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

What Is a Small Business?

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

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

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

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

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

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

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

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

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

3. Construction About 9.6 percent of businesses with fewer than 20 employees are involved in © 2025 Pearson Education, Ltd. All rights reserved.

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construction. Projects are primarily locally based.

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

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

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

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

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

KEY TEACHING TIP 

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

QUICK QUESTION 

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

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

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

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

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

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

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

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



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

QUICK QUESTIONS 

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



What are some common characteristics shared by all entrepreneurs?

Use In-Class Activity 2: Up for Debate: The Wide World of Risk Time Limit: 30 minutes Use In-Class Activity 3: Small Group Discussion: Entrepreneurship and the Growth of Businesses Time Limit: 20 minutes © 2025 Pearson Education, Ltd. All rights reserved.

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

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

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

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

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

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

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

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

3. Financial Planning

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

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

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

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

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

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

1.

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

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

KEY TEACHING TIPS 

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



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



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

QUICK QUESTIONS

 What is the purpose of a business plan? 

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



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



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



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

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

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

At-Home Completion Time: 30 minutes

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

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

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

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

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

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

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

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

2.

3.

4.

Managerial incompetence or inexperience Neglect Weak control systems Insufficient capital

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

2.

3.

4.

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

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KEY TEACHING TIPS 

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



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

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

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

Time Limit: 30 minutes

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

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

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

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

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

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

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

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

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

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

KEY TEACHING TIPS 

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



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



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



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



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

QUICK QUESTIONS 

What are some advantages and disadvantages of sole proprietorships?



What are some advantages and disadvantages of partnerships?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

KEY TEACHING TIPS 

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



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



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



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

QUICK QUESTIONS 

What is meant by “double taxation?”

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

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

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

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

At-Home Completion Time: 60 minutes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What is my product or service?

Who are my customers?

Where are my customers located?

Is my business idea easily copied?

If there are substitutes for my product or service, how can I make my product/service stand out from competitors’ offerings?

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

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

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

Activity Overview: This activity asks students to identify what helps a company be competitive.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask each group to put together a list of factors that might mean the difference between the success and failure of a new company entering the electric automobile industry. Can small startups realistically hope to compete with companies such as Toyota and Tesla? (15 minutes) 2. Reassemble the class and ask students to share their results. (15 minutes) Don’t Forget: No set pattern for success or failure has been established in any industry.

Wrap-Up: Remind students that managerial incompetence, neglect, weak control systems, and insufficient capital are the primary reasons for business failure. Hard work, market demand for the products or services being provided, managerial competence, and luck contribute to business success.

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In-Class Activity 6: Conjuring up Profits?

Meta Platforms, Inc., doing business as Meta, and formerly named Facebook, Inc., and The Facebook, Inc., is an American multinational technology conglomerate based in Menlo Park, California. The company owns and operates Facebook, Instagram, Threads, and WhatsApp, among other products and services.

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

Time Limit: 30 minutes DISCUSSION QUESTIONS 1. Why do you think Meta has been so successful?

Answers will vary, but most students will cite the drive of its founder, the array of products and services, innovation, among others.

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

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

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

4. Suppose Mark Zuckerberg asked you for advice on how to generate more profits from Meta’s products and services. What would you tell him?

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

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

Small businesses create new jobs, foster entrepreneurship and innovation, and supply goods and services needed by larger businesses. (Learning Objective 3-1—AACSB—application of knowledge) 3-2. What is the most significant reason for the large number of small business start-ups and successes?

The emergence of e-commerce as a major way of providing products and services to customers is the most significant reason for the rise of small business start-ups and successes. The Internet provides fundamentally new ways of doing business, enabling savvy entrepreneurs to create and expand new businesses faster and more easily than ever before. Leading cutting-edge firms such as Google, Amazon, and eBay owe their existence to the Internet. (Learning Objective 4 – AACSB – application of knowledge) 3-3. What are the primary reasons for new business failure and success?

Reasons for failure include managerial incompetence or inexperience, neglect, weak control systems, and insufficient capital. Reasons for success include hard work and dedication, market demand for the products or services being provided, managerial competence, and luck.

(Learning Objective 3-4—AACSB—application of knowledge) 3-4. What is a sole proprietorship? What are its key advantages and disadvantages?

A sole proprietorship is owned and usually operated by one person. Its advantages include greater freedom, which is one of its most important benefits. Because they own their businesses independently, sole proprietors answer to no one but themselves. Sole proprietorships are also easy to form. Sometimes, one can start a business by simply putting up a sign on the door.

Simple legal procedures and low start-up costs make sole proprietorships appealing to selfstarters and independent-minded people. Another attractive feature of this model is the tax benefits extended to businesses that are likely to suffer losses in their early stages. As for the disadvantages of this model, a sole proprietor is personally liable for all debts incurred by the business. If the company fails to generate enough cash, bills must be paid out of the owner’s pocket. Another disadvantage is the lack of continuity; a sole proprietorship legally dissolves when the owner dies. Although the business can be reorganized by a successor, executors or heirs must sell its assets. Finally, a sole proprietorship depends on the proprietor’s resources, and their managerial and financial limitations may constrain the business. Sole proprietors often find it hard to borrow money to start up or expand. (Learning Objective 5 – AACSB – reflective thinking)

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QUESTIONS FOR ANALYSIS 3-5. How does the current perspective on entrepreneurs differ from the conventionally accepted way they were perceived in the past?

Answers will vary, but many students will suggest that entrepreneurs in the past were often stereotyped as “the boss”—self-reliant, male, and able to make quick, firm decisions. Today, an entrepreneur is seen more often as an open-minded leader who relies on networks, business plans, and consensus. Past and present entrepreneurs also have different views on such topics as how to succeed, how to automate businesses, and when to rely on experience in the trade or on basic business acumen. (Learning Objective 2 – AACSB –application of knowledge) 3-6. What are the four major reasons for businesses failing, and why is it important to examine each of them?

Answers will vary, but many students will note that it is important to take a holistic view of the business failure and recognize that a single reason may not provide a comprehensive and compelling explanation for it. However, one major factor could be managerial incompetence or inexperience. Some entrepreneurs put too much faith in common sense, overestimate their own managerial skills, or believe that hard work alone ensures success. Another factor is neglect. Some entrepreneurs try to launch ventures in their spare time, and others devote only a limited amount of time to new businesses. A third factor is weak control systems. Effective control systems keep a business on track and alert managers to potential trouble. If control systems don’t signal impending problems, one may end up in serious trouble before one can even spot the difficulties. Finally, inadequate capital is also a factor to be considered. Some entrepreneurs are overly optimistic about how soon they will start earning profits. In most cases, being profitable takes months or even years. (Learning Objective 4 – AACSB – application of knowledge) 3-7. Identify three sources of funding for new businesses. What are the advantages and disadvantages of each?

Students should identify personal resources, borrowing, governmental assistance, and equity financing such as investors and venture capital. (Learning Objective 3-3—AACSB— application of knowledge) 3-8. Why would a business choose to introduce an employee stock ownership plan? What advantages would the business receive from such a decision?

These plans provide employees an opportunity to own a part of the business (in trust). The key advantages of introducing such a plan are that the employees will have a stake in the company, and their input will have a direct bearing on the value of the business in terms of its profitability and share price. This will offer them a greater sense of loyalty to the business because of their long-term investment in it. (Learning Objective 6 – AACSB – application of knowledge)

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

Answers will vary, but most students will discover that small businesses started as proprietorships or partnerships because the owners were attracted to the simplicity in starting up and in being their own boss, in spite of the disadvantage of unlimited liability. Changing the form of business ownership took advantage of additional capital and/or forms of managerial expertise added to the business. Different businesses will have taken different paths and faced various obstacles that can be discussed. (Learning Objectives 3-5 and 3-6—AACSB— application of knowledge) 3-10. Many new businesses need external funding for a successful launch. Some may have access to the necessary funds through partners, families, loans, or other forms of finance; others look to venture capital companies. What do you think these venture capitalists are looking for?

This should be an interesting and eye-opening exercise. Students should be able to state that venture capital companies are groups of investors seeking to generate a profit on companies with rapid growth potential. They will invest money, gaining partial ownership of the business in return. This gives them a voice in the decision-making processes of the company, allowing them to protect their investment. (Learning Objective 3 – AACSB –application of knowledge)

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

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

The second reason for the business plan is to help attract financing for the new venture. This might come from friends, banks, or venture capitalists.

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

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

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

EXERCISING YOUR ETHICS: BAD COMPANY (Learning Objective 3-4, 3-5 – AACSB – ethical understanding and reasoning, analytical thinking) The Situation Justine, Kara, George, and Anita each have their own small and successful furniture design and manufacturing businesses. They socialize, compare ideas, and share some clients. They often collaborate on larger orders to make sure their limited production facilities are not overwhelmed.

Their arrangement has worked well; their relationship is informal and friendly, and there have not been any serious misunderstandings or arguments among them.

Last year, the four designers agreed to meet once a fortnight to discuss their work, share ideas, compare notes on customers, and see if there are any contracts or other work they can help each other with in the near future. At the last meeting, Kara suggested that the four of them and two other designers who are based around 40 km away (and whom they all know but haven’t worked with) form a cooperative and put their collaboration on a more formal footing.

After some discussion and debate, the four agreed to think it over and make a final decision at the next meeting, scheduled in ten days’ time. As soon as the meeting finished, one of the other two designers recommended by Kara texted each of them about a third designer who would like to join the cooperative.

The Dilemma The potential seventh designer is Emma, who is older than the others and considered fairly unreliable and very difficult to work with. It seems that it was Emma who had convinced Kara to suggest the cooperative and the expansion of the collaboration from four to six, and then to seven.

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Justine, George, and Anita have been exchanging texts and calls for the past couple of days. None of them wants to work with Emma. They are happy to include the other two designers in the cooperative along with Kara, but they fear that the whole idea will fall apart. They decide that the best thing to do is to call an emergency meeting with Kara, express their concerns, and ask her why she has chosen to include Emma.

The idea of the cooperative is a good one and will benefit everybody. The problem is that the designers have not worked together this closely before. They are also worried about Emma’s reputation and whether they can actually work with her at all. At the same time, Anita in particular is concerned about the influence Emma seems to have over Kara and hopes it will not damage Kara’s relationship with Justine, George, and herself.

QUESTIONS TO ADDRESS 3-19. How would the original four designers benefit if they joined together as a cooperative?

Structuring the venture as a cooperative would enable them to combine the freedom of operating as a sole proprietorship with the financial power of a corporation. As sole proprietorships, they will agree to work together for their common benefit. This will give them greater production power, greater marketing power, or both.

3-20. What are the implications of adding three more people to the cooperative?

The biggest implication is that there will be three additional opinions and votes to consider in any decision the collective needs to make. Although the original group still outnumbers the new designers, the former may be outvoted in decision-making situations if Kara is influenced

by Emma. However, the influence of the three new members may change the organizational culture into something that is right for all of them.

3-21. As an independent advisor, what would you recommend that the original four designers do?

Should they form the cooperative with four, six, or seven members? Explain your answer.

Answers will vary, but students will want to consider whether creating the cooperative is more beneficial than retaining the informal arrangement. It may be difficult to resolve the situation if the initial group of designers (except Kara) are reluctant to enter into a venture with Emma.

The views and opinions that the other two designers hold about Emma should also be considered. Students may suggest that the group test the experience of operating as a sevenmember cooperative for a limited period of time and check whether any serious issues arise.

The arrangement can then be reviewed, perhaps after three to six months.

CASES: IN-N-OUT IS NO SMALL BURGER (Learning Objective 3-3—AACSB—analytical thinking, application of knowledge) 3-22. What are some of the primary reasons for In-N-Out’s success?

Student’s should point out various factors of product differentiation, such as brand loyalty, and

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should address price.

3-23. Why do you think the company is so firmly opposed to selling or going public? What do you think are the advantages and disadvantages of private versus public ownership?

Students should outline the differences between a privately held company (where fewer owners call the shots) and a publicly held company (with thousands of shareholders). One major advantage of going public is the massive amount of funding available through an Initial Public Offering (IPO).

3-24. Can you think of other examples of small businesses with a cult-like following? How have they gained popularity? How has increased visibility on social media impacted the ability of businesses to get new customers?

Students should come up with a wide variety of businesses that are using social media to reach a narrow customer base.

3-25. Consider In-N-Out’s journey from a small business to the company it is today. What advice would you give to a small business start-up that aspires to that level of success?

Answers will vary but students will probably focus on product differentiation and using technology both to streamline business processes and to enhance the customer experience.

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

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

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

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

3-28. While franchise owners must have at least $125,000 of cash available, start-up costs can be more than four times this amount. What are the most likely sources of funding for a franchise?

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

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

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you would need in deciding whether to invest in a Cold Stone Creamery franchise. What kind of information did you gather, and what were your sources?

A potential franchisee could contact the FTC for information, search the Internet for articles on a particular franchise, research Cold Stone Creamery’s own website, and contact current franchisees to hear about their experiences and concerns.

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

Answers will vary depending on students’ interest.

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

This chapter discusses the overall dynamic nature of international business and how it is shaped by social, cultural, economic, legal, and political differences among nations. We look at:   

The rise of international business and describe the major world marketplaces, trade agreements, and alliances.

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

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

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

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

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

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

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

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

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: Shoes in the Global Marketplace 2. Class Discussion: Assessing Your Own Culture

Description Students discuss why certain countries produce labor-intensive products more than others in the global marketplace.

Ask students to describe what a foreign manager might expect to experience in our domestic marketplace.

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Time Limit 20 min.

20 min.

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

The Contemporary Global Economy The world economy is becoming an interdependent system through the process of globalization.

The total volume of international trade is more than $23.2 trillion. Exports are products that are made domestically and shipped for sale abroad; imports are products that are made abroad but sold domestically. International trade is becoming increasingly important to most nations and their businesses. Governments and businesses are more aware of the benefits of globalization to businesses and shareholders. New technologies have made travel, communication, and commerce faster and cheaper. In addition, competitive pressures push firms into foreign markets to keep up with competitors. However, critics charge that globalization allows businesses to exploit workers in less developed countries and bypass domestic environmental and tax regulations. Critics also claim that globalization leads to the loss of cultural heritage and often benefits the rich more than the poor.

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

1. Distinctions Based on Wealth The World Bank uses per capita income to make distinctions among countries. Current classifications include:     2.

High-income countries Upper-middle-income countries Lower-middle-income countries Low-income countries

Geographic Clusters North America is the world’s largest marketplace and most stable economy. Europe includes both Western and Eastern regions. The European Union has helped to transform this region into a more integrated economic system. Though Japan has dominated Pacific Asia, other important commerce centers include China, Thailand, Malaysia, Singapore, Indonesia, South Korea, Taiwan, Vietnam, the Philippines, and Australia. China, one of the world’s most densely populated countries, now boasts one of the world’s largest economies.

B. Trade Agreements and Alliances Virtually every nation has formal treaties with other nations to promote free trade. A treaty is a legal agreement that specifies areas in which nations will cooperate with one another.

1. North American Free Trade Agreement (NAFTA)/United States-Mexico-Canada

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Agreement (USMCA) NAFTA removed most tariffs and other trade barriers among the United States, Canada, and Mexico and includes agreements on environmental issues and labor abuses. It was replaced by the USMCA in 2020 with the goal of promoting trade among the three nations.

2. The European Union (EU) The European Union includes most European nations; these countries have eliminated most quotas and set uniform tariff levels on products imported and exported within their group.

The EU is now the largest free marketplace in the world.

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

KEY TEACHING TIPS 

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



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



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



Point out that trade agreements affect U.S. law regarding foreign commerce, which Congress regulates, thus requiring legislation to implement. .

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

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

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

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

C. Exchange Rates An exchange rate is the rate at which a nation’s currency can be exchanged for the currency of another. Fluctuations in exchange rates can greatly affect a country’s balance of trade. With fixed exchange rates, the value of a country’s currency remains relatively constant to that of another country. With floating exchange rates, the value of a country’s currency relative to another currency varies with market conditions. The United States has criticized China over the years for its inflexible exchange rate policy—China being one of the few countries that still uses fixed exchange rates. When the value of a currency rises, companies based in that country find it harder to export products to foreign markets and easier for foreign companies to enter local markets. When the currency value declines, the opposite occurs. In this situation, the country’s balance of trade usually improves because domestic companies should experience a boost in exports. One of the most significant developments in foreign exchange has been the introduction of the euro, the common currency of the EU. The euro was officially introduced in 2002 and has replaced several other currencies, such as the German Deutsche Mark, the Italian lira, and the French franc. In the years since its debut, the euro has become one of the world’s most important currencies.

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

1.

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

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

3.

National Competitive Advantage National competitive advantage derives from factor conditions (labor, capital, entrepreneurs, physical resources, and information resources), demand conditions, related and supporting industries (strong local or regional suppliers or industrial customers), and strategies, structures, and rivalries (firms and industries that stress cost reduction, product quality, higher productivity, and innovative products).

KEY TEACHING TIPS 

Students often confuse balance of trade with balance of payments. Make sure they understand that a country’s balance of trade is the difference between that country’s exports and imports, while the balance of payments refers to the flow of money into or out of a country.



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

QUICK QUESTIONS 

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



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



What countries are currently members of the European Union?

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

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

International Business Management The primary key to a firm’s success is based largely on how well the firm is managed. The three basic decisions that a company must make when considering globalization are whether to go international at all, the level of international involvement, and the organizational structure that will best meet the firm’s global needs.

A. Going International Not every business is prepared to go international. A major decision factor is the business climate of other countries. Other factors include demand and product adaptations.

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

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

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

KEY TEACHING TIPS 

A company must make three decisions when considering globalization: o Whether to go international at all o Its level of international involvement o Its organizational structure



Make sure students do not confuse outsourcing with offshoring. A U.S. company can outsource to another U.S. company. Offshoring implies outsourcing to other countries.

Students typically confuse these two terms, so it is worth emphasizing the difference.

QUICK QUESTION 

What kinds of issues does a China-based producer of laser printers have to take into account in order to successfully export to other countries?

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

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

2.

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

3. Multinational Firms Multinational firms (firms that design, produce, and market products in many nations) do not ordinarily think of themselves as having domestic and international divisions.

Planning and decision making are geared to international markets. Headquarters locations are almost irrelevant. It is important not to underestimate the economic impact of multinational firms. In 2019, the largest 500 multinationals accounted for nearly $1.65 trillion in profits from $29.4 trillion total revenues. They employed tens of millions of people, paid billions in taxes, and bought equipment and services from thousands of other firms across the world.

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

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

2.

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

3.

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

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4.

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

5.

Foreign Direct Investment Foreign direct investment means buying or establishing tangible assets such as manufacturing plants in a foreign country.

KEY TEACHING TIPS 

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



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



Remind students that independent agents often act as sales representatives.

QUICK QUESTIONS 

What are licensing arrangements?



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



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



How many Japanese multinational companies can you name?



How many European companies can you name?

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

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

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

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

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

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

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

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

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

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

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Use In-Class Activity 2: Assessing Your Own Culture Discussion Time Limit: 20 minutes Students often think of how different other cultures are from the U.S. culture. This discussion helps students recognize how foreign the U.S. culture really is to business managers from other countries.

Ask students to form groups and identify parts of U.S. culture that might appear interesting, strange, or very uncomfortable for a businessperson from overseas. If you have international students in your class this will add to the reality of the discussion.

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

At-Home Completion Time: 30 minutes

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

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

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

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

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

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

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

4.

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

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

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KEY TEACHING TIPS 

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



Governments can affect international business in many ways. They can set conditions for doing business within their borders and even prohibit doing business altogether. They can control the flow of capital and use tax legislation to discourage or encourage activity in a given industry. They can even confiscate the property of foreign-owned companies.



Quotas, tariffs, subsidies, protectionism, local content laws, and business practice laws are all methods used by governments to influence international business.

QUICK QUESTIONS 

Do you think the United States should impose import quotas on goods made overseas to protect U.S. jobs?



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



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

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

At-Home Completion Time: 45 minutes

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

Time Limit: 20 minutes What to Do: 1. Ask students to remove their shoe and note the country in which it was made. Go around the class and keep a tally of country of origin. Most students will likely have shoes from China.

(5 minutes) 2.

Ask students why they think shoes are often made in China. Possible answers will include low wages and a workforce willing to perform this type of work. (5 minutes)

3.

Examine how other countries on the list are similar to China. Point out that shoes are laborintensive and cost savings can be significant. (10 minutes)

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

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

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

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

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

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

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

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

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

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

Critics would say the disadvantages include the possibility of businesses exploiting workers in less developed countries and bypassing domestic environmental and tax regulations. Another possibility is that globalization might lead to the loss of cultural heritages and often benefits the rich more than the poor. (Learning Objective 4-1—AACSB—analytical thinking) 4-2. What distinguishes an international business from a multinational business?

An international business conducts a significant portion of its activity overseas. A multinational business designs, manufactures, and sells products and services in a variety of countries.

(Learning Objective 3 – AACSB – analytical thinking) 4-3. What is the role of an independent agent in an international organization?

Independent agents are foreign individuals or organizations that represent exporters in foreign markets, often acting as sales representatives. They sell the exporter’s products, collect payments, and ensure customer satisfaction. They often represent several firms at once and usually do not specialize in a particular product or market. (Learning Objective 3 – AACSB – analytical thinking) 4-4. Why might a business enter a strategic alliance?

A company may want a partner in a country in which it wants to do business. Each party would agree to invest resources and capital into a new business or work together in some mutually beneficial way. This new business, called an alliance, is owned by the partners, who divide its profits according to their agreement. A strategic alliance may not mean the creation of a new business but simply the sharing of risks and potential profits between partners. Such alliances are sometimes called joint ventures, but the term ‘strategic alliance’ arose because such partnerships play increasingly important roles in the strategies of major companies. (Learning Objective 3 – AACSB – analytical thinking)

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QUESTIONS FOR ANALYSIS 4-5. Outline the meanings of social, power, uncertainty, goal, and time orientation as identified

by Geert Hofstede. Explain how these ideas help us understand different cultures despite the impossibility of predicting human behavior.

Answers will vary, but students may indicate that identifying certain characteristics of different cultures can be helpful. Geert Hofstede’s concepts of social, power, uncertainty, goal, and time orientations allow one to do so. Social orientation concerns a person’s beliefs about the relative importance of the individual’s interests versus those of the group. Power orientation refers to people’s beliefs about how appropriate differences in power and authority are within a hierarchy, such as a business organization. Uncertainty orientation is the emotional response people have to uncertain and ambiguous situations. Goal orientation is the degree to which people are motivated to work toward different kinds of goals. Time orientation is the extent to which people adopt long-term versus short-term outlooks on work, life, and other elements of society. (Learning Objective 4 – AACSB – analytical thinking, application of knowledge) 4-6. Why are cultural factors sometimes a minor challenge for managers and, at other times, a major one?

Cultural factors do not usually pose problems for managers when the cultures of the countries involved are similar. Difficulties can arise in situations where, for instance, there are major differences between the native culture of a manager and the culture of the country in which business is to be conducted. (Learning Objective 4 – AACSB – analytical thinking, application of knowledge) 4-7. Identify and research a quota your country imposes on an imported product. Do you support that quota? If so, why?

Answers will vary, but students will recognize that quotas are imposed to protect domestic producers from cheaper imports. The quota fixes the total amount of product that can be imported in a year. By restricting the number of imports of a certain type, their price is raised.

Thus, to a certain degree, the prices of domestically produced goods will be protected since foreign competition is reduced. Further, protectionist tariffs make the prices of domestic products more appealing to consumers, thus limiting their buying choices. (Learning Objective 5 – AACSB – application of knowledge) 4-8. Overproduction in a particular country can lead to a global glut in supply. Its consequences can be disastrous for domestic producers. What steps can governments take to prevent dumping in domestic markets?

Answers will vary, but students should note that many countries have anti-dumping laws that are specifically designed to prevent this. The problem is that businesses often find ways around such legislation and export to third parties before sending overproduced goods to their primary target market. In other cases, oversupplied products are stored and gradually released into the global market. Preventing dumping is an important priority for the government. Oversupply

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tends to be relatively short-term, but the damage it causes domestic producers may be permanent. (Learning Objective 5 – AACSB – analytical thinking and application of knowledge)

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

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

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

TEAM EXERCISE: DIRTY LITTLE SECRET 4-14 TO 4-17 (Learning Objective 3 – AACSB – application of knowledge, interpersonal relations and teamwork, ethical understanding and reasoning)

The Situation The falling prices of milk led to some tough decisions for your family farm. One option was to diversify and do something else with the milk. That’s when the family decided to make Greekstyle yogurt. After all, it was trendy, attracted a premium price, and had a steady demand that would save the farm. If only life were that simple.

The Dilemma

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The traditional way of making Greek-style yogurt involves straining the milk through cloth. That means that around 65 percent of the milk used becomes acid whey. When production started, this waste was flushed out of stainless-steel tanks into the river nearby. Soon, that part of the river had been stripped of fish and wildlife, leaving a pungent smell. As you paid a hefty fine and the costs of the clean-up, you discovered that you could not just dump the acid anywhere. If the acid gets into the waterway, it begins to decompose. This removes the oxygen from the water, kills aquatic life, and clogs the waterway with waste.

Luckily, there was no long-term effect on the river, and it was showing signs of recovery within a year. However, to continue production, you needed an alternative. You signed an agreement with several other farmers to take the acid whey and mix it with their animal feed. You even agreed to pay to transport the liquid to their farms. A local bulk carrier company now picks up a tanker full each week. All seemed to be working well until you heard that a lake nearby had been devastated.

Team Activity 4-14. Make each member of the team create a series of actions that will be needed to deal with this situation. Consider all the facts. Identify who this situation has affected and what its probable causes are.

4-15. Gather your group together and, taking turns, reveal each member’s list of actions. Create a definitive list of actions that will be necessary to deal with the situation.

4-16. In a similar fashion, have each member of the team identify the key stakeholders in this situation and have them suggest the likely reactions and demands of these stakeholders.

4-17. As a group, consider the impact of the situation on the farm and the appropriate steps needed to rectify and mitigate the situation.

This exercise should generate a lively discussion with passionate arguments, since many students may have witnessed organizations contributing to different forms of pollution or practicing poor waste management. Students may be inclined to view this issue in absolute terms, but they need to be encouraged to explore all aspects of the situation.

EXERCISING YOUR ETHICS: GRAY AREA4-18 TO 4-20 (Learning Objective 4-4 – AACSB – application of knowledge, ethical understanding and reasoning) The Situation A European telecom and smartphone company has recently set up shop in a new territory. It caters to business users as well as consumers. Over the past four years, the company has expanded from having three stores and a small warehouse and repair shop to having 19 stores, one central warehouse and repair center, and three sub-warehouses for outlying areas. It has also started online sales, with a new dedicated sales and call center located just outside a major city in the country.

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However, from the outset, the supply of smartphones has been problematic. The parent company did not consider the complexities of scaling up as the business grew. The procedure for supply is that the smartphones are ordered in bulk on a weekly basis, and the order is sent to the European fulfillment house. The fulfillment house picks and packs the bulk order, sending it by courier to the in-country warehouse. Here, the order is broken down into smaller shipments for each of the stores, with online sales sent directly to the customers. The European fulfillment house does not ship the bulk order until everything in that order is in stock. The smartphones are manufactured and shipped to European countries from China. One of the store managers has calculated that an average smartphone will have already traveled over 14,500 kilometers before it reaches the consumer!

The Dilemma Delays cause loss of sales. Five store managers have been circumventing the ordering process and buying the smartphones directly from Chinese suppliers. These are unregistered, unregulated, and not checked or processed by the parent company. However, they are typically delivered five days earlier and cost around a quarter of the price charged by the parent company. The accounts department at the parent company has noticed the transactions. A board-level meeting is about to take place to decide the future of the five store managers. Opinions are extremely divided on these gray-market transactions.

QUESTIONS TO ADDRESS 4-18. What are the key ethical issues in this situation?

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

4-20. What would you do?

This exercise should generate a lively discussion with passionate arguments, since many students may have different ways of perceiving the ethical issue at hand. Students may have a tendency to view this issue in absolute terms, but they should be encouraged to explore all aspects of the situation. A discussion on process versus efficiency can also be encouraged.

CASES: THE MAGICAL KINGDOM GOES GLOBAL (Learning Objectives 4-2, 4-3, 4-4 and 4-5—AACSB—application of knowledge, ethical understanding and reasoning) 4-21. Do you think small business owners and entrepreneurs face the same global challenges and opportunities that a large corporation like Disney faces? What are the major challenges and opportunities for small businesses going global?

Students will have differing answers but should identify cultural barriers as well as political and global opportunities such as untapped markets.

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4-22. Disney’s recent acquisition of 20th Century Fox for $71 billion makes Disney one of the largest communications and entertainment companies in the world. Do you think this kind of global expansion is good for consumers?

Answers will vary, but students should address the idea that bigger isn’t always better.

4-23. What role does local culture play in doing business in foreign countries? Do you think companies should adapt to local customs or be faithful to the brand and expect local consumers to embrace the changes that come with global expansionism?

The students should identify cultural differences in places like Southeast Asia, South America, and Europe, and give examples of how local culture and customs have both helped and hindered globalization.

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

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

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

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

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

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4-27. What role does the current cultural environment in the United States play in corporate decisions to manufacture goods in other countries? Is the culture in the United States static or dynamic?

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

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

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

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

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

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

In addition to giving a general overview of the business planning project, you should copy and distribute the following documents to students:  

Student FAQs for the Business Plan Project Student Business Plan Project Template Part 1: The Contemporary Business Environment

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PART 1 THE CONTEMPORARY BUSINESS ENVIRONMENT This part of the business plan asks students to come up with a “great idea” for a business, creating an identity and forming a concrete notion of what the business will do. The first part of the plan also asks students to identify the type of ownership the business will take and briefly looks at who the firm’s ideal customers are. This part of the plan also looks at how the business will interact with the community and demonstrate social responsibility, and includes a perspective on the impact of global business.

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

HOMEWORK DELIVERABLE FROM STUDENTS Each business plan is a unique document, so some variance in response lengths should be expected.

As a result, you may not wish to designate a minimum number of pages for the assignment. Keep in mind that students who display a grasp of the concepts and demonstrate higher-level thinking may write 20 to 26 pages during the project. For Part 1, expect an approximate range of 2 to 4 pages.

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

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

2. What should my business plan look like?

There are six parts to the business plan. Your instructor will provide you with the “Business Plan Project Student Template” file; you’ll need to complete each part. Answer the questions that make up each part in the order that they are shown. Note that the template includes hints that will help you answer each question. Once you are done answering the question, you can delete the question and the tip, leaving just your answer behind.

Your instructor may also provide you with a sample business plan for you to use as a guide.

Note that your plan does not have to look exactly like the sample, but you need to show good organizational skills. Note that each of the six parts of the business plan project is fully explained in the Business Plan portion of this Instructor’s Manual.

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

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

Note: You will be using the same student template file to complete the entire plan. Therefore, after completing each part of the plan, you need to save the file on a disk or to your hard drive.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SOCIAL RESPONSIBILITY P1-7. A business shows social responsibility by respecting all of its stakeholders. What steps will you take to create a socially responsible business?

Hint: Refer to the discussion of social responsibility in Chapter 2. What steps can you take to be a “good citizen” in the community? Consider also how you may need to be socially responsible toward your customers and, if applicable, investors, employees, and suppliers.

GLOBAL ISSUES P1-8. Will you sell your product in another country? If so, what countries and why? What challenges will you face?

Hint: To help you consider issues of global business, refer to Chapter 4. Consider how you will expand internationally (e.g., independent agent, licensing). Do you expect global competition for your product? What advantages will foreign competitors have?

CASE PART 1: STARBUCKS P1-9. Think of an entrepreneur currently in the news, or someone you admire. What qualities and traits does that person demonstrate that make them entrepreneurial? Are those traits different today than they were in the 1970s and ’80s when Bowker and his team started Starbucks?

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

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P1-10. How are the current economic, political, and social environments of today different from those of 45 years ago? How are they similar? How about 10 years ago? How about 5?

Answers will vary, but students should be able to explain the importance of the economic, political, and social environments, and how they shape business, and the historical significance of things like the recession of 2008–9, and how development of the Internet was both similar to and different than the creation of roads, for instance. (Learning Objective 1-4—AACSB— analytical thinking)

P1-11. Do you think that Bowker and his friends were unique in some way, or were they just in the right place at the right time with the right idea?

Answers will vary, but students should reflect on the combination of being in the right place at the right time and the entrepreneurial spirit, as well as the knack for finding a need and a way to fill that need, or even to create a market, such as coffee houses, where there was no clearly identified need. (Learning Objective 3-2—AACSB—reflective thinking)

P1-12. What is the corporate form of ownership? What are the economic, social, and ethical benefits and drawbacks of running a business as a corporation?

Students should be able to describe how a corporation is a separate legal entity with many of the same rights as a person, to be able to buy and sell assets, incur debt, sue and be sued.

However, unlike a person, a corporation has a theoretically unlimited life span, and in many cases cannot be held accountable for crimes, other than paying a fine (cannot be incarcerated, although sometimes the officers and directors can be held personally accountable.) In many cases, the ownership through shares is protected though from legal liability like debt and crimes. (Learning Objective 3-6—AACSB—analytical thinking)

P1-13. Does demand have to precede supply, or can a company create demand by creating supply? What do you think were the significant events that created demand for gourmet coffee back in the early 80s? Are the concepts of supply and demand different today than they were in Ford’s time?

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

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P1-14. What kind of ethical concerns arise when a group of people get together to start a business?

Answers will vary based on each student’s personal ethics and opinion, but students should be able to articulate the problems with a corporation being held to ethical standards, as opposed to the people in management, leadership, and even line positions being held to ethical standards. (Learning Objective 2-2—AACSB—ethical understanding and reasoning) FINDING YOUR PATH Careers in Business Most experts agree that the people with the most successful careers are those who make an effort to plan them, not just plan for their first job. You may discover new interests and may need to revisit your career path as your interests change and as the nature of jobs and organizations evolves.

Making Yourself Employable One big part of a successful career is having options. To give yourself the best opportunity for this, remember that learning and skill development are not passive. Focus on continuing to learn, to develop and enhance your skills, and to think about where you might go next. Make yourself a valuable asset so that employers will actively want you to join them.

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

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

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

D. Global Issues The global context of business is more important today than ever before. It is important to be knowledgeable about the global economy as well as economic issues like the balance of payments and its impact on business. International business courses are often required.

Foreign language skills will be an asset for you, and something you can bring to your company.

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Chapter 5: Managing the Business Chapter Overview This chapter presents an introduction to the foundations of effective management. It describes the nature of management and identifies the four basic functions that constitute the management process and the different types of managers likely to be found in an organization. It discusses the basic skills required of managers, the importance of strategic management and effective goal setting in organizational success (as well as contingency planning and crisis management), and the importance of corporate culture.

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

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

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

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

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

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

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: The Management Process 2. Class Discussion: How Do Your Goals Stack Up? 3. Small Group Discussion: SWOT Analysis 4. Class Discussion: Crisis Management 5. Up for Debate: Who Creates Corporate Culture?

Description Students work in groups to discuss the management process and how it works.

Students write down their short-term, intermediate, and long-term goals.

Students brainstorm in small groups in order to complete a SWOT analysis.

Students are divided into teams to discuss crisis management.

Students work in small groups to share their thoughts on corporate culture.

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Time Limit 30 min.

30 min.

30 min.

20 min.

30 min.

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

The Management Process The principles of management apply to all kinds and sizes of organizations and those organizations depend on effective management. That means managers are among an organization’s most important resources.

A. Basic Management Functions Management is the process of planning, organizing, leading, and controlling an organization’s financial, physical, human, and resources to achieve its goals.

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

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

3.

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

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

B. The Science and the Art of Management Effective management is a blend of both science and art.

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

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

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

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

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

KEY TEACHING TIPS 

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



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



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



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



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



Confirm that education and experience are critical for developing the skills to be a successful manager.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A. Managerial Roles Research offers a number of interesting insights into the nature of managerial roles. Based on detailed observations of what executives do, it appears that many of their activities fall into 10 different roles in three basic categories.

1. Interpersonal Roles There are three interpersonal roles inherent in the manager’s job. First, the manager is often expected to serve as a figurehead—taking visitors to dinner, attending ribbon-cutting ceremonies, and the like. The manager is also expected to serve as a leader—hiring, training, and motivating employees. Managers can have a liaison role. This role often involves serving as a coordinator or link among people, groups, or organizations.

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

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

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

Finally, as negotiator, the manager enters into negotiations with other groups or organizations as a representative of the company.

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

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

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monitoring performance.

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

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

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

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

6. Global Management Skills Businesses now demand managers with global management skills—those who can understand foreign markets, cultural differences, and the motives and practices of foreign competitors. Managers must also understand how to collaborate with others around the world on a real-time basis, as well as understand international operations.

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

KEY TEACHING TIPS 

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



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

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HOMEWORK Research a Manager Now is a good time to assign Application Exercise 5-9 from the end-of-chapter materials as homework. The assignment asks students to research the background and skill sets of a high-level manager to understand what makes that manager successful.

At-Home Completion Time: 45 minutes

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

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

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

1. Purposes of Goal Setting An organization functions systematically because it sets goals and plans accordingly.

Organizational goal setting: (a) provides direction and guidance for managers at all levels; (b) helps firms allocate resources; (c) helps to define corporate culture; and (d) helps managers assess performance.

2. Kinds of Goals. Every firm has a purpose and a mission. A mission statement is a statement of how the firm will achieve its purpose in the environment in which it operates. In addition, every firm needs long-term goals, which look five years or more into the future; intermediate goals, which focus on a period of one to five years; and short-term goals, which are set for one year.

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

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

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

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

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

2. Step 2: Analyzing the Organization and Its Environment: SWOT Analysis

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

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

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

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

KEY TEACHING TIPS 

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



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



Students often confuse the types of strategy. Highlight the difference between corporate strategy, business strategy, and functional strategy.



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



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

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planning.

QUICK QUESTIONS 

What are the purposes of goal setting?



What is included in your college’s mission statement?



What is the difference between environmental analysis and organizational analysis?

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

At-Home Completion Time: 30 minutes

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

Contingency Planning and Crisis Management

Because business environments are often difficult to predict and because the unexpected can create major problems, most managers recognize that even the best-laid plans sometimes simply do not work out. Two common methods of dealing with the unknown and unforeseen are contingency planning and crisis management.

A. Contingency Planning Contingency planning is planning for change; it identifies ways in which a company will respond to change. It involves identifying aspects of a business or its environment that might entail changes in strategy and identifying alternatives.

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

KEY TEACHING TIPS 

It’s important to point out that a contingency plan may not always work. Changes in internal and external variables can force changes to even the most well-thought-out plan.



Remind students that the most successful organizations are those that make their mission statements clear, remain open about internal policies and external relationships, and are adaptive to change.

Use In-Class Activity 4: Class Discussion: Crisis Management Time Limit: 20 minutes

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

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

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

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

QUICK QUESTIONS 

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

In a beauty salon?



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

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

Time Limit: 30 minutes

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

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

2. Ask each group to think of ways in which the caterer can use the four basic functions of management—planning, organizing, leading, and controlling—in order to accommodate the party. (15 minutes) 3. Reassemble the class and discuss the ways in which the managerial functions may be used. (15 minutes) Don’t Forget: The management process includes a focus on an organization’s financial, physical, human, and information resources.

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

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

Time Limit: 30 minutes What to Do: 1. Ask students to write down one or two of their long-term goals, focusing on the five-year-plus horizon. (10 minutes) 2. Ask students to write down one or two intermediate goals—focusing on a one- to five-year horizon—that may help them to achieve their long-term goals. (10 minutes) 3. Ask students to identify one or two short-term goals—covering a range of less than one year— that may help them to achieve their intermediate goals. (10 minutes) Don’t Forget: Remind students that the achievement of short-term goals can support the achievement of intermediate goals, which can ultimately support long-term goals.

Wrap-Up: Wrap up the exercise by reminding students that goal setting in organizations is driven by corporate, business, and functional strategies; however, the process is dynamic. Organizational environments and situations can change. As a result, goals may need to be reshaped.

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

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

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

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In-Class Activity 4: Class Discussion: Crisis Management Activity Overview: This activity is designed to get students talking about crisis management.

Time Limit: 20 minutes What to Do: 1. Divide the class into small groups and ask each group to assume they are the management team for a large hotel chain doing a post-COVID review of the contingency and crisis management plans.

2. What were the lessons learned? What could the organization have done differently to prepare?

What kinds of crises might arise in the future and how can the organization prepare? (20 minutes) Don’t Forget: For smaller class sizes, you might complete this as a whole class activity.

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

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

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

Time Limit: 30 minutes What to Do: 1. Divide the class into three-member groups and ask them to discuss among themselves who creates corporate culture. Ask the groups to consider these conversation starters: (15 minutes) a. If top managers create corporate culture, how do they get everyone else to follow? b. If first-line managers or employees create corporate culture, how do they get top managers to go along with it? c. How often does corporate culture change? d. When corporate culture changes, what typically causes the change?

2. Reassemble the class and discuss each group’s answers. (15 minutes) Don’t Forget: Corporate culture is not always a direct result of top managers’ actions. Sometimes corporate culture is created by first-line managers, employees, or even everyone in the organization.

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

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 5-1. Why is effective management considered a science as well as an art?

Management is a science because it employs rational thinking, quantitative data, logic, and objectivity. Managers use models and decision-making techniques, gathering data, facts, and objective information to solve problems. However, management can also be considered an art: managers must frequently use their intuition, experience, instinct, and personal insights to take decisions and solve problems. (Learning Objective 2 – AACSB –analytical thinking) 5-2. What are the key features of long-term goals in an organization?

Long-term goals relate to extended periods of time, typically five years or more. They tend to be aspirational and can be modified and pursued by utilizing short- and medium-term goals.

(Learning Objective 4 – AACSB – analytical thinking) 5-3. Identify and explain the three different types of strategies used by organizations.

Organizations may use a corporate strategy, which is employed to determine their overall attitude toward growth and the way they intend to manage their businesses or product lines.

They may also use a business (or competitive) strategy, focusing on improving their competitive position. Finally, they may use a functional strategy, which involves managers deciding the best means of achieving corporate goals by performing functional activities as productively as possible. (Learning Objective 4 – AACSB – analytical thinking) 5-4. How can an organization go through the process of changing its corporate culture?

The first step of the process involves an analysis of the company’s environment at the highest level, which highlights extensive change as the most effective response to its problems. This period is typically characterized by conflict and resistance. The second step is that top management begins to formulate a new vision for the company. The new vision must include a renewed focus on the activities of its competitors and the needs of its customers. In the last step of the process, the firm sets up new systems for appraising and compensating employees who enforce the firm’s new values. This gives the new culture a solid foundation within the firm. (Learning Objective 6 – AACSB – analytical thinking)

QUESTIONS FOR ANALYSIS 5-5. How do you distinguish strategic plans from tactical plans? What makes the two types of planning different in form and order as well as in detail?

Strategic plans reflect decisions about resource allocations, company priorities, and the steps needed to meet strategic goals. The creation of a strategic plan is the fundamental outcome of

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the strategic planning process. They are usually created by the firm’s top management team but often rely on input from others in the organization. Tactical plans are shorter-term plans for implementing specific aspects and accomplishing vital elements of the company’s strategic plans. After the creation of the strategic plan, managers then develop shorter-term plans to guide decisions and ensure that they are consistent with the strategic plan. Tactical plans typically involve upper and middle management. A broad strategic plan aiming to open one new retail store globally each week would need to be supported by a large number of tactical plans. These include identifying likely locations, investigating the competition, identifying HR implications and essentials, shop fitting, staff training, and launching the new store. (Learning Objective 4 – AACSB –application of knowledge) 5-6. How would the role of a middle manager differ from that of a first-line manager?

Middle managers tend to be responsible for implementing strategies and working toward the goals set by top managers. First-line managers are responsible for supervising the work of employees who report to them. They also ensure that employees are properly trained in company policies and procedures. (Learning Objective 2 – AACSB – application of knowledge) 5-7. What contingencies would a major retailer of home improvement supplies need to consider during planning? How do you think the organization would address those risks?

Contingency plans can include preparations for natural disasters, such as hurricanes. These preparations include communication plans (using social media feeds, perhaps), plans to get extra supplies (such as water), and plans to obtain extra stocks of hardware (such as generators, plywood, and batteries) for the community. Contingency plans also include preparations for technological, legal, social, and other kinds of internal and external threats.

Encourage students to be creative when answering this question.(Learning Objective 5 – AACSB – analytical thinking) 5-8. How and why would a business decide to fundamentally change their corporate culture? What are the advantages of starting again?

Sometimes, organizations must change their cultures due to significant market changes, changes in business emphasis, mergers, takeovers, and acquisitions. The process involves analyzing the company’s environment, formulating a new vision for the company, and setting up appraisal and compensation systems for employees who enforce the new values. The advantage of changing a company’s corporate culture is that the organization gets a fresh start and can revitalize itself by correcting instances of bad company culture or misinterpreted culture. (Learning Objective 6 – AACSB –reflective thinking)

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APPLICATION EXERCISES 5-9. Audit and assess the basic management skills of a local manager or business owner. Note technical, human relations, conceptual, decision-making, and time management skills. How important are these skills to them? In which areas do they require development?

Answers will vary, but students should cover every management skill. (Learning Objective 3 – AACSB – application of knowledge) 5-10. Compare and contrast the corporate cultures of two companies that do business in your community. Give examples of the culture of each company.

Answers will vary, but students should focus on areas where companies are likely to be similar, such as the types and extent of skills that managers typically use. The areas where companies are likely to be different would include target markets, philosophies, and management styles.

(Learning Objective 6 –AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 5-11 TO 5-16 (Learning Objectives 5-1, 5-2, 5-3, 5-4, 5-5, and 5-6—AACSB—interpersonal relations and teamwork, analytical thinking, application of knowledge) In this exercise students are focusing on the expertise necessary to successfully run their business.

They should incorporate information from their SWOT analysis to determine their goals and strategies. The students should also incorporate lessons learned from this chapter to develop detailed contingency plans.

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

5-17. Working with your group and based on the information in the scenario, develop a draft mission statement for Dream Vacations. Why is developing a mission statement important?

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

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

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

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

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

The scenario identifies two intermediate-term goals of growing at least 10 percent per year over the first five years through advertising and referrals and expanding into multiple offices within two years. Are these goals that help Dream Vacations meet the long-term goals? If not, additional intermediate-term goals must be developed. Corrective action must be designed that is specific to the goals. It may be necessary to identify what is influencing the growth to examine if advertising and referrals are effective.

5-20. Identify the short-term goals of Dream Vacations. Are short-term goals more or less important than long-term goals?

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

EXERCISING YOUR ETHICS: TIME FOR THE AX? (Learning Objective 5-1, 5-2, 5-3, 5-4, 5-5, and 5-6 – AACSB – ethical understanding and reasoning, reflective thinking, application of knowledge) The Situation You are the sales manager for a well-established medical equipment company. You’ve been with the company for a long time, and, generally, you really enjoy your job. The company’s new president is interested in proving herself and has set a goal of 10 percent sales growth per year.

Each sales representative has a quota that they are expected to meet. Those who exceed their quotas will receive a bonus, and those who fall short of their quotas will be fired or placed on probation.

The Dilemma Your sales staff has worked really hard over the past year to meet their new quotas. Six of the eight representatives met their quotas and received bonuses. However, the other two have fallen behind.

Jane fell 2 percent short of her quota, and you are not surprised. She is not hardworking and often leaves work early to play golf. Bill, on the other hand, has been with the company for a long time and is widely respected for his work ethic. However, he is struggling to care for his unwell mother and fell 7 percent below his quota. You know that control is an important part of being a manager, but you are unsure of what to do. The company president has asked to meet with you tomorrow to discuss the situation.

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QUESTIONS TO ADDRESS 5-21. Which management functions are involved in setting goals and measuring performance?

The management function responsible for determining what the firm needs to do and how best to get it done (in other words, setting goals) is called planning. The process of monitoring performance to make sure that the firm is meeting its goals is called controlling.

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

The key ethical issue is the fact that people with different reputations and work ethics fell short of the quota. Should they be treated the same when Bill has extenuating circumstances that likely impacted his performance this year? Is there a way to motivate Jane to work harder and reach her quota?

5-23. What do you think most managers would do in this situation?

Some managers will adhere to the strictest guidelines: they will fire employees who fall short of the targeted growth level or they will place them on probation. Such managers will not look at individual situations and circumstances. Most others will look at the individuals involved and how their performance has been in the past and make a decision based on the bigger picture.

5-24. What would you do?

Answers will vary, but students should acknowledge that it is often difficult to make personnel decisions. They should explain their decision and not simply pick the “easier” choice.

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

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

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

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

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

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

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

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

5-29. How do you feel about Sundar Pichai’s $229 million salary? Explain why you feel the way you do and how you would address your concerns if you worked at Alphabet.

Student answers will vary but opinions should be substantiated and concerns addressed professionally.

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

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

Though students’ focus will vary, answers should include mention of the four management functions: planning, organizing, leading, and controlling. They may emphasize leading and discussing when exploring Erwin’s role in the formation of the organization, but may emphasize other roles when discussing his day-to-day management.

5-31. The text describes a variety of skills that are essential to management. Which skills do you think are most important for Erwin as his organization grows?

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

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

Student answers should focus on the difference between stakeholders of for-profit and nonprofit organizations, most likely pointing to the drive for profits vs. the drive to accomplish mission as well as the general stakeholder groups that each kind of organization must answer to (shareholders of for-profit companies vs. the public for a notfor-profit).

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

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

by Erwin. Answers will vary with opinion, of course, but should demonstrate an understanding of how Erwin performed certain management functions, and may mention his role in establishing corporate culture.

5-34. What role do you think the board of directors of Team RWB (see https://www.teamrwb.org/about-us/leadership/) play in leading and managing the organization? How is an NPO board of directors different than that of a for-profit company? How do you think the NPO board and the ED should interact?

Students should examine the difference between the management functions of an Executive Director and the leadership functions of a board of directors. Answers may focus on strategic planning, goal setting, and the functions of management. They may also discuss the importance of Erwin’s role in setting corporate culture.

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Chapter 6: Organizing the Business Chapter Overview Like a thumbprint, every organization has a unique structure. Some new business start-ups begin with a simple structure and over time evolve into an elaborate structure. All organizational structures change, but some change more quickly than others.

This chapter presents the building blocks of organizational structure—specialization and departmentalization. It also describes centralization and decentralization, delegation, and authority as the key ingredients in establishing the decision-making hierarchy. Along the way, the chapter looks at the differences among functional, divisional, matrix, and international organizational structures, and examines the most popular new forms of organizational design.

Finally, the chapter explores the informal organization and intrapreneuring.

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

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

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

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

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

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

2. Small Group Discussion: Centralization versus Decentralization 3. Up for Debate: Making the Grade 4. Up for Debate: Who Runs the Grapevine?

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

Students consider the advantages of centralization and decentralization.

Students are divided into teams to discuss the advantages and disadvantages of intrapreneurship at FedEx. Students are divided into teams to discuss “who” within the organization most likely creates the grapevine.

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Time Limit

30 min.

30 min.

30 min.

30 min.

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

What Is Organizational Structure?

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

A. Organization Charts Organizational charts are prepared to clarify structure and to show employees where they fit into a firm’s operations. The chain of command refers to reporting relationships within the company. Size prevents many large firms from even having charts that include all their managers. Typically, they create one organization chart showing overall corporate structure, separate charts for each division, and even more charts for individual departments or units.

B. Determinants of Organizational Structure Many factors play a part in determining an organization’s optimal structure. Managers must consider the organization’s mission and strategy along with the organization’s size and environment. Most organizations change their structures on an almost continuous basis.

These changes are driven by decisions to achieve a better fit with the organization’s shifting environment, changes in corporate and business strategies, actions taken by competitors, new technologies, and myriad other reasons.

KEY TEACHING TIPS 

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



Many factors play a part in determining an organization’s optimal structure, including the organization’s mission, strategy, size, and environment. Most organizations change their structures on a continuing basis.

QUICK QUESTION What does an organization chart tell us?

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

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

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

A. Job Specialization Job specialization, a natural part of an organization’s growth, is the process of identifying the specific jobs that need to be done and designating the people who will perform them. Job specialization may even involve breaking jobs into small components prior to assigning them to individuals.

In a very small organization, the owner may perform every job. As the firm grows, however, so does the need to specialize jobs so that others can perform them. Specialized jobs are learned more easily and can be performed more efficiently than nonspecialized jobs. It is possible to overspecialize, however, leading to boredom, carelessness, and lack of satisfaction.

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

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

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

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

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

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

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

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KEY TEACHING TIPS 

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



An interesting point to make is that larger companies tend to adopt different types of departmentalization for various levels of the company.

QUICK QUESTIONS 

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



What type of company might opt to use process departmentalization?



What type of company might opt to use functional departmentalization?



What type of company might opt to use customer departmentalization?

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

Establishing the Decision-Making Hierarchy The decision-making hierarchy is created by formalizing reporting relationships. When the focus is on the reporting relationships among individual managers and the people who report to them, it is referred to as delegation. When it is on the overall organization, it becomes a question of decentralization versus centralization.

A. Distributing Authority: Centralization and Decentralization Some managers make the conscious decision to retain as much decision-making authority as possible at the higher levels of the organizational structure; others decide to push authority as far down the hierarchy as possible.

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

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

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

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

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

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

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

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

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

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

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

KEY TEACHING TIPS 

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



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



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



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



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



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

QUICK QUESTIONS 

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



Why do managers sometimes have trouble delegating authority?



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

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Use In-Class Activity 2: Small Group Discussion: Centralization versus Decentralization Time Limit: 30 minutes HOMEWORK Interview a Manager Now is a good time to assign Application Exercise 6-9 from the end-of-chapter materials as homework. This assignment asks students to draw a high-level organization chart for your college or university, and to describe it in terms of the organizational structures identified in this chapter.

At-Home Completion Time: 1 to 2 hours

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

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

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

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

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

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

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

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

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

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

KEY TEACHING TIPS 

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



Remind students that there are several forms of international structure, depending on the degree with which an organization depends on foreign companies to manufacture, purchase, and sell its products.

QUICK QUESTIONS 

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



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



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

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

At-Home Completion Time: 1 hour

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6-10

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

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

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

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

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

KEY TEACHING TIPS 

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



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



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

QUICK QUESTIONS 

What is the informal organization at your job?



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

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

Time Limit: 30 minutes

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6-11

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

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

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

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6-12

In-Class Activity 2: Small Group Discussion: Centralization versus Decentralization Activity Overview: This activity encourages students to consider the advantages and disadvantages of centralization and decentralization within organizations.

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

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

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6-13

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

Time Limit: 30 minutes What to Do: 1. Ask students to read the Chapter 6 Entrepreneurship and New Ventures feature in the textbook. Divide the class into groups of two or three students, and ask students to discuss how FedEx focuses on intrapreneurship. How has the company benefited from intrapreneuring? Has it faced any disadvantages from intrapreneuring? (10 minutes) 2. Ask the groups to discuss how Valve Software’s organizational structure contributes to or detracts from its success. (10 minutes) 3. Reassemble the class as a whole and discuss each group’s input. (10 minutes) Don’t Forget: Before you begin, remind students that organizational structures are rarely simple to describe and each has advantages and drawbacks.

Wrap-Up: Valve's flat corporate structure means that, as its own New Employee Handbook reads, "we don’t have any management, and nobody 'reports to' anybody else. We do have a founder/president, but even he isn't your manager." The symbol of this freedom is the office's wheeled desks, which allow employees to form ad hoc teams by moving together when someone—anyone—proposes a project that interests others, then wheeling away once they decide to move on. Bring the activity to a close by highlighting Valve’s ability to innovate as managers and developers are encouraged to develop new ideas and create cross-functional teams on the fly.

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

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

Time Limit: 30 minutes What to Do: 1. Divide the class into two- or three-member teams and ask them to discuss within their groups where the grapevine begins within an organization. Is it top managers? Is it mostly males or females? Is the grapevine generated from specific departments? Is it generated from those people with the most seniority? (15 minutes) 2. Reassemble the class as a whole and debate the small groups’ thoughts. (15 minutes) Don’t Forget: The grapevine is not likely to be generated in the same way within every organization. In addition, information changes as it “moves” from person to person. Remind students that they will be merely considering generalizations in this activity.

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

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 6-1. What do the solid lines in an organization chart represent?

The solid lines in an organization chart define the chain of command. The chain of command refers to the reporting relationships within the organization. In theory, such reporting relationships follow a “chain” from the highest level in the organization to the lowest.

(Learning Objective 1 – AACSB – application of knowledge) 6-2. What does a manager’s span of control suggest in terms of their workload?

Span of control is the distribution of authority in an organization; it is also reflected in the number of people who work for any individual manager. In a flat organizational structure, a manager’s span of control is usually wide. In tall organizations, the span of control tends to be narrower. The size of the span of control is determined by the employees’ abilities, the supervisor’s managerial skills, the similarity and simplicity of the tasks, and the extent to which tasks are interrelated. The span of control should not necessarily aim to maximize the number of employees that are overseen. The ability to effectively control any number of employees depends on the complexity of the project and the skills required for it. Thus, an increase in the complexity of a project or in the skills required leads to a decrease in the number of employees that can be effectively managed. (Learning Objective 3 – AACSB – application of knowledge) 6-3. What needs to be done when a manager believes they cannot delegate work because they like to control everything themselves?

The manager needs to recognize that if they try to accomplish everything themselves while their team does nothing, it will result in burnout and failure. If the manager learns to relinquish control, they will be able to trust their team more and watch its members succeed.

(Learning Objective 3 – AACSB – application of knowledge) 6-4. What are the significant differences between line authority and staff authority in an organization?

Line authority is the type of authority that flows up and down the chain of command. Most companies are heavily reliant on line departments that link directly to the production and sales of specific products. Some also rely on staff authority, which is based on special expertise and usually involves advising line managers in such areas as law, accounting, and human resources. Staff members help line departments make decisions but do not usually have the authority to take the final decisions themselves. Typically, the distinction between line authority and staff responsibility is clearly defined. Organization charts usually indicate this distinction by using solid lines for line authority and dotted lines for staff responsibility.

(Learning Objective 3 – AACSB – application of knowledge)

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6-5. Why are grapevines potentially positive as well as negative in organizations?

A grapevine is an informal communications network that can permeate an entire organization. Grapevines are found in all but the smallest of organizations. They do not always follow the same patterns as formal channels of authority and communication.

Research has identified two kinds of grapevines. One is the gossip chain, which occurs when one person spreads the message to many other people. Each one, in turn, may either keep the information confidential or pass it on to others. A gossip chain is likely to carry personal information. The other common kind of grapevine is the cluster chain, in which one person passes the information to a select few individuals. Some of the receivers share this information with a few others, while the rest keep it confidential. (Learning Objective 5 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 6-6. A business wants to merge sales and production. Suggest an appropriate structure and explain its features.

The organizational structure required is likely to be functional or divisional. Students should be able to recognize the need for parallel command and control, along with built-in coordination and communication features. (Learning Objectives 1 and 4 – AACSB – application of knowledge) 6-7. Describe a virtual organizational structure for a group of writers and artists working on joint projects. Describe the changes that might be necessary as the business grows.

Answers will vary, but this type of organization has little or no formal structure. It is designed to exist in response to its current needs. Its employees, facilities, and subcontracted services will change based on the requirements of its projects. If the number and complexity of projects increase, there may be a need to create a slightly more formal structure to support the basic requirements of the organization. (Learning Objective 4 – AACSB – application of knowledge) 6-8. Do you think that a learning organization is an appropriate type of structure for most types of businesses? What types of organizations are better suited to this form of structure, and why?

Students are likely to realize that implementing a learning organization in a business that has already had a more formal and traditional structure is difficult. A learning organization is designed to encourage ongoing improvement along with continuous employee learning and development. The most consistent and logical strategy for achieving continuous improvement as a business is to constantly upgrade employee talent, skill, and knowledge.

This would be ideal in a situation where market requirements and the employee skills associated with them are continually changing and developing. (Learning Objective 4 – AACSB – analytical thinking, reflective thinking)

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APPLICATION EXERCISES 6-9. Choose three business organizations of different sizes—one large, one medium-sized, and one small. Examine and identify their organizational structure. How do you think decisionmaking occurs in the organization? Explain your findings.

Answers will vary, but large organizations are likely to have multiple levels of management, tall structures, and formal decision-making processes that tend to emanate from the top of the organization. Medium and smaller businesses tend to be flatter, with fewer management levels and perhaps greater delegation in terms of decision-making. (Learning Objective 3 – AACSB – application of knowledge) 6-10. Select a company where you would like to work one day. Using online research, determine if the company has a functional, divisional, matrix, international, team, virtual, or learning organization. Explain how you arrived at this conclusion. Do you believe that this organizational structure is consistent with the organization’s mission? Do you think that organizational structure is well suited to your working style and preferences?

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

Organizational charts depict the extent of line and staff authority, departmentalization, and span of control at various levels. How students feel the structure fits them will depend on the company chosen. (Learning Objective 6-4—AACSB—application of knowledge, reflective thinking) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 6-11 TO 6-14 (Learning Objectives 6-3 and 6-4—AACSB—interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) This exercise will give the students the opportunity to analyze and reflect on the impact that organizational structure has on a company. Additionally, students should recognize that the structure, number of employees, and decision making should evolve and change depending on various internal and external environmental factors. In this exercise students should discuss the nuances of putting together an effective employee team and organization.

TEAM EXERCISE: TRUSTED FRIENDS 6-15 TO 6-17 (Learning Objective 6-3 –AACSB– analytical thinking, application of knowledge, reflective thinking) Background Information You are the founder of a small but growing chain of coffee shops. You have eight shops, and all of them are managed by employees who have worked under your management in the original shop. You consider each of them to be friends, and you trust all of them to follow your vision of how the shop should work. As the chain has grown, you are spending progressively less time in the shops. You barely spend two or three days in the original shop each month, and with the

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prospect of opening three new shops in a city 50 miles away, this is likely to be reduced further in the months to come.

Method Working together with three or four classmates, identify the ways in which these specific organizational changes will allow you to use similar techniques to choose and train potential managers, despite you being too busy to devote a lot of time to this yourself: 

Delegation. Would it be possible to choose one of your current managers and make them responsible for choosing future managers for the new coffee shops? Is there a manager that you trust enough to take on your role? How would this work as an option?



Concentrated Training Programs. Another option is to establish triannual training programs that you would lead. The other managers would choose candidates for this training.



Remote Observation. Setting up cameras and watching the footage so that you can stay updated is another option.



Shadowing. Good candidates could accompany you on your work so that you can get to know them.

FOLLOW-UP QUESTIONS 6-15. What organizational changes are going to be necessary for you to continue to grow and select the right managers?

Answers will vary, but students could opt for some of the suggestions made. It is likely that delegation coupled with an oversight veto is the best option.

6-16. If you were the owner of the company, how would you choose the right coffee shop managers?

Answers will vary, but organizational skills, people management, and customer service are key areas to keep in mind while making the choice. A manager would have to be a leader, be motivated, and be able to get the best out of employees while ensuring the coffee shop has the right ambience.

6-17. As the founder of the company, how willing would you be to make major organizational changes in light of your increased and difficult workload?

Answers will vary, but students should acknowledge that without making the needed changes, the business is unlikely to thrive in the long term. There is a limit to how much the owner can do, so delegation should definitely be considered.

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EXERCISING YOUR ETHICS: THE INDOLENT INTRAPRENEUR (Learning Objective 6-5–AACSB – ethical understanding and reasoning, reflective thinking) The Situation There is no doubt that Raj has, almost singlehandedly, revolutionized the prospects of the business. His simple product design improvement has cut costs, streamlined supply and production, tripled sales overnight, and extended the product life cycle of the main product range by at least 10 years. Since then, he has done nothing despite being given a support team, new offices, and lab space. At the time, it was quite exceptional for a traditional business to encourage intrapreneuring in this way.

The Dilemma Raj’s team now costs the company four times more than any other team of similar size with the same resources. The board has had enough. They want to fire Raj and break up the team. Raj had turned down a 2 percent royalty on his ideas for the promise of lifelong employment. Nothing has been put in writing. The business has moved on, and its involvement with intrapreneuring has ended.

QUESTIONS TO ADDRESS 6-18. What are the ethical issues in this situation?

The employer’s responsibility to Raj presents an ethical issue. Morally, the business owes Raj a lot; however, Raj might also be someone who was once an asset to the company but is now inefficient. Terminating Raj’s employment might be a legal option but is not an ethical choice in this scenario.

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

Answers will vary. The answer is likely to focus on the ethics involved in this situation.

Students should consider how the management is at fault for letting the situation continue without intervening.

6-20. How can you ensure that intrapreneuring makes a continued and effective contribution to the business?

Intrapreneuring enhances creativity and flexibility among employees in large, bureaucratic businesses. To ensure the continued and effective contribution of intrapreneurs, there should be a system in place that identifies and supports inventors. Inventors would need the assistance of product champions and sponsors in high-level management positions. The product champions and sponsors should monitor the creation of new ideas, products, services, or processes.

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CASES: FOCUS ON MISSION (Learning Objectives 6-2, 6-3, 6-4—AACSB – analytical thinking, application of knowledge) 6-21. Chose a business you are familiar with, such as a place you have worked. What was the organizational structure? Do you think a different model would work better? Why or why not?

Students should identify the business and address the specific functional structure from the text, as well as making a suggestion for change or for staying with the current structure.

6-22. How do you think a formal organizational structure relates to or is informed by the environment of the business? How is organizational structure related to the product or service of the business?

Students should be able to relate different structures to both the internal and external environments of a business, using concrete examples.

6-23. Do some research to determine REI’s major competitors. Choose one and determine its organizational structure. Is it the same as REI’s? How are the two organizational structures different, and what do they have in common?

Students should be able to identify several competitors, such as Patagonia, North Face, DICK’S Sporting Goods, and Big 5 Sporting Goods, and be able to relate the organizational structure to the chosen company’s growth and performance, as well as to compare it to REI’s fairly traditional organizational structure (and to its rather unique co-operative business model). .

A MORE NIMBLE STRUCTURE (Learning Objective 6-5—AACSB—analytical thinking, application of knowledge) 6-24. In your workplace or college, how “agile” do you think the organization is?

Answers will vary but should include reasoning behind the opinion.

6-25. Do you think the practice of “safe failure” is a good idea for a workplace? Can you think of a time in your career (either as an employee or student) when a failure resulted in growth or progress?

Students’ perspective and experiences will frame their answer to this question.

6-26. Do you think it’s possible to sustain an atmosphere of innovation and experimentation in a public company where stakeholders have an interest in proven profitability?

Student answers will vary.

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6-27. Etsy’s mission is “Keep Commerce Human.” Do you think this is a viable mission for a public company with almost 90 billion buyers? Why or why not?

Student answers will vary.

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6-22

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

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

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

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

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

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

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

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

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

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

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

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: Are You Getting What You Paid For? 2. Up for Debate: Does a company really need a formal Total Quality Management system?

Description Students discuss perceptions of service quality.

Students are divided into teams to discuss the advantages of TQM.

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Time Limit 25 min.

40 min.

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

What Does Operations Mean Today?

Service operations (or service production) provide tangible and intangible services; firms that only make tangible products are engaged in activities for goods operations (or goods production). The term operations (or production) refers to all the activities involved in making products—goods and services—for customers.

Growth in the Services and Goods Sectors Historically, agriculture was the dominant economic sector in the early years of the United States. Eventually, manufacturing grew, becoming the economic backbone from the nineteenth century into the mid-twentieth century. Services then began a rapid climb in economic importance in terms of both number of employees and percentage of gross domestic product (GDP)—the value of all goods and services produced by the economy, excluding foreign income. The service sector’s greater percentage of GDP has hovered above 50 percent while the smaller 11 percent of the workforce in goods-producing jobs produced almost half of national income.

KEY TEACHING TIP Remind students that operations refers to all the activities involved in making products—goods and services—for customers.

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

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

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

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

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

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

A. Differences Between Service and Goods Manufacturing Operations Both service and manufacturing operations transform raw materials into finished products. In service operations, finished products are not things, but are people with needs met and possessions serviced. Four aspects of service operations can make such operations more complicated than simple goods production: 1.

Interacting with Customers. Manufacturing operations focus on physical goods, whereas service operations are a combination of goods and services.

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

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

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

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

1.

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

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quantities.

2.

Service Production Processes: Extent of Customer Contact. In high-contact systems, such as a city metro system, the customer must be a part of the service.

Managers must therefore be concerned with issues of cleanliness, punctuality, and usability of ticket kiosks. In low-contact systems, such as a mail sorting office, customers do not have to be present while the service transaction is being performed.

KEY TEACHING TIPS 

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



Reinforce that goods are produced; services are performed.



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



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

QUICK QUESTIONS 

What are examples of form, time, and place utility?



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



What are some examples of the intangible and unstorable nature of services?



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

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

Business Strategy as the Driver of Operations Companies go about selecting the kind of production that is best for their business based on the firm’s larger business strategy. They aim to adopt the kind of production that achieves that strategy in the most efficient way possible.

A. The Many Faces of Production Operations Every company identifies a strategy that it can use for winning customer orders; such strategies often include quality, lower prices, flexibility, and dependability.

1. Business Strategy Determines Operations Capabilities. Operations capability refers to the activity or process that production must do especially well to outperform the competition.

2.

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

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

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

Operations Planning Managers from many departments contribute to the firm’s decisions about operations management; this is a process of logical steps upon which the success of the firm depends. The overall business plan provides guidance for long-term operations plans.

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

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

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

1.

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

2.

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

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

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

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

1.

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

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

KEY TEACHING TIPS 

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



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



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

QUICK QUESTIONS 

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



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



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

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

At-Home Completion Time: 1 hour

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

Operations Scheduling Operations scheduling involves developing timetables for implementing operations plans.

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

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

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

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

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

KEY TEACHING TIPS 

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



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

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

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Use In-Class Activity 2: Up for Debate: Does a Company Really Need a Formal Total Quality Management System?

Time Limit: 20 minutes HOMEWORK Operations Management Now is a good time to assign Application Exercise 7-10 from the end-of-chapter materials as homework. This assignment asks students to create a short memo to a struggling manufacturing business explaining the benefits of formal operating planning schedules.

At-Home Completion Time: 1 hour

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7-10

Learning Objective 7-6: Discuss the two key activities required for operations control.

Operations Control Operations control requires managers to monitor performance by comparing results with detailed plans and schedules. If employees do not meet schedules or quality standards, managers can take corrective action. Follow-up, checking to ensure that production decisions are being implemented, is a key and on-going facet of operations. Operations control includes materials management and quality control. Both activities ensure that schedules are met and products delivered, both in quantity and in quality.

A. Materials Management Materials management is the process by which managers plan, organize, and control the flow of materials from sources of supply through distribution of finished goods.

1. Materials Management Activities for Physical Goods Once a product has been designed, successful materials flows depend on five activities: Supplier selection means finding and choosing suppliers of services and materials.

Purchasing (procurement) is the acquisition of all the raw materials and services that a company needs to produce its products. Transportation is the means of transporting resources to the producer and finished goods to customers. Warehousing is the storage of both incoming materials for production and finished goods for distribution to customers. Inventory control includes the receiving, storing, handling, and counting of all raw materials, partly finished goods, and finished goods.

2. Lean Production Systems Lean production systems are designed for smooth production flows that avoid inefficiencies, eliminate unnecessary inventories, and continuously improve production processes. Just-in-time (JIT) production, a type of lean system, brings together all needed materials at the precise moment they are required for each production stage, not before, thus, creating fast and efficient responses to customer orders.

3. Inventory Management is Crucial for Producing Services For many service firms, too, the materials stakes are high. The most important “inventory” used for many high-contact services is not physical goods but exists in the form of information about service product offerings, clients, their interests, needs, activities, and even their plans for interactions with other clients.

B. Quality Control Quality control means taking action to ensure that operations produce products that meet specific quality standards.

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KEY TEACHING TIPS 

Reinforce that lean production systems are designed to avoid inefficiencies, eliminate unnecessary inventories, and improve production processes.



Point out that operations control requires managers to monitor performance by comparing results with detailed plans and schedules, and then making any necessary changes.



Make sure students understand that materials management is the process by which managers plan, organize, and control the flow of materials from sources of supply through distribution of finished goods.

QUICK QUESTIONS 

What are some ways in which managers carry out the following materials management activities: supplier selection, purchasing, transportation, warehousing, and inventory control?



How might quality control be carried out at a bank? How might quality control be carried out at a fast-food restaurant?



What is the difference between controlling quality and building quality into a product or service?

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Learning Objective 7-7: Identify the activities and underlying objectives involved in total quality management.

Quality Improvement and Total Quality Management It is not enough to control quality by inspecting products and monitoring service operations as they occur. Businesses must also consider building quality into products and services.

A. The Quality-Productivity Connection It’s no secret that quality and productivity are watchwords in today’s competitive environment.

Productivity is a measure of economic performance: It compares how much we produce with the resources we use to produce it. The more we can produce while using fewer resources, the more productivity grows and the more everyone benefits. Productivity refers both to the quantity and quality of what is produced.

B. Managing for Quality Total Quality Management (TQM) includes all of the activities necessary for getting quality goods and services into the marketplace; this process involves all parts of the business, including customers, suppliers, and employees. To bring all the interests of the stakeholders together, TQM involves evaluating costs of poor quality, identifying the sources causing unsatisfactory quality, assigning responsibility for corrections, and ensuring that those responsible take steps for improving quality.

1. The Cost of Poor Quality Producers of goods and services suffer financial distress from poor quality service or products.

2. Quality Ownership: Taking Responsibility for Quality With TQM, employees and suppliers ultimately accept quality ownership—the idea that quality belongs to each person who creates it while performing a job.

C. Tools for Total Quality Management Hundreds of tools have proven useful for quality improvement, ranging from statistical analysis of production data, to satisfaction surveys of customers, to competitive product analysis—a process by which a company analyzes a competitor’s products to identify desirable improvements. Five of the most commonly used tools for TQM are: 1. Value-Added Analysis Value-added analysis refers to the evaluation of all work activities, material flows, and paperwork to determine the value that they add for customers.

2. Quality Improvement Teams Quality improvement teams are groups of employees from various work areas who meet regularly to define, analyze, and solve common production problems with the goal of improving both their own work methods and the products they make.

3. Getting Closer to the Customer

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Customers are the driving force for all business activity; the most successful firms keep close to their customers and know what they want in the products they consume.

Improvement projects are undertaken for both external and internal customers. Internal customers exist wherever one employee or activity relies on others in the firm.

4. The ISO Series ISO 9000 is a certification program attesting that a firm or laboratory has met the quality management requirements set by the International Organization for Standardization. The ISO 14000 program certifies improvements in environmental performance. It requires a firm to develop an environmental management system: a plan documenting how the company has acted to improve its performance in using resources and in managing pollution. The plan must not only identify hazardous wastes the firm expects to create, but also stipulate the plans for treatment and disposal of those wastes.

5. Business Process Reengineering Business process reengineering focuses on productivity and quality, and entails rethinking each step in a process by starting over from scratch. Reengineering involves the redesign of business processes to achieve improvements in cost, quality, service, and speed.

KEY TEACHING TIPS 

Remind students that competitive product analysis is a process by which a company analyzes a competitor’s products to identify desirable improvements.



Students often forget that quality improvement teams comprise groups of employees from various parts of the organization.



Remind students that ISO 14000 guarantees that a company has an environmental management system, a plan documenting improved use of resources and pollution management.



Remind students that business process reengineering involves focusing on improving a business process by rethinking each of its steps by starting from scratch.

QUICK QUESTIONS 

What do companies try to achieve with value-added analysis?



What are some examples of “internal” customers? What does “getting closer to the customer” mean?



What does it mean when a company is ISO 9000 certified?



Who is responsible for ensuring TQM within an organization?

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Learning Objective 7-8: Explain how a supply chain strategy differs from traditional strategies for coordinating operations among firms.

Adding Value Through Supply Chains A supply chain (or value chain) for any product is the flow of information, materials, and services that starts with raw-materials suppliers and continues through other stages in the network of firms until the product reaches the end customer.

A. The Supply Chain Strategy Supply chain strategy is based on the idea that members of the chain, working as a coordinated unit, will gain competitive advantage.

1.

Supply Chain Management Supply chain management (SCM) looks at the supply chain as a whole in order to improve the overall flow through a system composed of companies working together.

Each of the chain’s members gains competitive advantage in this situation.

2.

Reengineering Supply Chains for Better Results The results often include lower costs, faster service, and the coordination of flows of information and materials.

B. Outsourcing and Global Supply Chains Outsourcing is the strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials or services. Global outsourcing creates new operations jobs for supply chain management and, sometimes, the need for more or different types of employee training.

QUICK QUESTIONS 

Who are the supply chain members for a manufacturer of baked goods?



How can the reengineering of supply chains add value?

HOMEWORK Business Plan Now is a good time to assign Part 2 of the Business Plan. In this second section, students are asked to devise goals for their company, analyze the internal and external factors affecting their business, and discuss the organizational structure of their business.

At-Home Completion Time: 2 to 3 hours

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For the complete instructions for this part of the assignment, refer to the instructions at the end of this chapter. The entire business-planning project (including a sample business plan) can be seen in the Business Plan Project section of the Instructor’s Manual files.

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Are You Getting What You Paid For? Activity Overview: This activity is designed to get students to think about how to perceive service quality.

Time Limit: 25 minutes What to Do: 1. Divide the class into groups of two to four members and ask each group to think of three services, such as cell phone service, restaurants, a barber or hair salon, insurance agent, or various repair services. (5 minutes) 2. Ask groups to think of ways in which buyers of those services measure the level of service quality they are receiving. (10 minutes) 3. Reassemble the class and ask each group to reveal what they discussed. (10 minutes) Don’t Forget: Measuring the quality of manufactured goods—often through durability, functionality, sturdiness, and so on—is often easier and provides more consistency than measuring service quality. Not everyone measures service quality in the same way.

Wrap-Up: Remind students that service quality is often measured by the tangible evidence of the service— such as a manicured lawn, a tailored suit, and so on. However, service quality can also be measured by examining the characteristics of the service performer; these might include reliability, assurance, responsiveness, etc.

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In-Class Activity 2: Up for Debate: Does a Company Really Need a Formal Total Quality Management System?

Activity Overview: This activity asks students to debate the pros and cons of TQM. Time Limit: 40 minutes What to Do: 1. Divide the class into four-member teams. Ask each team to spend some time really considering the pros and cons of TQM—especially the cons, which may not be immediately obvious. (5 minutes) 2. Ask each group to prepare two statements to the CEO and Board of Directors of a hypothetical automobile company, one arguing in favor of adopting TQM and one arguing against. Make sure each argument also rebuts the other side. (15 minutes) 3. Reassemble the class as a whole and ask students to present their arguments. Choose half of the groups to present arguments against and the other half to present arguments for, allowing them to debate each other, two at a time.(20minutes) Don’t Forget: The backbone of TQM, however, and its biggest challenge, is motivating all employees and the company’s suppliers to achieve quality goals.

Wrap-Up: Wrap up the activity by discussing the advantages and disadvantages of TQM.

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BUSINESS PLAN PROJECT PART 2: THE BUSINESS OF MANAGING Assignment Overview: The second part of the business plan project asks students to think about goals of their business, some internal and external factors affecting the business, as well as the organizational structure of the business. As part of this assignment, students are asked to complete a simple SWOT analysis, an organizational chart, and a floor plan. These analyses and charts will vary greatly depending on the scope of the business. Encourage as much detail as possible so students can get a clear picture of the true costs of owning a business. Make sure your expectations are clear as to what format (e.g., handwritten or electronic) you would like to see the organizational charts and floor plans submitted.

Files to Provide Students: For this part of the project, students will be asked to complete Part 2: The Business of Managing. If students have already started working on the business plan project, they should continue using the student template they began working on in Part 1.

Part 2 Estimated At-Home Completion Time: If done well, this section will require a minimum of 2 to 3 hours. Instructor feedback will improve the quality of student responses so you may wish to spend class time working on the plan.

Homework Deliverable from Students: The length of this section should be somewhat consistent, although some variance can be expected in the organizational chart and floor plan, based on the size of the business. You should expect at least three to five pages in this section.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 7-1. In your own words, describe the meaning and significance of operations management. What does it tell us about operations processes and the transformation of goods and services?

Answers will vary, but students should state that operations management deals with the systematic processes involved in transforming resources into finished goods or services. It also pertains to the direction and control of these processes. (Learning Objective 1 – AACSB – application of knowledge) 7-2. In most high-income nations, what is the most significant sector in terms of employment and national income?

Over the past 20 years, the service sector has seen an approximate 10 percent rise in employment, demonstrating significant growth. However, employment in the manufacturing sector has stagnated, remaining essentially flat with growth at around 1 percent. Students should identify the service sector and know that it is estimated to account for approximately 70 percent of global GDP. (Learning Objective 1 – AACSB – application of knowledge) 7-3. Production adds value by providing utility in terms of which three utility factors?

Production creates form utility by converting raw materials and human skills into finished goods and services. It also creates time utility; that is, it adds customer value by making products available when consumers want them. Lastly, it creates place utility by making products available in places that are convenient for consumers. Creating a product that customers value is no accident; it is the result of an organized effort. (Learning Objective 2 – AACSB – application of knowledge) 7-4. What are the five areas that comprise materials management?

The five areas that comprise material management are supplier selection, purchasing, transportation, warehousing, and inventory control. Supplier selection is the process of finding and choosing suppliers of services and materials. This includes evaluating potential suppliers, negotiating terms of service, and maintaining positive relationships between buyers and sellers. Purchasing (sometimes called procurement) is the acquisition of all the raw materials and services that a company needs to produce its products. Most large companies have purchasing departments to buy services and materials in the amounts needed.

Transportation is the means of transporting resources to the producer and finished goods to customers. Warehousing is the storage of both incoming materials for production and finished goods for distribution to customers. Inventory control includes the receiving, storing, handling, and counting of all raw materials, partly finished goods, and finished goods. It ensures that enough material inventories are available to meet production schedules while simultaneously avoiding expensive excess inventories. (Learning Objective 6 – AACSB – application of knowledge)

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QUESTIONS FOR ANALYSIS 7-5. How would you describe the five major operations planning activities to an administrator of your college or to a local business owner? Use specific examples as they apply to your chosen organization.

Capacity planning might include both the minimum and maximum number of students or customers that the college or business is able to serve based on space, employees, equipment, etc. Location planning should focus on the site of the college or business, how accessible it is, and how that location either lends or detracts from the overall mission. Layout planning can include the arrangement of the buildings, the classrooms, and other structural issues, and should include some mention of process, product, and fixed layouts. Quality planning should include indicators of quality, performance, and value. Methods planning should cover efficiency and effectiveness, and the school or company’s plans for improvement.

(Learning Objective 7-4—AACSB—application of knowledge) 7-6. List three products you have had trouble finding at some point in your life due to supply chain disruptions. Where in the chain do you think things broke down and why?

Student answers will vary but should include a direct link between the product and the supply chain issues that may have caused a shortage of the items. (Learning Objective 7-8— AACSB—application of knowledge) 7-7. Develop a list of internal customers and internal suppliers for a business that you use frequently (or one in which you are employed), such as a cafeteria, a dormitory or hotel, or a movie theater. Identify areas for potential quality improvement in these internal customersupplier activity relationships.

Answers will vary greatly, but students should remember that internal customers and suppliers are people or entities whose work is primarily involved with other workers within the organization. (Learning Objective 7 – AACSB – reflective thinking) 7-8. If you were a member of a quality improvement team at your college or a local business of your choice, what would be four to five specific high-impact operations recommendations?

Describe which two would be the most important, and briefly explain what strategies you might employ as a manager to implement those two recommendations.

Examples will vary, but should be specific, such as decreasing response time for financial aid. For the two most important recommendations, students should identify tangible, implementable strategies, such as, for the above example, the college may try flow-charting the current process, identifying roadblocks and barriers, and then establishing a more streamlined process along with a staff training program. (Learning Objective 7-7— AACSB—analytical thinking, application of knowledge)

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APPLICATION EXERCISES 7-9. Map out the processes involved in preparing, researching, drafting, and finalizing your next major assignment for this course. Work backwards from the deadline and show all the predecessor relationships involved in the process.

Answers will vary, but process charts should include a logical starting point, show all the steps in the process, and show predecessor relationships—that is, other tasks that must be completed before a particular task can start. (Learning Objective 5 – AACSB – application of knowledge) 7-10. Create a short memo to a struggling manufacturing business explaining the benefits of formal operating planning schedules.

Memos will vary, but should stress the advantages to delivering what the customer wants and controlling costs involved in creating and delivering the service.

(Learning Objective 7-7—AACSB—application of knowledge, reflective thinking)

BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 7-11 TO 7-15 (Learning Objectives 7-2, 7-3, 7-4, 7-7 and 7-8—AACSB—interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Answers will vary but students should note regardless of the type of business, every business will have a service component. Remind students that service quality is often measured by the tangible evidence of the service and there will be different perceptions on service quality. When analyzing the key operations characteristics, students should focus on operations planning and the activities or processes that the business needs to consistently perform well to survive and flourish.

In analyzing the planned production activities students should consider lean manufacturing concepts to improve its business, how the layout of a facility affects its operations, how products offer different forms of utility to customers, and how companies’ activities impact the triple bottom line.

When looking at supply chain management the students should focus on the supply chain as a whole in order to improve the overall flow of their business.

TEAM EXERCISE: CALCULATING THE COST OF COMPETITION 7-16 TO 7-19 (Learning Objectives 7-2, 7-6, and 7-7—AACSB—interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge, ethical understanding and reasoning) In this exercise the students will be faced with the real-world dilemma of cost versus benefits.

The students will need to consider not only competition issues but also, the company’s

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reputation, costs, and profits. They will also need to consider the CEO’s decision-making process and how she considers input from stakeholders.

7-16. If you were a customer, what would you hope the company would do? Would your answer be different if you were an investor or stockholder? What would you want the company to do if you were an employee?

Answers will vary, but students should address the conflict between a lower product cost and the value of the company’s “Made in America” reputation. A lower product cost could increase profits or decrease cost to consumer, or possibly both. Students should also address the ethical implications of both layoffs and offshoring, and the impacts of those decisions on the company.

7-17. What are the pros and cons of moving both manufacturing and the call center to other countries?

Pros include potential savings to customers and increased profits for stockholders. Cons include loss of reputation and reduced control of supply chain and quality as well as negative impact on the morale of remaining employees.

7-18. What other options are available?

Students may suggest including employees in the decision-making process, implementing a TQM program, encouraging and rewarding innovation, exploring other supply chain options, process improvements, or other creative suggestions.

7-19. What course of action does your team advise, and why? What are both the short- and longterm ramifications of your recommendation?

Student answers will vary, but students should be able to justify their suggestions and recognize the implications of their decisions in relation to all stakeholder groups, both short and long term.

EXERCISING YOUR ETHICS: PROMISES, PROMISES (Learning Objective 7-4—AACSB—ethical understanding and reasoning, analytical thinking) 7-20. What are the underlying ethical issues in this situation?

The salesperson should have communicated the potential contract with his or her boss, knowing that the contract would require a 20-percent increase in production capacity.

However, with a large layoff of employees previously—and knowing that the company needs the business—the salesperson may have assumed that production would not be a problem.

7-21. From an ethical standpoint, what is an appropriate response to the customer’s question?

What steps should you take in responding to it? Explain.

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Answers will vary, but students should mention that you should be honest with the manager of King Kong Mufflers, letting him know that the company can react to the large order, that the company does have the production capacity, but that the workforce will need to be expanded, which may take a little time up front.

7-22. What would you say on the phone at this time to this customer?

Answers will vary, but students should keep in mind that proper delivery to the customer is a priority. Without the production capacity, that cannot be done.

CASES: MADE FROM SCRATCH (Learning Objectives 7-4 and 7-6—AACSB—analytical thinking, application of knowledge) 7-23. How would you define quality and how is quality measured in the restaurant industry? Are some measurements more useful than others? Explain.

Quality, while subjective, is the combination of characteristics of a product or service that impacts its ability to satisfy stated or implied needs. Quality in the restaurant industry is often measured on ambiance of the restaurant, speed of service, attentiveness of service, customer’s satisfaction with the taste and appearance of the food, price, and more.

Consistency of service and goods is vital in the restaurant industry. The type of restaurant will influence which characteristics are valued more.

7-24. Would you categorize The Cheesecake Factory as a service provider or a provider of goods, or both? How would your classification affect your quality control decisions? How would it affect the way you approach operations?

As a restaurant does provide both service and goods, students must support their choice. The classification will affect quality control decisions by prioritizing on certain aspects of the business, whether service or food. It can impact staffing and training, or supplier choice.

7-25. Describe how process flowcharts may be helpful for methods improvement in restaurant operations. What kinds of information would you hope to gain from the flowcharts?

Process flowcharts could help with handling customer flow, busy times, and food preferences. Before creating the charts, you would need information on the type and length of activities, performance measures, historical trends, among others.

7-26. Identify a major U.S. restaurant chain that has recently received poor quality ratings. Who are its customers, and what are the basic causes that led to declining quality?

Students may identify a restaurant that straddles the fast-food and luxury dining market, like Chili’s or Chipotle Mexican Grill. They may identify its customers as people looking for a fresh quick meal. They may perceive it as healthier than fast-food establishments such as McDonald’s. These firms may have experienced issues with food safety. In particular, claims

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of organic ingredients and use of local suppliers do not ensure food safety if appropriate quality control processes are not in place.

7-27. U.S. restaurants must comply with local health regulations. The results of periodic inspections have to be posted or published, or both. What actions would you recommend be considered by restaurants to overcome negative perceptions from a less-than-satisfactory rating?

Restaurants with satisfactory ratings should prominently post them where customers can see them. They can use their social media presence to publicize the ratings. Make a story and explain changes they have instituted to improve their ratings.

SUPPLY CHAIN TRANSPARENCY (Learning Objective 7-8—AACSB—analytical thinking, reflective thinking, application of knowledge) 7-28. Sourcemap is open-source, meaning it is free for anyone to use. Users upload information themselves, meaning the Hershey Company is responsible for the information found on their map. How transparent do you think their Sourcemap is, and how much should consumers rely on the information provided?

Students may opine that Sourcemap could be unreliable due to the company’s responsibility to update the information. However, they may also find great value in having source information available at all.

7-29. Do you think consumers will be more likely to purchase products from companies that provide transparency and traceability in their supply chain? Why or why not?

Students may note that not many buyers actually track supply chains and sources unless the company invests heavily in advertising and promotion.

7-30. If you worked for a company that manufactured goods, would you advocate for the use of a transparency tool like Sourcemap, or would you recommend an outside service that tracks information on your company’s behalf? Provide reasons for your recommendation.

Student answers will vary.

7-31. Consider businesses such as grocery stores, auto dealers, hardware stores, or others that provide products to consumers. Could you identify ways in which these companies could use Sourcemap or another traceability tool to inform customers about supply chain issues? Do you think it would have a positive impact?

Answers will vary depending on the businesses the students choose and each student’s position on transparency.

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7-32. Given that providing information about the supply chain requires additional expenditures for a company (personnel hours to provide the information, media representation, potential outside services), do you think it’s a worthwhile investment?

Answers will vary, but students should be able to find examples of companies with robust social responsibility agendas and information about the supply chain (see Starbucks, for example).

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PART 2 INTEGRATIVE LEARNING PORTFOLIO THE BUSINESS OF MANAGING CRAFTING A BUSINESS PLAN

MISSION STATEMENT P2-1. Provide a brief mission statement for your business.

Hint: Refer to the discussion of mission statements in Chapter 5. Be sure to include the name of your business, how you will stand out from your competition, and why a customer will buy from you.

BUSINESS GOALS P2-2. Consider the goals for your business. What are three of your business goals for the first year? What are two intermediate to long-term goals?

Hint: Refer to the discussion of goal setting in Chapter 5. Be as specific and realistic as possible with the goals you set. For example, if you plan to sell a service, how many customers do you want by the end of the first year, and how much do you want each customer to spend? If you plan to sell a good, how many do you hope to sell?

SWOT ANALYSIS P2-3. Perform a basic SWOT analysis for your business, listing its main strengths, weaknesses, opportunities, and threats.

Hint: We explained previously what factors you should consider in your basic SWOT analysis.

Look around at your world, talk to classmates, or talk to your instructor for other ideas in performing your SWOT analysis.

MANAGEMENT P2-4. Who will manage the business?

Hint: Refer to the discussion of managers in Chapter 5. Think about how many levels of management as well as what kinds of managers your business needs.

ORGANIZATION CHART P2-5. Show how the “team” fits together by creating a simple organizational chart for your business. Your chart should indicate who will work for each manager as well as each person’s job title.

Hint: Most businesses start off quite small. However, as you create your organizational chart, consider what your business will look like in the future. What different tasks are involved in the business? Who will each person report to in the organizational structure? Refer to the discussion of organizational structure in Chapter 6 for information to get you started.

FLOOR PLAN

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P2-6. Create a floor plan of the business. What does it look like when you walk through the door?

Hint: When sketching your floor plan, consider where equipment, supplies, and furniture will be located. Ask your instructor how he or she would like you to submit the floor plan for your business.

RAW MATERIALS AND SUPPLIES P2-7. Explain what types of raw materials and supplies you will need to run your business.

How will you produce your good or service? What equipment do you need? What hours will you operate?

Hint: Refer to the discussion of operations earlier in this chapter for information to get you started.

QUALITY ASSURANCE P2-8. What steps will you take to ensure that the quality of the product or service stays at a high level? Who will be responsible for maintaining the quality of the product or service (or both)?

Hint: Refer to the discussion of quality improvement and Total Quality Management in this chapter for information to get you started.

CASE PART 2: STARBUCKS QUESTIONS FOR DISCUSSION P2-9. How important was the role of operations in Schultz plan to expand? Explain your answer.

Operations was a key component of Schultz’s plans to expand Starbucks from a small operation of five stores in Seattle to a global operation with thousands of stores. (Learning Objective 7-1—AACSB—analytical thinking) P2-10. Schultz wrote, “As a parent, or as an entrepreneur, you begin imprinting your beliefs from Day One, whether you realize it or not. Once the children, or the people of the company, absorb those values, you can’t suddenly change their worldview with a lecture on ethics.”i How do you think Starbucks’ corporate culture affects the customer experience? Do you think the culture is different today than it was in the late eighties? How and why?

Students should be able to support or refute Schultz’s statement, but should also be able draw a connection between what the customer experiences and the overall corporate culture, especially as it relates to operations (behind the scenes) and quality. Schultz tried to create a global business that would retain the success of the original small business culture. However, students may point out that in standardizing the customer experience it diluted the original third place experience and overall quality. (Learning Objective 5-6—AACSB—analytical thinking)

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P2-11. What aspects of the customer experience in a particular store are related to operations?

Students should address the roasting process and how keeping the product fresh adds to the aroma in the store. Also, Schultz built his operations with growth in mind, and with the idea that all the stores would be very similar and provide a similar experience. They should be able to tie operations such as establishing consistency between stores so that the experience in San Francisco is the same as Hong Kong. (Learning Objective 7-1—AACSB— analytical thinking) P2-12. How do you think Starbucks was structured in the early years? Based on your research, how do you think the structure has changed since then, if at all, and why?

Students will probably choose a functional organizational structure as well as to point out that Starbucks has a very traditional hierarchical governance—a tall and relatively narrow, centralized organization, pointing out that decision-making authority resides at the highest level and lower-level employees perform relatively simple, repetitive tasks and have very little say in how the organization is run.. (Learning Objective , 6-4—AACSB—analytical thinking) P2-13. What are the pros and cons of expanding a business nationally and globally? What challenges does Starbucks faces as it expands across the world?

Students should acknowledge that global expansion involves a considerable capital investment and adaptability. The pros can include increased revenue and brand recognition, as well as a larger social impact that could be negative or positive in the areas of expansion.

(Learning Objective 6-4—AACSB—analytical thinking) P2-14. What type of manager was Schultz in the early years??

Students may posit that Schultz was a hands-on manager in the early years. They should also acknowledge that he was focused on growth, and part-and-parcel to that, systemizing the store experience. (Learning Objective 5-2—AACSB—analytical thinking)

FINDING YOUR PATH Careers in Business Demand for employees with business degrees continues to grow, whether people want careers in general management or more specialized areas of management.

Making Yourself Employable As discussed in Chapter 5, the seven core management skills are technical, human relations, conceptual, decision making, time management, global management, and management and technology skills. Begin (or continue) tracking your activities that help you develop these skills or provide evidence that you possess them. i

Schultz, Howard, and Dori Jones Yang. Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time. New York, NY: Hachette, 2014. Kindle Edition page 73

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Chapter 8: Employee Behavior and Motivation Chapter Overview This chapter discusses the basic forms of behaviors that employees exhibit in organizations, as well as the nature and importance of individual differences among employees. It also explains the meaning and importance of psychological contracts and the person–job fit in the workplace.

Finally, the chapter presents some time-tested models and concepts of employee motivation, and some strategies and techniques used by organizations to improve employee motivation.

Learning Objectives 8-1. Identify and discuss the basic forms of behaviors that employees exhibit in organizations.

8-2. Describe the nature and importance of individual differences among employees.

8-3. Explain the meaning and importance of psychological contracts and the person–job fit in the workplace.

8-4. Identify and summarize the most important models and concepts of employee motivation.

8-5. Describe some of the strategies and techniques used by organizations to improve employee motivation.

LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE

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8-1

Activity 1. Icebreaker: Employee Behavior 2. Small Group Discussion: Balancing Inducements and Contributions 3. Up for Debate: What Are You Looking for in a Job? 4. Small Group Discussion: Motivation in Global Firms

Description Students discuss both productive and counter-productive behaviors in the workplace.

Students discuss the psychological contract between themselves and their jobs.

Students are divided into teams to express their opinions about important job criteria.

Students examine the challenges stemming from trying to motivate employees in a global company.

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Time Limit 20 min.

20 min.

40 min.

25 min.

8-2

CHAPTER OUTLINE Learning Objective 8-1: Identify and discuss the basic forms of behaviors that employees exhibit in organizations.

Forms of Employee Behavior Employee behavior is the pattern of actions by the members of an organization that directly or indirectly influences the organization’s effectiveness.

A. Performance Behaviors Performance behaviors are the total set of work-related behaviors that the organization expects employees to display. They directly target the performance of a job.

B. Organizational Citizenship Organizational citizenship includes positive employee behaviors that do not directly contribute to the bottom line. They provide positive benefits to the organization above and beyond strict job performance.

C. Counterproductive Behaviors Counterproductive behaviors detract from, rather than contribute to, organizational performance. Such behaviors include absenteeism, which occurs when an employee does not show up for work, and turnover, which occurs when people quit their jobs. These behaviors actually cost the organization.

KEY TEACHING TIPS 

Students should be able to identify employee behavior as the pattern of actions by members of an organization that directly or indirectly influences the organization’s effectiveness.



Reinforce that counterproductive behaviors include absenteeism, turnover, theft and sabotage, workplace aggression and violence, and sexual and racial harassment. You might ask students what counterproductive behaviors they have observed at their jobs.

QUICK QUESTIONS 

What are some typical performance behaviors expected of you in the workplace?



What are some examples of employee behaviors that exemplify organizational citizenship?



In addition to turnover and absenteeism, what are some other counterproductive behaviors and what are the ramifications of those behaviors?

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Use In-Class Activity 1: Icebreaker: Employee Behavior Time Limit: 20 minutes

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Learning Objective 8-2: Describe the nature and importance of individual differences among employees.

Individual Differences between Employees Individual differences are personal attributes that vary from one person to another; they may be physical, psychological, and emotional. Two basic categories include personality and attitudes.

A. Personality at Work Personality is the relatively stable set of psychological attributes that distinguish one person from another.

1. The “Big Five” Personality Traits The “big five” personality traits include agreeableness, conscientiousness, emotionality, extraversion, and openness. Agreeableness is a person’s ability to get along with others.

Highly conscientious people tend to focus on only a few things at one time in contrast to less conscientious people who often pursue a wider array of tasks, but are also often disorganized with less self-discipline. People with positive emotionality are relatively more poised, calm, and secure. People with negative emotionality are more excitable, insecure, and reactive. Extraversion refers to a person’s comfort level with relationships and openness reflects how open or rigid a person’s beliefs are. The value of this framework is that it encompasses an integrated set of traits that appear to be valid predictors of certain behaviors in certain situations.

2. The Myers-Briggs Framework Another interesting approach to understanding personalities in organizations is the Myers-Briggs framework. This framework, based on the classical work of Carl Jung, differentiates people in terms of four general dimensions. These are: Extraversion (E) Versus Introversion (I), Sensing (S) Versus Intuition (N), Thinking (T) Versus Feeling (F), and Judging (J) Versus Perceiving (P).

The Myers-Briggs Type Indicator (MBTI) is a popular questionnaire that some organizations use to assess personality types. It is among the most popular selection instruments used today, with as many as 1.5 million people taking it each year. Research suggests that the MBTI is a useful method for determining communication styles and interaction preferences.

3. Emotional Intelligence Emotional intelligence or emotional quotient (EQ) refers to the extent to which people are self-aware, can manage their emotions, can motivate themselves, express empathy for others, and possess social skills. Research suggests that people with high EQs may perform better than others, especially in jobs that require a high degree of interpersonal interaction (such as a public relations specialist) or that involve influencing or directing

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the work of others (such as a project manager). Moreover, EQ appears to be something that isn’t biologically based but that can be developed.

4. Other Personality Traits at Work Locus of control is the extent to which people believe that their behavior has a real effect on what happens to them. A person’s self-efficacy is that person’s belief about his or her capabilities to perform a task. Authoritarianism is the extent to which a person believes that power and status differences are appropriate within hierarchical social systems such as organizations. Self-esteem is the extent to which a person believes that he or she is a worthwhile and deserving individual. Risk propensity is the degree to which a person is willing to take chances and make risky decisions.

B. Attitudes at Work Attitudes reflect our beliefs and feelings about specific ideas, situations, or other people.

They are important because they are the mechanism through which we express our feelings.

1. How Attitudes Are Formed Attitudes are formed by a variety of forces, including our personal values, our experiences, and our personalities. Any of the “Big Five” or individual personality traits may influence our attitudes.

2. Attitude Structure Attitudes are usually viewed as stable dispositions to behave toward objects in a certain way. Attitudes contain three components: cognition, affect, and intention. Cognition is the knowledge a person presumes to have about something and is based on perceptions of truth and reality. Affect is a person’s feelings toward something, is similar to emotion, and is something over which we have little or no conscious control. Intention guides a person’s behavior. Some attitudes, and their corresponding intentions, are much more central and significant to an individual than others.

3. Cognitive Dissonance When two sets of cognitions or perceptions are contradictory or incongruent, a person experiences a level of conflict and anxiety called cognitive dissonance. It also occurs when people behave in a way that is inconsistent with their attitudes.

4. Key Work-Related Attitudes People in an organization form attitudes about many different things. Employees are likely to have attitudes about their salary, their promotion possibilities, their boss, employee benefits, and so on. Especially important attitudes are job satisfaction, which reflects the extent to which people have positive attitudes toward their jobs, and organizational commitment, which reflects an individual’s identification with the organization and its mission. Managers can take actions to promote satisfaction and commitment. Treating employees fairly, and providing reasonable rewards and job security leads to employees that are more likely to be satisfied and committed. Allowing

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employees to have a say in how things are done can also promote these attitudes, as can designing jobs so that they are stimulating.

KEY TEACHING TIPS 

Remind students that individual differences may be physical, psychological, or emotional.



Make sure students understand that people with high EQs may perform better than others, especially in jobs that require high interpersonal interaction and involve influencing the work of others.

QUICK QUESTION What can you say about each of the “big five” personality traits?

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8-7

Learning Objective 8-3: Explain the meaning and importance of psychological contracts and the person–job fit in the workplace.

Matching People and Jobs Managers like to have a good match between people and the jobs they are performing.

A. Psychological Contracts A psychological contract is the overall set of expectations held by employees and the organization regarding what employees will contribute to the organization (contributions) and what the organization will provide in return (inducements). Recent trends in downsizing have led to changes in the psychological contract. Whereas firms used to offer some degree of job security as part of the psychological contract, now other forms of inducements like training and flexible work schedules are often needed to attract and retain people.

B. The Person–Job Fit The person–job fit refers to the extent to which a person’s contributions and the organization’s inducements match one another. Good person–job fit can result in higher performance and more positive attitudes. A poor person–job fit can have the opposite effect.

KEY TEACHING TIPS 

Students often have trouble understanding the concept of the psychological contract.

Make sure they understand that it is the set of employee expectations about the contributions that they will make to the organization, and the inducements the organization will provide in return.



Reinforce that a good person–job fit is one in which the employee’s contributions match the inducements the organization offers.

QUICK QUESTION How might a company benefit from high degrees of job satisfaction and organizational commitment among its employees?

Use In-Class Activity 2: Small Group Discussion: Balancing Inducements and Contributions Time Limit: 20 minutes

HOMEWORK Interview a Manager

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Now is a good time to assign Application Exercise 8-10 from the end-of-chapter materials as homework. This assignment asks students to interview a manager and identify sources of job satisfaction at that company.

At-Home Completion Time: 1–2 hours

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8-9

Learning Objective 8-4: Identify and summarize the most important models and concepts of employee motivation.

Basic Motivation Concepts and Theories Motivation is the set of forces that cause people to behave in certain ways. There are a number of major studies and theories of employee motivation.

A. Classical Theory According to the classical theory of motivation, employees are motivated solely by money.

Frederick Taylor, the father of scientific management, proposed that paying workers more money would prompt them to produce more.

B. Early Behavioral Theory The Hawthorne effect is the tendency for productivity to increase when workers believe they are receiving special attention from management.

1. Human Resources Model: Theories X and Y Scientist Douglas McGregor’s Theory X is the managerial assumption that workers are lazy and need direction; Theory Y is the managerial assumption that workers are energetic, cooperative, and self-motivated. The value of these two theories lies in their ability to highlight and classify the behavior of managers in light of their attitudes toward employees.

2. Maslow’s Hierarchy of Needs Model Psychologist Abraham Maslow proposed that workers each have a set of needs that they seek to fulfill in their work, and these needs are arranged in a hierarchy of importance.

These needs are physiological, security, social, self-esteem, and self-actualization.

Maslow further proposed that lower-level needs must be met before higher-level needs; once one set of needs is met, it ceases to motivate behavior.

3. Two-Factor Theory Psychologist Frederick Herzberg proposed that job satisfaction depends on motivation factors, such as recognition in the workplace, as well as the presence of hygiene factors, such as work conditions. Hygiene factors do not enhance satisfaction, but they do prevent dissatisfaction. Research suggests that the theory works only in some situations. The practice also suggests that managers must first ensure that hygiene factors such as working conditions are acceptable, resulting in an absence of dissatisfaction. Then the managers must offer motivation factors as a way to improve satisfaction and motivation.

4. Other Important Needs Harvard Professor David McClelland’s acquired needs theory hypothesized three other needs, the needs for achievement, affiliation, and power. The need for achievement comes from an individual’s desire to accomplish a goal or task as effectively as possible.

The need for affiliation is the need for human companionship, and the need for power is the desire to control one’s environment.

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C. Contemporary Motivation Theory Recently, more complex models of employee behavior and motivation have been developed.

1. Expectancy Theory This theory suggests that employees are especially motivated to work toward rewards when they believe they have a reasonable chance of obtaining them. This theory explains why people may not work as hard when their salaries are based solely on seniority, for example.

2. Equity Theory This theory focuses on social comparisons, people evaluating their treatment by the organization relative to the treatment of others.

KEY TEACHING TIPS 

To begin a discussion on motivation, you might want to ask students what motivates them on the job.



Remind students that according to the classical theory of motivation, workers are motivated by money; paying them more money should prompt them to produce more goods.



Make sure students understand the distinction between Theory X (workers are lazy) and Theory Y (workers want to do a good job).



Make sure students understand that hygiene factors affect motivation and satisfaction only if they are absent or fail to meet expectations.



Students often forget that equity theory focuses on social comparisons—people evaluating their treatment by the organization relative to the treatment of others.

QUICK QUESTIONS 

What is the theory behind scientific management?



Does the Hawthorne effect still apply to people in the workplace?



Why are Theory Y managers more likely to have satisfied and motivated employees?



Based on Maslow’s hierarchy of needs, what is an example of how physiological needs take precedence over security and social needs?



How does expectancy theory apply when a student feels that the harder she or he studies for an exam the greater the likelihood of a good grade?

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8-11



How is the comparison of employee inputs relative to outputs similar to the “psychological contract?”

Use In-Class Activity 3: Up for Debate: What Are You Looking for in a Job? Time Limit: 40 minutes HOMEWORK Satisfaction and Motivation Now might be a good time to assign Application Exercise 8-9 from the end-of-chapter materials as homework. This exercise asks students to think about what makes employees satisfied and motivated.

At-Home Completion Time: 30-45 minutes

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8-12

Learning Objective 8-5: Describe some of the strategies and techniques used by organizations to improve employee motivation.

Strategies and Techniques for Enhancing Motivation Understanding what motivates workers is only one part of the manager’s job. The other part is applying that knowledge.

A. Reinforcement/Behavior Modification Positive reinforcement is used when a company or manager provides a reward when employees exhibit desired behaviors; punishment is used to change behavior by presenting people with unpleasant consequences if they exhibit undesired behaviors. Social learning occurs when people observe the behaviors of others, recognize their consequences, and alter their own behavior as a result.

B. Using Goals to Motivate Behavior Management by objectives (MBO) is a system of collaborative goal setting, extending through all levels of an organization. MBO is primarily concerned with the implementation of plans in organizations. Because employees contribute to setting the goals, they should accept and be committed to achieving them.

C. Participative Management and Empowerment In participative management and empowerment, employees are given a voice in the management of their jobs and the company. Employees may feel more committed to the firm’s goals if they have helped to shape them. A key to success in this case is to invite participation only to the extent that employees want to have input and only if participation will have real value for an organization.

D. Work Teams and Team Structures Some companies benefit from using team management. Although teams are often less effective in traditional and rigidly structured bureaucratic organizations, they can help smaller, more flexible organizations make decisions quickly and effectively, enhance communication, and encourage organizational members to feel more like a part of an organization.

E. Job Enrichment and Job Redesign Both of these programs typically increase worker satisfaction in jobs that lack motivating factors.

1. Job Enrichment Programs These programs attempt to add motivating factors to job activities. They can involve job rotation programs, or increasing responsibility or recognition.

2. Job Redesign Programs

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These programs attempt to create a better fit between employees and their jobs by restructuring work. Job redesign can usually be carried out through combining tasks, forming natural work groups, or establishing client relationships. a. Combining Tasks. Enlarging jobs and increasing their variety can make employees feel that their work is more meaningful. b. Forming Natural Work Groups. People who perform different jobs on the same projects are candidates for natural work groups that help employees see the place and importance of their jobs in the total structure of the firm. c. Establishing Client Relationships. Allowing employees to interact with customers can increase job variety and give workers both a greater sense of control and more feedback about performance.

F. Modified Work Schedules and Alternative Workplaces 1. Work-Share Programs These programs allow employees to share a single, full-time job. Employees appreciate the schedule flexibility to accommodate their personal needs, and firms can reduce turnover and save on the cost of benefits.

2. Flextime Programs.

Flextime programs allow workers to choose their working hours by adjusting a standard work schedule.

3. Alternative Workplaces.

A rapidly growing number of U.S. workers do a significant portion of their work via telecommuting. Telecommuting allows employees to perform job functions away from standard office settings.

4. Advantages and Disadvantages of Modified Schedules and Alternative Workplaces Some advantages include: (a) more freedom in employees’ personal lives; (b) ability of employees to coordinate work around family members’ schedules; (c) an increased sense of freedom and control for employees; and (d) higher commitment and satisfaction for employees. Some disadvantages include: (a) the difficulty of accurately tracking working hours; (b) the lack of self-discipline to work without supervision as well as the lack of social interaction available in the workplace; and (c) employer perceptions that unobserved workers are not actually working.

KEY TEACHING TIP Students often confuse the following topics. Job enrichment is designed to add one or more motivating factors to job activities; job redesign acknowledges that different people want different things from their jobs.

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QUICK QUESTIONS 

What are examples of positive reinforcement and punishment in the workplace?



With management by objectives, managers and subordinates set goals and evaluate progress over time. What are some advantages and disadvantages of MBO?



Participative programs are not for everyone. What are some drawbacks of such programs?



What are some advantages and disadvantages of using teams in organizations?



In what types of situations might employees benefit from work-share programs and flextime programs?



What are some drawbacks of relying on telecommuting?

Use In-Class Activity 4: Small Group Discussion: Motivation in Global Firms Time Limit: 25 minutes

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8-15

IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Employee Behavior Activity Overview: This activity asks students to think about both productive and counterproductive behaviors in the workplace.

Time Limit: 20 minutes What to Do: 1. Divide the class into small groups of three or four students. Give students a brief overview of both productive and counterproductive behaviors in the workplace. (5 minutes) 2. Have the members of each group discuss behaviors they have observed in a place of work, either as an employee or a customer, preparing to describe to the class at least one productive behavior and one counterproductive behavior. (10 minutes) 3. Reassemble the class and ask students to share the information they’ve obtained in their discussions. (15 minutes) Don’t Forget: Some students may not feel comfortable revealing the name of the employer in this scenario; if so, they can refer to the employer as “Company X.” Wrap-Up: Close with a recap of both productive and counterproductive workplace behaviors and the realworld ramifications of those behaviors. Ask the class how workplace behaviors can be related to a person’s behavior outside of the workplace.

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8-16

In-Class Activity 2: Small Group Discussion: Balancing Inducements and Contributions Activity Overview: This activity asks students to think about the psychological contract between themselves and their jobs.

Time Limit: 20 minutes What to Do: 1. Divide students into three-member groups. Remind students what it means to have a psychological contract, and what person–job fit refers to. (5 minutes) 2. Tell each student to interview his or her partners, asking the partners to assess the balance of contributions and inducements at their jobs. Is the psychological contract even for both sides?

Do the contributions outweigh the inducements? If the contributions and inducements do not balance, what has to happen so they will be in balance? (15 minutes) 3. Reassemble the class and ask students to share the information they’ve obtained in their interviews. (10 minutes) Don’t Forget: Some students may not feel comfortable revealing the name of their employer in this scenario; if so, they can refer to the employer as “Company X.” Wrap-Up: Close with a recap of the psychological contract and highlight how a good person–job fit occurs when employee contributions and company inducements line up. Ultimately, this results in higher performance and more positive attitudes.

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8-17

In-Class Activity 3: Up for Debate: What Are You Looking for in a Job? Activity Overview: This activity asks students to express their opinions about important job criteria and compare these with other students.

Time Limit: 40 minutes What to Do: 1. Ask students to think about what is important to them in a job, ranking the following items, with 1 being the most important and 10 being the least important. (10 minutes) • • • • • • • • • •

Working Conditions Quality of Coworkers/Mentors Salary Benefits Location of Job Level of Challenge/Responsibility Training Programs Offered Advancement Opportunities Job Security Job Title

2. Divide the class into four-member teams.

3. Ask each team to compare their rankings. What conclusions can they draw? While they are doing this, students could potentially go to the board or an overhead slide and mark their rankings on a table you create; this would give you an overview of the class. (10 minutes) 4. Reassemble the class as a whole and have each group share their findings with the class. (10 minutes) 5. Look at the list of items that people ranked highest in general. Talk about how companies can actually accomplish these. For example, how would a company provide ideal working conditions for its employees? (10 minutes) Don’t Forget: There are no right or wrong answers to this exercise.

Wrap-Up: Wrap up the discussion by reminding students that this is the challenge in any organization— people are motivated by different things. Business owners and managers must find ways to motivate every employee so they have high job satisfaction.

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8-18

In-Class Activity 4: Small Group Discussion: Motivation in Global Firms Activity Overview: This activity asks students to think about the increased challenges that stem from trying to motivate employees in a global company.

Time Limit: 25 minutes What to Do: 1. Divide the class into small groups and ask them to discuss what types of additional difficulties may arise when attempting to motivate employees in a global company as compared with a domestic company. (10 minutes) 2. Reassemble the class and discuss group comments. (15 minutes) Don’t Forget: Cultural differences can be difficult to assess; students may want to think of differences in perceptions of time, personal space, punctuality, reasons for working, and communication when completing this assignment.

Wrap-Up: Remind students that a good rule of thumb when motivating workers in a global company is to always treat employees with respect, to be sensitive to local cultures, and to follow laws of the host country; the rest might come a little easier.

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8-19

ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 8-1. What do emotional intelligence and emotional quotient demonstrate about an employee?

Emotional intelligence and emotional quotient (EQ) refer to the extent to which people are self-aware, can manage their emotions, can motivate themselves, can express empathy for others, and possess social skills. It is suggested that EQ is, in fact, more significant to an individual’s success than IQ. It is increasingly important to be able to read other people’s signals and react appropriately. An employee’s EQ shows their capacity to understand, empathize, and negotiate; it indicates their ability to work in a cooperative manner.

(Learning Objective 2 – AACSB – application of knowledge) 8-2. How does a psychological contract differ from a business contract?

A psychological contract is the overall set of expectations that both an organization and its employees have regarding what employees will contribute to the organization and what it will provide them in return. Unlike a business contract, a psychological contract is neither officially recorded nor are its terms negotiated explicitly. (Learning Objective 3 – AACSB – application of knowledge) 8-3. What are the strategies and techniques for enhancing employee motivation? Give examples of each.

Strategies can include cognitive strategies such as positive reinforcement, goal setting, and empowerment, and structural factors such as teamwork, job redesign, and alternative schedules and workplaces. (Learning Objective 8-5—AACSB—application of knowledge) 8-4. What goals are set by using management by objectives? How does the process work?

Management by objectives (MBO) is a system of collaborative goal-setting that extends across all levels of an organization. In MBO, both managers and subordinates are involved in setting goals and evaluating progress. First, the organization specifies its overall goals and plans. Managers then collaborate with each of their subordinates to set individual goals that will best contribute to the organization’s goals. Managers meet periodically to review the progress made toward individual goals and then evaluate goal achievement, usually on an annual basis. They use these results as the basis for planning the next round of this cycle.

(Learning Objective 5 – AACSB – application of knowledge)

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8-20

QUESTIONS FOR ANALYSIS 8-5. What is person-job fit? Describe a person-job fit you currently have or have had in the past with an employer, or describe the person-job fit of the instructor in your class.

Person-job fit refers to the extent to which a person’s contributions and the organization’s inducements match one another. A good person-job fit can result in better performance and a more positive attitude. On the other hand, a poor person-job fit can have the opposite effect.

In answering the second part of this question, students should consider their own skills, background, knowledge, and experience (or those of the instructor), recognizing that they are integral to evaluating a person-job fit. (Learning Objective 3 – AACSB – reflective thinking) 8-6. According to Maslow, what happens when an individual’s set of needs is satisfied? What should an organization do when this happens?

Once an individual’s set of needs has been satisfied, it ceases to motivate their behavior. For example, if you feel secure in your job (that is, your security needs have been met), additional opportunities to achieve further security (such as being assigned to a long-term project) will probably be less important to you than the chance to fulfill your social or selfesteem needs (such as working with a mentor or becoming a member of an advisory board).

Organizations should recognize when an individual’s set of needs has been realized and help them achieve the next level of their needs. (Learning Objective 4 – AACSB – reflective thinking) 8-7. What was your most recent job experience in terms of your contributions and the organization’s inducements?

Answers will vary, but should mention a variety of contributions to the organization, such as effort, ability, loyalty, skills, and time, and tangible rewards such as pay and career and training opportunities, as well as intangible rewards, such as job security and status, and increased flexibility in working schedules. (Learning Objective 8-5—AACSB—reflective thinking) 8-8. What would you tell a worker performing a simple and routine job who wants more challenge and enjoyment from work?

Answers will vary, but many people would suggest that the worker improve his job skills— through training and education—that might open doors to more job variety. In addition, many students will suggest that the worker talk with his or her manager about enriching his current job. (Learning Objectives 8-5—AACSB —analytical thinking)

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8-21

APPLICATION EXERCISES 8-9. Assume you are about to start your own business. What would you do from the beginning to ensure that your employees will be satisfied and motivated?

Answers will vary, but many will suggest that the employees be empowered to make certain decisions early on and that you commit a certain amount of resources early on for any additional training and education that they might want or need. (Learning Objective 8-4— AACSB—analytical thinking) 8-10. Interview your employer or an administrator at your college. Ask the manager what they believe motivates their employees. Identify one or more theories of motivation that seem consistent with this manager’s approach.

Answers will vary, but they should include the strategies reviewed in the chapter. For some manufacturing companies, resources are plentiful, and managers can afford to provide higher-than-average wages and competitive benefits. Job enrichment and open communication throughout an organization are other factors for satisfaction that can be fulfilled. A college environment is likely to be more focused on service and will present different motivations for employees. (Learning Objective 5 – AACSB – application of knowledge)

BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 8-11 TO 8-15 (Learning Objectives 8-1, 8-2, 8-4, and 8-5—AACSB—interpersonal relations and teamwork, analytical thinking, reflective thinking, application of knowledge) Answers will vary but students should note regardless of the type of business, every business will have employees. Setting expectations and managing and motivating those employees will be instrumental in determining the success of the business venture.

Remind students that choosing employees that best fit with the mission and the culture of the firm is challenging but results in higher levels of satisfaction from the employees. The many dimensions discussed in the chapter help students understand that each employee has individual motivations that are different in scope and balance from other employees. Finding the right rewards and methods of motivation is key.

Students need to consider how flexible they will be able to be in the inducements they offer to employees, especially in the early stages of a new venture. As the business grows, how will they modify their structure, and their management practices?

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8-22

TEAM EXERCISE: WHERE HAVE THE PROFITS GONE?8-16 TO 8-20 (Learning Objectives 8-3, 8-4, 8-5 – AACSB – interpersonal relations and teamwork, analytical thinking, application of knowledge) The Situation Five years ago, it was decided that the company would radically change the structure of its sales force. Some of the salespeople had been with the company for two decades, and their strengths were the day-to-day contact and personal relationships they had established with existing customers. They weren’t that great at finding new customers.

The company employed what they called “new customer discovery agents” (NCDAs). These were specialists in prospecting for new customers, and they would be paid a basic salary and a bonus based on the projected first-year business with the new customers. The existing sales force would then take on the new customers and receive a small, ongoing percentage commission as their payment.

Reviewing the sales figures again this year, it is clear that new customers last barely 12 months before they stop placing orders. Neither group of salespeople seems motivated at all.

Method In groups of four, step into the role of the company’s management. Start by analyzing your client’s workforce-motivation problems from the following perspectives, and then develop a set of recommendations.

8-16. Job satisfaction and morale. The NCDAs are complaining that the accounts department withholds bonus payments if new customers stop ordering after 12 months have passed. The original sales force is unhappy that the commission they get from new customers is small.

How can the levels of job satisfaction and morale be raised?

8-17. Theory X versus Theory Y. Although the behavior of these workers seems to make a case for Theory X, why is it difficult to draw this conclusion about a company that focuses more on retaining ineffectual salespeople than on sales or profits?

8-18. Two-factor theory. Analyze the various ways in which improving such motivational factors as recognition, added responsibility, advancement, and growth might reduce the importance of hygiene factors, including pay and security.

8-19. Expectancy theory. Analyze the effect on productivity of redesigning the company’s sales force compensation structure—namely, paying lower base salaries while offering greater earnings potential through a sales-based incentive system. This would be coupled with the merger of both groups of salespeople. They would have to cooperate and be collectively responsible for the customers.

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8-23

8-20. What is your group’s most important recommendation? Why do you think it is likely to succeed?

Students must focus on using most of the concepts present in the chapter, particularly the ones regarding motivation strategies, individual behaviors, performance behaviors, organizational citizenship, and psychological contracts with employees. Cultural changes will need to be made to the company’s operations, and these may need to be phased in.

Systems of collaborative goal-setting, like participatory management or management by objectives, offer employees a say in the company’s management and how employees are rewarded. Securing employee commitment for the changes will be absolutely necessary for their success.

EXERCISING YOUR ETHICS: DOUBLE DIPPING (Learning Objectives 8-3, 8-4, 8-5—AACSB—ethical understanding and reasoning, application of knowledge, analytical thinking) 8-21. What are the ethical issues in this case?

The HR manager is deeply concerned that the behavior modification approach demonstrates a lack of respect for employees.

8-22. What do you think most managers would do in this situation?

Answers will vary, but students should recognize that proceeding with the behavior modification plan is a direct order from the CEO. As employees are dissatisfied with the loss of these programs, the HR manager can suggest to the CEO that rewards be offered in exchange for losing the flexible scheduling. As the company enjoys a loyal workforce, with low turnover, it should not want to lose that valuable asset.

8-23. What would you do? Justify your answer.

Answers will vary, but students will probably consider including elements of expectancy theory while implementing the behavior modification approach.

CASES: BUILDING A CULTURE OF HOSPITALITY (Learning Objectives 8-2, 8-3, 8-4—AACSB—analytical thinking, application of knowledge) Students’ perspective will frame their answer to these questions based on their personalities and past experiences. Every person in an organization is fundamentally different from everyone else.

To be successful, managers must recognize that these differences exist and attempt to understand them. They also need to understand why people work.

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8-24

8-24. Do you think that higher pay is the best way to increase employee engagement and commitment? What leads you to this conclusion?

If Hilton employees are motivated by money, then, yes, higher pay should result in higher productivity and lower turnover. But this also will only be true if the increased pay actually is enough to make a difference in the employees’ ability to meet their financial and personal needs.

8-25. What factors motivate you personally?

Answers will vary but should take into account both tangible and intangible factors.

8-26. Explain Hilton’s employee support programs in light of the classical theory of motivation.

The classical theory of motivation holds that workers are motivated solely by money.

However, Hilton recognized the importance of intangible motivating factors like uniforms and service-worker employee spaces. Students may acknowledge that the classical theory only goes so far, and that Hilton’s programs focus instead on recognizing the value of employees.

8-27. How could Maslow’s hierarchy of needs help explain the relationship between pay and productivity?

Maslow’s hierarchy of needs explains the relationship between pay and productivity because pay falls into the physiological needs level of the Figure 8.3. The needs at the lower points of the figure must be met before the needs above that become relevant to an individual. Being secure in one’s salary will help meet that need and let the employee move up the pyramid and meet other needs. Increased productivity may result from increased pay, in this theory, because the employee will feel more secure and happier, and that often leads to increased productivity.

8-28. Use equity theory, expectancy theory, or two-factor theory to explain Hilton’s employee engagement programs.

The expectancy theory fits with Hilton’s programs, as improvements were made for all employees, indicating that everyone had a fair shot at rewards. Equity theory also applies in this case, since Hilton was recognizing even their lowest-paid staff. The two-factor theory fits best here, as Hilton addressed both hygiene and motivation factors.

8-29. Do you believe that companies have greater social responsibility to pay higher wages or to provide a supportive workplace? Support your claim.

Answers will vary. While it might be ideal to state that there is a social responsibility to pay higher wages, companies must also provide a supportive workplace and balance the economic impact of higher wages with the skills and talents required to perform various tasks.

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8-25

WORK/LIFE BALANCE (Learning Objectives 8- 2, 8-3, 8-4, 8-5—AACSB—analytical thinking, application of knowledge, reflective thinking) 8-30. How do you feel about remote work? Would you rather have a job in which you have set office hours, or would you rather work from home? Do you think that working from home would cause you to be more productive or less productive? Why? Answers will vary, especially depending on the previous employment experience of the students. However, various personal preferences and motivation factors should be considered.

8-31. Consider businesses such as grocery stores, auto dealers, hardware stores, or others that provide products to consumers. Could you identify ways in which these companies could provide goods and services with remote workers?

Students should include support services, remote customer service work, and other behindthe-scenes operations of a company. They may acknowledge that there is no replacement for brick-and-mortar presences and live customer interactions in some cases.

8-32. How do you think companies can balance flexible schedules with accountability?

Students may point to surveillance techniques like recording keystrokes or monitoring activity, but should be looking at workplace culture, onboarding and training, and expectations as well.

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8-26

Chapter 9: Leadership and Decision Making Chapter Overview

This chapter focuses on several approaches to leadership and describes transformational and charismatic perspectives on leadership. It also looks at types of leadership substitutes and neutralizers, as well as several contemporary issues in leadership—seeing leaders as coaches and examining gender and cross-cultural issues in leadership. This chapter also:   

Discusses strategic leadership, ethical leadership, and virtual leadership.

Relates leadership to decision making.

Discusses both rational and behavioral perspectives on decision making.

Learning Objectives: 9-1. Define leadership and distinguish it from management.

9-2. Summarize early approaches to the study of leadership.

9-3. Discuss the concept of situational approaches to leadership.

9-4. Describe transformational and charismatic perspectives on leadership.

9-5. Identify and discuss leadership substitutes and neutralizers.

9-6. Discuss leaders as coaches and examine gender and cross-cultural issues in leadership.

9-7. Describe strategic leadership, ethical leadership, and virtual leadership.

9-8. Relate leadership to decision making and discuss both rational and behavioral perspectives on decision making.

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9-1

LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity

Description

Time Limit

Students assess their own abilities as leaders 1. Icebreaker: Are You a Leader or a Manager?

and managers.

2. Small Group Discussion: Transformational vs.

Transactional Leadership

20 min.

Students identify a business or political leader and identify transformational or transactional

20 min.

characteristics of that leader.

Students are asked to put themselves in the

3. Up for Debate: Substitutes and Neutralizers

position of having a substitute teacher for the class and to debate how that temporary leader

30 min.

might deal with substitutes and neutralizers.

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9-2

CHAPTER OUTLINE Learning Objective 9-1: Define leadership and distinguish it from management.

The Nature of Leadership Leadership includes the processes and behaviors used by someone, such as a manager, to motivate, inspire, and influence the behaviors of others.

A. Leadership and Management Leadership differs from management in a number of ways: A person can be a manager, a leader, both, or neither. Management focuses primarily on the activities of planning, organizing, leading, and controlling. Leadership, in contrast, is much more closely related to activities such as agenda setting, aligning, inspiring, and monitoring. Organizations need both management and leadership if they are to be effective. Management in conjunction with leadership can help achieve planned orderly change, and leadership in conjunction with management can keep the organization properly aligned with its environment.

B. Leadership and Power Power is the ability to affect the behavior of others. Legitimate Power is power granted through the organizational hierarchy, by rank and position. It is authority. By itself, it does not make someone a leader. Reward Power is the power to give or withhold rewards ranging from salary increases to praise to interesting job assignments. If the subordinate values only formal organizational rewards, the manager is not a leader; if the subordinate values informal rewards such as praise and recognition, the manager is showing leadership. Coercive Power is the power to force compliance by means of psychological, emotional, or physical threat. It is accepted that these are not appropriate managerial behaviors, and a manager using this kind of power is likely to provoke resentment and hostility, and is less likely to be seen as a leader. Referent Power is power based on identification, imitation, loyalty, or charisma.

This is abstract and based on followers identifying in some way with a leader, who may be like them in personality, background, or attitudes. Charisma is an intangible attribute that attracts loyalty and enthusiasm. Expert Power is power derived from information or expertise. The more important the information and the fewer the people who have access to it, the greater is the degree of expert power possessed by any one individual. Generally, people who are both leaders and managers tend to have large amount of expert power.

QUICK QUESTION 

What distinguishes leadership from management? In other words, can someone be a manager and not a leader, or a leader and not a manager?

Use In-Class Activity 1: Icebreaker: Are You a Leader or a Manager?

Time Limit: 20 minutes

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9-3

Learning Objective 9-2: Summarize early approaches to the study of leadership.

Early Approaches to Leadership A. Trait Approaches to Leadership The trait approach to leadership focuses on identifying the essential leadership traits in individuals. Although the trait approach was all but abandoned several decades ago, in recent years, it has resurfaced. A limited list of traits includes emotional intelligence, mental intelligence, drive, motivation, honesty and integrity, self-confidence, knowledge of the business, and charisma. It is still undetermined whether these traits relate to leadership.

B. Behavioral Approaches to Leadership The behavioral approach to leadership focused on the behaviors employed by effective leaders; this research led to the identification of two basic forms of leader behavior: taskfocused leader behavior, which occurs when a leader focuses on how tasks should be performed in order to meet certain goals and performance standards; and employee-focused leader behavior, which occurs when a leader focuses on the satisfaction, motivation, and well-being of employees.

KEY TEACHING TIPS Students often confuse the various approaches to leadership. Remind them that the trait approach focuses on identifying traits that indicate leadership ability, including intelligence, dominance, self-confidence, energy, activity, and knowledge.

Remind students to keep the behavioral approach to leadership separate from the trait approach.

The behavioral approach focuses on behaviors used by effective leaders and can include taskfocused behaviors, employee-focused behaviors, or a combination depending on the situation.

QUICK QUESTIONS 

What is the difference between task-focused leader behavior and employee-focused leader behavior?



The trait approach was all but abandoned several decades ago. Why?

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9-4

Learning Objective 9-3: Discuss the concept of situational approaches to leadership.

The Situational Approach to Leadership The situational approach to leadership assumes that appropriate leader behavior varies from one situation to another. It attempts to identify various forms of leader behavior that result in contingent (they depend on elements of the situation and characteristics of both the leader and followers) outcomes and consequences.

Leadership characteristics considered include:  The manager’s value system  Confidence in subordinates  Personal inclinations  Feelings of security  Actual behaviors Then, subordinate characteristics include:  Subordinates’ need for independence  Readiness to assume responsibility  Tolerance for ambiguity  Level of interest in the problem  Understanding of goals  Level of knowledge, experience, and expectations Situational characteristics that affect decision making include:  The type of organization  Group effectiveness  The problem itself  Time pressures Three important situational approaches to leadership are (1) the path–goal theory, (2) the decision tree approach, and (3) the leader–member exchange model. The path–goal theory is an extension of the expectancy theory of motivation and suggests that the primary functions of a leader are to make valued or desired rewards available in the workplace and to clarify for the subordinate the kinds of behavior that will lead to goal accomplishment and valued rewards. The leader should clarify the paths to goal attainment. The decision tree approach concerns itself with only subordinate participation in decision making and assumes that the degree to which subordinates should be encouraged to participate depends on the situation. The leader–member exchange (LMX) model stresses the importance of variable relationships between supervisors and each of their subordinates. It focuses on the different relationships leaders often establish with different subordinates.

QUICK QUESTION 

The situational approach suggests that leaders can vary their use of authority to fit the situation. What are some situational characteristics that affect decision making?

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9-5

Learning Objective 9-4: Describe transformational and charismatic perspectives on leadership.

Leadership Through the Eyes of Followers Another recent perspective that has been adopted by some leadership experts focuses on how leaders are seen through the eyes of their followers.

A. Transformational Leadership Transformational leadership focuses on the importance of leading for change; it is the set of abilities that allows a leader to recognize the need for change, to create a vision to guide that change, and to execute the change effectively. Transactional leadership is essentially the same as management in that it involves routine, regimented activities. Only highly skilled leaders tend to be able to succeed in both transactional and transformational realms.

B. Charismatic Leadership Charismatic leadership is a type of influence based on a leader’s personal charisma; charismatic leaders are likely to have a lot of self-confidence, confidence in their beliefs and ideals, and a strong need to influence people. Charismatic leaders: 1. Envision likely future trends, set high expectations for themselves and others, and behave in ways that meet or exceed those expectations 2. Energize others by demonstrating personal excitement and confidence and consistent patterns of success 3. Enable others by supporting them, empathizing with them, and expressing confidence in them

KEY TEACHING TIPS 

Remind students that a few leaders are able to adopt either transformational or transactional perspectives, depending on their circumstances; others are able to do one or the other, but not both.



Point out to students that someone with charisma is more likely to influence others than someone without charisma.



It is worth noting that taking over a leadership role from someone who is highly charismatic is a challenge and early positive results are important for them to gain credibility.

QUICK QUESTION What kind of leader are you?

Use In-Class Activity 2: Small Group Discussion: Transformational vs. Transactional Leadership

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9-6

Time Limit: 20 minutes HOMEWORK Leadership Style Now is a good time to assign Application Exercise 9-10 from the end-of-chapter materials as homework. This assignment gives students a chance to further research Richard Branson’s leadership style and to understand and evaluate his style and effectiveness of leadership.

At-Home Completion Time: 45 minutes

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9-7

Learning Objective 9-5: Identify and discuss leadership substitutes and neutralizers.

Special Issues in Leadership A. Leadership Substitutes Leadership substitutes are individual, task, and organizational characteristics that tend to outweigh the need for a leader to initiate or direct employee performance. In other words, when certain individual abilities, experiences, training, knowledge, motivation, and/or professionalism are present, people can perform well without a designated leader. An ER specialist knows what to do whether a leader is present or not.

B. Leadership Neutralizers Leadership neutralizers are factors that may render certain leadership behaviors ineffective.

Examples of leadership neutralizers include long-standing norms, group cohesiveness, elements of the job, and organizational factors. An example would be an inexperienced leader assigned to a very experienced group with long-standing performance norms and high group cohesiveness. Another example might be a worker on an assembly line—he or she can only work as fast as the belt moves and motivational attempts on behalf of leaders cannot necessarily change production rates, although such leadership might be able to reduce errors and absenteeism.

KEY TEACHING TIP Students often confuse leadership substitutes and leadership neutralizers. Leadership neutralizers are factors that can render various leadership behaviors ineffective. Leadership substitutes are characteristics that tend to outweigh the need for a leader to initiate or direct employee performance, meaning that sometimes, employees will perform their jobs capably without the direction of a leader.

QUICK QUESTIONS 

What are some examples of possible leadership neutralizers?



Leadership substitutes are characteristics that outweigh the need for a leader to initiate or direct employee performance. What are some examples of leadership substitutes?

Use In-Class Activity 3: Up for Debate: Substitutes and Neutralizers.

Time Limit: 30 minutes

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9-8

Learning Objective 9-6: Discuss leaders as coaches and examine gender and cross-cultural issues in leadership.

The Changing Nature of Leadership A. Leaders as Coaches Many organizations are becoming less hierarchical, changing the role of the leader from “overseer” to “coach.” The leader would help select and train team members and other new employees, provide some general direction, and help the team get the information and other resources it needs. Mentors help less-experienced employees learn the ropes and better prepare them to advance within the organization. The leader keeps a low profile and lets the group get its work done with little or no direct oversight, just as a coach would do during a game.

B. Gender and Leadership Contrary to stereotypes, female leaders are not necessarily more nurturing or supportive than male leaders; and male leaders are not systematically harsher, controlling, or task-focused than female leaders. Females do tend to be more democratic in making decisions; males tend to be more autocratic.

C. Cross-Cultural Leadership Culture encompasses both international differences and diversity-based differences within one culture. Cross-cultural factors play a growing role in organizations as their workforces become more diverse. Collectivism places the group before the individual while individualism places the individual before the group.

KEY TEACHING TIP Students often remember that culture refers to international differences among people, but they often forget that culture also includes diversity-based differences within one culture.

QUICK QUESTIONS 

Is the United States a collectivist culture or an individualist culture?



“...this new role for a leader is to become a coach, rather than an overseer.” Explain this statement. What has brought about this change in leadership focus?



Do men and women tend to lead differently? If so, how?

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9-9

HOMEWORK Evaluate a Leader Now might be a good time to assign Application Exercise 9-9 from the end-of-chapter materials as homework. The assignment asks students to consider the challenges facing members of minority groups in succeeding as leaders.

At-Home Completion Time: 1 hour

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9-10

Learning Objective 9-7: Describe strategic leadership, ethical leadership, and virtual leadership.

Emerging Issues in Leadership A. Strategic Leadership Strategic leadership is a leader’s ability to understand the complexities of both the organization and its environment, and to lead change in the organization so as to enhance its competitiveness.

B. Ethical Leadership Ethical leadership is a leader’s ability to maintain high ethical standards for his or her own conduct, to unfailingly exhibit ethical behavior, and to hold others in the organization to the same standards.

C. Virtual Leadership Virtual leadership refers to leadership that is exhibited when leaders and their employees work in locations that are far from one another.

QUICK QUESTIONS 

Virtual leadership involves managing employees who work in different locations than the manager. What are some advantages and disadvantages of virtual leadership from the manager’s perspective? How can a manager show leadership in this kind of environment?

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9-11

Learning Objective 9-8: Relate leadership to decision making and discuss both rational and behavioral perspectives on decision making.

Leadership, Management, and Decision Making Decision making—choosing one alternative from among several options—is a critical management skill.

A. The Nature of Decision Making Decision making is the act of choosing one alternative from among a set of alternatives. The decision-making process includes recognizing and defining the nature of a decision situation, identifying alternatives, choosing the “best” alternative, and putting it into practice.

1. Types of Decisions. Managers must make many different types of decisions. In general, however, most decisions fall into one of two categories: programmed and nonprogrammed. A programmed decision is one that is relatively structured or recurs with some frequency (or both). Nonprogrammed decisions, on the other hand, are relatively unstructured and occur much less often.

2. Decision-Making Conditions. Just as there are different kinds of decisions, there are also different conditions in which decisions must be made. State of Certainty is when the decision maker knows with reasonable certainty what the alternatives are and what conditions are associated with each alternative. State of Risk is when the availability of each alternative and its potential payoffs and costs are all associated with probability estimates. State of Uncertainty is when the decision maker does not know all the alternatives, the risks associated with each, or the likely consequences of each alternative.

B. Rational Decision Making There are a number of steps in the rational decision-making process.

1. Recognizing and Defining the Decision Situation. Step one is to recognize that a decision is necessary. A stimulus or spark must initiate the process; managers must define the problem.

2. Identifying Alternatives. Alternative courses of effective action must be developed; the more important the decision, the more attention is directed to developing alternatives.

Developing both obvious, standard alternatives and creative, innovative alternatives is useful.

3. Evaluating Alternatives. Managers must weigh the pros and cons and the feasibility of all alternatives to the problem. Managers must thoroughly evaluate all the alternatives to increase the chances that the alternative chosen will be successful.

4. Selecting the Best Alternative. While many situations do not lend themselves to objective, mathematical analysis, managers and leaders can develop subjective estimates

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9-12

and weights for choosing an alternative. Finding multiple acceptable alternatives may be possible; selecting just one alternative and rejecting all the others might not be necessary.

5. Implementing the Chosen Alternative. Implementation is sometimes fairly easy, but frequently is more difficult than anticipated. There is potential resistance at various stages of an implementation process, for reasons including insecurity, inconvenience, and fear of the unknown. Unanticipated consequences are possible; unexpected factors may develop.

6. Following Up and Evaluating the Results. Managers should make sure that the chosen alternative has served its original purpose. Several responses are available, if it is not working as expected, and range from redefining the problem to implementing previously disregarded alternatives.

C. Behavioral Aspects of Decision Making While approaching decision situations logically is ideal, frequently decisions made with little regard for logic can turn out to be correct. Several ingredients in how these forces work are behavioral aspects of decision making.

1. Political Forces in Decision Making. Political forces contribute to the behavioral nature of decision making. A coalition is an informal alliance of individuals or groups formed to achieve a common goal.

2. Intuition. Intuition is an innate belief about something, often without conscious consideration. Intuition is often thought of as a “hunch.” While not as arbitrary as that sounds, it is actually based on experience and practice in making decisions in similar situations.

3. Escalation of Commitment. Escalation of commitment occurs when managers become so committed to the course of action they have chosen that they stay with it, even when it appears to have been wrong.

4. Risk Propensity and Decision Making. Risk propensity is the extent to which a decision maker is willing to gamble when making a decision. Conservative managers are cautious and more likely to avoid mistakes or big losses. More aggressive managers may achieve big successes, but are also more likely to incur greater losses.

KEY TEACHING TIPS 

Remind students that they often engage in rational decision making, which occurs when a manager makes a decision by selecting and implementing a “best” alternative.



A coalition is an informal alliance of individuals or groups formed to achieve a common goal; point out that this goal is often a preferred decision alternative.

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9-13



Remind students that when they have a “hunch,” it is intuition, which is an innate belief about something, often without conscious consideration.



Point out that every individual has a varying level of risk propensity, which is the extent to which a person is willing to gamble when making a decision.

QUICK QUESTIONS 

What are some typical constraints that can limit the identification of alternatives?



If an alternative appears not to be working, what are the manager’s options?



For what types of decisions would the rational decision-making model apply? Why?



Escalation of commitment involves selecting a course of action and then becoming so committed to it that managers stay with it, even when it appears to be wrong. Why do some managers stay with a course of action even when they know it to be wrong?

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9-14

IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Are You a Leader or a Manager?

Activity Overview: This activity provides students with a chance to interview a classmate, then discuss their own leadership potential with that classmate.

Time Limit: 20 minutes What to Do: 1. After reviewing the differences between “managers” and “leaders,” ask students to think about their own leadership and management potential. Assign each student to a partner, asking each one to briefly interview the other to find out how each would assess his or her own management and leadership potential. (10 minutes) 2. Reassemble the class and ask for volunteers who are willing to share any information about their own personal assessments and/or introduce their interviewee to discuss some of the topics discussed in the interview. (10 minutes) Don’t Forget: Some students will already have some managerial/leadership experience upon which to draw.

For those who don’t, ask them to consider a situation where they have been able to display management or leadership qualities (in a school club, sports team, or a circle of friends, for example); or, ask them to identify characteristics and behaviors in their own bosses that they admire, and then assess whether they could emulate those behaviors and characteristics. This may help them to better distinguish their leadership potential from their management potential.

Wrap-Up: Wrap up the discussion by reminding students that some managers are both leaders and managers.

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9-15

In-Class Activity 2: Small Group Discussion: Transformational vs.

Transactional Leadership Activity Overview: This activity asks students to assess the leadership characteristics of selected leaders, identifying transformational and transactional characteristics among them.

Time Limit: 20 minutes What to Do: 1. Divide the class into small groups and ask each group to come up with a business or political leader with whom all are familiar. Based on the leader selected, each group should identify their selected leader as being either transformational or transactional. (10 minutes) 2. Reassemble the class as a whole to discuss each group’s input. (10 minutes) Don’t Forget: People can perceive leadership differently. Groups should make their assessments based on the descriptions of transactional and transformational leadership given in the textbook.

Wrap-Up: Bring the activity to a close by providing a quick overview of both types of leadership, identifying some cited leadership characteristics from the groups’ discussions for further definition.

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9-16

In-Class Activity 3: Up for Debate: Substitutes and Neutralizers Activity Overview: This activity asks students to assess the effects of leadership substitutes and neutralizers on a familiar leadership role.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups to discuss the scenario of a substitute teacher for the class being assigned to lead. What kinds of leadership issues might arise? What kind of leadership substitutes and neutralizers would the substitute face? (10 minutes) 2. Ask the class as a whole to discuss their ideas. (20 minutes) Don’t Forget: Stepping into a business role might involve any number of alternatives to leadership.

Wrap-Up: Bring the activity to a close by discussing how leadership neutralizers and substitutes arise in other places of business.

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9-17

ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 9-1. How do you distinguish between reward power and coercive power?

Reward power is the ability to give or withhold rewards. A manager may control rewards like salary increases, bonuses, promotion recommendations, praise and recognition, and interesting job assignments. In general, the greater the number of rewards a manager controls and the more important these rewards are to subordinates, the greater is the manager’s reward power. Coercive power is exercised by forcing compliance by using psychological, emotional, or physical threats. Physical coercion in organizations was once relatively common. In most organizations today, however, coercion is limited to verbal and written reprimands, disciplinary layoffs, fines, demotions, and terminations. (Learning Objective 1 – AACSB – application of knowledge) 9-2. What are the basic premises underlying the trait approach to leadership?

The trait approach to leadership focuses on identifying specific leadership traits that may indicate one’s leadership potential. The premise was that leaders had certain traits in common and that evaluating someone based on their possession and strength of those traits would be a good indicator of someone’s leadership potential. (Learning Objective 9-2—AACSB— application of knowledge) 9-3. What are organizational factors in the context of leadership substitutes and neutralizers?

Organizational factors include explicit plans and goals, rigid rules and procedures, rigid reward systems that are not tied to performance, and physical distance between the supervisor and the subordinate. (Learning Objective 5 – AACSB – application of knowledge) 9-4. List and briefly explain the behavioral aspects of decision-making.

The behavioral aspects of decision-making: 1. Political forces can contribute to the behavioral nature of decision-making. A coalition is an informal alliance of individuals or groups that is formed to achieve a common goal.

2. Intuition is an innate belief about something, which often occurs without conscious consideration. Intuition is often based on experience and practice in making similar decisions.

3. Escalation of commitment occurs when managers become so committed to their chosen course of action that they stay with it, even when it seems wrong.

4. Risk propensity is the extent to which a decision-maker is willing to gamble when making a decision. Conservative managers are cautious and more likely to avoid mistakes or big losses. More aggressive managers may achieve big successes but are also more

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9-18

likely to incur greater losses. (Learning Objective 8 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 9-5. Which type or types of leadership power does your current supervisor exercise?

Legitimate Power is granted through the organizational hierarchy. Reward Power is the power to give or withhold rewards. Coercive Power is the power to force compliance by means of psychological, emotional, or physical threat. Referent Power is the power based on identification, imitation, loyalty, or charisma. Expert Power is the power derived from information or expertise. (Learning Objective 9-1—AACSB—application of knowledge, analytical thinking) 9-6. When is task-focused leader behavior most important? When is it more important for a leader to exhibit employee-focused behavior?

Students should discuss various scenarios where the leader needs to initiate or direct employee performance and focus on the task. They should also discuss various leadership neutralizers, which render task leadership behaviors ineffective, such as dealing with professionals and other highly skilled employees. (Learning Objective 9-5—AACSB— application of knowledge) 9-7. Give a current example of a virtual leader. As a potential “follower” in a virtual leadership situation, what issues would be of most concern to you? What would the issues be from the perspective of the “leader” role in such a situation?

There are a number of concerns that followers typically have in virtual organizations. One concern is making sure instructions are clearly understood. In the absence of nonverbal communication, it is sometimes difficult to assess the relative importance of different tasks.

The second problem is loneliness and isolation. Research is showing that people who work from home sometimes feel isolated from the daily interactions that typically take place in organizations. One problem for the leaders of virtual organizations is that they must work harder to develop a positive work culture. Team leaders may not know their team members personally and this may make appropriate task assignments more difficult.

(Learning Objective 9-7—AACSB—application of knowledge) 9-8. Identify a leader who you believe exhibits charismatic leadership. What are the behaviors that support your choice?

Answers will vary but will focus on the behavioral characteristics of the leaders such as selfconfidence, outgoing personality, and the need to influence people. (Learning Objective 94—AACSB—application of knowledge)

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9-19

APPLICATION EXERCISES 9-9. Overwhelmingly, the CEOs of the largest companies in the United States are white males, but women and people of color are making inroads. Identify one or more leaders who are not white, middle-aged males, and describe the challenges they face as well as strategies or traits that make them successful.

Answers will vary but will focus on the behavioral aspects of political forces and coalitions, intuition, escalation of commitment, and risk propensity that especially impacts minority leaders. (Learning Objective 9-6—AACSB—application of knowledge) 9-10. Sir Richard Branson is one of the wealthiest citizens of the United Kingdom. According to Forbes, in 2023, he had an estimated net worth of about $3 billion and has owned 400 companies under his Virgin conglomerate. Based on a bit of research, how would you classify Branson’s leadership style? What are the pros and cons of his leadership style?

Would you want to work for Branson as part of his management team? Why or why not?

There will be a range of answers with some students describing Branson’s leadership style in terms of his behaviors; other answers will focus on his decision-making style, and still others will focus on his gender and its impact on his decisions. Students’ thoughts on his effectiveness will depend on their perspectives on the ethics of his decisions and whether they agree with them. (Learning Objective 9-4—AACSB—reflective thinking, analytical thinking)

BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 9-11 TO 9-15 (Learning Objectives 9-2, 9-3, 9-4, 9-5—AACSB—interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Answers will be determined by the type of business (brick and mortar, e-commerce, etc.), the team’s perspective on the role the leader needs to play, each team member’s preferred leadership style, the number and type of employees, the skills and experience levels of the employees, etc.

When answering these questions, the students should be reminded of the type of traits/skills and decisions the leader might need to possess: 1: Communication; 2: Financial; 3: Strategic/tactical decisions; 4: Ethical; 5: Interpersonal; 6: Vision; and so on.

TEAM EXERCISE: EXCITING FUTURE 9-16 TO 9-19 (Learning Objectives 9-3, 9-4, 9-5, and 9-8 – AACSB – ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking) The Situation WHC Solutions are CEO recruitment specialists based in Dubai. They have offices in nine capital cities and earn commissions by identifying and securing the services of some of the best talent in the world to run major organizations. After several years of organic growth, the three

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original partners in the company have decided to accept a major investment company’s offer to help them expand. The partners have asked you to come in as a consultant and explain to the representatives of the investment company how WHC Solutions uses leadership theory to help them identify ideal characteristics of future CEOs. WHC Solutions wants you to lead the research and presentation as an objective outsider to ensure that the investment company is not overwhelmed with excessive jargon and understands what is involved.

Team Activity Assemble teams of four students and assign each group member one of the following approaches to leadership:    

Leader–member exchange (LMX) model Path–goal theory Task-focused leader Employee-focused leader

ACTION STEPS 9-16. What are the most important aspects of the leadership approach? How can it be used to identify outstanding leaders capable of becoming CEOs? 9-17. Assemble your team and share your assignment perspectives. Make sure you define each approach, outline the strategy, and tie it back to the facts of the case.

9-18. As a group, develop a list of advantages and disadvantages for each approach.

9-19. As a group, select the most appropriate leadership style and develop a justification for that decision.

This exercise should encourage a thoughtful discussion on the nature of leadership, responsibilities of a leader, the decision-making process, and the impact a leader’s personality has on an organization’s motivational strategy.

EXERCISING YOUR ETHICS: TUNNEL VISION (Learning Objective 9-8– AACSB – ethical understanding and reasoning, reflective thinking) The Situation On a wet October day, rainwater poured into a subway tunnel near one of the stations and submerged the tracks. The incident brought the subway line to a standstill for over 24 hours and directly affected the lives of over 300,000 commuters.

Incident reports suggested that the cause was faulty float switches that were used to control the pumping systems. When the float switches were submerged, the pumps should have started working, but the switches were coated in thick mud and the anti-storm pits were full of waste and

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debris. The blame fell immediately on the maintenance company since the float switches were supposed to be checked every week. Sure enough, the checklist had a scrawled (and indecipherable) signature dated two days before the incident. The maintenance company claimed that the floats must have been inundated with mud and debris in the 48 hours since the maintenance check and that it was not their fault.

At that point, a spot check on another set of float switches on a different line in the subway system uncovered a checklist that had been signed and dated no less than eight weeks in advance. The operative had already signed and dated a check that was to be carried out in January of the next year.

The Dilemma The maintenance company knew that they were in trouble. They had reduced one-third of their staff in the past two years, so it was inevitable that corners would be cut. In fact, the cornercutting had been unofficially approved at the board level. The decision to “sign ahead” and make “random and irregular checks” was made by the operations director after he was informed that his budget had been cut by another 15 percent. The maintenance company was tied to the contract with the subway operators for another five years and was losing at least US$2.6 million a year. They had not read the fine print in the contract, according to which they were committed to maintaining two new lines that would come into service during the contract period.

QUESTIONS TO ADDRESS 9-20. What are the ethical issues in this case?

9-21. What do you think most managers would do in this situation?

9-22. What would you do to make sure this never happened again?

This exercise should encourage a thoughtful discussion on the responsibilities of managers, the importance of the process of compliance, and the ownership of tasks.

CASES: TRANSFORMATIONAL LEADERSHIP (Learning Objectives 9-3 and 9-4, 9-6, and 9-7—AACSB—analytical thinking, application of knowledge) 9-23. What personal traits does Rihanna possess that identify her as a leader?

Students may mention empathy, emotional and mental intelligence, self-confidence, energy, activity, and knowledge, and likely, charisma.

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9-24. Do you think anyone could adopt Rihanna’s leadership style and be as successful? Why or why not?

Student answers will vary but should address Rihanna’s apparent authenticity. It would be hard to fake this leadership style.

9-25. Do you believe that Rihanna’s gender played a part in her success? Why or why not?

To an extent, anyone’s gender will affect their leadership style, in the same way that their experience, education, and background will also be factors. Gender will play a large role in shaping leadership, as it shapes a person’s whole life experience. Students should recognize this and consider how gender affects their own perceptions of leadership and leadership characteristics in explaining their answers.

9-26. What are three important lessons from Rihanna’s rise to fame?

Answers will vary depending on the students’ perspectives and experiences. Lessons to take away may include her willingness to take risks and to adapt, her interactions with fans, her understanding the importance of fostering innovation and enthusiasm, and her general understanding of what leadership actually means and how to show it.

THE MAN BEHIND THE GENIUS (Learning Objectives 9-1, 9-4, 9-7, 9-8—AACSB—analytical thinking, application of knowledge) 9-27. Do you think Steve Jobs was a charismatic leader? What leads you to this conclusion?

Most students will think that Steve Jobs was a charismatic leader, citing various behavioral characteristics such as confidence, desire for excellence, intelligence, among others.

9-28. Jobs enjoyed almost cultlike loyalty among his employees. Why do you think people clamored to work for Apple under Jobs’s leadership?

Answers will vary but many students will cite the challenge and excitement of working with a ground-breaking leader such as Jobs.

9-29. What challenges face employees working for a leader such as Jobs?

Answers will vary but most students will probably focus on Steve Jobs’s high standards, drive, perfectionism, and lack of compassion.

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9-30. Describe Jobs with respect to intuition, escalation of commitment, and risk propensity.

Again, answers will vary with most students seeing Jobs as an extremely confident, intuitive risk taker, and someone who was absolutely certain when he made up his mind about something.

9-31. Do you think that you would have enjoyed working for Apple during Jobs’s leadership?

Why or why not?

Answers will vary depending on students’ own comfort with the traits they observe that Steve Jobs possessed as a leader and what he demanded of Apple employees relative to their confidence in their ability to meet his standards.

9-32. How does a leader differ from a manager? Describe the situational approach to leadership and three major theories within this category. How would the path-goal theory help you identify the most appropriate leadership style in a situation?

Managers focus primarily on planning, organization, leading, and controlling, while leaders concentrate on agenda setting, aligning, inspiring, and monitoring. While there can be overlap, each is a discrete set of activities.

The situational approach to leadership assumes that appropriate leader behavior varies from one situation to another. It attempts to identify forms of leader behavior that result in contingent outcomes and consequences. The path–goal theory suggests that the primary functions of a leader are to make valued or desired rewards available in the workplace and to clarify for the subordinate the kinds of behavior that will lead to goal accomplishment and valued rewards. The decision tree approach concerns itself solely with the level of subordinate participation appropriate to a situation. The leader–member exchange model stresses the importance of different relationships between supervisors and each of their subordinates.

Path–goal theory identifies four kinds of behaviors that leaders can use, depending on the situation. Directive leader behavior lets subordinates know what is expected of them, gives guidance and direction, and schedules work. Supportive leader behavior is being friendly and approachable, showing concern for subordinates’ welfare, and treating members as equals.

Participative leader behavior includes consulting with subordinates, soliciting suggestions, and allowing participation in decision making. Achievement-oriented leader behavior sets challenging goals, expects subordinates to perform at high levels, encourages subordinates, and shows confidence in subordinates’ abilities.

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Chapter 10: Human Resource Management and Labor Relations Chapter Overview Human resource management involves a steady stream of activities. An HR manager’s job revolves around a set of functions including HR planning, staffing, developing employees, appraisal, and compensation and benefits.

This chapter covers each of these functions, including how managers plan for their organization’s HR needs and ways in which organizations select, develop, and appraise employee performance. The chapter also describes the main components of a compensation system and some of the legal issues involved in hiring, compensating, and managing workers. Finally, the chapter discusses workforce diversity, the management of knowledge workers, the use of a contingent workforce, and why workers organize into labor unions.

A career in HR management can be rewarding, but given the dynamic nature of the external environment, keeping abreast of changes and incorporating those necessary changes into these HR management functions is also challenging.

Learning Objectives 10-1. Define human resource management, discuss its strategic significance, and explain how managers plan for their organization’s human resource needs.

10-2. Discuss the legal context of human resource management and identify contemporary legal issues.

10-3. Identify the steps in staffing a company and discuss ways in which organizations recruit and select new employees.

10-4. Describe the main components of a compensation and benefits system.

10-5. Describe how managers develop the workforce in their organization through training and performance appraisal.

10-6. Discuss workforce diversity, the management of knowledge workers, and the use of a contingent workforce as important changes in the contemporary workplace.

10-7. Explain why workers organize into labor unions and describe the collective bargaining process.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: Writing a Job Description 2. Up for Debate: Performing Appraisals, Laying It On the Line 3. Small Group Discussion: What Motivates Employees?

Description Students write a job description for both the instructor’s job and the student’s job.

Students are divided into teams to discuss the steps involved in determining whether to fire someone.

Students consider what incentives might motivate workers.

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Time Limit

45 min.

30 min.

30 min.

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CHAPTER OUTLINE Learning Objective 10-1: Define human resource management, discuss its strategic significance, and explain how managers plan for their organization’s human resource needs.

The Foundations of Human Resource Management Human resource management (HRM) is the set of organizational activities directed at attracting, developing, and maintaining an effective workforce.

A. The Strategic Importance of HRM Human resources are the people comprising an organization’s workforce. They are critical for effective organizational functioning. The importance of HRM has grown dramatically in the last several years due in part to the recognition that human resources are a valuable means for improving productivity, and today’s awareness of the costs associated with poor human resource management. The effectiveness of HR performance directly impacts the bottom-line performance of the firm.

Human capital reflects the organization’s investment in attracting, retaining, and motivating an effective workforce while talent management recognizes that people represent a portfolio of talents that can be managed and used in ways best targeted to organizational success.

B. HR Planning Human resource planning is the starting point for attracting qualified new employees.

1. Job analysis Job analysis is a systematic analysis of jobs within an organization. The job analysis results in: (a) the job description, which lists the duties and responsibilities of a job; its working conditions; and the tools, materials, equipment, and information used to perform it; and (b) the job specification, which lists the skills, abilities, and other credentials and qualifications needed to perform the job effectively. Job analysis is needed to develop appropriate selection methods, create relevant performance appraisal systems, and set equitable compensation rates.

2. Forecasting HR Demand and Supply Forecasting the supply of labor involves forecasting the internal supply—the number and type of employees who will be in the firm at some future date—and the external supply—the number and type of people who will be available for hiring from the labor market at large. a. Replacement Charts. Replacement charts list each important managerial position, who occupies it, how long that person will probably stay in it before moving on, and who is now qualified or soon will be qualified to move into it. b. Skills Inventories. Employee information systems (skills inventories) contain information on each employee’s education, skills, work experience, and career

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aspirations to aid in identifying qualified employees when a position becomes available. Forecasting the external supply of labor requires information from outside sources, such as state employment commissions, government reports, and figures supplied by colleges on the number of students in major fields.

3. Matching HR Supply and Demand After comparing future demand and internal supply, managers can make plans to manage predicted shortfalls or overstaffing. Hiring new employees, retraining present employees, and investing in productivity-enhancing systems, can help meet shortfalls. Overstaffing can be handled by transferring employees, not replacing employees who quit, encouraging early retirement, and laying off workers. During the Great Recession of 2008–2011, many firms found it necessary to reduce the size of their workforce through layoffs. Others did not reduce their workforce but reduced the number of hours each employee spent at work. The same issues arose during the COVID-19 pandemic that arose in 2020.

KEY TEACHING TIPS 

Remind students that HRM is the set of organizational activities directed at attracting, developing, and maintaining an effective workforce.



Students often confuse these terms: A job description lists what you do in the job, including the duties and responsibilities; a job specification lists the skills and abilities you bring with you to the job.



Remind students that forecasting the supply of labor includes both an internal and external forecast.

QUICK QUESTIONS 

Why has the role of human resource management increased in importance in the last several years?



How can an HR manager benefit from the use of a replacement chart?



How can an HR manager benefit from the use of an employee information system?

Use In-Class Activity 1: Icebreaker: Writing a Job Description Time Limit: 45 minutes

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Learning Objective 10-2: Discuss the legal context of human resource management and identify contemporary legal issues.

The Legal Context of HRM A number of laws regulate various aspects of employee–employer relations, especially in the areas of equal employment opportunity, compensation and benefits, labor relations, and occupational safety and health.

A. Equal Employment Opportunity Title VII of the Civil Rights Act of 1964 forbids discrimination in all areas of the employment relationship. The intent of Title VII is to ensure that employment decisions are made on the basis of an individual’s qualifications rather than on the basis of personal biases.

The Equal Employment Opportunity Commission (EEOC) has responsibility for enforcing Title VII, the Age Discrimination in Employment Act, and the Americans with Disabilities Act. A business with government contracts must have on file a written affirmative action plan—a written statement of how the organization intends to actively recruit, hire, and develop members of underused groups.

B. Compensation and Benefits The Fair Labor Standards Act sets a minimum wage and requires the payment of overtime rates for work in excess of 40 hours per week. The Equal Pay Act of 1963 requires that men and women be paid the same amount for doing the same job. The Employee Retirement Income Security Act (ERISA) of 1974 ensures the financial security of pension funds by regulating how they can be invested. The Family and Medical Leave Act (FMLA) of 1993 requires employers to provide up to 12 weeks of unpaid leave for family and medical emergencies.

C. Labor Relations Union activities and management’s behavior toward unions constitute another heavily regulated area. The National Labor Relations Act (also known as the Wagner Act), passed in 1935, sets up procedures for employees to vote on whether to have a union.

The National Labor Relations Board (NLRB) was established by the Wagner Act to enforce its provisions. Following a series of severe strikes in 1946, the LaborManagement Relations Act (also known as the Taft-Hartley Act) was passed in 1947 to limit union power.

D. Health and Safety The Occupational Safety and Health Act of 1970 holds that every employer must provide a place of employment that is free from hazards that may cause death or serious physical harm.

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E. Other Legal Issues 1. Sexual Harassment Sexual harassment is defined by the EEOC as unwelcome sexual advances in the work environment. The employer is responsible for changing the environment by warning, reprimanding, or firing the harasser. With quid pro quo harassment, the harasser offers to exchange something of value, such as a raise or promotion, for sexual favors. Lewd jokes, unwelcome comments, a work area decorated with inappropriate photographs, and so on constitute a hostile work environment.

Harassment has been expanded to include unwelcome or inappropriate behaviors regarding ethnicity, religion, and age.

2. Employment at Will The concept of employment at will holds that both employer and employee have the mutual right to terminate an employment relationship at any time for any reason, with or without advance notice to the other. However, employees can bring suit based on grounds of wrongful discharge.

3. The Patriot Act In response to the terrorist attacks of September 11, 2001, the U.S. government passed legislation to increase its powers to investigate and prosecute suspected terrorists. The HRM implications are that certain individuals (including ex-convicts and aliens from other countries deemed by the U.S. State Department to have repeatedly provided support for acts of international terrorism) are ineligible to work with potentially dangerous biological agents. Other sections grant government investigators access to previously confidential personal and financial records.

KEY TEACHING TIPS 

Reiterate that protected groups consist of individuals who share characteristics— such as race, color, religion, gender, age, disability status, and national origin—as indicated by a given law.



Reinforce that sexual harassment includes (a) quid pro quo, in which the harasser offers something of value for sexual favors, and (b) hostile work environment, in which lewd behavior displayed by another employee is offensive. Also, remind students that harassment definitions have been broadened to include age, religious, and ethnic harassment.

QUICK QUESTIONS  

What is the purpose of an affirmative action plan?

What does OSHA guarantee?

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Learning Objective 10-3: Identify the steps in staffing a company and discuss ways in which organizations recruit and select new employees.

Staffing the Organization When managers have determined that new employees are needed and understand the legal context in which they operate, they can then turn their attention to recruiting and hiring the right mix of people.

A. Recruiting Employees Recruiting is the process of attracting qualified persons to apply for the jobs that are open.

1. Internal Recruiting Internal recruiting means considering present employees as candidates for openings.

2. External Recruiting External recruiting involves attracting people outside of the organization to apply for jobs. Recruiting decisions go both ways. While the organization is recruiting an employee, the prospective employee is also selecting a job.

Since hiring the wrong employee can be a costly error, companies look to strive for a good person-job fit. One tool used is the realistic job preview that provides the applicant with a real picture of what performing the available job would be like.

B. Selecting Employees The intent of the selection process is to gather from applicants the information that will predict their job success and then to hire the candidates likely to be most successful.

1. Application Forms An application form is a method of gathering information about the applicant’s work history, educational background, and other job-related data.

2. Tests Tests of ability, skill, aptitude, or knowledge relevant to a particular job are usually the best predictors of job success, although tests of general intelligence or personality are occasionally useful as well.

3. Interviews In a structured interview, questions are written in advance, and all interviewers follow the same question list with each candidate; in an unstructured interview, questions vary with the candidates’ backgrounds.

4. Other Techniques Organizations often require applicants to take physical exams and drug tests. Some

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organizations also run background checks on prospective employees.

KEY TEACHING TIPS 

Remind students that new employees are found both internally and externally in the recruitment process.



Remind students that all applicant information gathered in the selection process can be used to predict job success.

QUICK QUESTIONS 

What are the benefits and drawbacks of internal recruiting? External recruiting?



When do you think tests are useful in the selection process?



Why are interviews sometimes a poor predictor of job success? In what way(s) might an interview be an accurate predictor of job success?

HOMEWORK Interview a Manager Now might be a good time to assign Application Exercise 10-10 from the end-of-chapter materials as homework. This assignment asks students to interview someone familiar with a company’s current hiring processes about the recruitment and selection process at the company.

At-Home Completion Time: 1 hour

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Learning Objective 10-4: Describe the main components of a compensation and benefits system.

Compensation and Benefits A major factor in retaining skilled workers is a company’s compensation system—the total package of rewards that it offers employees in return for their contributions to the organization’s mission.

A. Wages and Salaries Wages are paid for time worked. A salary is an amount paid per month or year for performing a job. Companies may set wages and salaries by looking at competitors’ rates. In addition, firms must decide how their wage and salary levels will compare for different jobs.

B. Incentive Programs Incentive programs are special pay programs designed to motivate high performance. A bonus may be awarded to employees upon their reaching a sales quota or performance goal. Merit salary systems link raises to performance levels in nonsales jobs. Pay-for-performance (or variable pay) goes to middle managers for especially productive output with earnings that significantly exceed the cost of bonuses.

1. Company-Wide Incentives. These programs apply to all employees in a firm. In profit-sharing plans, a firm’s profits earned above a certain level are distributed to employees. Gainsharing plans distribute bonuses to employees when a firm’s costs are reduced through greater work efficiency. Pay-for-knowledge plans distribute pay to workers who learn new skills and become proficient at different jobs.

C. Benefits Programs Benefits are compensation other than wages and salaries, including health, disability, and life insurance, and paid vacations and holidays. Most companies are required by law to provide Social Security retirement benefits and workers’ compensation insurance (insurance for compensating workers injured on the job).

Many public companies allow employees to use payroll deductions to buy stock at discounted prices. Counseling services, on-site childcare centers, and reduced fees at gyms are other types of benefits increasingly being offered.

1. Retirement Plans. Retirement plans are set up to pay pensions to workers when they retire. Contributions are made either totally by the company or by both the company and the employee. In recent years more companies have run into problems because they have not set aside enough money to cover the retirement funds for their workers. Some major companies have stopped contributing toward retirement accounts while others have transitioned employees to riskier 401(k) plans.

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2. Containing the Costs of Benefits. To contain the costs of benefits, employees can select from a variety of benefit alternatives in what is known as a cafeteria benefits plan. A certain dollar amount of benefits per employee is set aside so that each employee can choose from a variety of alternatives.

KEY TEACHING TIPS 

Point out that a compensation system includes more than just wages and salaries; it includes incentives and employee benefit programs.



Students often confuse the types of incentive plans: Profit-sharing plans distribute profits earned above a certain level to employees; gainsharing plans distribute bonuses to employees who achieve greater work efficiency; and pay-for-knowledge plans encourage workers to learn new skills.

QUICK QUESTIONS 

In what way(s) is variable pay a better motivator than a merit raise?



How can an organization benefit from offering incentive programs to its employees?



How does a cafeteria benefit plan allow a company to cut costs?

Use In-Class Activity 3: Small Group Discussion: What Motivates Employees?

Time Limit: 30 minutes

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10-10

Learning Objective 10-5: Describe how managers develop the workforce in their organization through training and performance appraisal.

Developing the Workforce A. Training and Development Training usually refers to teaching operational or technical employees how to do the job for which they were hired. Development refers to teaching managers and professionals the skills needed for present and future jobs and includes improved decision making, strategic leadership, and more.

1. Assessing Training Needs The first step in developing a training plan is to determine what needs exist. Not all performance issues are due to lack of training; motivation, poor equipment, or poor supervision may also be at fault. As training programs are being developed, the manager should set specific and measurable goals specifying what participants are to learn. Managers should also plan to evaluate the training program after employees complete it.

2. Common Training Methods After a company hires new employees, it must acquaint them with the firm and their new jobs. Lectures, readings, role-playing, practice using tools and materials, and web-based activities are among the methods of training. The purpose of the training and the content being provided will determine the preferred training method(s).

When employees must learn a physical skill, methods allowing practice or the actual use of tools and materials are needed, as in on-the-job training. Vestibule training focuses on safety, learning, and feedback, rather than on productivity.

3. Evaluation of Training Typical evaluation approaches include measuring one or more relevant criteria (such as attitudes or performance) before and after the training, and determining whether the criteria changed as a result of the training and development. Trainees may say that they enjoyed the training and learned a lot, but the true test is whether their job performance improves after their training.

B. Performance Appraisal Performance appraisals are designed to show workers precisely how well they are doing their jobs. Employees’ performances should be evaluated regularly for many reasons. One reason is that a performance appraisal may be necessary for validating selection devices or assessing the impact of training programs. A second, administrative reason is to aid in making decisions about pay raises, promotions, and training. Still another reason is to provide feedback to employees to help them improve their current performance and plan their future careers.

Because performance evaluations often help determine wages and promotions, they must be fair and nondiscriminatory. In the case of appraisals, managers use content

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10-11

validation to show that the appraisal system accurately measures performance on important job elements and does not measure traits or behavior that are irrelevant to job performance.

1. Common Appraisal Methods Two basic categories of appraisal methods commonly used in organizations are objective methods and judgmental methods. Objective measures of performance include actual output (number of units produced), scrap rate, dollar volume of sales, and number of claims processed. Judgmental methods, including ranking and rating techniques, are the most common way to measure performance, though they have flaws.

2. Errors in Performance Appraisal Errors or biases can occur in any kind of rating or ranking system. One common problem is recency error, the tendency to base judgments on the subordinate’s most recent performance because it is most easily recalled. But an appraisal is meant to evaluate performance over an entire time period. Halo error is allowing the assessment of an employee on one dimension to “spread” to ratings of that employee on other unrelated dimensions. One interesting innovation in performance appraisal used in some organizations today is called 360-degree feedback, in which managers are evaluated by everyone around them—their boss, their peers, and their subordinates.

3. Performance Feedback The last step in most performance appraisal systems is giving feedback to subordinates about their performance. This is usually done in a private meeting between the person being evaluated and his or her boss. It should be focused on the facts: the assessed level of performance, how and why that assessment was made, and how it can be improved in the future.

QUICK QUESTIONS 1. What types of training are offered at your place of work?

2. What do you think would be the biggest challenges of giving an employee performance appraisal?

Use In-Class Activity 2: Up for Debate: Performing Appraisals, Laying It On the Line Time Limit: 30 minutes

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10-12

Learning Objective 10-6: Discuss workforce diversity, the management of knowledge workers, and the use of a contingent workforce as important changes in the contemporary workplace.

New Challenges in the Changing Workplace New challenges arise as the economic and social environments of business change.

A. Managing Workforce Diversity Workforce diversity is the range of workers’ attitudes, values, beliefs, and behaviors that differ by gender, race, age, ethnicity, physical ability, and other relevant characteristics; many U.S. organizations are now creating more diverse workforces than ever before. Organizations are recognizing that diversity can be a competitive advantage.

B. Managing Knowledge Workers Traditionally, employees added value to organizations because of what they did or because of their experience; today, however, many employees add value because of what they know. Knowledge workers, which include computer scientists, engineers, physical scientists, and game developers, require extensive specialized training.

Retraining and training updates are critical to prevent their skills from becoming obsolete.

Companies must provide this training or risk losing employees to firms that will support this need; additionally, firms must ensure they are compensating these employees at market rates.

C. Contingent and Temporary Workers Many employers use contingent and temporary workers to increase their flexibility and, in most cases, lower their costs.

1. Trends in Contingent and Temporary Employment A contingent worker is a person who works for an organization on something other than a permanent or full-time basis. Independent contractors, on-call workers, temporary employees (usually hired through outside agencies), and contract or leased employees are categories of contingent workers. Another category is parttime workers. In 2019, around 40 percent of employed U.S. workers fit into one of these categories.

2. Managing Contingent and Temporary Workers The keys to understanding how to use such workers involve careful planning and understanding their advantages and disadvantages within the organization. In addition, managers must assess the real cost of using contingent workers. Managers must make decisions about how to integrate contingent workers into the organization.

KEY TEACHING TIP

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Remind students that workforce diversity is the range of workers’ attitudes, values, beliefs, and behaviors that differ by gender, race, age, ethnicity, physical ability, and so on.

Remind students that training is a vital responsibility of the firm, to create and maintain competitive advantage, enhance productivity, and increase job satisfaction among employees.

Students should understand that performance appraisals, while often uncomfortable, are a necessary part of the evaluation process and work to ensure good communication and performance by employees by providing feedback to them.

Remind students that temporary and contingent workers are valuable assets to the organization.

QUICK QUESTIONS 

How can an organization benefit from welcoming a diverse workforce?



How do knowledge workers add value to an organization?



What are some advantages and disadvantages of hiring contingent workers?

HOMEWORK Search for three companies that are considered great places to work.

Now might be a good time to assign Application Exercise 10-9 from the end-of-chapter materials as homework as it asks students to review compensation, benefits, and perks at various companies.

At-Home Completion Time: 1 hour

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10-14

Learning Objective 10-7: Explain why workers organize into labor unions and describe the collective bargaining process.

Dealing with Organized Labor A labor union is a group of individuals working together to achieve shared job-related goals, such as higher pay, shorter working hours, more job security, better benefits, or improved working conditions. Labor relations refers to the process of dealing with employees who are represented by a union.

A. Unionism Today U.S. labor unions have experienced increasing difficulties in attracting new members. In 2021, 10.31 percent of the U.S. labor force is represented by a labor union.

The Future of Unions. The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), as well as independent major unions such as the Teamsters and the National Education Association (NEA), still play a major role in U.S. business. Unions in the traditional strongholds of goods-producing industries continue to wield considerable power as well. But, even large and influential unions such as the United Auto Workers (UAW) were forced to make significant concessions during the large-scale restructuring of the U.S. auto industry in 2008–2009. Also, auto plant closures will reduce the number of auto jobs in the future.

Another issue affecting the future of unionism is the geographic shift in the U.S. economy.

For the most part, unionism in the United States started in the North and Midwest regions and in cities such as Detroit, Pittsburgh, Cleveland, St. Louis, and Chicago. But over the past several decades, there has been a pronounced shift as businesses have moved their operations to the South and Southwest, areas that do not have a strong union heritage.

B. Collective Bargaining Collective bargaining is the process by which labor and management negotiate conditions of employment for union-represented workers and draft a labor contract.

1. Reaching Agreement on Contract Terms By law, union leaders and management representatives must negotiate “in good faith.” Each party will have its starting point on an issue, but also its zone in which it can compromise while meeting that side’s needs. If an agreement cannot be reached, the willingness of each side to use tactics such as strikes, or mediation or arbitration, comes into play.

2. Contract Issues The contract can address any number of issues, including control over hiring policies and work assignments, working hours, overtime policies, rest period arrangements, differential pay plays for shift employees, and grievance procedures. Some of the issues that are typically most important to union negotiators are: a. Compensation. A cost-of-living adjustment (COLA) is one of the most

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common tools for securing wage increases. Wage reopener clauses provide for renegotiating wage rates at preset times during the duration of the contract. b. Benefits. Typical employee benefit issues include the cost of insurance, retirement, paid holidays, and working conditions. c. Job Security. In many cases, demands for job security include the promise that a company will not move to another location and that, if the workforce is reduced, seniority will be used to determine which workers lose their jobs.

3. When Bargaining Fails An impasse occurs when, after a series of bargaining sessions, management and labor have failed to agree on a new contract or a contract to replace an agreement that is about to expire. Each side has tactics at its disposal once an impasse is reached. a. Union Tactics. When their demands are not met, unions may bring a variety of tactics to the bargaining table. Historically, one of the most common tactics has been a strike. A strike occurs when employees walk off the job and refuse to work. Beginning in the 1990s, the number of strikes per year has declined dramatically. From an average of 281 strikes per year from 1960 to 1980, the average dropped to 15 per year between 2010 and 2021.

Other union tactics include picketing, in which workers march at the entrance to the firm with signs explaining their reasons for striking; boycotts, in which union members agree not to buy products of a targeted employer; and a work slowdown, in which workers perform their jobs at a much slower pace than normal. b. Management Tactics. Lockouts occur when employers deny employees access to the workplace. A firm can also hire temporary or permanent replacements called strikebreakers. In some cases, an employer can obtain legal injunctions that either prohibit workers from striking or prohibit a union from interfering with its efforts to use replacement workers.

4. Mediation and Arbitration In mediation, a neutral third party offers advice and suggestions in settling a labormanagement dispute but cannot impose a settlement; in arbitration, the neutral third party dictates a settlement between the two sides, which have agreed to submit to outside judgment. Compulsory arbitration is used to settle disputes between the government and public employees.

KEY TEACHING TIPS 

Remind students that the official term describing the process of dealing with

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employees represented by a labor union is labor relations. 

Remind students that collective bargaining is much like the negotiation process.

When involved with collective bargaining, both labor and management present demands and then focus on identifying the bargaining zone.



Be sure students understand that a contract involves many more topics than simply pay scales. Benefits and job security frequently are very important topics in a negotiation.



Students often confuse mediation and arbitration. Mediation involves a third party who makes recommendations to solve a dispute; arbitration involves a third party who makes a legally binding decision to solve a dispute.

QUICK QUESTIONS 

In most sectors, unions are in a weakened position compared with many decades ago. How has this affected the way in which labor works with management?



What issues are typically most important to union negotiators when collective bargaining with management?



When bargaining fails between labor and management, what are some union tactics that can be brought to the bargaining table? Management tactics?

HOMEWORK Business Plan Now is a good time to assign Part 3 of the business plan project. In this section, students think about their employees, the jobs they will be performing, and the ways in which they can lead and motivate them, as well as train them.

At-Home Completion Time: 3 to 5 hours

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10-17

IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Writing a Job Description Activity Overview: This activity asks students to write a job description for an instructor and for a student.

Time Limit: 45 minutes What to Do: 1. Review what is included in a job description, then ask students to think about what variables should be included in their instructor’s job description and what should be included in a student’s job description, if one were to exist, making individual notes along the way. (10 minutes) 2. Split the class into small groups, asking members of each group to share what they came up with in Step 1. (10 minutes) 3. Ask each group to further discuss what should be included in their instructor’s job description and in a student’s job description, considering any other factors that might come to mind that have not already been discussed. Write a final job description for both instructor and student. (10 minutes) 4. Reassemble the class and discuss each group’s suggestions. (15 minutes) Don’t Forget: There are many roles that instructors play in a college or university other than what students see in the classroom.

Wrap-Up: Review the purpose of a job description, highlighting some of the major elements included in most college or university instructors’ job descriptions.

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10-18

In-Class Activity 2: Up for Debate: Performing Appraisals, Laying It On the Line Activity Overview: This activity asks students to consider the steps involved in determining whether to fire someone.

Time Limit: 30 minutes What to Do: 1. Divide the class into three-member groups and ask them to read the Entrepreneurship and New Ventures feature in the textbook. (10 minutes) 2. Ask groups to consider the points Dan Yoo describes in the case. Do you think these points make sense? Do they make sense for employees? Do they make sense for employers? (10 minutes) 3. Regroup the class as a whole and discuss each group’s input, then ask the class to come up with a final decision. (10 minutes) Don’t Forget: When a person has to be let go from a position, it is not personal. It is based on performance data.

Wrap-Up: Wrap up the activity by briefly discussing what students think the future of performance appraisals will look like. Things are changing in this area and the students will be in the middle of these changes.

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10-19

In-Class Activity 3: Small Group Discussion: What Motivates Employees?

Activity Overview: This activity asks students to consider what companywide incentives might motivate workers who work in specific jobs.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and assign each group to one of the jobs below: (5 minutes) • Cook at a fast-food restaurant • Waitress at a local diner • Groundskeeper • Computer technician at a small firm • Janitor • College professor 2.

Ask each group to brainstorm what incentives would be especially motivating for a worker performing the assigned job; remind students to consider both tangible and intangible incentives. (10 minutes)

3.

Reassemble the class and ask each group to share their results, allowing all students to share input. (15 minutes)

Don’t Forget: This activity can be completed using any type of job as the basis for discussion. Remind students to consider “reasonable” costs to the company as they brainstorm for ideas.

Wrap-Up: Bring the activity to a close by recapping each group’s conclusion, reminding students that tangible incentives, such as various benefits packages, can be motivating but that intangible incentives, such as employee recognition programs, can also be motivating.

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10-20

BUSINESS PLAN PROJECT PART 3 PEOPLE IN ORGANIZATIONS Assignment Overview: This part of the business plan asks students to think about their employees, the jobs they will be performing, and the ways in which they can lead and motivate them. Students take the different job titles they created in the organizational chart in Part 2 and give thought to the skills that employees will need to bring to the job before they begin. They also consider the training they’ll need to provide employees after they are hired, as well as how they’ll compensate their employees. Part 3 of the business plan also asks students to consider how they’ll lead employees and keep them happy and motivated.

Files to Provide Students: For this part of the project, students will be asked to complete Part 3: People in Organizations. If students have already started working on the business plan project, they should continue using the student template they worked on in Parts 1 and 2.

Part 3 Estimated At-Home Completion Time: If done well, this section will require a minimum of 3 to 5 hours. As noted previously, because some companies will have more job descriptions and job specifications than others, you may want to limit the number you ask students to complete.

Homework Deliverable from Students: The length of this section should be somewhat consistent, although some variance can be expected depending on the size and complexity of the business. You should expect at least three to five pages in this section.

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10-21

ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 10-1. What is a realistic job preview, and why is it considered a vital part of external recruitment by many organizations?

A realistic job preview provides applicants with a realistic idea of the job and what it entails. An example of an unrealistic job preview is one where the applicant is told that the job is exciting and challenging when in fact it is routine and straightforward. Some managers use this technique to attract the best candidates for the job. However, a more likely outcome of an unrealistic job preview is that dissatisfied employees will be hired and will soon want to leave the company. When the job preview is honest and realistic, new hires are more likely to stay in the job for longer periods of time. This is why realistic job previews are vital for external recruitment. (Learning Objective 3 – AACSB – application of knowledge) 10-2. Why might an organization choose to run vestibule training? Under what kind of circumstances is it likely to be used?

On-the-job training or vestibule training is used when employees need to learn physical skills by getting hands-on experience with actual tools and materials. It enables employees to focus on safety, learning, and feedback rather than on productivity.

(Learning Objective 5 – AACSB – application of knowledge) 10-3. What are company-wide incentive schemes? Give three examples of plans that are used by some organizations.

Company-wide incentive schemes apply to all the employees in a company. Some examples are: profit-sharing plans, where profits earned above a certain level are distributed to employees; gainsharing plans, where employees are given bonuses when the company’s costs have been reduced through greater work efficiency; and pay-forknowledge plans, in which workers are paid to learn new skills and to become proficient at different jobs. (Learning Objective 4 – AACSB – application of knowledge) 10-4. What is workforce diversity? Why are many organizations keen to ensure that they have it?

Workforce diversity is a term used to describe the range of workers’ attitudes, values, beliefs, and behaviors. These aspects are all likely to differ due to diversity in gender, race, age, ethnicity, physical ability, and other relevant characteristics. Workforce diversity is valued because it provides an organization with a key competitive advantage; it offers a broader range of perspectives and solutions to deal with different situations and problems. (Learning Objective 6 – AACSB – application of knowledge)

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10-22

QUESTIONS FOR ANALYSIS 10-5. What is the value of internal recruitment? Why would an organization consider internal recruitment essential in some cases?

Internal recruitment involves considering present employees as candidates for job openings. Promotion from within the organization can help build morale and keep highquality employees from leaving. For higher-level positions, a skills inventory system may be used to identify internal candidates, or managers may be asked to recommend suitable candidates. (Learning Objective 3 – AACSB – reflective thinking) 10-6. It is not always appropriate or fair to offer performance-related pay for all jobs and positions. Other bonus systems work better for certain roles. Why is this? Are the alternatives fair? Should the bonuses be based solely on profit generation?

Many employees in non-sales roles do not have the opportunity to make distinct contributions to the profits of a business. Thus, it is not appropriate for bonuses to always be based on profit generation; employees can contribute to the business’s success in other ways as well. The efforts and ideas of employees in non-sales roles may lead to cost savings or efficiencies. These can be rewarded, even though they may not generate sales. In such cases, employees can be remunerated through some form of merit pay or productivity pay that is based on their actual output. They can also be rewarded in different ways, such as by being offered paid day trips, experience days, spa treatments, or entertainment tickets. (Learning Objective 4 – AACSB – reflective thinking) 10-7. What are some distinct challenges of managing knowledge workers?

Answers will vary, but many students will recognize that in the past, most employees added value to organizations through their specific technical or manual skills or because of their experience. With knowledge workers, this is no longer the case. Organizations that employ computer scientists, engineers, physical scientists, or game developers require them to undergo extensive training. These organizations should be aware that this training is a continuous process that is constantly in need of upgrading. The organization also needs to regularly refresh its workforce to bring in newly trained talent. (Learning Objective 6 – AACSB – reflective thinking) 10-8. How much will benefit considerations affect your choice of an employer after graduation? What types of benefits would be most and least appealing to you and why?

Student answers will vary, as age, experience, and life-stage (single, married, with or without children, living arrangements, etc.) will influence their decisions. Students should be able to express that wages and salaries are only a portion of the benefits they should consider. Students should include discussion of benefits including health, life, and disability insurance; vacation time or paid time off; sick leave; payroll deductions to buy company stock; employee counseling services; childcare; retirement plans; also whether the company contributes to them should be factored in as well. (Learning Objective 10-4 – AACSB – reflective thinking)

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10-23

APPLICATION EXERCISES 10-9. Go online and search for at least three companies that are considered great places to work. Describe the compensation, benefits, and perks at each of these companies. Of the three companies you chose, which is most appealing to you, and why? Which is the least appealing, and why?

Answers will vary but students will probably focus on companies that pay better, provide better benefits, and flexible working conditions. (Learning Objective 10-4— AACSB—application of knowledge) 10-10. Interview someone familiar with a company’s current hiring processes. Briefly outline how the company recruits employees to apply for jobs, the steps in the selection process, and the orientation program for new employees. Relate your notes back to the topics and learning objectives in this chapter.

Answers will vary based on the company and the position. Most HR professionals will reveal how certain recruitment tools work better than others, how certain jobs require pre-employment testing, and how the value placed on the interview process may vary depending on the job or other factors. Students may also include mention of a realistic job preview. (Learning Objective 10-3—AACSB—application of knowledge)

BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 10-11 TO 10-15 (Learning Objectives 10-2, 10-3, and 10-4 – AACSB – interpersonal relations and teamwork, application of knowledge, analytical thinking) Answers will be determined by the type of business (brick and mortar, e-commerce, etc.), the numbers and types of employees needed, the competition, prevailing wages, projected company finances, normal industry practices, and so on.

TEAM EXERCISE: CLOSING UP SHOP 10-16 TO 10-20 (Learning Objectives 10-2 and 10-6 – AACSB – ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking) The Situation You are the operations director of a chain of seven small retail stores located in the same city. Your profits are decreasing, and the competition is increasing. As the city becomes more prosperous, the rents that are up for renewal for some of the properties are about to increase. The CEO has asked you to identify two stores that should be closed to cut costs.

The options are not very clear.

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10-24

The details of each of the stores are as follows:       

Store 1: The largest store; most profitable; 12 employees; pays the highest rent; flagship store in the center of the city.

Store 2: Newest store; located at the center of the city; pays a high rent; 10 employees; is currently unprofitable but has a growing customer base.

Store 3: Located to the north of the city’s center; five employees; has an ethnic minority customer base; breaks even; pays moderate rent.

Store 4: Located to the south of the city’s center; pays a high rent; is loss-making; 15 employees; is located in an area undergoing regeneration, with a huge potential for future growth.

Store 5: The first store; located to the east of the city’s center; nine employees; pays low rent; is unprofitable; is located in a declining area of the city.

Store 6: Located in the southwest outskirts of the city; pays low rent; is moderately profitable; eight employees; has had few changes in the last five years.

Store 7: Located in the city’s main railway station; has small but expensive premises; three employees; breaks even; pays a very high and increasing rent.

Team Activity Assemble a group of four students. Your group has agreed to provide the CEO with a recommendation.

ACTION STEPS 10-16. As a group, discuss the underlying legal and ethical issues in this situation. What laws must be considered before making this decision?

10-17. Working individually, develop a recommendation about which two stores should be closed.

10-18. Have each team member discuss their recommendation with the group, justifying their decision on the basis of both ethical and legal considerations.

10-19. Finally, develop a group recommendation about the order in which the two stores should be closed.

10-20. Now that you have decided which two stores to close, you must also decide how you will go about doing this. How will you handle the redundancies? What packages should you offer the employees? How should you handle the PR regarding the closures?

This should be an interesting discussion because students will bring their own perspectives to this exercise. Students should focus on ethical and legal considerations and employee strength.

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10-25

EXERCISING YOUR ETHICS: OPERATING TACTICALLY (Learning Objective 10-7—AACSB—ethical understanding and reasoning, reflective thinking) 10-21. What are the ethical issues in this situation?

The key ethical issue is dishonesty—your manager is encouraging you to deliberately mislead employees and to actively interfere with organizing activities. Furthermore, terminating a key organizer is blatant intimidation.

10-22. What are the basic arguments for and against extreme measures to fight unionization efforts?

Basic arguments for extreme measures to fight unionization include the need to limit spending on human resources. Basic arguments against extreme measures include the questionable ethics of this approach and the negative impact on morale, which could negatively affect efficiency and effectiveness.

10-23. What do you think most managers would do in this situation? What would you do?

Answers will vary, but older, more experienced managers may be more likely to stand up to their bosses, refusing to mislead their employees.

CASES: A UNIQUE PARTNERSHIP DRIVES WEGMANS (Learning Objectives 10-3, 10-4, 10-5—AACSB—reflective thinking, analytical thinking) When discussing this case, students should focus on the pros and cons of internal and external recruiting, recognizing that internal recruitment builds loyalty and often leads to lower employee turnover but recognizing that not every position can be filled from within. Plus, external recruits can bring a different and valuable perspective.

When discussing the training program, students need to focus on the skills that the managers will ultimately need. The employee appraisal question should generate much discussion with many students basing their answers on how effective they think their company’s annual appraisal is.

10-24. If you were an HR executive at Wegmans, would you focus more on internal recruiting or on external recruiting? Would your strategy for higher-level positions differ from your strategy for lower-level positions? How would current economic conditions influence your strategy?

Both kinds of recruiting are important for Wegmans. Internal recruiting should be used to fill openings by promoting from within. External recruiting should be used to fill

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10-26

entry-level openings and openings for which no one is qualified and available internally.

Economic conditions will influence the strategy because they determine the number of candidates available and the ease of finding those candidates. In a strong and growing economy, employees will be more difficult to find; in a struggling economy, they will be easier to find.

10-25. As an HR executive at Wegmans, you need to hire a group of new employees as part of your management-trainee program—people who will be put on a track leading, ultimately, to positions as store managers. Briefly outline your program for developing these employees.

Students will need to create a training and development plan, focused on moving people through various areas of the company and developing their management skills. Indicate what kinds of training are necessary and what methods will be appropriate: role-playing, lectures, on-the-job and vestibule training, and more.

10-26. If you were an employee at Wegmans, how would you expect your annual performance appraisal to be conducted? Given the company’s customer-relations strategy, which appraisal methods do you think would be most appropriate?

Common appraisal methods include objective measures of performance, such as sales volume, and judgmental methods, including ranking and rating techniques. Each has flaws in a retail environment such as Wegmans. Employees should expect feedback about their performance. Methods evaluating someone’s skill in developing positive customer relationships will be important. A 360-degree feedback may be helpful, as it can provide useful feedback from a variety of sources.

FINDING THE WORK/LIFE BALANCE (Learning Objectives 10-3, 10-4, 10-6— AACSB—analytical thinking, reflective thinking) Students’ perspective will frame their answer to this question based on their current experience in the workforce, their experiences with wages and salaries, and other benefits described. Students at different life stages will find that different benefits appeal to them.

One possible trade-off is the location of the company, though Cary is near the Research Triangle area in North Carolina. Another trade-off is that the company is privately held, meaning that publicly traded stock options are unavailable as an incentive.

Policies and benefits that support the work–life balance include many of the benefits offered by SAS Institute: a relatively short work week, childcare and bring-your-childto-work occasionally, onsite pharmacies, farmer’s market, and health clinic. All of these add convenience and make life easier for the employees. Easier usually also means less stress, which is always a positive.

Challenges a manager faces in this environment still must revolve around job performance of the employees and contributions each employee makes to the company.

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10-27

The lack of turnover actually makes it even more important to evaluate employees as accurately as practical on these criteria.

10-27. After reading about SAS Institute, what would appeal to you most about working there?

Students are likely to focus on the flexibility offered by the variety of benefits offered by SAS Institute. Answers will vary about which benefits most appeal to them, as stage of life will influence their choices.

10-28. What trade-offs is SAS making to offer the benefits and culture described?

There are costs associated with providing such a breadth of benefits. The company may need to determine if enough people to justify the costs utilize each benefit. But the costs of training new employees must be factored in, as well. The company should also evaluate the productivity of its employees and which benefits favorably impact it.

10-29. What types of policies and benefits do you believe are most supportive of work–life balance?

Answers will vary, but students are likely to approve of the approach SAS Institute has taken. Pay is good, a variety of benefits are available, and the challenges, atmosphere, and bosses are great.

10-30. What challenges might you face as a manager working in this environment? How could you overcome these challenges?

Answers will vary depending on students’ employment experience. However, they should note that the flexible hours and great atmosphere do not encourage a strict disciplinary approach to management.

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10-28

PART 3 INTEGRATIVE LEARNING PORTFOLIO PEOPLE IN ORGANIZATIONS CRAFTING A BUSINESS PLAN CORPORATE CULTURE P3-1. What do you see as the “corporate culture” of your business? What types of employee behaviors, such as organizational citizenship, will you expect?

Hint: Will your business demand a casual environment or a more professional environment? Refer to the discussion on employee behavior in Chapter 8 for information on organizational citizenship and other employee behaviors.

LEADERSHIP PHILOSOPHY P3-2. What is your philosophy on leadership? How will you manage your employees day to day?

Hint: Refer to the discussion on leadership in Chapter 9 to help you formulate your thoughts.

JOB DESCRIPTIONS P3-3. Looking back at your organizational chart in Part 2, briefly create a job description for each team member.

Hint: As you learned in this chapter, a job description lists the duties and responsibilities of a job, its working conditions, and the tools, materials, equipment, and information used to perform it. Imagine your business on a typical day. Who is working and what are each person’s responsibilities?

JOB SPECIFICATIONS P3-4. Next, create a job specification for each job, listing the skills, other credentials, and qualifications needed to perform the job effectively.

Hint: As you write your job specifications, consider what you would write if you were composing an ad for the position. What would the new employee need to bring to the job to qualify for the position?

Insert Job Title #1: Insert Needed Skills/Credentials/Qualification for Job: Insert Job Title #2: Insert Needed Skills/Credentials/Qualification for Job:

Insert Job Title #3: Insert Needed Skills/Credentials/Qualification for Job:

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10-29

TRAINING EMPLOYEES P3-5. What sort of training, if any, will your employees need once they are hired? How will you provide this training?

Hint: Refer to the discussion of training in this chapter. Will you offer your employees onthe-job training? Off-the-job training? Vestibule training?

COMPENSATION P3-6. A major factor in retaining skilled workers is a company’s compensation system—the total package of rewards that it offers employees in return for their labor.

Part of this compensation system includes wages or salaries. What wages or salaries will you offer for each job? Why did you decide on that pay rate?

Hint: Refer to the discussion in this chapter for more information on forms of compensation.

You may also want to check out sites like www.salary.com, which includes a salary wizard you can use to determine how much people with different job titles are making in your area and across the United States.

INCENTIVES P3-7. As you learned in this chapter, incentive programs are special programs designed to motivate high performance. What incentives will you use to motivate your workforce?

Hint: Be creative and look beyond a simple answer, such as giving pay increases. Ask yourself: Who are my employees and what is important to them? Refer to the discussion in this chapter for more information on the types of incentives you may want to consider.

CASE PART 3: STARBUCKS P3-8. Starbucks was one of the first privately held companies to offer stock as compensation.

At the time, do you think it motivated employees to provide better service? Why or why not?

Students should include a discussion of employee motivating factors, including both monetary compensation and intangible benefits. They should mention components of different theories and philosophies, like Frederick Taylor’s Classical Theory, Herzberg’s Two-Factor Theory, the X and Y Theory, Hawthorne effect, and other modern motivational theories. Offering stock to the lower-level employees may not have impacted employee behavior at the time because no one could be sure that the stock would increase in value and employees tend to take a shorter-term view of the company, as well as the fact that employees may not have fully understood what stock was.

(Learning Objective 8-5 – AACSB – analytical thinking)

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10-30

P3-9. What are the differences between unions today and the unions of the 1920s and 1930s? How are they the same? What is your personal opinion on unionization?

Answers should include mention of the violence and coercion of the unions of the 1920s and 1930s and should note the unions’ political and social power. Unionism steadily declined until the recession of 2008, when membership began to rise again. However, even the powerful auto unions had to make concessions to avoid plant closures and do not wield the same power they did decades ago. As the economy shifts from manufacturing to service/knowledge base along with the rise of the gig economy, unions are becoming less relevant. Similarities in unions of the past and today include collective bargaining (arguably the most important current function of a union) and protection of workers’ rights. (Learning Objective 10-7—AACSB—analytical thinking) P3-10. Do you think Howard Schultz’s leadership style was the driving force behind his success? If so, what traits contributed to his success? If not, what do you think was the driving force behind his success?

Students will need to identify Schultz’s transformation leadership style and note the characteristics that both served and hampered Schultz’s success. They may note that Schultz’s dynamic and charismatic style had a direct influence on upper management, but also an indirect but significant effect on line staff and employees. Students should demonstrate an understanding of the components of various leadership styles. (Learning Objectives 9-1 and 9-2—AACSB—analytical thinking) P3-11. How do you think compensation and benefits have changed over the past 30 years?

The main difference that students should point to is peripheral benefits beyond monetary compensation. They should be able to discuss the idea of a living wage and the value of additional benefits. Students may note that unions were instrumental in bringing about changes to compensation and benefits, like retirement plans and health benefits.

Students will need to identify the most current benefits like work-from-home agreements, on-site perks, and flex time. (Learning Objective 10-4—AACSB— application of knowledge) P3-12. How do you think employee motivation has changed over the past 30 years, and why?

Contemporary motivational theory includes expectancy and equity theories. The major change that students should be able to articulate is a shift away from classical theory to other motivating theories and the continuing growth of nontraditional benefits and recognition of the social-emotional needs of employees. They may discuss job enrichment, participative management, how performance reviews have evolved, and other changes. (Learning Objective 8–4—AACSB—analytical thinking)

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10-31

P3-13. How would you describe Schultz’s leadership style? Do you know of a manager or leader who shares some of those same traits, and if so, how effective is that leader or manager, in your opinion? How about objectively—how is that manager’s or leader’s organization or department performing?

Though answers may vary, students will need to point to Schultz’s charismatic and transformational style and his top-down approach to leadership. They should be able to link their opinions to specific traits outlined in the text. Students should also be able to articulate objective measures of a manger or leaders’ performance. (Learning Objective 9-4—AACSB—analytical thinking) P3-14. Do you think workers today are happier than they were 30 years ago? Why or why not?

Opinions in this answer should draw on the importance of individual employee differences, the rise of the recognition of emotional intelligence, personality traits, and psychological contracts. Their answers should focus on job satisfaction and measurements thereof. (Learning Objectives 8-2 and 8-3—AACSB—analytical thinking)

FINDING YOUR PATH Careers in Business Part 3 of the book focused on two general areas, motivation and leadership and the specific field of human resource management. When asked what one wants in a job, a person should be honest and make sure the answer has substance and conveys something meaningful about herself and her interests.

Making Yourself Employable Throughout your career, you will be working with people so should develop your own human relations skills (interpersonal skills).

A. Developing Your Human Relations Skills To start developing human relations skills, first honestly assess your current skill level. Do you get along with others? Do you listen to others? Are you willing to take criticism? Identify someone you trust and ask the same questions about yourself.

B. Human Resource Management HRM is a growing field. If you choose to enter it, keep in mind that you will be a manager who helps your organization attract, develop, and retain talent. It may be challenging in difficult times. Understand the details of what is involved in HRM, the legal context of employment, current and emerging trends involving new approaches to compensation, alternative work arrangement, performance management, and labor relations.

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10-32

Chapter 11: Marketing Processes and Consumer Behavior Chapter Overview Many students think that marketing is merely sales or advertising. Actually, sales and advertising are just a small part of the overall marketing process. Think of a product that you buy often. You might not realize that everything about that product—from the time it is created, produced, packaged, and shipped to you—involves various facets of marketing.

This chapter explains the concept of marketing and discusses the five forces that constitute the external marketing environment. It also explains the purpose of a marketing plan, identifies the four components of the marketing mix, and discusses the necessity of identifying market segments.

As the chapter unfolds, many variables surrounding both the consumer and organizational markets are discussed. A focus is provided on distinguishing features between products and services, and the importance of branding and packaging. The chapter also discusses the consumer buying process, organizational markets, and key considerations in the new product development process.

Finally, it looks at the challenges that arise in adopting an international marketing mix and the ways in which small businesses can benefit from an understanding of the marketing mix.

Learning Objectives 11-1. Explain the concept of marketing and identify the five forces that constitute the external marketing environment.

11-2. Explain the purpose of a marketing plan and identify its main components.

11-3. Explain market segmentation and how it is used in target marketing.

11-4. Discuss the purpose of marketing research and compare the four marketing research methods.

11-5. Describe the consumer buying process and the key factors that influence that process.

11-6. Discuss the four categories of organizational markets and the characteristics of businessto-business (B2B) buying behavior.

11-7. Discuss the marketing mix as it applies to small business.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity

Description

1. Icebreaker: Assessing the Marketing Environment

Students consider various elements from the marketing environment that affect specific industries.

Students consider all the valuable information they give to others about themselves.

Students are divided into teams to debate the advantages and disadvantages of being an entrepreneur in a highly competitive industry.

Students consider what a foreign visitor might notice about the marketing mix in the American marketplace.

2. Small Group Discussion: Data Mining

3. Up for Debate: Big or Small?

4. Small Group Discussion: Marketing Mix

Time Limit 30 min.

20 min.

30 min.

30 min.

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CHAPTER OUTLINE Learning Objective 11-1: Explain the concept of marketing and identify the five forces that constitute the external marketing environment.

What Is Marketing?

The American Marketing Association defines marketing as “activities, a set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.”

A. Delivering Value Consumers buy products that offer the best value when it comes to meeting their needs and wants.

1. Value and Benefits. Value compares a product’s benefits with its costs; benefits include the product’s functions and emotional satisfaction associated with owning, experiencing, or possessing it. But, costs, including the sales price, the buyer’s time, and even the emotional costs of making a purchase decision factor into determining value. A satisfied customer perceives the benefits derived from the purchase to be greater than its costs. Value = Benefits/Costs.

2. Value and Utility. Products provide utility, which is the product’s ability to satisfy a person’s want or need. Marketing strives to provide four kinds of utility—form utility (designing products with features customers want), time utility (providing products when customers want them), place utility (providing products where customers want them), and possession utility (providing terms of sale that result in transferring product ownership to customers).

B. Goods, Services, and Ideas Consumer goods are tangible products that consumers purchase for personal use; firms that sell these goods are engaged in consumer marketing. Industrial goods are products that are purchased by companies to be used in further production of other products; firms that sell products to other businesses are engaged in industrial marketing. Services are products with intangible (nonphysical) features, such as professional advice, timely information for decisions, or vacation packaging. Service marketing is the application of marketing for services.

C. Relationship Marketing and Customer Relationship Management Relationship marketing focuses on building lasting relationships between customers and suppliers. Customer relationship management (CRM) is an organized method that a firm uses to build better information connections with clients, to strengthen relationships.

Data warehousing is the compiling and storage of customers’ data; data mining allows for the sifting, sorting, and searching for previously undiscovered clues about what customers look at and react to, and how they might be influenced. This leads to clearer pictures of customer preferences, and allows a business to build closer relationships.

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D. The Marketing Environment Marketing decisions are affected by various influences in the external environment, everything outside an organization’s boundaries that might affect it.

1. Political and Legal Environment. The political-legal environment is the relationship between business and government, usually in the form of government regulation of business. Political activities may result in favorable laws and regulations that may open new business opportunities.

2. Sociocultural Environment. Elements from this segment of the environment include the customs, mores, values, and demographic characteristics of the society in which an organization functions.

3. Technological Environment. New products make existing products obsolete, and many products change our values and lifestyles. Lifestyle changes often stimulate new products not directly related to the new technologies themselves.

4. Economic Environment. Economic conditions affect many facets of marketing, including consumer spending patterns and marketers’ plans for product offerings, pricing, and promotional strategies. Interest rates and inflation concern marketers, as does the general business cycle.

5. Competitive Environment. Marketers must convince buyers that they should purchase one company’s products rather than another’s. Marketers must understand the types of competition they face. Substitute products may not look alike or they may seem very different from one another, but they can fulfill the same need; brand competition occurs between similar products and is based on buyers’ perceptions of the benefits of products offered by particular companies; international competition matches domestic products against foreign products.

KEY TEACHING TIPS ● Students often forget that marketing is more than just advertising and sales. It is a set of processes for creating, communicating, and delivering value to customers, and for managing customer relationships. ● Make sure that students grasp the concept of utility—the ability of a product to satisfy a person’s want or need—as it is a difficult concept for some students. ● Consumer marketing involves the sale of consumer goods and services to consumers; industrial marketing involves the sale of industrial goods and services to other companies.

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● Relationship marketing emphasizes building lasting relationships with customers and suppliers. What do organizations hope to gain from relationship marketing? ● Make sure students understand the distinction between data warehousing and data mining. ● Reinforce that every marketer is faced with forces from the external environment, including the political-legal, sociocultural, technological, economic, and competitive environments.

QUICK QUESTIONS ● How does a marketer create form utility, time utility, place utility, and possession utility? ● What are some examples of consumer goods? What about industrial goods? ● Relationship marketing emphasizes building lasting relationships with customers and suppliers. What do organizations hope to gain from relationship marketing? ● Make sure students understand the distinction between data warehousing and data mining. ● What are some common political-legal factors that affect marketing? ● What are some common sociocultural factors that affect marketing? ● What are some common technological factors that affect marketing? ● What are some common economic factors that affect marketing? ● What are some examples of competing products? ● Why do marketers attempt to differentiate their products?

Use In-Class Activity 1: Icebreaker: Assessing the Marketing Environment Time Limit: 30 minutes Use In-Class Activity 2: Small Group Discussion: Data Mining Time Limit: 20 minutes

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Learning Objective 11-2: Explain the purpose of a marketing plan and identify its main components.

The marketing plan is a detailed strategy for focusing marketing efforts on consumers’ needs and wants. The plan identifies the marketing objectives, stating what marketing will accomplish in the future. It contains a strategy that identifies the specific activities and resources that will be used to meet the needs and desires of customers in the firm’s chosen target markets, so as to accomplish the marketing objectives.

Every well-developed plan should begin with objectives or goals, setting the stage for everything that follows. Marketing objectives, the goals the marketing plan intends to accomplish, are the foundation that guides all of the detailed activities in the plan. The marketing objectives themselves exist solely to support the company’s overall business mission.

A. Marketing Strategy: Planning the Marketing Mix Marketing strategy identifies the planned marketing programs, all the marketing activities that a business will use to achieve its marketing goals, and when those activities will occur. A company’s marketing managers are responsible for planning and implementing all the marketing activities that result in the transfer of goods or services to its customers. Marketing strategy focuses on the needs and wants of customers in the chosen target markets. It also includes four basic components, known as the marketing mix. This mix consists of the “Four Ps” of marketing: product, pricing, place, and promotion.

1. Product. The product is a good, service, or idea designed to fill a customer’s need or want. Producers often promote particular features of products to distinguish them in the marketplace. Product differentiation is the creation of a feature or image that makes a product differ enough from existing competitive products to attract customers.

2. Pricing. Pricing, selecting the best price at which to sell a product, is often a balancing act.

Pricing must be set to support direct and indirect costs, yet prices cannot be so high that consumers turn to lower-priced competing products. Low prices, for example, generally lead to larger sales volumes but lower profits on each unit. High prices usually limit the number of units being sold but increase profits per unit. High prices may also attract customers by implying that a product is of high quality.

3. Place (Distribution). Place refers to the where and how customers get access to the products they buy. Distribution activities are concerned with getting the product from the producer to the consumer. The place can be a retail store, direct delivery to the customer, or on a digital device. Marketers use channels to distribute products. Manufacturers can sell to other companies that then sell to retailers that sell to the final consumers. Others sell directly to retailers, and others sell directly to the final consumers.

4. Promotion Promotion refers to techniques for communicating information about products. Promotion includes a combination of advertising, personal selling, sales promotion, publicity/public relations, and direct or interactive marketing.

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a. Advertising is any form of paid nonpersonal communication used by an identified sponsor to persuade or inform potential buyers about a product. b. Personal selling is person-to-person sales, frequently used in marketing industrial goods and services. c. Sales promotion involves one-time direct inducements to buyers. These inducements may include premiums (free gifts), coupons, or package inserts, meant to tempt consumers to buy the products. These are “deals” of limited duration. d. Public relations includes all communication efforts directed at building goodwill.

5. Blending It All Together Integrated marketing strategy ensures that the Four Ps blend together so that they are compatible with one another and with the company’s nonmarketing activities as well.

KEY TEACHING TIPS ● Reinforce that although price may be the easiest of the Four Ps to change, a price that is too high fails to attract buyers, and a price that is too low yields little profit. ● Make sure students understand that place is concerned with all of the activities involved in getting products from producers to consumers. ● Reinforce that promotion refers to techniques—advertising, personal selling, sales promotions, publicity, and PR—for communicating information about products. ● Remind students that the marketing mix consists of product, price, promotion, and place.

It is affected by variables such as consumer characteristics, consumer needs, emerging marketing, and competition. ● Stress that the elements of the marketing mix—the Four Ps—are treated similarly by small businesses and large businesses; only the implementation may change.

QUICK QUESTIONS ● What are the Four Ps? ● What is an integrated marketing strategy and why is it important?

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HOMEWORK CRM and the Marketing Mix Now is a good time to assign Application Exercise 11-9 from the end-of-chapter materials as homework. This assignment is designed to get students thinking about how to use the different elements of the marketing mix to create an on-going relationship with customers.

At-Home Completion Time: 30 minutes

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Learning Objective 11-3: Explain market segmentation and how it is used in target marketing.

Marketing Strategy: Target Marketing and Market Segmentation Target markets are groups of people or organizations on which a firm’s marketing efforts are focused. Market segmentation divides a market into categories of customer types or “segments,” with similar wants and needs that can be expected to show interest in the same products. The process of fixing, adapting, and communicating the nature of the product itself is called product positioning.

Identifying Market Segments Members of a market segment must share common traits that will affect their purchasing decisions. The most important variables are: A. Geographic Segmentation Consumers in certain geographic regions exhibit characteristics and buying patterns that are typical of those regions. Geographic variables are the geographical units, from countries to neighborhoods that may be considered in a segmentation strategy.

B. Demographic Segmentation Demographic variables describe populations, including such traits as age, income, gender, ethnic background, marital status, race, religion, and social class. A segment can focus on a single trait, or on a combination of traits.

C. Geo-Demographic Segmentation Geo-demographic segmentation is a combination strategy. Geo-demographic variables are a combination of geographic and demographic traits. Looking at people through this combination of traits is becoming the most common segmentation tool. Segmentation is more effective because the greater number of variables defines the market more precisely.

D. Psychographic Segmentation Psychographic variables include lifestyles, personalities, interests, and attitudes as these impact people’s decision processes.

E. Behavioral Segmentation Behavioral segmentation uses behavioral variables to market items, including such categories as usage rate (light, moderate, heavy user), situation (holiday, seasonal) or specific purpose (very specific features of the product).

KEY TEACHING TIP The variables that can be used to divide a market into segments include geographic segmentation, demographic segmentation, geo-demographic segmentation, psychographic segmentation, and behavioral segmentation. Frequently, target markets are identified based on some combination of variables.

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QUICK QUESTIONS ● What demographic variables would affect your purchase of a cell phone? ● Would other variables affect your purchase of a cell phone, such as behavioral or psychographic variables? ● How can psychographic variables—unlike geographic and demographic variables—be changed by marketing efforts?

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Learning Objective 11-4: Discuss the purpose of marketing research and compare the four marketing research methods.

Marketing Research Marketing research, the study of what customers need and want and how best to meet those needs and wants, is a powerful tool for gaining decision-making information. Its role is to increase competitiveness by clarifying the interactions among a firm’s stakeholders, marketing variables, environmental factors, and marketing decisions.

A. The Research Process Market research can occur at almost any point in a product’s life cycle. Typically, however, it is used in developing new products or altering existing products.

1. Study the current situation What is the need and what is being done to meet it?

2. Select a research method In choosing from a wide range of methods, marketers must consider the effectiveness and costs of different options.

3. Collect data Secondary data are already available from previous research. When secondary sources are unavailable or inadequate, researchers must obtain primary data, new data from newly performed research. Primary data is gathered for the specific purpose, while secondary data will have been gathered for other reasons, but can be applied to other studies.

4. Analyze the data Data are of no use until organized into information.

5. Prepare a report This report should sum up the study’s methodology and findings. It should also identify solutions and, where appropriate, make recommendations on a course of action.

B. Research Methods The success of a research study often depends on the method a research team uses. There are four basic methods of market research.

1. Observation Observation involves watching and recording consumer behavior. Information technology systems, including live camera feeds, electronic scanners and data files, and data storage of television viewing and website activity, allow marketers to observe consumer preferences rapidly and accurately.

2. Surveys

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One way to get useful information is by performing surveys, a method of collecting data in which the researcher interacts with people to gather facts, attitudes, or opinions, either by mailing out or e-mailing questionnaires, by telephone calls, or by conducting face-toface interviews. Most surveys now are conducted online.

3. Focus Groups In a focus group, participants are gathered in one place, presented with an issue, and asked to discuss it. The researcher takes notes but provides only a minimal amount of structure.

This technique allows researchers to explore issues too complex for questionnaires and can produce creative solutions.

4. Experimentation Experimentation compares the responses of the same or similar people under different circumstances or regarding different products, or product features.

HOMEWORK Market Research Now is a good time to assign Application Exercise 11-10 from the end-of-chapter materials as homework. This assignment is designed to get students thinking about applying market research techniques, as well as the Four Ps to marketing a product.

At-Home Completion Time: 45 minutes

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Learning Objective 11-5: Describe the consumer buying process and the key factors that influence that process.

Understanding Consumer Behavior Consumer behavior is the study of the decision process by which people buy and consume products.

A. Influences on Consumer Behavior Influences on consumer behavior can include psychological (motivations, perceptions, ability to learn, attitudes), personal (lifestyle, personality, economic status), social (family, opinion leaders, and reference groups such as friends, coworkers, and professional associates), and/or cultural (culture, subculture, social class—background, occupation, income) elements. When consumers exhibit brand loyalty, they regularly purchase products because they are satisfied with the product’s performance or benefits. The influence elements have minimal impact when brand loyalty is strong.

B. The Consumer Buying Process Various models have been constructed to help show how consumers decide to purchase products; marketers use this information to develop marketing plans. The consumer buying process includes five steps: 1. Problem/Need Recognition The consumer recognizes a problem or a need.

2. Information Seeking Consumers seek information from personal sources, marketing sources, public sources, and experiences. Depending on the complexity of the purchase, the search for information may not be extensive.

3. Evaluation of Alternatives Consumers compare products before deciding which one(s) best meet their needs.

4. Purchase Decision Ultimately, consumers make purchase decisions. Rational motives involve the logical evaluation of product attributes, such as cost, quality, and usefulness. Emotional motives involve nonobjective factors and include sociability, imitation of others, and aesthetics.

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5. Postpurchase Evaluation Only satisfied customers will likely make repeat purchases.

KEY TEACHING TIP ● The consumer buying process consists of a series of steps taken by consumers when making purchases: (a) Problem/Need Recognition, (b) Information Seeking, (c) Evaluation of Alternatives, (d) Purchase Decision, and (e) Postpurchase Evaluation.

QUICK QUESTIONS ● What are some examples of psychological influences and personal influences on consumers? What about social influences and cultural influences? ● What is the difference between rational motives and emotional motives when consumers make a purchase decision? Are emotional motives related to psychographics? ● What factors might consumers consider when evaluating alternatives in the consumer buying process?

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Learning Objective 11-6: Discuss the four categories of organizational markets and the characteristics of business-tobusiness (B2B) buying behavior.

Organizational Marketing and Buying Behaviors. Marketing to organizations that buy goods and services used in creating and delivering consumer products or public services involves various kinds of markets and buying behaviors different from those in consumer markets.

A. Business Marketing Organizational markets fall into four categories: service companies, industrial, reseller, and government and institutional markets. Taken together, the B2B markets do more than double the amount of business conducted in the U.S. consumer market.

1. Services Market The services companies market encompasses the many firms that provide services to the purchasing public.

2. Industrial Market The industrial market includes businesses that buy goods that are either converted into other products or goods that are used up during production.

3. Reseller Market The reseller market consists of marketing intermediaries, such as wholesalers and retailers that buy finished products and resell them.

4. Government and Institutional Market In addition to federal and state governments, the institutional market consists of nongovernment organizations, such as hospitals, churches, charities, and museums, that also use supplies and equipment as well as legal, accounting, and transportation services.

B. B2B Buying Behavior Organizational buying behavior bears little resemblance to consumer buying practices.

Differences include the buyers’ purchasing skills and an emphasis on buyer–seller relationships.

1. Differences in Buyers Industrial buyers purchase in large quantities, and are trained, professional, specialized, and expert, which is important given the amount of money at stake in industrial purchases.

2. Differences in the Buyer-Seller Relationship Industrial buying situations often involve frequent, long-term buyer–seller relationships, emphasizing personal selling by trained representatives who understand the needs of each customer.

C. Social Media and Marketing

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Social networking as used by marketers today refers to communications that flow among people and organizations interacting through an online platform that facilitates building social relations among its users.

1. Viral Marketing and Social Networking Viral marketing is a form of marketing that relies on social networking and the Internet to spread information like a “virus” from person to person. Corporations use corporate blogs increasingly for public relations, branding, and otherwise spreading messages that stimulate chat about products in target markets.

2. Web-Driven Revenue with Social Networking Although many major consumer companies have their own Facebook pages, small businesses, too, use social media channels to increase revenues by networking with customers in target markets.

Viral marketing and social networking can lead to consumer awareness faster and with wider reach than traditional media messages, and at a lower cost.

D. The International Marketing Mix Foreign consumers differ from domestic buyers in language, customs, business practices, and consumer behavior. Marketing products internationally means mounting a strategy to support global business operations.

1. International Products Some products can be marketed internationally without modifications, whereas other products need to be modified to fit the needs of a local market.

2. International Pricing Many factors that affect domestic pricing also affect international pricing; additional factors affecting global pricing are the costs of transportation and selling abroad.

3. International Distribution Distribution networks in other countries may be costly. Many domestic marketers avoid time delays by buying existing businesses with already established distribution and marketing networks.

4. International Promotion Many American promotional tactics do not succeed in other countries. Marketers must consider differences in customs and cultural values when promoting products abroad.

KEY TEACHING TIPS ● In the consumer market, buying and selling transactions are visible to the public. Equally important, though far less visible, are organizational (or commercial) markets.

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● The industrial market involves different complexities from the consumer market, in particular due to the difference in buyers and the buyer–seller relationship. ● International marketing requires examining each of the 4Ps to determine what adaptations, if any, need to be made for selling in specific countries. ● Reinforce that marketers face an extreme advantage when distributing products abroad if they can deliver through already established networks.

QUICK QUESTIONS ● How are farmers and manufacturers, for example, included in the industrial market? ● What are the roles of wholesalers and retailers in the reseller market? ● How are consumer–seller relationships different from buyer–seller relationships? ● Why is social media especially important to small businesses? Remind students that one consideration when determining the difference between domestic pricing and international pricing is the higher cost of transporting and selling products abroad.

Use In-Class Activity 3: Small Group Discussion: Up for Debate: Big or Small?

Time Limit: 30 minutes

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Learning Objective 11-7: Discuss the marketing mix as it applies to small business.

Small Business and the Marketing Mix Many of today’s largest firms were once small businesses. The successful small businesses have learned skillful application of the marketing concept and careful consideration of each element in the marketing mix.

A. Small Business Products Understanding the target market and the targeted group’s wants is critical.

B. Small-Business Pricing Profits are often determined by accurately assessing costs from the start. Haphazard pricing can sink a firm with a good product.

C. Small-Business Distribution The most critical aspect of distribution for small businesses is facility location, particularly relative to customer location. Small businesses can often react to changes in needs more quickly than larger firms.

D. Small Business Promotion Understanding promotional costs, as well as benefits of chosen promotional tools, may be the most critical steps involved. Costs can be reduced by using less expensive promotional methods.

KEY TEACHING TIP Students need to understand that establishing the Marketing Mix is especially critical for small businesses.

Use In-Class Activity 4: Small Group Discussion: Marketing Mix Time Limit: 30 minutes

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Assessing the Marketing Environment Activity Overview: This activity asks students to consider various elements from the marketing environment that affect specific industries.

Time Limit: 30 minutes What to Do: 1. Divide the class into five-member groups and assign an industry to each group. For example, you may use the automotive industry, fast-food industry, apparel industry, airline industry, and the banking industry. (5 minutes) 2. Ask each group to discuss how variables from each of the five environments highlighted in the textbook—the political-legal, sociocultural, technological, economic, and competitive environments—affect their assigned industry. (10 minutes) 3. Reassemble the class and discuss each group’s input. (15 minutes) Don’t Forget: With groups of five students, you can assign each student to analyze one of the environments.

After this activity is completed, you can ask students to further research their assigned industry to find additional environmental variables that are currently affecting it.

Wrap-Up: Review the five marketing environments presented in the textbook and some of the common variables that come from each. Remind students that, in many cases, the same variables from each respective environment affect a number of different industries.

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In-Class Activity 2: Small Group Discussion: Data Mining Activity Overview: This activity asks students to think about all the valuable information about themselves that they give to others.

Time Limit: 20 minutes What to Do: 1. Divide students into small groups and ask them to discuss and make a list of all the locations where they freely give valuable personal information. (10 minutes) 2. Reassemble the class and compile the groups’ lists. Are the lists similar? For what purposes is this information used by others? (10 minutes) Don’t Forget: You can also use this activity as an in-class debate with students considering the pros and cons of data mining.

Wrap-Up: Bring the activity to a close by briefly discussing the purpose of data mining and its advantages and disadvantages from a consumer’s perspective.

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In-Class Activity 3: Up for Debate: Big or Small?

Activity Overview: This activity asks students to debate the advantages of starting a small company in a highly competitive industry.

Time Limit: 30 minutes What to Do: 1. Divide the class into three-member groups and ask them to read the Managing in Turbulent Times feature. (5 minutes) 2. Ask each group to discuss the following questions: (15 minutes) a. What marketing strategies did Iconik use to stay afloat during the pandemic in a highly competitive industry? b. What are the advantages and disadvantages of being a small business owner? c. What kind of market information would be useful to a small business owner, and would help them learn what they need to know to be successful? Information about what different environments will have the most impact on their ability to succeed?

3. Bring the class together and debate the groups’ answers. (10 minutes) Don’t Forget: To remind the students that there is a lot more to being a successful business person than simply providing a product or service. What are the most important factors besides the product or service?

Wrap-Up: Bring the activity to a close by encouraging students to consider how many different tasks a business owner must perform to succeed, and the different environments that impact their decisions.

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In-Class Activity 4: Small Group Discussion: Marketing Mix Activity Overview: This activity asks students to consider what a foreign visitor might notice about the American marketplace.

Time Limit: 30 minutes What to Do: 1. Divide students into small groups and ask them to assume that they will be receiving a foreign visitor. At this point, individual groups can select the home country of their visitor if it will help with the assignment.

2. Tell each group to assume that the visitor wants to know what he or she might be able to observe about the American marketplace. In general, the visitor is curious about the various elements of the marketing mix. For example, in considering products, you might mention product assortment and the use of brands; for promotion, you might mention the most popular media options used for specific products and what consumers are attracted to in an advertisement. Ask each group to come up with some suggestions. (15 minutes) 3. Regroup the class and have each group share some of their suggestions. (15 minutes) Don’t Forget: Parts of the marketing mix can often be quite similar from one culture to the next; however, elements of the marketing mix can also vary, depending on the product and the culture into which the product is being sold.

Wrap-Up: Close the activity with a short discussion of the elements of the marketing mix and how these elements can change from one culture to the next, depending on the product and the culture into which the product is being sold.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 11-1. What are the five forces in the external marketing environment?

Five outside factors comprise a company’s external environment and influence its marketing programs: (1) the political and legal environment, (2) the sociocultural environment, (3) the technological environment, (4) the economic environment, and (5) the competitive environment. (Learning Objective 11-1—AACSB—application of knowledge) 11-2. What is the difference between value and utility?

The value of a product refers to its comparative benefits and costs. Benefits include not only the functions of the product but also the emotional satisfaction associated with owning, experiencing, or possessing it. Costs include the sales price, the buyer’s time finding the product, and even the emotional costs of making a purchase decision. A satisfied customer perceives the benefits derived from the purchase to be greater than its costs. Utility is the ability of the product to satisfy the customer’s wants and needs. In a sense, utility is both a separate issue and a subset of benefits. (Learning Objective 11-1—AACSB—application of knowledge) 11-3. What is market segmentation and how is it used in target marketing?

Market segmentation is a method of breaking consumers into mutually exclusive groups based on similar characteristics that are likely to affect consumption. By identifying and targeting segments that are most likely to purchase its products, an organization can tailor its marketing efforts in terms of product features and benefits, pricing, packaging, promotion, and distribution. (Learning Objective 11-3—AACSB—application of knowledge) 11-4. What are four ways that companies conduct market research?

Students should note observation, survey, focus group, and experimentation. (Learning Objective 11-4—AACSB—application of knowledge)

QUESTIONS FOR ANALYSIS 11-5. Select three everyday products (personal fitness training, vacuum cleaners, dog food, cell phones, coffee, or shoes, for example). How are these different products aimed toward different market segments? How does the marketing mix differ for each segment?

Answers will vary but should include how students will tailor their marketing efforts in terms of product features and benefits, pricing, packaging, promotion, and distribution. (Learning Objective 11-3—AACSB—analytical thinking)

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11-6 Imagine being the marketing manager for a local chain of family dining restaurants. How would you adapt the marketing mix to an economic downturn? How would you adapt it to an economic boom?

Students should mention the four components of the marketing mix: product, pricing, place, and promotion. (Learning Objective 11-3—AACSB—analytical thinking) 11-7 Select a well-known company. After doing a bit of research on the company website and in the news, how would you summarize the company’s marketing plan? For instance: What are the target demographics? What products or services does the company offer? Are there different strategies for each product line?

Students should discuss marketing mix and marketing objectives. Students likely cannot see the actual marketing plan of their chosen company, but the strategy should be clear from the marketing mix, and students should note alignment with the company mission. (Learning Objective 11-2—AACSB—analytical thinking) 11-8. Assume two companies make similar wooden picture frames. One company is a small business producing the frames mostly by hand, and the other is a very large business that mass produces frames using an automated assembly line. What are the advantages and disadvantages for each? How would you market these—similarly or differently?

Students should be able to identify major advantages of the large corporation such as economies of scale, and the disadvantages such as lack of uniqueness, as well as the advantages of the small business that can produce unique items but will likely have higher unit costs and a more difficult time distributing the product, although with e-intermediaries like Amazon and Etsy, that may not be as big of a disadvantage as it once was. (Learning Objectives 11-2, 113, 11-4, 11-5, and 11-7—AACSB—analytical thinking)

APPLICATION EXERCISES 11-9 Describe how the consumer buying process applied to a recent purchase. Address the factors that influenced your purchase, as well as the steps in your purchase, and how the company’s marketing mix affected your decision.

The students should focus on the four major influences on consumer behavior: psychological, personal, social, and cultural. They should be able to identify when they recognized the need for the product, how they sought information, how they evaluated alternatives, motives (both rational and emotional) for their decision, and their post-purchase evaluation (how they felt about the purchase, or if they left a positive or negative review on a website). (Learning Objective 11-5—AACSB—analytical thinking) 11-10. Choose an existing product that is not widely known. Once you have identified the product, describe how you would use what you have learned about marketing to increase demand for the product.

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Students will select a wide variety of goods and services so the marketing plans will vary.

However, the answers should contain utility and value information and focus on the marketing mix as well as demonstrate some market research, target marketing, and the consumer buying process. (Learning Objectives 11-2, 11-3, 11-4, and 11-5—AACSB—analytical thinking)

BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 11-11 to 11-15 (Learning Objectives 11-2, 11-3, 11-4, and 11-5—AACSB—interpersonal relations and teamwork, analytical thinking, application of knowledge) This assignment gives students an opportunity to design a complete marketing plan for their business. They should use the framework referenced in “Developing the Marketing Plan” and formulate an appropriate marketing strategy focused on the needs and wants of potential customers.

TEAM EXERCISE: FINDING THE SILVER LINING 11-16 TO 11-21 (Learning Objectives 11-1, 11-2, 11-3, 11-4, and 11-5—AACSB—interpersonal relations and teamwork, reflective thinking) The students’ responses to the questions may vary dramatically due to the different perspectives.

Students should be encouraged to explore all the issues including: the target market, the environmental factors, political-legal, economic, competitive, among others. Students should also review the consumer buying behavior model and the market segmentation variables that will impact the purchase. Finally, the students should create a marketing mix plan based on their target market and market research.

EXERCISING YOUR ETHICS: THE 480 MILLION DOLLAR QUESTION (Learning Objective 11-2—AACSB—analytical thinking, reflective thinking, ethical understanding and reasoning) 11-22. What are the ethical issues in this situation?

The key ethical issue is integrity (should the company keep the money or return it?). Students may also highlight communication or other secondary ethical issues.

11-23. From an ethical standpoint, what are your obligations as the marketing manager in this situation?

Students should acknowledge the need to strike a balance between external market forces (the current political environment, social media, etc.) and the need to drive profits. They may also address balancing their own personal ethics and the eventual decision of the company. In the end, they may note that their obligation as marketing manager is to the company.

11-24. As the marketing manager, what recommendation would you argue for in this situation and how would you attempt to persuade your peers?

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Answers will vary but most students will probably recommend returning the money. Students will want to consider the negative impact to the company’s reputation of keeping the money.

Students should be able to formulate arguments that balance emotion (personal ethics) and logic (business decisions). Students should be encouraged to explore what might happen if the company decision was at odds with their own personal ethics.

CASES: BUILDING A BRAND WITH SOCIAL MEDIA (Learning Objectives 11-1, 11-2, 11-3, and 11-5—AACSB—analytical thinking) 11-25. What forces in the external environment have created opportunities or challenges for IKEA? Explain.

Challenges facing IKEA include the political and legal environment (e.g., tariffs may impact their pricing competitiveness), sociocultural environment (social media and pop culture), technological environment (moving the catalog online), economic environment (shifting spending on home goods), and the competitive environment (retailers like Amazon and Walmart). Opportunities may include some of the same elements, but students should focus on the increasing influence of social media on purchasing behavior.

11-26. How would you describe IKEA’s marketing philosophy in terms of its value package, marketing mix, and overall approach?

Though IKEA’s marketing mix and value package focus on product and price elements, the company also pays attention to place and promotion. Students should note that the company’s overall approach changes constantly to reflect its customer’s buying process but never strays from the company’s mission.

11-27. Describe the consumer buying process for someone purchasing furniture. How would the buying process for an IKEA customer be similar to and different from the buying process for someone purchasing furniture from a more traditional local store?

The consumer buying process consists of a series of steps taken by consumers when making purchases: (a) Problem/Need Recognition, (b) Information Seeking, (c) Evaluation of Alternatives, (d) Purchase Decision, and (e) Postpurchase Evaluation. Students should run through all these steps in their answers, relating each step to the process of purchasing cosmetic products. Social media can fit into multiple steps, including Information Seeking, Evaluation of Alternatives, and Postpurchase Evaluation. Students should note the way IKEA shapes the buying process both in-person and online (using both social media and other, more traditional forms of promotion).

11-28. Search IKEA on social media. On the basis of what you find, how would you describe its target audience?

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Answers may vary. However, students should take psychographic, demographic, and behavioral variables into account to answer this question. Age, gender, education, income, lifestyle, attitudes, and interests are some relevant variables to consider.

SHAVING OFF THE PROFITS (Learning Objectives 11-1, 11-2, 11-3, 11-5—AACSB—analytical and reflective thinking, application of knowledge) 11-29. How would you best describe P&G’s marketing strategy for Gillette?

P&G’s marketing strategy is focused on lowering prices and increasing the diversity of its target market. Students may also note a shift in the company’s focus on buying process (online vs. in-person shopping).

11-30. What elements of P&G’s external marketing environment, if any, are influencing the company’s marketing strategy? Explain your reasoning.

Most students will cite the economic, competitive environment, and the sociocultural forces as having the main impact on P&G’s new strategic plan.

11-31. Why do you suppose lowering the prices of Gillette products didn’t increase sales?

Most students will probably conclude that lowering prices alone would not help Gillette overcome the increased market competition and concurrent decreased demand. They may note the enduring reputation of Gillette in comparison with newer, “fresher” brands.

11-32. Explain the roles of target marketing and market segmentation as they apply in this case.

Students should note in general how P&G and its competitors are using demographic, psychographic, and behavioral variables to determine their target market and better meet the customers’ needs and wants. They should be able to cite specific examples to support their answers.

11-33. In what ways are the components of P&G’s marketing mix being affected by the situation described in this case? Give examples to illustrate.

Most students will state that all of the components of the marketing mix: product, price, place, and promotion have been affected by the changes in the customer base for P&G. The products will have different features meant to appeal to either the lower-end market segments, or the higher-end market segments. Price will be reflected appropriately. Products targeting the highend segment will be priced higher while products targeting the low-end segment will be priced appropriately lower than before. P&G will be selling each set of products at appropriately chosen retail outlets that will appeal to the market segments. Promotions will also be modified to appeal to the low-end segments for “their” products and the high-end segments for “their” products.

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Chapter 12: Developing and Pricing Products Chapter Overview By now, students have grasped that the marketing mix—or the Four Ps—is built around the characteristics and needs of the target market. This chapter brings the Four Ps another step forward by discussing product and pricing.

As the chapter unfolds, many variables surrounding both the consumer and organizational markets are discussed, as well as a focus on distinguishing features between products and services, and the importance of branding and packaging.

Specifically, the chapter identifies the various pricing objectives that govern pricing decisions and the price-setting tools used in making these decisions. It discusses pricing strategies and identifies the pricing tactics that can be used for setting prices.

Learning Objectives 12-1. Explain the definition of a product as a value package and how to classify goods and services.

12-2. Describe the new product development process.

12-3. Describe the stages of the product life cycle (PLC) and methods for extending a product’s life.

12-4. Identify the various pricing objectives that govern pricing decisions and describe the price-setting tools used in making these decisions.

12-5. Discuss pricing strategies that can be used for different competitive situations and identify the pricing tactics that can be used for setting prices.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: Can We See Your Value Package?

2. Up for Debate: Should We Be Granting a New Life?

3.Small Group Discussion: What’s the Deal with Pricing?

Description Students discuss value packages of some well-known competing products.

Students are divided into teams to discuss the pros and cons of extending the life of a declining or even recently deceased product.

Students consider pricing strategies of common household items.

Time Limit

30 min.

30 min.

30 min

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CHAPTER OUTLINE Learning Objective 12-1: Explain the definition of a product as a value package and how to classify goods and services.

What Is a Product?

In order to develop the marketing mix and plan their strategies effectively, marketers must consider what consumers buy when they purchase products; marketers must begin by understanding that every product is a value package that provides both features and benefits to satisfy the needs and wants of customers.

A. The Value Package Product features are the tangible and intangible qualities that are built into products; product benefits include what products can do emotionally or physically for consumers.

Today’s consumer regards a product as a bundle of attributes, benefits, and features—that taken together are the value package.

B. Classifying Goods and Services Goods and services may be classified according to their expected buyers; buyers may be classified as buyers of consumer products or buyers of organizational products. The consumer and industrial buying processes differ significantly.

1. Classifying Consumer Products. Convenience goods (such as milk and bottled water) and convenience services are consumed rapidly and regularly. They are inexpensive and are purchased often and with little output of time and effort. Shopping goods (such as appliances and mobile devices) and shopping services (such as hotel or airline reservations) are more expensive and are purchased less often than convenience products.

Consumers often compare brands, sometimes in different stores. They may also evaluate alternatives in terms of style, performance, color, price, and other criteria. Specialty goods (such as wedding gowns and tuxedoes) and specialty services (such as catering for wedding receptions or health care insurance) are extremely important and expensive purchases. Consumers usually decide on precisely what they want and will accept no substitutes. They often go from source to source, sometimes spending a great deal of money and time to get a specific product.

2. Classifying Organizational Products. Production items are goods or services that are used directly in the production process. Expense items are goods and services consumed within one year by organizations producing other goods or supplying other services.

Capital items are longer-lasting (expensive and sometimes permanent) goods and

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services that have expected lives of more than one year and typically several years.

C. The Product Mix The product mix is the group of all goods and/or services that a marketer makes available for sale, whether consumer goods, industrial goods, or both. A Product Line is a group of products that are closely related because they function in a similar manner (flavored coffees) or are sold to the same customer group (stop-in coffee drinkers) who will use them in similar ways. Product lines help a company to grow by broadening the customer base.

KEY TEACHING TIPS ● Remind students that a value package is a combination of all the product features and benefits—all bundled together—that are found to be attractive to the consumer. ● Make sure students understand the distinction between a product mix (the total assortment of all goods and services available from a marketer) and a product line (a group of products that function in a similar manner or are sold to the same customer group who will use them in similar ways).

Use In-Class Activity 1: Can We See Your Value Package?

Time Limit: 30 minutes

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Learning Objective 12-2: Describe the new product development process.

Developing New Products To expand or diversify to survive, marketers must develop and introduce streams of new products. Competition and shifting consumer preferences cause marketers to continually monitor and frequently change their offerings.

A. The New Product Development Process Product development is a long, complex process. New products usually involve carefully planned and sometimes risky commitments of time and resources.

B. Product Mortality Rates Estimates indicate that it takes 50 new product ideas to generate one product that reaches that marketplace; only a few of the survivors become successful. Speed to market (or time compression) means the quicker a product enters the marketplace, the more likely it is to survive. Introducing new products ahead of competitors allows companies to become market leaders.

C. The Seven-Step Development Process To increase their chances of developing a successful new product, many firms adopt some version of a seven-step process for developing physical goods.

1. Product ideas. Product development begins with a search for ideas for new products.

Ideas typically come from consumers, the sales force, R&D departments, suppliers, or engineering personnel.

2. Screening. This stage is designed to eliminate ideas that do not mesh with the firm’s abilities or objectives. Representatives from marketing, engineering, operations, and finance participate.

3. Concept testing. Once ideas have been screened, companies use market research to get consumers’ input about benefits and prices.

4. Business analysis. After gathering consumer opinions, marketers compare production costs and benefits to see whether the product meets minimum profitability goals.

5. Prototype development. Once the firm has determined the potential profitability of a product, engineering, R&D, or design groups produce a prototype. Expenses increase at this stage.

6. Product testing and test marketing. Applying lessons from the prototype, the company goes into limited production.

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7. Commercialization. If test marketing proves positive, the company begins full-scale production and marketing.

D. Variations in the Process for Services The development of services involves many of the same stages. Basically, steps 2, 3, 4, 6, and 7 are the same. There are, however, important differences in steps 1 and 5: Service ideas. The search for service ideas includes defining the service value package, identifying the tangible and intangible features that characterize the service, and stating service specifications. Service process design. Instead of prototype development, services require a three-part service process design that includes process selection (identifying each step of the service, including sequence and timing), worker requirements (stating employee behaviors, skills, capabilities, and interactions with customers during the service performance), and facility requirements that designate all equipment that supports delivery of the service.

KEY TEACHING TIP ● New product development is time intensive, expensive, and risky. Being the first to market with a product is only valuable if sound research indicates demand for a product or service with the value package being offered. ● Most new products fail, and far more never even get the chance. Stress that high mortality rates indicate that out of many new ideas, only a few products reach the market.

QUICK QUESTIONS ● Can you think of any recent examples of a product that benefited from its speed to market? ● Can you think of any recent examples of new products that did not meet expectations, or actually failed? What about successes?

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Learning Objective 12-3: Describe the stages of the product life cycle (PLC) and methods for extending a product’s life.

The Product Life Cycle Every product passes through a series of stages during its commercial life.

A. Stages in the PLC The product life cycle is a natural process in which products are born, grow, mature, decline, and die. The stages include: introduction, which begins when the product enters the marketplace; growth, when sales and profits climb; maturity, the longest stage when sales growth begins to slow; and decline, when sales and profits continue to fall.

B. Extending Product Life: An Alternative to New Products Companies try to keep products in the maturity stage as long as they can. In fact, companies try to keep products in the maturity stage as long as they can. Foreign markets, for example, offer three approaches to extending life cycles: In product extension, an existing product is marketed globally instead of just domestically. With product adaptation, the product is modified for greater appeal in different countries. Reintroduction means reviving, for new markets, products that are becoming obsolete in older ones.

C. Identifying Products Branding and packaging are two tools that allow consumers to recognize products in the marketplace.

1. Branding Products Brand names are symbols for characterizing products and distinguishing them from one another; branding is the process of using symbols, names, logos, and colors to communicate the features and qualities of products. a. Brand awareness is the brand name that first comes to your mind when you consider a particular product category. b. Gaining Brand Awareness. Firms compete to be “top-of-mind” for consumers; it is an expensive struggle that pays tremendous dividends when successful. Marketers are finding more effective, less expensive ways to gain brand awareness. c. Product Placements. A product placement is a promotional tactic for brand exposure in which characters in television, film, music, magazines, or video games use a real product that is visible to viewers. Its marketing purpose is to be visible to viewers and potential consumers. It legitimizes the brand in the mind of the customer.

2. Types of Brand Names

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Just about every product has a brand name. Generally, different types of brand names— national, licensed, or private—increase buyers’ awareness of the nature and quality of competing products. a.

National Brands. These are brand-name products produced by, widely distributed by, and carrying the name of the manufacturer.

b. Licensed Brands. These are brand-name products that carry the name of an organization or individual. Marketers exploit brands because of their public appeal, image, and status that customers hope to gain by associating with them. c. Private Brands. These are brand-name products that a wholesaler or retailer has commissioned from a manufacturer. These products can only be found in the stores of that wholesaler or retailer.

D. Packaging Products A product’s package serves several purposes; the packaging can serve as an in-store advertisement, a display for the brand name, an identifier of product features and benefits, and can reduce the risk of damage and increase the difficulty of stealing.

KEY TEACHING TIPS ● Reinforce that the product life cycle is a series of stages through which a product passes during its commercial life; the duration of a product’s life cycle varies. ● Remind students that both product placements and viral marketing help marketers gain brand awareness. ● Make sure students understand that branding is the process of using symbols, names, logos, and colors to communicate the qualities of a particular product made by a particular producer.

QUICK QUESTIONS ● What happens in the decline stage of the product life cycle? ● How does successful branding lead to brand awareness? ● Why is viral marketing sometimes more successful than traditional media options? ● What is the difference between national, licensed, and private brands? ● What are some purposes of packaging?

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Use In-Class Activity 2: Should We Be Granting a New Life?

Time Limit: 30 minutes

HOMEWORK Product Features and Benefits Now might be a good time to assign Application Exercise 12-9 from the end-of-chapter materials as homework. This assignment encourages students to consider the product benefits and how they are used to attract the chosen target market.

At-Home Completion Time: 30 minutes

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Learning Objective 12-4: Identify the various pricing objectives that govern pricing decisions and describe the pricesetting tools used in making these decisions.

Determining Prices In pricing, managers decide what the customer pays and the seller receives in exchange for a product.

A. Pricing to Meet Business Objectives Pricing objectives are the goals that sellers hope to achieve in pricing products for sale.

Marketers’ pricing strategies are influenced by a variety of factors. Some companies have profit-maximizing pricing objectives, while others have market share pricing objectives. Still others are concerned with pricing for e-business objectives. Competition, social and ethical concerns, and corporate image all can factor into the decision.

1. Profit-Maximizing Objectives Some companies that set prices to maximize profits, therefore, have profit-maximizing pricing objectives. Marketers attempt to set prices to sell the number of units that will generate the highest possible profits. The seller’s pricing decision is critical for determining the firm’s revenue, which is the selling price times the number of units sold.

REVENUE = SELLING PRICE X UNITS (QUANTITY) SOLD 2. Market Share (Market Penetration) Objectives Some firms want to dominate the market or secure high market share and, therefore, have market share pricing objectives. Market share is determined by estimating the total percent of the market that the marketer is currently supplying; a business may be willing to accept minimal profits or even losses to establish market share. Market domination means continuous sales of more units and higher profits, even at lower unit prices.

3. Pricing for E-Business Objectives Because the Web provides a more direct link between producer and customer, buyers often avoid the added costs of wholesalers and retailers. Marketing costs as well as selling prices for e-businesses can be somewhat lower because of the unique marketing capabilities of the Internet. The ease of online comparison shopping can lead to cost efficiencies.

B. Price-Setting Tools Marketers must estimate the potential impact before deciding on final prices. Tools used for this purpose are cost-oriented pricing and breakeven analysis.

1. Cost-Oriented Pricing Cost-oriented pricing considers the need to cover production costs and make a profit.

Selling price = Seller’s costs + Profit. Markup is the amount added to an item’s total

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cost to earn a profit; markup is usually stated as a percentage of the product’s selling price.

Markup percentage 

Markup 100% Sales price

2. Breakeven Analysis: Cost-Volume-Profit Relationships Using cost-oriented pricing, a firm will cover variable costs—costs, such as materials bought to make the product, that change with the number of units of a product produced and sold. It will also make some money to pay fixed costs—costs, such as annual rent, that must be paid regardless of the number of units produced and sold.

Breakeven analysis assesses costs versus revenues for various sales volumes. It shows, at any particular selling price, the financial result—the amount of loss or profit—for each possible volume of sales. The breakeven point is how many of a product must be sold so that total revenues exactly cover both fixed and variable costs.

Breakeven Point (in units)

=

Total Fixed Cost Price − Variable Cost

KEY TEACHING TIPS ● Reinforce that pricing enables managers to decide what the firm will get in exchange for its products; pricing objectives are the goals they hope to achieve in pricing products. ● Make sure students understand that cost-oriented pricing considers profit and a firm’s need to cover production costs and the costs of the merchandise. ● Breakeven analysis can be a tough concept for students so you may want to reinforce the concept and the formula: Breakeven Point (in units) = Total Fixed Cost/Price − Variable Cost.

Review the shirt example in the textbook.

QUICK QUESTION How do marketers achieve profit-maximizing objectives and market share objectives?

HOMEWORK Pricing

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Now might be a good time to assign Application Exercise 12-10 from the end-of-chapter materials as homework. This assignment encourages students to consider the pricing objectives behind familiar products.

At-Home Completion Time: 30 minutes

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Learning Objective 12-5: Discuss pricing strategies that can be used for different competitive situations and identify the pricing tactics that can be used for setting prices.

Pricing Strategies and Tactics Pricing strategies are planning activities that affect the marketing mix. Pricing tactics are ways that managers implement a firm’s pricing strategies. It is much easier to change pricing than to change products or distribution channels.

A. Pricing Strategies 1. Pricing Existing Products A firm can price existing products above, below, or at or near market price. Marketers that price products above market rely on the assumption that higher prices are accompanied by higher quality. Pricing below the market can succeed if the firm can offer a product of comparable quality while keeping costs below those of the competitors.

2. Pricing New Products If a marketer can differentiate a product from all others, the marketers may implement price skimming, in which price is initially set high to earn large profits. Such a strategy will attract competitors to enter the marketplace with lower prices. With penetration pricing, price is initially set low to create consumer interest and to stimulate trial purchases. Profit is low; therefore, the marketer relies on raising prices as consumer acceptance grows.

3. Fixed versus Dynamic Pricing for Online Business Dynamic pricing works because information flow on the Web notifies buyers of changes in product availability. Examples of dynamic pricing include eBay’s traditional auction bidding while eBay’s Buy It Now is an example of fixed pricing.

4. Bundling A bundling strategy groups several products together to be sold as a single unit, rather than individually. Cable or satellite TV/phone/Internet packages are one example of a bundle. A discount on insurance by purchasing multiple policies (for home and car) is another way a bundle serves to benefit both the company and the consumer.

B. Pricing Tactics Price lining involves offering all items in certain categories at a limited number of prices. A store predetermines three or four price points at which a particular type of product will be sold. Price lining involves setting each price level with a specific type of customer in mind and then packaging and promoting products accordingly. Psychological pricing takes advantage of the fact that customers are not completely rational when making buying decisions. One type of psychological pricing, odd-even pricing, is based on the theory that customers prefer prices that are not stated in even dollar amounts. Discounts are price reductions designed to stimulate sales.

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C. International Pricing Sometimes products must be priced for what customers in other countries can afford. This may involve developing products to fit that pricing. Another strategy calls for pricing products below cost to increase foreign market share; this practice is called dumping and is illegal in the United States.

KEY TEACHING TIPS ● Students often confuse these terms: With price skimming, price is initially set high to cover costs and generate a profit; with penetration pricing, price is initially set low to establish a new product in the market. ● Reinforce that price lining offers all items in certain categories at a limited number of prices at price points, whereas odd-even pricing is based on the theory that customers prefer prices that are not stated in even dollar amounts, such as $.99 and $1.99.

QUICK QUESTIONS ● How has dynamic pricing benefited Web users over traditional fixed pricing strategies? ● When might sellers resort to using discounts?

Use In-Class Activity 3: Small Group Discussion: What’s the Deal with Pricing?

Time Limit: 30 minutes

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Can We See Your Value Package?

Activity Overview: This activity asks students to consider value packages of well-known competing products.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask each group to come up with four sets of competing products or services. Students should select products that are similar, but carry a different brand name, such as Blue Bonnet Margarine versus Prairie Farms Margarine. (10 minutes) 2. Ask students to discuss the value package associated with each product and be able to explain the similarities and differences. (10 minutes) 3. Reassemble the class as a whole and ask for each group’s input. (10 minutes) Don’t Forget: Students will come up with a variety of value packages. Some will be more difficult to explain than others. For example, almost everyone knows that a one-night stay at the Holiday Inn Express is more affordable than a stay at the Ritz-Carlton because the Ritz-Carlton offers more amenities. Conversely, the Ritz-Carlton offers more upscale features and benefits to the visitors.

Luxurious surroundings are a feature of the Ritz-Carlton that the Holiday Inn Express doesn’t even try to compete with (perhaps).

Wrap-Up: Bring the activity to a close by reminding students of the role the value package plays in the marketing mix and the common types of pricing strategies and tactics seen in the marketplace.

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In-Class Activity 2: Up for Debate: Should We Be Granting a New Life?

Activity Overview: This activity asks students to discuss how firms decide to either try to extend a product’s life or let it go.

Time Limit: 30 minutes What to Do: 1. Ask the class to consider a product that has recently grown obsolete or is projected to become obsolete, such as gas-powered vehicles being replaced by Electric Vehicles which may be replaced by hydrogen-powered vehicles or even something unknown at present. (10 minutes) 2. Divide the class into small groups to discuss their pros and cons of trying to extend the life of gas-powered vehicles and/or Electric Vehicles. Do the pros outweigh the cons? For whom?

What strategies would your group recommend to extend the life of the product chosen? (10 minutes) 3. Reassemble the class to debate the pros and cons as a group. Do the pros outweigh the cons?

Why and how? Who benefits from companies that try to revive or sustain a product that may no longer be viable? (10 minutes) Don’t Forget: Three prominent methods are used for extending the lives of declining or even recently deceased products. (1) In product extension, an existing product is marketed globally instead of just domestically. A product that is in the maturity stage or even declining domestically may provide value to customers in other countries. (2) With product adaptation, the product is modified to contain changed features that appeal to new customers in different countries. (3) Reintroduction means reviving, for new markets, products that are becoming obsolete or have died in older ones.

Wrap-Up: Ask students to discuss whether they would buy a gas-powered vehicle if price were no object.

Why or why not?

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In-Class Activity 3: Small Group Discussion: What’s the Deal with Pricing?

Activity Overview: This activity asks students to consider pricing strategies behind some well-known competing products.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask each group to come up with at least four sets of competing products or services. Students should select products that are similar but carry competing brand names, such as Nike shoes versus Addidas. (10 minutes) 2. Ask students to discuss the price of each product and be able to explain the similarities and differences. (10 minutes) 3. Reassemble the class as a whole and ask for each group’s input. (10 minutes) Don’t Forget: Students will come up with a variety of reasons for differing products’ prices. Some will be more difficult to explain than others. For example, almost everyone knows that a one-night stay at the Holiday Inn Express is less costly than a stay at the Ritz-Carlton because the Ritz-Carlton offers more amenities. Price differences between Del Monte spinach and Jolly Green Giant spinach might be more difficult to explain.

Wrap-Up: Bring the activity to a close by reminding students of the role the pricing plays in the marketing mix and the common types of pricing strategies and tactics seen in the marketplace.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 12-1. What is a value package?

A value package is defined as a bundle of attributes that provide the right features and benefits that satisfy customers’ wants and needs. (Learning Objective 12-1—AACSB— application of knowledge) 12-2. How would you explain the product development process?

Students should include most aspects of the seven-step product development process from idea to commercialization. (Learning Objective 12-2—AACSB—application of knowledge) 12-3. What are the various classifications of consumer and industrial products? Give an example of a good and a service for each category other than those discussed in the text.

The various classifications of consumer and organizational products include:  Consumer products—any product made for the end user to purchase and use  Convenience goods and services—candy, ATM services, take-out ice cream  Shopping goods and services—clothing, car repair, furniture  Specialty goods and services—houses, interior design, funeral services  Production goods—gym member demand for classes used to create new class schedule, plant products used to create pharmaceuticals, trees trimmed and turned into lumber  Expense items—inventory, repair bills, office supplies  Capital items—computer servers, long-term maintenance contracts (Learning Objective 12-1 – AACSB – application of knowledge) 12-4. What pricing strategies can companies use for different competitive situations?

Students should be able to describe various pricing strategies, including penetration pricing, skimming, pricing high or low, fixed or dynamic pricing. Students should be able to apply strategies to different competitive market types: monopolistic, oligopoly, monopoly, and pure competition as well as start-ups, new products, mature products, and other factors. (Learning Objective 12-5—AACSB—application of knowledge)

QUESTIONS FOR ANALYSIS 12-5. Describe the four stages of the product life cycle and the marketing mix that is used in each. Provide at least one example of a product in each stage other than those provided in the text.

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1. Introduction Stage, prices are high, there are few models, little competition, sales and profits are at their lowest, and companies focus on consumer awareness.

2. Growth Stage, prices drop, competition, sales and profit increase.

3. Maturity Stage is typically the longest stage with sales and profits peaking then declining, increased competition leads to lower prices and increased promotional expenses.

4. The final stage is the Decline Stage. Profits, sales, and promotion decline. Eventually, the product dies.

Examples will vary.

(Learning Objective 11-3—AACSB—application of knowledge) 12-6. Some companies have very narrow product mixes, producing just one or two products, while others have many different products. What are the advantages of each approach?

A narrow product mix permits a company to focus its efforts on a core product and one or two target markets. A wide product mix gives a company more flexibility if one product does not do as well. Additionally, they can appeal to multiple target markets. (Learning Objective 12-1—AACSB—analytical thinking) 12-7. Suppose that a small publisher selling to book distributors has fixed operating costs of $600,000 each year and variable costs of $3.00 per book. How many books must the firm sell to break even if the selling price is $6.00?

Breakeven units = Fixed costs/(selling price − variable costs) Breakeven units = $600,000/($6 − $3) = 200,000 books (Learning Objective 12-4—AACSB—application of knowledge) 12-8. Describe price skimming and penetration pricing. What types of new products would be best suited to price skimming? What types of products will be most successful with penetration pricing?

Price skimming is entering the market at a high price and gradually lowering it. This approach works well for durable products that will be purchased infrequently. A penetration approach is entering the market with a low price and gradually increasing it. This approach works well for consumables since customers will be purchasing the product frequently.

(Learning Objective 12-5—AACSB—application of knowledge)

APPLICATION EXERCISES 12-9. For this exercise, select a car or truck or other vehicle, something you wouldn’t ordinarily buy, and identify the target market. Once you’ve identified the target market, describe the features of the vehicle that appeal specifically to the target market.

Students answers will vary but many will pick popular brands and describe the features in terms of price, comfort, gas mileage, service, reputation, etc. (Learning Objective 12-1— AACSB—analytical thinking)

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12-10. Select a product and analyze pricing objectives for it. What information would you want to gather if you were to adopt a profit-maximizing objective? What information would you want to gather if you were to adopt a market share objective?

Answers will vary but should include a great deal of competitive information, including number of competitors and, competitor prices. Market share objectives should consider breakeven point, number of competitors, and their shares. (Learning Objective 12-4— AACSB—analytical thinking) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 12-11 TO 12-15 (Learning Objectives 12-2, 12-4, 12-5—AACSB—interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Depending on the type of business venture, teams’ product mix and pricing strategies will vary widely. Teams should be able to justify that their strategies are consistent with the needs and wants of the target market. They should know where in the Product Life Cycle their product(s) will be, and how many steps of the new product development process they might need to go through.

TEAM EXERCISE: SOCIAL ENTERPRISES, PROFITS STILL MATTER 12-16 TO 12-20 (Learning Objectives 12-4 and 12-5 – AACSB – interpersonal relations and teamwork, analytical thinking, application of knowledge) You are a member of a team of students who have decided to create and run a social enterprise.

Social enterprises can operate in almost any sector of the economy. Their main difference from other types of business organizations is that they exist to meet a specific social purpose and use the vast majority of the profits they generate to help further this purpose or mission.

You have decided to offer cooking classes to first-year students who might lack the skills to create nutritious and healthy food. You have the following information:    

You will rent a functional kitchen at a cost of US$3,000 per month. You will be open eight hours a day, five days a week, for an average of 20 days each month. Over this period, a qualified tutor will cost US$25 per hour.

You will need to appoint a part-time coordinator who will also liaise with suppliers, order from them, and deal with customer bookings and queries. The coordinator will need to be paid US$4,000 per month.

Negotiations with your suppliers have led to an agreement that they will supply raw materials at US$3 for each person per hour of the session. This is inclusive of delivery charges.

The local higher-education institutions are fully supportive of your social enterprise, and they will market your service to all first-year students and offer them a basic set of cooking utensils for the course.

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You need to carry out some vital calculations and consider your options while deciding the pricing and viability of the project.

Team Activity 12-16. Assemble in groups of four and assign one member of the group to each of the following pricing philosophies:    

Because the venture is a new one, profits should be maximized in order to ensure the long-term financial viability of the social enterprise.

There are other providers of similar courses in the private and public sector, so the emphasis needs to be on ensuring that a significant market share is captured at the earliest opportunity.

The social enterprise should focus on gourmet cooking classes for financially well-off students.

The courses are short, so repeat business is essential. In this case, penetration pricing is vital to secure repeat business.

Have each group member describe the pricing strategy that they think the social enterprise should use based on their assigned philosophy. Be sure to list the benefits of each approach.

12-17. As a group, come to a consensus about the best pricing philosophy and a rationale for why you have selected this approach.

12-18. Using the information provided in the question, identify the fixed and variable costs.

12-19. Using the amounts calculated in Step 2, find the break-even point at an hourly course cost of US$15, US$20, US$25, and US$30. Based on these answers and your assessment of likely monthly bookings, decide what the best price for the cooking classes will be.

12-20. What other pricing tactics could be used to attract more customers for the courses?

After completing the Action Steps, students will better understand the impact of pricing strategies, what pricing strategies are available to marketers, and the objectives that companies try to achieve through pricing.

12-18. Fixed costs include rent, employee salaries, and the business manager’s salary. The variable cost is the cost from the supplier for each pack of ingredients.

12-19. The formula is: Breakeven Point in units = Total Fixed Cost/Price − Variable Cost To work out total fixed costs: US$3,000 + (8 × 5 × 20 × US$25) + US$4,000 = US$27,000 27,000/(15 − 3) = Breakeven @ US$15 = 2,250 students/month 27,000/(20 − 3) = Breakeven @ US$20 = 1,588 students/month 27,000/(25 − 3) = Breakeven @ US$25 = 1,227 students/month 27,000/(30 − 3) = Breakeven @ US$30 = 1,000 students/month

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Students will notice that at the lowest price, the demand is the highest, although this will mean larger class sizes and less time to devote to each customer.

12-20. Students could suggest bundling course costs into several sessions and offering fixed prices for six, eight, or twelve sessions. They could also offer the courses at a higher cost to individuals who are not students; this could reduce the price for core customers and fill in classes where demand might otherwise be low.

EXERCISING YOUR ETHICS: DRIVING A LEGITIMATE BARGAIN (Learning Objective 12-1—AACSB—ethical understanding and reasoning, reflective thinking) 12-21. How would you characterize the particular ethical issues in this situation?

The key ethical issues are integrity and communication. Matt has invested enormous effort in information collecting and evaluating alternatives, expecting that once he had made the purchase decision, the dealer would come through on its end of the bargain. One possibility is that the sales representative and the sales manager simply had not communicated, but this becomes an ethical issue when the sales representative has the responsibility to establish contracts without the authority to deliver results.

12-22. From an ethical standpoint, what are the obligations of the sales representative and the sales manager regarding the pricing of the product in this situation?

Since the contract has been signed, the minimal obligation of the car company is to offer the new model at the price of the previous year’s model.

12-23. If you were Angela, the sales manager, how would you defend your actions?

Answers may vary. Students should focus on the ethical issues. Manufacturing schedules are something Matt could know about or account for, when signing the contract. Gary, too, should have known and communicated about manufacturing schedules to Matt.

12-24. If you were responsible for maintaining good customer relations at the dealership, how would you handle this matter, considering the interests of both the consumer and the business?

Answers will vary. Students will want to consider the negative impact on the local marketplace if the customer leaves completely dissatisfied. Especially, with social media, this situation could go viral. As noted in 12-22, the minimum offer should be a new model at the previous year’s price. Other options are available.

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CASES: THE THIRTY-THOUSAND DOLLAR HANDBAG (Learning Objectives 12-1, 12-4, and 12-5—AACSB—analytical and reflective thinking, application of knowledge) 12-25. How would you describe the value package of the Louis Vuitton purse?

Students should note social capital (both of the company and the purchaser), scarcity, and function. They may note other creative components of the value package.

12-26. What is Louis Vuitton’s target market? Do you think it is evolving or is it static?

Answers will vary. Students should note the high price of the product, which places it out of reach of much of the general population. They should mention the specific desire for social capital (people who buy these bags will want to display them), and the bags’ value as status symbols. Students may argue that the market is either evolving or static depending on their opinion, but should be able to back up their opinion with market research.

12-27. If you were starting a small boutique store that carried handbags, what kinds of bags would you stock and why?

Student answers will vary but should be backed up with supporting evidence.

12-28. Pick a small business in your community. In a paragraph or two, describe the products or services provided by the company and the target market(s). Taking those two things into consideration, how do you think the company sets its prices?

Answers will vary. Students should investigate both products and market and should describe the various elements that contribute to pricing, including market research, target market research, supply and demand, and market share and other pricing objectives.

12-29. Do you think the economic downturn of 2008 affected the price of Louis Vuitton handbags? Do you think the economic crisis of 2020 affected the price of Louis Vuitton and other luxury handbags? Why or why not?

Answers will vary based on student opinion, but students should support their opinions with market research and historical sales and pricing data.

A PENNEY FOR YOUR THOUGHTS (Learning Objectives 12-4 and 12-5—AACSB—analytical and reflective thinking, application of knowledge) 12-30. Do you think it’s ethical for Arlo to refuse to support older products? Why or why not?

Student answers will vary, but may touch on the cost of supporting older products and Arlo’s notice to customers.

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12-31. Do you think there should be laws governing obsolescence? Why or why not?

Student answers will vary but opinions should be supported by learning from the chapter.

12-32. What other options would Arlo have in lieu of discontinuing support?

Student answers will vary but may mention additional charges for supporting older products, offering a discount to update, or other options.

12-33. If you were the CEO of Arlo, how would you justify planned obsolescence to your employees?

Students may draw attention to the end-of-life policy already in place at Arlo.

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Chapter 13: Distributing and Promoting Products Chapter Overview By now, students have grasped that the marketing mix—or the Four Ps—is built around the characteristics and needs of the target market. This chapter brings the Four Ps another step forward by discussing distribution and promotion.

Specifically, the chapter examines the meaning of distribution mix and identifies the different channels of distribution. Along the way, the chapter examines the role of wholesalers, different types of retailing, the role of e-intermediaries, and the major activities in the physical distribution process. Finally, the chapter looks at the objectives of promotion, the considerations in selecting a promotional mix, the tasks involved in personal selling, sales promotions, and publicity and public relations.

Learning Objectives 13-1. Explain the meaning of distribution mix and identify the different channels of distribution.

13-2. Describe the role of wholesalers and the functions performed by e-intermediaries.

13-3. Describe the different types of retailing and explain how online retailers add value for consumers on the Internet.

13-4. Define physical distribution and describe the major activities in the physical distribution process.

13-5. Identify the objectives of promotion and the considerations in selecting a promotional mix, and discuss the various kinds of advertising promotions.

13-6. Outline the tasks involved in personal selling and describe the various types of sales promotions.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: Why Do They Sell Where They Do? 2. Small Group Discussion: What’s the Best Way to Reach Them?

3. Up for Debate: Getting a Stimulus Boost with Promotion

Description Students consider distribution and promotion strategies.

Students discuss different ways that a product can be promoted to one specific target market.

Students are divided into teams to discuss the pros and cons of relying on direct marketing and promotions to help push products through distribution channels.

Time Limit 30 min.

30 min.

30 min.

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Learning Objective 13-1: Explain the meaning of distribution mix and identify the different channels of distribution.

The Distribution Mix The distribution mix is the combination of distribution channels that a firm selects to get a product to end users.

A. Intermediaries and Distribution Channels Intermediaries help to distribute a producer’s goods, either by moving them or by providing information that stimulates their movement from sellers to customers. Wholesalers are intermediaries who sell products to other businesses for resale to final consumers. Retailers sell products directly to consumers. The nature of the product and the target market greatly affect whether intermediaries are used.

1. Distribution of Goods and Services A distribution channel is the path that a product follows from producer to end user. a. Channel 1: Direct Distribution. In a direct channel, the product travels from the producer to the consumer or other buyer, without intermediaries. b. Channel 2: Retail Distribution. In Channel 2, producers distribute consumer products through retailers, whether their own retail outlets or other retailers. c. Channel 3: Wholesale Distribution. Wholesalers enter the distribution network primarily for the purpose of storage and restocking of merchandise. d. Channel 4: Distribution by Agents or Brokers. Channel 4 uses sales agents or brokers who represent producers and sell to consumers or industrial users. They receive commissions based on the prices of the goods they sell. Sales agents generally deal in the related product lines of a few producers, and form long-term relationships to represent those producers and meet the needs of many customers. Brokers match numerous sellers and buyers as needed, often without knowing in advance who they will be.

2. The Pros and Cons of Nondirect Distribution Nondirect distribution becomes higher priced for end users because each distribution link charges a markup or commission. However, intermediaries can save consumers time by reducing the number of contacts made, and save consumers money by providing speed of delivery, storability, and less cost by buying cheaply in bulk from manufacturers and then passing savings on to final consumers. Intermediaries exist because they provide necessary services that get products efficiently from producers to users.

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B. Distribution Strategies Selecting an appropriate distribution network is a strategic decision; it determines both the amount and cost of market coverage that a product gets, or how many of any kind of intermediary will be used. Three strategies, (1) intensive, (2) exclusive, and (3) selective distribution, provide different degrees of market coverage.

1. Intensive Distribution Intensive distribution means distributing through as many channels and channel members as possible (both wholesalers and retailers). This method is usually used for low-cost consumer goods such as candy and magazines.

2. Exclusive Distribution With exclusive distribution, a manufacturer grants the exclusive right to distribute or sell a product to a limited number of wholesalers or retailers, usually in a given geographic area. High-cost prestige products such as Rolex watches are sold in this manner.

3. Selective Distribution Using selective distribution, a producer selects only wholesalers and retailers that will give a product special attention in sales effort, display and promotion advantage, and so forth. Furniture and appliances are examples of consumer products that use selective distribution.

C. Channel Conflict and Channel Leadership Manufacturers and services providers may distribute through more than one channel, and many retailers are free to strike agreements with as many producers as capacity permits. In such cases, channel conflict may arise.

1. Channel Conflict Channel conflict occurs when members of the channel disagree over roles or rewards.

Conflict may arise if one channel member has more power or is perceived as getting preferential treatment. Conflicts can defeat the purpose of the system by disrupting the flow of goods.

2. Channel Leadership Usually one channel member—the channel captain —can determine the roles and rewards of the others. The channel captain often is a manufacturer or an originator of a service. But in some industries, an influential wholesaler or a large retailer such as Walmart may be a channel captain because of large sales volume.

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KEY TEACHING TIPS ● The distribution channel strategy depends on the nature of the product and the target market. ● Each of the intermediaries plays a very specific role in distributing the product.

QUICK QUESTIONS ● What are some activities involved between manufacturing and retail? How is value added in these activities? Remind students of the various benefits that intermediaries provide in the distribution process. ● No intermediaries are involved in a direct channel. What are some products that flow through Channel 2? ● Channel 3 emerged as a way of reducing the need for floor space among retailers. What products might pass through Channel 3?

Use In-Class Activity 1: Icebreaker: Why Do They Sell Where They Do? Time Limit: 30 minutes

HOMEWORK Now might be a good time to assign Application Exercise 13-9 from the end-of-chapter materials as homework. This assignment asks students to consider the logistics of become an online seller with Amazon..

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Learning Objective 13-2: Describe the role of wholesalers and the functions performed by e-intermediaries.

Wholesaling Wholesalers provide a variety of services, which may include storing, providing an assortment of products, and offering delivery, credit, and product information.

A. Merchant Wholesalers Most wholesalers are independent operations that sell various consumer or business goods produced by a variety of manufacturers. The largest group, merchant wholesalers, buys products from manufacturers and sells them to other businesses. They own the goods that they resell and usually provide storage and delivery.

Full-service merchant wholesalers (about 80 percent of all merchant wholesalers) provide value-adding services, including credit, marketing advice, and merchandising services. Limited-function merchant wholesalers provide fewer services, sometimes merely storage. Drop shippers don’t even carry inventory or handle products; they take orders from customers, negotiate with producers to supply goods, take title to them, and arrange for shipment.

B. Agents and Brokers Agents and brokers, including online e-agents, serve as independent sales representatives for many companies’ products. Unlike wholesalers, agents and brokers do not own their merchandise. However, they serve as sales and merchandising arms for producers or sellers who do not have their own sales forces.

C. The E-Intermediary E-intermediaries are online channel members (wholesalers) who perform one or both of two functions: (1) collect information about sellers and present it to consumers; and/or (2) help deliver online products to buyers.

1. Syndicated Sellers Syndicated selling occurs when one website offers another commission for referring customers.

2. Shopping Agents Shopping agents (e-agents) gather, sort, and present accurate information to help online consumers compare websites, stores, prices, and product features. Many consumers use e-agents when purchasing airline tickets or hotel rooms.

3. Business-to-Business Brokers E-commerce intermediaries provide online value-adding services for business customers.

The pricing process between B2B buyers and sellers of commodities and services can be outsourced, for example. As a broker, the intermediary brings together timely information and links businesses to one another.

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Learning Objective 13-3: Describe the different types of retailing and explain how online retailers add value for consumers on the Internet.

Retailing Varying greatly in size, retailers represent the end of the distribution channel, making the sale of goods or services to final consumers. More than one-half of the U.S. retailers account for less than 10 percent of all retail sales.

A. Types of Brick-and-Mortar Retail Outlets U.S. retail operations vary by type, size, pricing strategies, location, range of services, or range of product lines.

1. Product-Line Retailers Retailers that feature broad product lines include department stores, which are arranged into specialized departments and handle a wide range of goods, and a variety of other services such as credit plans; supermarkets, which offer a wide selection at low prices, with self-service and wide selection; and specialty stores, which are small stores that carry a full line of related products in narrow product fields and feature knowledgeable salespeople.

2. Bargain Retailers Bargain retailers carry wide ranges of products at low prices and come in many forms: discount houses, which feature a large number of items at low prices; catalog showrooms, which allow customers to view displays, place orders, and wait briefly while clerks retrieve orders from warehouses; factory outlets, which are manufacturer-owned stores that avoid wholesalers and retailers by selling merchandise directly from factory to consumer; wholesale clubs, which offer large discounts on a wide range of brand-name merchandise to customers who pay annual membership fees.

3. Convenience Stores Convenience stores offer ease of purchase of a narrow assortment of products with higher prices.

B. Nonstore Retailing Some retailers sell some or all of their products without stores. Vending machines are ideal for products such as snack foods, bottled water and soft drinks, cigarettes, and even videos (Redbox). Major types of nonstore selling include direct-response retailing, in which firms make contact with customers both to inform them about products and to receive sales orders; mail order (or catalog marketing) is a popular form of direct-response retailing; less popular in recent years is telemarketing—the use of the telephone to sell directly; in direct selling, companies sell door-to-door or through home-selling parties.

C. Online Retailing Online retailing allows sellers to inform, sell to, and distribute to consumers using online technology.

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1. Electronic Catalogs Electronic catalogs use the Internet to display products for both retail and business customers. Advantages include little cost in maintaining and accessing the catalog, as well as reducing mail distribution and printing costs.

2. Electronic Storefronts and Cybermalls Electronic storefronts allow consumers to collect information about products and buying opportunities, whereas cybermalls are collections of virtual storefronts representing diverse products. Convenience and accessibility of information are prime benefits.

3. Interactive and Video Retailing Interactive marketing allows both retail and B2C customers to interact with multimedia sites using voice, graphics, animation, film clips, and access to live human advice. Video retailing lets viewers shop at home from channels on their TVs or other digital devices, and place orders by phoning in or emailing.

KEY TEACHING TIPS ● Students easily confuse the work of agents and brokers. Agents form long-term relationships to represent just a few producers, while brokers match numerous sellers and buyers. ● Students often confuse the various types of bargain retailers. It may help to review the functions of each type: discount houses, catalog showrooms, factory outlets, and wholesale clubs. ● Review the functions of nonstore retailing, including direct-response retailing, mail order, telemarketing, and direct selling. ● Emphasize the variety of e-intermediaries and the impact on marketing.

QUICK QUESTIONS ● How do online retailers benefit from the use of syndicated sellers? ● How do online consumers benefit from shopping agents (e-agents)? ● How do online retailers and consumers benefit from electronic retailing? ● How can consumers benefit from interactive and video marketing?

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Learning Objective 13-4: Define physical distribution and describe the major activities in the physical distribution process.

Physical Distribution refers to the activities needed to move products efficiently from manufacturer to consumer. Two primary activities include warehousing and transportation. Its purpose is to make goods available when and where customers want them, keep costs low, and provide services to satisfy customers.

A. Warehousing Operations Storing or warehousing is a major part of distribution management. Private warehouses are owned by a single manufacturer, wholesaler, or retailer that needs storage space on a regular basis; public warehouses are independently owned and rent space to firms that need it. A growth area for storage is in storing digital data by using off-site digital storage services.

B. Transportation Operations Factors involved in choosing a transportation method include the nature of the product, the distance it must travel, the speed with which it must be received, and the customers’ wants and needs. The most common modes are trucks, railroads, planes, digital transmission, water carriers, and pipelines. Differences in cost most often are related to delivery speed.

C. Distribution through Supply Chains as a Marketing Strategy Instead of just offering advantages in product features, quality, price, and promotion, many firms have turned to supply chains that depend on distribution as a cornerstone of business strategy. This approach means assessing, improving, and integrating the entire stream of activities—upstream suppliers, wholesaling, warehousing, transportation, delivery, and follow-up services—involved in getting products to customers.

QUICK QUESTIONS ● How can intermediaries provide added value to customers? ● What is the difference between a private warehouse and a public warehouse? ● What are the advantages and disadvantages of relying on the following modes of transportation: trucks, planes, water carriers, railroads, and pipelines?

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Learning Objective 13-5: Identify the objectives of promotion and the considerations in selecting a promotional mix, and discuss the various kinds of advertising promotions.

The Importance of Promotion Promotion is any technique designed to sell a product; it is a message that a marketer sends to consumers about its product(s).

A. Promotional Objectives Marketers may use promotion to accomplish a number of tasks, such as communicating information, positioning products, adding value, or controlling sales volume. The ultimate objective is to increase sales. Positioning is the process of establishing an easily identifiable product image in the minds of consumers by fixing, adapting, and communicating the nature of the product itself.

B. Promotional Strategies Once its larger marketing objectives are clear, a firm must develop a promotional strategy to achieve them. Two prominent types of strategies are pull and push.

1. Pull Strategy A pull strategy appeals directly to consumers who will demand the product from retailers.

2. Push Strategy Using a push strategy, a firm markets its product to wholesalers and retailers who then persuade customers to buy it.

Manufacturers frequently use a combination of pull and push strategies, appealing to customers to create demand for the product and to wholesalers and retailers to stock the item.

C. The Promotional Mix Marketers use five types of promotional tools: advertising, personal selling, sales promotions, direct or interactive marketing, and publicity and public relations. The best combination of these tools—the best promotional mix—depends on many factors. A marketer’s product, its target audience, and its budget are all important considerations in building the promotional mix.

Buyers must recognize the need to make a purchase prior to searching for product or service information. Buyers then compare competing products and services before purchasing one.

Buyers then evaluate the purchase. There are five stages to this process, and the marketer matches promotional tools with these steps: 1. When buyers first recognize the need to make a purchase, marketers use advertising and publicity to make sure buyers are aware of their products.

2. As buyers search for information about available products, advertising and personal selling are important methods to educate consumers.

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3. Personal selling can become vital as buyers compare competing products. Sales representatives can demonstrate product quality, features, and performance in comparison with competitors’ products.

4. When buyers are ready to purchase products, sales promotion can give consumers an incentive to buy. Personal selling can help by bringing products to convenient purchase locations.

5. After making purchases, buyers evaluate products and make a note of their strengths and deficiencies. Advertising and personal selling can remind consumers that they made wise purchase choices.

D. Advertising Advertising is paid, nonpersonal communication used by an identified sponsor to inform an audience about a product.

1. Advertising Media Advertising media are specific communication devices for carrying a seller’s message to potential customers; advertising media include newspapers, television, direct mail, radio, magazines, and outdoor advertising.

2. Real-Time Ad Tracking Advertisers always want better information about who looks at their ads and for how long. Accurate ad-watching behavior of shoppers in malls, theaters, and grocery stores is on the increase through the introduction of high-tech real-time surveillance. Companies like Google have become experts at feeding back ad data to their advertisers. The combination of media through which a company advertises is called its media mix.

KEY TEACHING TIPS ● Remind students of the elements of the promotional mix and reinforce that many factors determine how a marketer designs its promotional mix, with target audience being the most important. ● Reinforce that promotion refers to techniques for communicating information about products; it is a part of the communication mix—the total message a company sends to consumers about its products. ● Point out that when designing the promotional mix, marketers match the best promotional tools with where buyers currently are in the decision-making process. ● Ensure that students realize that to most effectively promote a product, marketers must find out who their customers are, to which media they pay attention, what messages appeal to them, and how to get their attention.

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QUICK QUESTIONS ● What elements make up the media mix? ● What are some advantages and disadvantages of using newspapers, magazines, radio, Internet, and outdoor advertising?

Use In-Class Activity 2: Small Group Discussion: What’s the Best Way to Reach Them?

Activity Overview: This activity asks students to discuss how firms are changing their distribution messages during economic downtimes.

Time Limit: 30 minutes What to Do: 1. Ask students to read the Managing in Turbulent Times feature in the textbook, making a list of as many pros and cons of relying on direct marketing as possible. (10 minutes) 2. Divide the class into small groups to discuss their pros and cons of premiums, direct (or interactive) marketing, and integrated promotion and distribution. Do the pros outweigh the cons? (10 minutes) 3. Reassemble the class to debate the pros and cons as a group. Do the pros outweigh the cons? (10 minutes) Don’t Forget: Retailers are constantly looking for ways to get an edge in the marketplace. Remind students that retailers will use all of the four Ps (price, promotion, product, and place) to add value and try to get an edge in competitive markets.

Wrap-Up: Ask students to clip advertisements from newspapers or magazines, or print online advertisements that show how retailers are seeking to use promotion to gain attention and boost demand. Get the students to bring them to the next class and vote on the one that is most innovative.

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Time Limit: 30 minutes HOMEWORK Advertising Media Now is a good time to assign Application Exercise 13-10 from the end-of-chapter materials as homework. The assignment encourages students to analyze a marketing video in terms of appeal to the target market.

At-Home Completion Time: 1 hour

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Learning Objective 13-6: Outline the tasks involved in personal selling and describe the various types of sales promotions.

Personal Selling In personal selling, a salesperson communicates one-to-one with potential customers to identify their needs and to line them up with the seller’s products. Personal selling requires a certain level of trust between buyer and seller, which must be established over time.

A. Personal Selling Situations Salespeople must consider the ways in which personal sales activities are affected by the differences between consumer and industrial products. Retail selling is selling a consumer product for the buyer’s personal or household use. Industrial selling is selling products to other businesses, either for the purpose of manufacturing or for resale.

In retail selling, the buyer usually comes to the seller, whereas the industrial salesperson typically calls on the prospective buyer. An industrial decision usually takes longer than a retail decision because it involves more money, decision makers, and weighing of alternatives.

B. Personal Selling Tasks In order processing, a salesperson receives an order and sees to its handling and delivery.

Creative selling involves providing information and demonstrating product benefits to persuade buyers to complete a purchase. A company may use missionary selling when its purpose is to promote itself and its products rather than simply to close a sale.

C. The Personal Selling Process Perhaps the most complex and challenging of these three sales tasks is creative selling. The creative salesperson is responsible for starting and following through on most of the steps in the personal selling process: 1. Prospecting and qualifying Prospecting is the process of identifying potential customers. In qualifying, prospects must be assessed to determine whether they have the authority to buy and the ability to pay.

2. Approaching The approach refers to the first few minutes of a salesperson’s contact with a qualified prospect, the first impression.

3. Presenting and demonstrating Next, the salesperson makes a presentation, a full explanation of the product, its features, and its uses. The presentation must link product benefits to the prospect’s needs.

A presentation may or may not include a demonstration.

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4. Handling objections No matter what product is for sale, prospects will have some objections. Objections indicate interest on the part of the buyer, but also pinpoint the parts of the presentation that concerned the buyer.

5. Closing The most critical part of the selling process is the closing, in which the salesperson asks the prospect to buy the product. Successful salespeople recognize the signs that a customer is ready to buy.

6. Following up Follow-up is a key activity, especially in relationship marketing. For lasting relationships with buyers, good salespeople don’t end the sales process with the closing; they want sales to be so successful that customers will buy from them again.

D. Sales Promotions Sales promotions are short-term promotional activities designed to stimulate consumer buying, industrial sales, or cooperation from distributors. Sales promotions are important because they increase the likelihood that buyers will try products.

The best-known forms of sales promotion are samples and discount coupons, premiums, which are free or reduced-priced items, point-of-sale (POS) displays, loyalty programs, and trade shows. Successful sales promotions provide potential customers with convenience and accessibility when the decision to buy occurs.

E. Direct (or Interactive) Marketing Direct (or interactive) marketing is one-on-one nonpersonal selling that tries to get consumers to make purchases away from retail stores and, instead, to purchase from home, at work, or by using a mobile device. When used by B2B businesses, direct marketing is primarily lead generation so a salesperson can close the sale where interest has been shown.

In B2C businesses, it has primarily a selling goal. The advantage of direct marketing is that you can target the message to the individual and you can measure the results.

F. Publicity and Public Relations Publicity is information about a company, a product, or an event transmitted by the general mass media to attract public attention. Public relations is company-influenced publicity that seeks to build good relations with the public and to deal with the effects of unfavorable events.

KEY TEACHING TIPS ● Personal selling is used to communicate one-on-one with potential customers to identify their needs and align them with the seller’s products.

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● Review the tasks involved in personal selling: order processing, creative selling, and missionary selling. ● Reinforce that sales promotions include a number of short-term promotional activities designed to encourage consumer buying, industrial sales, or cooperation from distributors. ● Remind students of the flexibility and adaptability of direct (or interactive) marketing in targeting very specific customers. ● Make sure that students understand the difference between publicity and public relations, as these two concepts are often confused.

QUICK QUESTIONS ● What are some types of sales promotions? ● What are some differences between personal selling for consumer products or industrial products?

Use In-Class Activity 3: Up for Debate: Getting a Stimulus Boost with Promotion Time Limit: 30 minutes HOMEWORK Business Plan Now is a good time to assign Part 4 of the business plan project. In this section, students consider their target market, the features and benefits of their product or service, and the use of the four Ps in attracting customers to their product or service.

At-Home Completion Time: 3 to 5 hours

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Why Do They Sell Where They Do? Activity Overview: This activity asks students to consider distribution strategies behind some well-known competing products.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask each group to come up with four sets of competing products or services; in most cases, students will select products that are similar, but carry a different brand name, such as Blue Bonnet Margarine versus Prairie Farms Margarine. These should be products that are similar to each other but that are found in different types of places. (10 minutes) 2. Ask students to discuss the place each product is sold and be able to explain the reasoning for one brand being sold in one kind of place rather than a different place (convenience store and Whole Foods, for example). (10 minutes) 3. Reassemble the class as a whole and ask for each group’s input. (10 minutes) Don’t Forget: Students will come up with a variety of reasons for differing products being sold where they are sold. Some will be more difficult to explain than others. For example, almost everyone knows that a product purchased at Walmart often is less costly than a product from Kroger. But students may not understand why that is the case when the product appears to be the same, from their perspective.

Wrap-Up: Bring the activity to a close by reminding students of the role distribution plays in the marketing mix and the common types of distribution strategies seen in the marketplace.

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In-Class Activity 2: Small Group Discussion: What’s the Best Way to Reach Them?

Activity Overview: This activity asks students to discuss how firms are changing their distribution messages during economic downtimes.

Time Limit: 30 minutes What to Do: 1. Ask students to read the Managing in Turbulent Times feature in the textbook, making a list of as many pros and cons of relying on direct marketing as possible. (10 minutes) 2. Divide the class into small groups to discuss their pros and cons of premiums, direct (or interactive) marketing, and integrated promotion and distribution. Do the pros outweigh the cons? (10 minutes) 3. Reassemble the class to debate the pros and cons as a group. Do the pros outweigh the cons? (10 minutes) Don’t Forget: Retailers are constantly looking for ways to get an edge in the marketplace. Remind students that retailers will use all of the four Ps (price, promotion, product, and place) to add value and try to get an edge in competitive markets.

Wrap-Up: Ask students to clip advertisements from newspapers or magazines, or print online advertisements that show how retailers are seeking to use promotion to gain attention and boost demand. Get the students to bring them to the next class and vote on the one that is most innovative.

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Activity Overview: This activity asks students to discuss how firms are changing their distribution messages during economic downtimes.

Time Limit: 30 minutes What to Do: 1. Ask students to read the Managing in Turbulent Times feature in the textbook, making a list of as many pros and cons of relying on direct marketing as possible. (10 minutes) 2. Divide the class into small groups to discuss their pros and cons of premiums, direct (or interactive) marketing, and integrated promotion and distribution. Do the pros outweigh the cons? (10 minutes) 3. Reassemble the class to debate the pros and cons as a group. Do the pros outweigh the cons? (10 minutes) Don’t Forget: Retailers are constantly looking for ways to get an edge in the marketplace. Remind students that retailers will use all of the four Ps (price, promotion, product, and place) to add value and try to get an edge in competitive markets.

Wrap-Up: Ask students to clip advertisements from newspapers or magazines, or print online advertisements that show how retailers are seeking to use promotion to gain attention and boost demand. Get the students to bring them to the next class and vote on the one that is most innovative.

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In-Class Activity 3: Up for Debate: Getting a Stimulus Boost with Promotion Activity Overview: This activity asks students to think about different ways that a product can be promoted to one specific target market.

Time Limit: 30 minutes What to Do: 1. Divide the class into four-member groups and ask each group to consider marketing a solarpowered vacuum cleaner to working women with fast-paced, on-the-go lifestyles. In their discussions, groups should consider the following: (15 minutes) a. Which elements of the promotional mix should be utilized? b. What are the best ways/places to promote this product to this specific target market?

2. Reassemble the class and discuss each group’s promotion suggestions. (15 minutes) Don’t Forget: Specific promotional mix elements do a better job than others in reaching or attracting specific target markets.

Wrap-Up: Bring the activity to a close by reviewing the elements of the promotional mix and how each element may or may not be suited in this scenario.

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BUSINESS PLAN PROJECT PART 4 PRINCIPLES OF MARKETING Assignment Overview: This part of the business plan asks students to think about marketing’s “Four Ps”—product, price, place (distribution), and promotion—and how they apply to their business. Students will list features and benefits, as well as the points of difference for their product or service. After describing the product, the student must connect those described features and benefits to a targeted buyer. Once the targeted buyer has been named, students will describe advertising and promotional efforts to get the buyer’s attention.

Files to Provide Students: For this part of the project, students will be asked to complete Part 4: Principles of Marketing.

If students have already started working on the business plan project, they should continue using the student template they began working on in Parts 1 to 3. A copy of the marketing template is available on the following page.

Estimated At-Home Completion Time: If done well, this section will require a minimum of 3 to 5 hours. Instructor feedback will improve the quality of student responses, so you may wish to spend class time working on the plan.

Homework Deliverable from Students: The length of student responses in this part of the plan will vary greatly, as critical or creative thinkers will often begin to distinguish themselves. At a minimum, you should expect three to five pages in this part, with exceptional students writing as many as eight pages to fully explain all aspects of their marketing program.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 13-1. What are the types of distribution channels that sellers use to get products to end users?

Give an example of each.

The channels of distribution are as follows: Channel 1 involves direct sales to consumers without intermediaries; Channel 2 involves a retailer; Channel 3 involves both a retailer and a wholesaler; Channel 4 includes an agent or broker before the wholesalers and retailers.

Students should give specific examples of each channel with a statement explaining why that example fits that channel concept. (Learning Objective 13-1—AACSB—application of knowledge) 13-2. What are the three distribution strategies for market coverage? When is each most appropriate?

Intensive distribution means distributing through as many channels and channel members as possible (both wholesalers and retailers) for low-cost consumer goods such as snacks and magazines. With exclusive distribution, a manufacturer grants the exclusive right to distribute or sell a product to a limited number of wholesalers or retailers, usually in a given geographic area. The product is usually a high-cost prestige product, such as a luxury car.

Using selective distribution, a producer selects only wholesalers and retailers that will give a product special attention in sales effort, display and promotion advantage, and so forth.

Furniture and appliances are often marketed using selective distribution. (Learning Objective 13-1—AACSB—application of knowledge) 13-3. How do retailers add value to consumers? Why don’t more manufacturers sell direct to consumers?

Students should address the product and place components of the marketing mix; retailers bring product to place, making it easier for consumers to access the product. They should also address the impact of online shopping on the place component of the marketing mix.

The retailer is often the end of the supply chain before the product reaches consumers.

Students may also address specialization (manufacturer and retailer) and the variety of complementary products that a retailer can offer. (Learning Objective 13-3—AACSB— analytical thinking) 13-4. What are the major activities in the process of physically distributing goods?

The major activities in physical distribution of goods are warehousing and transportation.

(Learning Objective 13-4—AACSB—application of knowledge)

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13-5. What are the steps in the personal selling process?

The first step is prospecting and qualifying: the process of identifying potential customers and then prospects must be assessed to determine whether they have the authority to buy and the ability to pay. The second step is approaching. The approach refers to the first few minutes of a salesperson’s contact with a qualified prospect. Next, the salesperson makes a presentation, a full explanation of the product, its features, and its uses. The fourth step is handling objections. No matter what product is for sale, prospects will have some objections. The next step is closing. The most critical part of the selling process is the closing, in which the salesperson asks the prospect to buy the product. The final step is follow-up, a key activity, especially in relationship marketing. (Learning Objective 13-6— AACSB—application of knowledge) QUESTIONS FOR ANALYSIS 13-6. Describe the four forms of nonstore retailing. Give examples of products that would be most appropriate for each, and discuss the reasons why that product would do well with that particular form.

In addition to the obvious answer of online retailing, nonstore retailing includes directresponse retailing, in which firms contact customers directly to inform them about products and to receive sales orders; mail order (or catalog marketing), in which customers place orders for catalog merchandise received through the mail; telemarketing, which uses phone calls to sell directly to consumers; and direct selling, which uses door-to-door or homeselling parties, many of which are conducted through social media. Students should provide specific examples for each form (such as kitchenware for direct selling.) (Learning Objective 13-3—AACSB—analytical thinking) 13-7. What are the major types of product line and bargain retailers? Identify at least one example of each type.

Retailers that feature broad product lines include department stores, which are arranged into specialized departments and handle a wide range of goods; supermarkets, which offer a wide selection at low prices; and, specialty stores, which are small stores that carry a line of related products. Bargain retailers carry wide ranges of products and come in many forms: discount houses, which feature a large number of items at low prices; catalog showrooms, which allow customers to view displays, place orders, and wait briefly while clerks retrieve orders from warehouses; factory outlets, which are manufacturer-owned stores that avoid wholesalers and retailers by selling merchandise directly from factory to consumer; wholesale clubs, which offer large discounts on a wide range of brand-name merchandise to customers who pay annual membership fees. (Learning Objective 13-3—AACSB— application of knowledge) 13-8. Identify the major tools of sales promotion. At which stage of the consumer buying process is each most important? Why?

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The major tools of sales promotion are samples and coupons, premiums, loyalty programs, and point-of-sale displays. Samples are important at the need recognition stage, and especially at the information seeking stage. They can encourage trial of a product, without any commitment. This eliminates risk and provides information. Coupons provide a discounted price to the consumer. This encourages trial of new products, trial of competitors’ products, or repurchase. Depending on the situation, the information seeking stage or the evaluation of alternatives stage would be where coupons are important. Premiums are “rewards” for purchasing a specific product. Therefore, the purchasing decision stage is when this promotion is most relevant. It may push a consumer in a certain direction on the purchase. Loyalty programs reward repeat purchasers. Therefore, the purchase decision stage and the post-purchase evaluation stage matter the most. If a consumer does not make the repeat purchase, or return to that store, then the evaluation was not positive, by the consumer.

Point-of-purchase displays matter at the need recognition and information seeking stages. In places like grocery stores, these capitalize on need recognition by providing the product, but not its competitors. In doctors’ offices and bank lobbies, their purpose it to provide information (but, again, not information on alternatives). (Learning Objective 13-5— AACSB—application of knowledge) APPLICATION EXERCISES 13-9. In addition to being a major online retailer, Amazon acts as an e-intermediary for many small to medium-sized businesses. Imagine that you are interested in selling refurbished cell phones. Using the information on Amazon’s website, how would you become a seller on Amazon? What costs are associated with selling your products through Amazon? If you decided to sell your products through your own website instead, what would be the pros and cons?

As a member of a supply chain, the company’s marketing mix has to be consistent with its partners’ strategy. A company cannot make unilateral decisions without considering the other members of the supply chain. For example, if a member increases its prices what is the impact on the other members? Students should also discuss how the supply chain process needs to be an integrated process. (Learning Objective 13-2—AACSB—application of knowledge, analytical thinking) 13-10. Search for some of the best viral marketing videos of all time and chose one to analyze.

What is the product being marketed, and who is the target market? How does the advertisement appeal to the target market? Why do you think this particular video was effective?

Student answers will vary based on both the product and the video. For instance, Dollar Shave Club rocketed to success based on a viral video promoting cheap, delivered-to-yourdoor razor blades. Students should identify the demographics of the target market and elements of the video as well that made it go viral, such as humor, drama, etc. (Learning Objective 13-5—AACSB—analytical thinking)

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BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 13-11 TO 13-15 (Learning Objectives 13-1, 13-4, 13-5, 13-6—AACSB—interpersonal relations and teamwork, analytical thinking) In this exercise students continue to develop their marketing plan by adding an appropriate distribution and promotional plan to their marketing mix. Determining promotion objectives and strategies leads to choosing the specific appropriate tools to successfully achieve the objectives.

Choosing the appropriate distribution mix relies on having earlier correctly identified your target market and the characteristics of the buyers. Knowing the costs of the tools you choose will help you stay within your budget.

TEAM EXERCISE: MAKING A DIFFERENCE 13-16 TO 13-19 (Learning Objectives 13-5, 13-6—AACSB—interpersonal relations and teamwork, analytical thinking) As students examine the guidelines, they must determine whether the objectives are the same for attracting students from Huge University as for attracting students from other North American colleges and universities. Why would the objective be the same? Will the elements of the promotional mix need to be different or can they be the same? Why? Once the program is a few years old, students should keep in mind that the message should be able to change and use the experiences of the students who completed the program to enhance the content of the promotions.

EXERCISING YOUR ETHICS: THE CHAIN OF RESPONSIBILITY (Learning Objective 13-4—AACSB—ethical understanding and reasoning, analytical thinking) 13-20. What are the responsibilities of each party—the customer, the store, and the delivery firm—in this situation?

The responsibilities of each party in this situation are as follows: ● Customer: To provide correct delivery information to the store. ● Store: To clearly communicate its delivery policies to consumers. ● Delivery firm: To make timely deliveries to the designated address and to clearly communicate its policies to the store.

13-21. From an ethical standpoint, in what ways is the store manager’s action right? In what ways is it wrong?

From an ethical standpoint, the store manager’s action is right and wrong as follows: ● Right: Since the store fulfilled its obligation to the customer, fiscal responsibility would suggest that the store manager should not refund the customer’s money.

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● Wrong: Since the package was not delivered to the bride, good customer service would suggest that the store manager should refund the money.

13-22. If you were appointed to settle this matter, what actions would you take?

Answers will vary, but students should recognize that customers typically broadcast a bad experience to many of their friends and colleagues, magnifying the impact of a dissatisfying experience.

CASES: CHAOS THEORY AT WORK (Learning Objectives 13-1, 13-2, 13-3, 13-4, and 13-5— AACSB—application of knowledge, analytical thinking) 13-23. Why are online retailers taking so much market share from the traditional brick-andmortar stores?

Online retailers have become experts at collecting and collating individual and marketplace buying patterns and tracking individual shopping preferences. Online retailing allows sellers to inform, sell to, and distribute to consumers using online technology. The breadth of products available and convenience of shopping online have proven to be very attractive to consumers.

13-24. Do you think that legacy stores such as Macy’s and even Walmart will be able to compete with online stores in the future? How would they have to change in order to be more competitive?

Legacy stores can compete by providing services that directly compete with online retailers.

These services include the ability to inform and sell to consumers conveniently. Promotional strategies such as advertising, personal selling, and sales promotion can be useful tools. Easy access to products and face-to-face selling can influence buyers in the information search and evaluation of alternatives, as well as the purchase decision.

13-25. How have changes in physical distribution changed the marketplace? How has the marketplace changed the distribution networks?

Global distribution systems allow products to be produced around the world and shipped efficiently to customers. Transportation options have changed. Digital transmission and digital storage have created new service requirements.

13-26. If everything were available to purchase online, would there still be products and services you would want to buy in person? How can online retailers become more competitive against traditional stores for items that people still prefer to buy in person?

Answers will vary depending on students’ comfort with buying various products online.

They will want to “touch” some products, where other products are easier to learn about online and purchase without the in-person experience. Online retailers can compete by

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coming as close as possible to offering the in-person experience. Videos, testimonials, and reviews can increase people’s willingness to complete a purchase, for example. Some vendors send samples in advance of a purchase, to help someone reach a decision.

THE LONG TAIL, REVISITED (Learning Objective 13-3—AACSB—analytical thinking) 13-27. What kinds of products do you think you would find in Anderson’s “long tail”? Give examples.

Older products no longer available in brick-and-mortar stores along with new products that have not yet developed a following are two primary categories of long-tail products. These are products at the beginning of the PLC and the end of the PLC. 13-28. Do you believe the long-tail theory is still applicable? Why or why not?

Yes. Simply examine the tremendous variety of products available on Amazon. Compare it to the number of products available in a Walmart store. Investigate products where Amazon is the seller and where it is the intermediary.

13-29. Would you start a niche marketing business? If so, why and how would you market your products or services? If not, why not?

Answers will vary depending on students’ risk tolerance. Students should address the value of the products to customers, the ease of reaching the customers, and which promotional tools will be most effective for marketing the chosen products. The best tools will differ with the product being marketed.

13-30. Do you think it is ethical for companies like Amazon to collect third-party data? How would you feel and what would you do if your product suddenly became mainstream and Amazon started carrying it, selling it, and fulfilling those sales? What are the issues? What are the pros and cons?

Answers will vary about the ethics of companies collecting third-party data. Students may be aware, and accept, that much of their online activity is already tracked. Students should be excited about their product going mainstream and being handled by Amazon. The growth curve for the product will increase significantly, so the opportunity for profit will likewise increase. Issues include the ability to meet the increased demand while maintaining the quality of the product.

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PART 4 INTEGRATIVE LEARNING PORTFOLIO PRINCIPLES OF MARKETING CRAFTING A BUSINESS PLAN

TARGET MARKET P4-1. Describe your target market in terms of age, education level, income, and other demographic variables.

Hint: Refer to Chapter 11 for more information on the aspects of target marketing and market segmentation that you may want to consider. Be as detailed as possible about who you think your customers will be.

PRODUCT FEATURES AND BENEFITS P4-2. Describe the features and benefits of your product or service.

Hint: As you learned in Chapter 11, a product is a bundle of attributes—features and benefits.

What features does your product have—what does it look like, and what does it do? How will your product benefit the buyer?

PRODUCT DIFFERENTIATION P4-3. How will you make your product stand out in the crowd?

Hint: There are many ways to stand out in the crowd, such as a unique product, an outstanding service, or a great location. What makes your great idea special? Does it fill an unmet need in the marketplace? How will you differentiate your product to make sure that it succeeds?

PRICING P4-4. What pricing strategy will you choose for your product, and what are the reasons for this strategy?

Hint: Refer to Chapter 12 for more information on pricing strategies and tactics. Because your business is new, so is the product. Therefore, you probably want to choose between price skimming and penetration pricing. Which will you choose, and why?

PLACE (DISTRIBUTION) ISSUES P4-5. Where will customers find your product or service? (That is, what issues of the distribution mix should you consider?)

Hint: If your business does not sell its product directly to consumers, what types of retail stores will sell your product? If your product will be sold to another business, which channel of distribution will you use? Refer to Chapter 12 for more information on aspects of distribution you may want to consider.

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ADVERTISING P4-6. How will you advertise to your target market? Why have you chosen these forms of advertisement?

Hint: Marketers use several different advertising media—specific communication devices for carrying a seller’s message to potential customers—each having its advantages and drawbacks.

Refer to this chapter for a discussion of the types of advertising media you may wish to consider here.

PROMOTIONS P4-7. What other methods of promotion will you use, and why?

Hint: There’s more to promotion than simple advertising. Other methods include personal selling, sales promotions, and publicity and public relations. Refer to the discussion of promotion in this chapter for ideas on how to promote your product that go beyond just advertising.

CASE PART 4: STARBUCKS P4-8. Without the benefit of hindsight, do you think Starbucks did the right thing by resisting raising prices when the cost of raw materials increased dramatically?

Students should note that consumers don’t care about the underlying cost of the product or service, and that the forces of supply and demand, and what a willing buyer will pay a willing seller are more determinate of the price. In other words, if Starbucks had raised prices to cover increased costs, it would result in lower volume and could hurt the company in the long term. . (Learning Objective 12-5—AACSB—analytical thinking) P4-9. Schultz claims he was, “trying to build a big business on a foundation of small business values.” In what ways do you see that legacy today?

Despite sometimes straying from the formula, Starbucks’s stores still exemplify the third place concept. However, as some have noted, the original ambiance has become a bit sterilized as it has become homogenous. (Learning Objective 11-5 – AACSB – analytical thinking) P4-10. Starbucks was vertically integrated in the early days, meaning it bought and roasted its own beans rather than buying pre-roasted beans. What advantages and disadvantages are there to that kind of integration?

With vertical integration, the company has much more control over quality and the supply chain. (Learning Objective 7-8—AACSB —analytical thinking)

P4-11. How do you think Starbucks established its prices for drinks? What do you suppose would be the ramifications today of a significant price increase?

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Students will most likely point to both total cost of the product, including overhead, raw materials, and labor all the way from roasting to selling, and will acknowledge that in the early days there was very little competition, so the price was established by the customers, but in today’s market, where there is significant competition, a price increase would drive many customers to other brands. (Learning Objectives 12-4 and 12-5—AACSB— analytical thinking) P4-12. What factors of the external marketing environment, both at home and abroad, worked in Starbucks’s favor as it grew in the early years? Which factors worked against it? Explain your reasoning.

Students should acknowledge the five factors of the external marketing environment and should be able to articulate how each one played a role in Starbucks’s early success. They should also be able to point to external influences such as the pricing crisis of 1994 and 1997.

(Learning Objective 11-1—AACSB—analytical thinking)

FINDING YOUR PATH Careers in Business Marketing is a popular major in most business programs. Marketing managers are often generalists responsible for all marketing-related activities for a particular product. However, there are also specialized marketing jobs including personal selling, marketing research, packaging, advertising, industrial marketing, social media, and distribution.

Making Yourself Employable Learn how to market yourself.

Marketing Skills Since a lot of marketing work involves interpersonal relationships, human relations skills are important. Additionally, the ability to assess marketing trends, understand product development and pricing, and interpret marketing research data are skills in demand.

Communications skills and data analytics skills count heavily as well.

Marketing Yourself Approach a job search process from the perspective of: you are a product and potential employers are customers looking for the product with the features and benefits that best meet their needs. So, do the following: ● Identify skills or abilities you possess (product features) ● List how those skills benefit a prospective employer (product benefits) ● Identify an industry or organization you are interested in (target market) and list characteristics of this target market. ● Evaluate how your features and benefits lists match your target market’s needs and what evidence you have to support your assessment.

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● How can you fill any gaps to improve the match between you and your prospective customer/employer?

Your Image and Résumé As your résumé likely will be your first chance to make an impression on your potential employer, be professional. Use resources on your campus, such as career centers, for help on creating the document.

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Chapter 14: Information Technology (IT) for Business Chapter Overview Information technology (IT) has had a tremendous impact on the business world in the last few years. Some people feel completely “out of touch” going just one day without it. We are connected to the remotest corners of the world. Businesses have a variety of IT resources at their disposal, and information systems and how these systems are used play an integral role in businesses.

This chapter provides the latest details on business IT. It discusses the impacts IT has had on the business world and identifies the IT resources businesses have at their disposal. It also describes the role of information systems, the different types of information systems, and how businesses use such systems. Finally, it looks at the various threats and risks IT poses for businesses, as well as the ways in which businesses protect themselves from these threats and risks. Even if you are apprehensive about IT and its uses, this chapter will help you become more familiar with and comfortable with IT.

Learning Objectives 14-1. Discuss the impacts information technology is having on the business world.

14-2. Identify the IT resources businesses have at their disposal and how these resources are used.

14-3. Describe the role of information systems, the different types of information systems, and how businesses use such systems.

14-4. Identify the threats and risks information technology poses to businesses.

14-5. Describe the ways in which businesses protect themselves from the threats and risks information technology poses.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: IT Devices

2. Small Group Discussion: AI Impacts on Business

3. Up for Debate: Is That Ethical?

Description Students discuss various ways in which technological devices allow the class as a whole to create, store, exchange, and use information.

Students examine how Artificial Intelligence helps in creation of new products and services.

Students are divided into teams to discuss the ethical issues surfacing when an employer has the ability to access and track employees’ computer usage.

Time Limit

20 min.

30 min.

30 min.

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CHAPTER OUTLINE Learning Objective 14-1: Discuss the impacts information technology is having on the business world.

Information Technology Impacts: A Driver of Changes for Business Information technology (IT) includes the various appliances and devices for creating, storing, exchanging, and using information in diverse modes, including visual images, voice, multimedia, and business data. E-commerce is the use of online networks and other electronic means for retailing and business-to-business transactions. Businesses are using IT to bolster productivity, improve operations and processes, create new opportunities, and communicate and work in ways not possible before.

A. Creating Portable Offices: Providing Remote Access to Instant Information Technology built into various devices offers businesses powerful tools that save time and travel expenses by enabling employees, customers, and suppliers to communicate from any location.

B. Enabling Better Service by Coordinating Remote Deliveries Company activities may be geographically scattered, but remain coordinated through a networked system that also provides better service for customers. Shipping from various locations is more cost-effective and efficient than gathering all the items in one place to then ship to the buyer.

C. Creating Leaner, More Efficient Organizations Networks and technology allow organizations to operate with fewer employees and simpler structures. IT communications provide better use of employee skills and greater efficiencies from physical resources.

D. Enabling Increased Collaboration Collaboration software and other IT communication devices enable greater collaboration among internal units and with outside firms.

E. Enabling Global Exchange The global reach of IT enables business collaboration on a huge scale and minimizes delays, holds down costs, and maintains quality.

F. Providing Flexibility for Customization IT networks and other IT advances create new manufacturing and service capabilities that enable businesses to offer customers greater variety and faster delivery cycles. Mass customization allows manufacturers to produce in large volumes, with each item featuring the unique options the customer prefers. The standardized assembly line has become very adaptable. Customization and greater flexibility is also possible for service industries, including pet care and travel.

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G. Providing New Business Opportunities IT is creating entirely new businesses where none existed before.

H. Improving the World and Our Lives Numerous businesses across various industries use IT to create improvements that enhance the standard of living worldwide.

KEY TEACHING TIPS ● Remind students that information technology (IT) includes the various devices for creating, storing, exchanging, and using information in diverse modes, including visual images, voice, multimedia, and business data. ● Students need to keep the meaning of standardization separate from mass customization, which allows companies to produce in large volumes and provide unique features and options for customers.

QUICK QUESTIONS ● How are portable offices bolstering productivity? ● How has IT allowed marketers to provide better service? ● How does IT allow firms to create leaner, more efficient organizations? ● How has IT changed the nature of the management process within organizations?

Use In-Class Activity 1: Icebreaker: IT Devices Time Limit: 20 minutes

HOMEWORK The Impact of IT Now might be a good time to assign Application Exercise 14-9 from the end-of-chapter materials as homework. This assignment asks students to think about how IT systems affect their daily lives, and whether their encounters with IT leave them at risk for identity theft.

At-Home Completion Time: 30 minutes

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Learning Objective 14-2: Identify the IT resources businesses have at their disposal and how these resources are used.

IT Building Blocks: Business Resources Businesses have numerous IT resources at their disposal.

A. The Internet and Other Communication Resources The Internet is a gigantic global system of interconnected computer networks belonging to millions of collaborating organizations and agencies—government, business, academic, and public—linked together by voice, electronic, and wireless technologies. The World Wide Web and its protocols (Hypertext transfer protocol (HTTP) and hypertext transfer protocol secure (HTTPS)) provide the common language that allows information sharing on the Internet.

1. Intranets Intranets are private networks of internal websites linked throughout an organization that are accessible only to employees.

2. Extranets Extranets allow outsiders limited access to a firm’s internal information network.

3. Electronic Conferencing Electronic conferencing allows groups of people to communicate simultaneously from various locations via e-mail, phone, or video, eliminating travel time and providing immediate contact.

4. VSAT Satellite Communications VSAT satellite communications have a transmitter-receiver that sits outdoors with a direct line-of-sight to a satellite; the hub sends signals to and receives signals from the satellite, exchanging voice, video, and data transmission. It provides privacy because the organization’s system has total control over communications among its facilities, without dependence on other companies.

B. Networks: System Architecture A computer network is a group of two or more computers linked together by some form of cabling or by wireless technology to share data or resources, such as a printer; a client-server network is a common type of network used in businesses in which the clients are usually the laptop or desktop computers being used, and the servers are any number of computers that provide services shared by users. Cloud computing adds an externally located component, a remote storage service, which enhances user flexibility.

1. Wide Area Networks (WANs)

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Wide area networks (WANs) are computers linked over long distances (statewide or even nationwide) through telephone lines, microwave signals, or satellite communications.

2. Local Area Networks (LANs) In local area networks (LANs), computers are linked in a smaller area, such as all of a firm’s computers within a single building. The arrangement requires only one computer system with one database and one software system.

3. Wireless Networks Wireless networks use airborne electronic signals to link network computers and devices.

For example, smartphone systems allow users to send and receive transmissions on wireless wide area networks (WWANS) of hundreds of service providers in over 90 countries around the world.

4. Wi-Fi A hotspot, or Wi-Fi access point, for the Internet is actually its own small network, called a wireless local area network (Wireless LAN or WLAN). “Super Wi-Fi” networks are to be developed in the future by the federal government.

KEY TEACHING TIP Make sure students understand the distinction between intranets (private networks accessible only to employees) and extranets (networks that allow outsiders limited access to a firm’s internal information).

QUICK QUESTIONS ● For what purposes might data conferencing be used? What about videoconferencing? ● What are the clients and what are the servers in a client–server network? ● What is the difference between a wide area network (WAN) and a local area network (LAN)? ● What are some benefits of Wi-Fi?

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Learning Objective 14-3: Describe the role of information systems, the different types of information systems, and how businesses use such systems.

Information Systems: Harnessing the Competitive Power of IT An information system is a system that uses IT resources and enables managers to take data— raw facts and figures—and transform data into information—the meaningful, useful interpretation of data. Information systems managers operate the systems used for gathering, organizing, and distributing information.

A. Leveraging Information Resources: Data Warehousing and Data Mining Data warehousing involves the collection, storage, and retrieval of data in electronic files.

1. Data Mining. Data mining is the application of statistics and electronic technologies for searching, sifting, and reorganizing pools of data to uncover useful information.

2. Information Linkages with Suppliers. Coordinated planning avoids excessive inventories, speeds up deliveries, and holds down costs throughout the supply chain while keeping shelves stocked for retail customers.

B. Types of Information Systems Each user group and department in an organization may need a special information system.

1. Information Systems for Knowledge Workers Knowledge information systems support knowledge workers by providing resources to create, store, use, and transmit new knowledge for useful applications. Computer-aided design (CAD) helps knowledge workers design products by simulating them and displaying them in three-dimensional graphics. Computer-aided manufacturing (CAM) uses computers to design and control the equipment needed in a manufacturing process.

2. Information Systems for Managers Each manager’s information activities and information system needs vary according to his or her functional area. a. Enterprise Resource Planning (ERP). Enterprise resource planning (ERP) is an information system for organizing and managing a firm’s activities across product lines, department, and geographic locations. b. Management Information Systems (MIS). Management information systems (MIS) support managers by providing reports, schedules, plans, and budgets that can then be used for making decisions. c. Decision Support Systems (DSS). Decision support systems (DSS) are interactive systems that create virtual business models and test them with different data to see how they respond.

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C. Artificial Intelligence Artificial intelligence (AI) refers to the development of computer systems and algorithms that are capable of performing tasks that typically require human intelligence, including solving complex problems, analyzing data, uncovering relationships, and making decisions.

ChatGPT, an AI system, identified five key concepts in artificial intelligence: machine learning (ML), neural networks, natural language processing (NLP), computer vision, and robotics.

1. Predictive Analytics Predictive analytics involves using AI models to analyze historical data and use its findings to predict future outcomes. The key steps involved in predictive analytics are: a. Data Collection: Gathering relevant data from various sources, such as databases, sensors, or online platforms. b. Data Cleaning and Preprocessing: Cleaning the data, handling missing values, removing outliers, and transforming the data into a suitable format for analysis. c. Feature Selection and Engineering: Identifying the most relevant variables (features) that are likely to impact the prediction and creating new features based on domain knowledge or data transformations. d. Model Selection and Training: Choosing an appropriate predictive model, such as regression, decision trees, or neural networks, and training it using historical data.

The model learns the patterns and relationships in the data during the training process. e. Model Evaluation: Assessing the performance of the trained model using evaluation metrics, such as accuracy, precision, recall, or area under the curve (AUC), to determine how well it predicts the outcomes. f. Prediction and Deployment: Using the trained model to make predictions on new, unseen data and integrating the predictive model into business processes or applications.

2. Machine Learning Machine learning is a subset of artificial intelligence (AI) that aims to develop algorithms that can change and adapt without additional programming as they find new patterns.

ChatGPT identified the following uses for ML: a. Training Data: Providing a large, labeled dataset for the algorithm to learn patterns and relationships between input features and corresponding output labels. b. Feature Extraction: Identifying relevant features from the input data that contribute to the desired prediction or decision.

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c. Model Selection and Training: Choosing an appropriate machine learning algorithm (e.g., linear regression, decision trees, support vector machines, or neural networks) and training it using the labeled training data. d. Model Evaluation: Assessing the trained model’s performance using evaluation metrics, cross-validation, or separate test datasets to ensure it generalizes well to unseen data. e. Prediction and Deployment: Using the trained model to make predictions or decisions on new, unseen data.

KEY TEACHING TIPS ● Students often confuse this point: Data warehousing is the collection, storage, and retrieval of data in electronic files; data mining is the application of electronic technologies for searching, sifting, and reorganizing data to uncover useful information. ● Reinforce that an information system enables managers to collect, process, and transmit that information for use in decision making. ● Make sure students understand that a management information system provides reports, schedules, plans, and budgets that managers use to make decisions. ● Remind students that AI is evolving rapidly and is affecting almost all aspects of business and consumerism.

QUICK QUESTIONS ● When does data become information? ● How do knowledge workers benefit from knowledge information systems? ● What is the role of a decision support system (DSS)? ● What are some of the pros and cons of AI? Use In-Class Activity 2: Small Group Discussion: AI Impacts on Business Time Limit: 30 minutes

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HOMEWORK System Architecture Now might be a good time to assign Application Exercise 14-10 from the end-of-chapter materials as homework. This assignment asks students to assess the impact of changes in IT on higher education.

At-Home Completion Time: 1 hour

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Learning Objective 14-4: Identify the threats and risks information technology poses to businesses.

IT Risks and Threats IT has attracted abusers that are set on doing mischief, with severity ranging from mild nuisance to outright destruction.

A. Hackers Hackers are cybercriminals who gain unauthorized access to a computer or network, either to steal information, money, or property or to tamper with data. Hackers cost companies and organizations billions in money and jobs annually.

B. Identity Theft Identity theft is the unauthorized stealing of personal information to get loans, credit cards, or other monetary benefits by impersonating the victim. It is among the fastest-growing crimes in the United States, with as many as 16.6 million victims each year.

C. Intellectual Property Theft Intellectual property includes products of the mind—something produced by the intellect, that has commercial value. Nearly every company faces the dilemma of protecting product plans, new inventions, industrial processes, and other intellectual property. Its ownership and right to its use may be protected by patent, copyright, trademark, and other means.

D. Computer Viruses, Worms, and Trojan Horses A computer virus exists in a file that attaches itself to a program and migrates from computer to computer as a shared program or as an e-mail attachment. Worms are a particular kind of virus that travels from computer to computer within networked computer systems, without needing you to open any software to spread the contaminated file. Unlike viruses, a Trojan horse does not replicate itself. It most often comes into the computer by masquerading as a harmless, legitimate software product or data file.

E. Spyware is unintentionally downloaded on a computer and crawls around to monitor the host’s computer activities. For example, Internet users open files that promise “free giveaways,” not suspecting that they are downloading spyware onto their systems.

F. Spam is junk e-mail sent to a mailing list or a newsgroup. It wastes time and bandwidth, decreasing productivity. Its damage in lost time and productivity is between $28 and $66 billion in the United States and could be $620 billion worldwide.

QUICK QUESTIONS ● Can hackers ever do good? ● How can identity theft be avoided? ● What types of damage might a worm and a Trojan horse do?

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Learning Objective 14-5: Describe the ways in which businesses protect themselves from the threats and risks information technology poses.

IT Protection Measures Businesses guard themselves against intrusion, identity theft, and viruses by using firewalls, special software, and encryption.

A. Preventing Unauthorized Access: Firewalls Firewalls are security systems with special software and/or hardware devices designed to keep computers safe from hackers. A firewall contains two components for filtering each incoming message: (1) the company’s security policy, which contains access rules; and (b) a router, which involves a “traffic switch” that determines on which network routes or paths to send each message after it is tested against the security policy.

B. Preventing Identity Theft The Fair and Accurate Credit Transactions Act (FACTA) strengthens identity-theft protections by specifying how organizations must destroy information, rather than simply dropping it in a dumpster. Documents must be shredded, pulverized, or burned, and electronic records must be permanently removed.

C. Preventing Infectious Intrusions: Antivirus Software Anti-virus software protects systems by searching incoming e-mail and data files for “signatures” of known viruses and virus-like characteristics and quarantining such messages.

D. Protecting Electronic Communications: Encryption Software An encryption system works by encoding e-mails so that only intended recipients can open them. The system works by scrambling an e-mail message so that it looks like garbled nonsense to anyone who doesn’t possess the “key,” another part of the software that decodes encrypted e-mails.

E. Avoiding Spam and Spyware Anti-spyware and spam filtering software on business systems helps employees avoid privacy invasion and improves worker productivity.

F. Ethical Concerns in IT It is obvious that IT developments and usage are progressing faster than society’s appreciation for the potential consequences, including new ethical concerns. Ease of access to computers, mobile devices, and the Internet, together with messaging capabilities and social networking, promote widespread public exposure about people’s private lives, including personal information about how they think and feel. Just how this information should be used, by whom, under what conditions, and with what restrictions, if any, are issues teeming with ethical considerations.

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KEY TEACHING TIPS ● Reinforce that an encryption system works by scrambling an e-mail message so that it looks like garbled nonsense to anyone who doesn’t possess the “key,” another part of the software that decodes encrypted e-mails. ● Remind students of the ethical issues associated with current information technology.

Ease of access to computers, mobile devices, and the Internet, together with messaging capabilities and social networking, promote widespread public exposure about people’s private lives, including personal information about how they think and feel. Just how this information should be used, by whom, under what conditions, and with what restrictions, if any, are issues teeming with ethical considerations. This should seem especially relevant to students, with the ubiquitous use of social media.

QUICK QUESTION What are a firewall’s two components for filtering incoming messages?

Use In-Class Activity 3: Up for Debate: Is That Ethical?

Time Limit: 30 minutes

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: IT Devices Activity Overview: This activity asks students to come up with a list of technological devices that reflect the many ways in which the class as a whole creates, stores, exchanges, and uses information.

Time Limit: 20 minutes What to Do: 1. Ask the class as a whole to brainstorm, coming up with a list of technological devices that they use in their personal lives, at work, or at school to create, store, exchange, and use information.

2. Ask the class to comment on these questions: a. Do students in the class as a whole use more or fewer devices than what you expected prior to brainstorming? b. In what way(s) do you see your individual use of these devices changing in the coming years? c. In what way(s) have these devices impacted your personal lives, such as at school, at the bank, while shopping, and so on?

Don’t Forget: Some people are more technologically savvy than others. Many students will say they take advantage of every gadget available, while others do not have Internet access at home.

Wrap-Up: Bring the activity to a close by reminding students that new technologies are always looming on the horizon and that no one can accurately predict how much IT will change and affect our lives in the future.

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In-Class Activity 2: Small Group Discussion: AI Impacts on Business Activity Overview: This activity encourages students to think about how advances in Artificial Intelligence (AI) can be used to develop new products and services.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask them to read the Finding a Better Way feature in the textbook. (10 minutes) 2. Ask students to discuss the following questions within their small groups (10 minutes): a. What do you think about AI as it relates to business? b. Think of how algorithms work with social media and online shopping services and how it sometimes seems that your phone or other Internet devices seems to be “listening in” and providing ads that relate to products and services you are currently considering. c. Have students make a list of where they think they may be interacting with AI on a regular basis.

3. Regroup the class as a whole and discuss each group’s conclusions. (10 minutes) Don’t Forget: Artificial Intelligence is evolving rapidly. As new technologies become available so do new possibilities. Encourage your students to keep their eyes on technology blogs to keep abreast of new developments.

Wrap-Up: Bring the activity to a close by reminding students of the speed with which technology changes can take place. Also remind them that a product does not have to have a target market of millions or billions of users to be successful if AI can help target potential qualified customers.

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In-Class Activity 3: Up for Debate: Is That Ethical?

Activity Overview: This activity asks students to discuss the ethical issues that may arise from an employer having the ability to access and track employees’ computer usage.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask them to consider this tidbit that a coworker overheard at the water cooler: “I guess it was as simple as that! Once Jeremy looked into everything Jason had been doing on the Internet, he asked Jason to hit the road. He was playing card games, placing personal stock market transactions, and sending e-mails to his friends and wife. I guess we all need to be more careful.” Ask each group to discuss whether firing an employee based on their Internet activities is ethical; groups should take notes on the pros and cons of such a company policy. (15 minutes) 2. Reassemble the class as a whole and discuss each group’s conclusion. (15 minutes) Don’t Forget: Many companies have such policies stated clearly in the employee handbook; on the other hand, some employers may use such tactics as an excuse to get rid of an employee.

Wrap-Up: Bring the debate to a close by reminding students that company policies stated in the employee handbook must be adhered to. However, one side of the argument is: “If you don’t want me to use the Internet, then don’t give it to me.” The other side of the argument is: “While working on company time, I should do what the employer wants.” Most group comments will fall somewhere between those two extremes.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 14-1. Compare and contrast an intranet with an extranet.

An intranet is an organization’s private network of internally linked websites, accessible only to employees. An extranet is a system that allows outsiders limited access to a firm’s internal information network. (Learning Objective 14-1—AACSB—application of knowledge) 14-2. What is ERP, and how have the Internet and improved IT made it possible?

Enterprise resource planning (ERP) is an information system for organizing and managing a firm’s activities across product lines, departments, and geographic locations. The ERP stores real-time information on work statuses and upcoming transactions and notifies employees when action is required for certain schedules to be met. It coordinates internal operations with the activities of outside suppliers and notifies customers of upcoming deliveries and billings. Consequently, many managers use it routinely for planning and controlling company-wide operations. A reliable Internet connection allows numerous remote locations to access the data and update it using portable IT, if needed. (Learning Objective 1 – AACSB – application of knowledge) 14-3. What use might an organization have for VSAT? A VSAT (which is short for “very small aperture terminal”) system has a transmitter-receiver (transceiver) that is located outdoors and has a direct line of sight to a satellite. The hub, a ground-station computer at the company’s headquarters, communicates with the satellite, exchanging voice, video, and data transmissions. A firm might use VSAT to exchange sales and inventory information, advertising messages, and visual presentations between headquarters and store managers who are in remote sites. (Learning Objective 2 – AACSB – application of knowledge) 14-4. What can a Trojan horse do to a computer network?

Unlike viruses, a Trojan horse does not replicate itself. Instead, it most often enters the computer system at your request, masquerading as a harmless, legitimate software product or data file. Once installed, it begins its damage. For instance, it may simply redesign desktop icons or, more maliciously, delete files and destroy information. (Learning Objective 4 – AACSB – application of knowledge) 14-5. What is the purpose of spyware, and what information does it collect?

Spyware masquerades as a friendly file that is available as a giveaway or shared among individual users on their PCs. It is often downloaded by users who are lured by the offer of “free” software. Once installed, it “crawls” around to monitor the host’s computer activities,

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gathering e-mail addresses, credit card numbers, passwords, and other inside information that it transmits back to someone outside the host system. Spyware authors assemble incoming stolen information to create their own “intellectual property” that they then sell to other parties to use for marketing and advertising purposes or for identity theft. (Learning Objective 4 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 14-6. What does computer-aided manufacturing do? How can it be used as the basis of an organization’s production processes?

Computer-aided manufacturing (CAM) uses computers to design and control the equipment needed in a manufacturing process. When they are coupled together, CAD and CAM (CAD/CAM) are useful for engineers in a manufacturing environment. They are used to design and test new products as well as to design the machines and tools that are required to create these products. (Learning Objective 3 – AACSB – application of knowledge) 14-7. How would a manufacturer of bakery products use information linkages with suppliers to make more efficient decisions?

Information linkages can increase efficiency through coordinated planning. This can help reduce overstocking, speed up deliveries, and suppress costs across the supply chain. Bakery products have a limited shelf life, so such coordination would be an important advantage.

(Learning Objective 3 – AACSB – application of knowledge) 14-8. Should all organizations and businesses use encrypted emails to ensure confidentiality and guard against hacking?

Students can argue that encrypted emails might be appropriate only for internal use. If they are used for external communications, the organization will have to decide who will be allowed to have the decoding key and what steps are necessary to prevent its circulation among unauthorized individuals. (Learning Objective 5 – AACSB – application of knowledge)

APPLICATION EXERCISES 14-9. Consider your daily activities—as a consumer, student, parent, friend, homeowner or renter, car driver, employee, and so forth—and think about the ways that you are involved with IT systems. Make a list of your recent IT encounters and then recall instances in those encounters in which you revealed personal information that could be used to steal your identity. Are some encounters on your list riskier than others? Why or why not?

Answers will vary, but most students will mention their access to ATMs and their use of credit cards, often daily, in making consumer purchases. Students use IT regularly in course registration, online access to educational materials, even payment of fees. Identity theft can

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happen at any time, either during or after the sharing of personal information. (Learning Objective 14-4—AACSB—analytical thinking) 14-10. After reading the first section of this chapter, consider how IT has changed the business of higher education. Identify at least three functions, services, or activities that would not have been available even 10 years ago. How do you think that colleges and universities will change in the future because of advances in IT? Answers will vary, but many students will mention online classes and testing, applying and registering for college/classes online, and accessing their academic records online.

(Learning Objective 14-1—AACSB—analytical thinking)

BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 14-11 TO 14-15 (Learning Objectives 14-2, 14-3, 14-4, and 14-5—AACSB—interpersonal relations and teamwork, analytical thinking, application of knowledge) Students should develop a comprehensive IT plan that focuses on meeting customers’ needs; improving efficiencies, operations, and processes; and bolstering productivity, while creating new opportunities. They should also address the various threats and risks it poses for their businesses, as well as the ways to protect themselves from threats and risks information technology might pose for their business.

TEAM EXERCISE: RURAL INTERNET 14-16 TO 14-20 (Learning Objectives 1, 2, 3, 4, and 5 – AACSB – ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking) The Situation A fast and reliable Internet connection is becoming more and more essential, not only for doing business but also for ensuring secure communication. While many of the cities and larger towns have excellent, well-funded networks, rural areas lag behind. This disparity puts rural businesses and individuals at a huge disadvantage. This is often cited as yet another reason why so many people leave the countryside and move to larger towns and cities. However, there are affordable and reliable options, the most common one of which is the signal booster.

Your team has been given the task of organizing technical staff to install and maintain a number of signal boosters to deal with so-called “Wi-Fi black spots” across a rural part of your country.

The idea is that they will identify significant rural buildings and landmarks and mount signalboosting masts on these structures or areas.

Each rural region will have 10 or 12 four-member work teams that will carry out the installation and maintenance. These teams will be managed on the ground by three supervisors, who will routinely rotate among the teams, depending on the workload. The main work will be managed remotely from offices in the capital.

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The theory and practice behind rural Internet connections have been well-tested in several European countries and in the United States. In India, about 35 percent of the population does not have access to the Internet. To increase connectivity in remote areas, Project Taara aims to provide cable-free Internet connections using beams of light. Elon Musk’s Starlink is also poised to launch in India to improve remote connectivity, but it may end up being too expensive for users. These fixed wireless services should work across even the most challenging terrains and connect remote areas to affordable and reliable Internet services.

QUESTIONS FOR DISCUSSION: 14-16. Many of the company’s employees will work in the field. What benefits can the company and employees expect from this? What differences in culture and approach could there be between field teams and office-based workers?

14-17. The company has installed tracking technology in all its vehicles and technical kits.

Employees are encouraged to use their own mobile devices to test the system. Should the company provide employees with a computer to use in the field, or is acquiring one a responsibility of the employees? What are the benefits and costs of each option?

14-18. How will you provide IT support to employees working in the field? Would it be easier for the company to train each supervisor in IT support? Give reasons for your answers.

14-19. Are there additional data security risks when employees are working in the field?

Describe the potential risks or concerns and how they might be addressed.

14-20. Briefly outline the policies, procedures, and guidelines that your department should establish in your first year on the job.

Students should initially focus on reviewing the types of tasks that should be worked on in the field and the types that require their presence in the office. After sorting this information out, students should determine whether the company or the employee is responsible for providing the technology that is to be used in the field. Answers may vary, but students should explain their reasoning. In this scenario, tech support is a vital requirement; it should be taken into account when determining how the employees will be supported in the field.

Security is another serious issue that cannot be ignored: students must address this factor (as they should, even for their home networks).

EXERCISING YOUR ETHICS: TO READ OR NOT TO READ (Learning Objectives 14-4 and 14-5—AACSB—ethical understanding and reasoning, reflective thinking) 14-21. Given the factors in this situation, what, if any, ethical issues exist?

The ethical issues focus on the trust issues between employees and employer.

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14-22. Do you think that the company is wise to monitor employees in this manner? Why or why not?

Answers will vary, but many students will recognize that companies do monitor employees’ activities to try to increase employee productivity but there is also the perspective of the trust issue from the employees’ perspective. Students should keep in mind that there is a trust issue from the employer’s perspective as well.

14-23. If you discovered that an employee was spending a lot of time on non-work–related searches, how would you address the issue with the employee?

Answers will vary, but many students will suggest that their advice would depend on the situation; the employee needs to understand that work obviously comes first.

CASES: THINK BEFORE YOU CLICK (Learning Objectives 14-4 and 14-5—AACSB—analytical thinking) 14-24. Think about recent spam e-mails and text messages that you have received. What kinds of information were the intruders seeking?

The intruders were seeking passwords, personal financial data, credit card numbers, among others.

14-25. Were you able to identify the e-mails and messages as “scams” before opening them, or did you discover their real contents after you opened them? What might have alerted you to the risks?

Most students are technically savvy and immediately identified the “scams.”

14-26. In what ways might the “opened” message from a scammer be harmful to you? To your IT devices and systems?

An open message may carry a virus, spyware, or worm that can capture personal information and permit identity theft.

14-27. What steps can you take (or have you taken) to protect against such intrusions? What costs would be involved for gaining that protection?

Answers will vary but most students will probably mention firewalls and other anti-theft software.

14-28. Consider the various IT systems you use daily. What kinds of protection do they have against invasion by cyberpirates?

Again, answers will vary depending on the IT devices used by students.

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SELLING CUSTOMER SEARCH DATA (Learning Objectives 14-4 and 14-5—AACSB—analytical thinking) 14-29. How and where do you see your browsing data affecting the ads that you see?

Students will have noticed that after they search for a product, they will see numerous ads for that product or a related product, on many sites they visit. These sites may have nothing to do with the product, but the ads “follow” them.

14-30. Do you appreciate the targeted marketing that more and more companies use, or do you feel that it is limiting your options? If so, how?

Student answers may vary with some appreciating the targeted marketing, and others feeling limited by it. They may notice the frequency with which ads appear after they search for a product. They should also pay attention to the lack of alternatives presented to them.

14-31. As a consumer, how do you feel about your Internet service provider selling your browsing data? How do you feel about that as a business owner, marketing manager, or entrepreneur? What arguments could you make to Congress either for or against enacting tougher restrictions on data like purchasing patterns, search history, and page visits?

Students may not be bothered by their ISPs selling their browsing data. They have grown up sharing personal information on various websites and may consider this simply an extension of that behavior. As a business owner, marketing manager, or entrepreneur, it can easily be seen as a positive, if you are able to use search results to drive customers to your business.

This ability to gather information helps the business owners to target people more likely to have an interest in their product. Arguments will vary, depending on the students’ perspectives on the gathering and selling of browsing data. Privacy concerns are likely to be identified.

14-32. As part of the marketing department of a consumer products company, how would you use browsing history to help market your products?

Browsing history can provide information about the type of people who purchase, or are interested in, your product. Any information that you can gain about your prospective customers lets you target them more effectively. You can learn about why they like your product, their other interests and product needs, benefits that are meaningful to them. This information allows you to craft a marketing message that appeals to them.

14-33. What kinds of measures could you implement to protect your privacy? Would you do those things, or do you feel that Internet privacy is an oxymoron?

There are many lists of suggested measures to protect one’s online privacy. Students will vary in their level of concern. They are comfortable sharing a great deal of personal information online and may not be concerned. Internet privacy does not need to be an oxymoron but does take awareness and effort to maintain.

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Chapter 15: The Role of Accountants and Accounting Information Chapter Overview Every organization relies on accounting information and financial statements in order to gauge business activity over periods of time. Accounting information can be thought of as a measuring stick of an organization’s performance in specific periods of time.

This chapter unfolds with a discussion of the role of accountants and an explanation of the types of accountants in the U.S. business system—public accountants, private accountants, management accountants, and forensic accountants. In addition, the chapter discusses the accounting equation as well as the three basic financial statements, showing how they reflect the activity and financial condition of a business. It also looks at the key standards and principles for reporting financial statements and describes how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business. Finally, the chapter ends with a discussion of the role of ethics in accounting—a subject that has received much press in recent years.

Learning Objectives 15-1. Explain the role of accountants in business and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.

15-2. Explain the accounting equation and how it is used.

15-3. Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.

15-4. Explain the key standards and principles for compiling and reporting financial statements.

15-5. Describe how computing financial ratios can help investors and other stakeholders get more information from financial statements to determine the financial strengths of a business.

15-6. Discuss the role of ethics in accounting.

15-7. Describe the purpose of the International Accounting Standards Board and explain why it exists.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: Do You Use Accounting?

2. Class Discussion: Interpreting Financial Statements 3. Small Group Discussion: Annual Reports 4. Class Discussion: Choose an Investment

Description Students think about ways in which they use accounting in their personal lives.

Students determine in which financial statement specific pieces of information are included.

Students review financial information from annual reports of real companies.

Students calculate financial ratios and interpret their results.

Time Limit 20 min.

20 min.

45 min.

30 min.

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CHAPTER OUTLINE Learning Objective 15-1: Explain the role of accountants in business and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.

What Is Accounting, and Who Uses Accounting Information?

Accounting is a comprehensive system for collecting, analyzing, and communicating financial information to a firm’s owners and employees, to the public, and to various regulatory agencies.

Bookkeeping is just one phase of accounting—the recording of transactions. Because businesses engage in thousands of transactions, ensuring consistent, dependable financial information is mandatory. This is the job of the accounting information system (AIS)—an organized procedure for identifying, measuring, recording, and retaining financial information so that it can be used in accounting statements and management reports. Users of accounting information include business managers, employees and unions, investors and creditors, tax authorities, and government regulatory agencies.

The controller manages a firm’s accounting activities. As chief accounting officer, the controller ensures that the AIS provides the reports and statements needed for planning, decision making, and other management activities.

A. Financial Versus Managerial Accounting 1. Financial Accounting A firm’s financial accounting system is concerned with external information users—the firm’s external stakeholders: consumer groups, unions, stockholders, suppliers, creditors, and government agencies. It prepares reports such as income statements and balance sheets that focus on the activities of the company as a whole rather than on individual departments or divisions.

2. Managerial Accounting Managerial (management) accounting serves internal users. Managers at all levels need information to make departmental decisions, monitor projects, and plan future activities.

Other employees also need accounting information. Engineers must know certain costs, for example, before making product or operations improvements, purchasing agents use information on materials costs to negotiate terms with suppliers, and to set performance goals, and salespeople need historic sales data for each geographic region and for each of its products.

B. Certified Public Accountants Certified public accountants (CPAs) offer accounting services to the public, whether a business or individual client. They are independent from the clients they serve. They are 15-3 © 2025 Pearson Education, Ltd. All rights reserved.

licensed by a state after passing an exam prepared by the American Institute of Certified Public Accountants (AICPA).

1. The “Big Four” Public Accounting Firms The “Big Four” public accounting firms, Deloitte Touche Tohmatsu (United Kingdom), Ernst & Young (United Kingdom), PricewaterhouseCoopers (PwC) (United Kingdom), and KPMG (Netherlands) account for one-half of the total revenue generated by accounting firms active in the United States.

2. CPA Services Most CPA firms provide auditing services, tax services, and management services. a. Auditing. An audit examines a company’s AIS to determine whether financial reports reliably represent its operations; an audit must ensure that clients’ accounting systems follow generally accepted accounting principles (GAAP), which are the guidelines governing the content and form of financial reports. b. Tax Services. Tax services include assistance not only with tax-return preparation, but also with tax planning. c. Management Advisory Services. Management advisory services range from personal financial planning to planning corporate mergers.

3. Noncertified Public Accountants. This category includes accountants who do not take the CPA exam, who are preparing for it, or who are waiting for state certification.

4. The CPA Vision Project. The CPA Vision Project is a profession-wide program that was established to assess the future of accounting; a prime reason for the project is the decline in the number of people who have entered the profession in recent years. The CPA Vision Project identifies core competencies for accounting that will be necessary for the future CPA. It foresees CPAs who combine specialty skills with a broad-based orientation to communicate more effectively with people in a wide range of business activities.

C. Private Accountants and Management Accountants Private accountants are hired as salaried employees of a firm who perform day-to-day activities. Management accountants provide services to support managers in various activities. Many hold the certified management accountant (CMA) designation.

D. Forensic Accountants Forensic accounting is the use of accounting for legal purposes. Forensic accountants may be called on by law enforcement agencies, insurance companies, or law firms for investigative accounting and litigation support in crimes against companies, crimes by companies, and civil disagreements.

1. Investigative Accounting

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Investigative accounting involves the investigation of a trail of financial transactions behind a suspected crime.

2. Litigation Support Forensic accountants assist in the application of accounting evidence for judicial proceedings by preparing and preserving evidence for these proceedings, testifying as expert witnesses, and in determining economic damages in any case before the court. a. Certified Fraud Examiners. The Certified Fraud Examiner (CFE) designation is administered by the Association of Certified Fraud Examiners; the CFE’s activities focus specifically on fraud-related issues, including fraud prevention and deterrence, financial transactions, fraud investigation, and legal elements of fraud.

E. Federal Restrictions on CPA Services and Financial Reporting: Sarbox The Sarbanes-Oxley Act (2002) was enacted to restore public trust in corporate accounting practices; Sarbox restricts the kinds of nonaudit services that CPAs can provide.

Sarbox Compliance Requirements. The CFO and CEO must pledge that the company’s finances are correct and must vouch for the methods and internal controls used to get those numbers; Sarbox requires companies to provide a system that is safe for all employees to anonymously report unethical accounting practices and illegal activities without fear of retaliation.

KEY TEACHING TIPS ● Remind students that accounting is a comprehensive system for collecting, analyzing, and communicating financial information, whereas bookkeeping is the recording of transactions. ● Point out that the controller manages a firm’s accounting activities. ● Make sure students keep these two points separate: Financial accounting is concerned with external information users; managerial accounting serves internal users and is not limited to managers. ● Make sure students understand the role of a CPA, who offers accounting services to the public and who is licensed by a state after passing an exam. ● Reinforce that generally accepted accounting principles (GAAP) are accounting guidelines governing the content and form of financial reports. ● In contrast to what students learned about the CPA, they should remember that private accountants perform day-to-day activities; most are management accountants who support managers in the organization.

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● Students often see the work of forensic accountants as being especially interesting. You may want to spend some time discussing these accountants to pique their interest.

QUICK QUESTIONS ● Who uses accounting information and for what purpose do they use it? ● Outside of the company, who might have an interest in a company’s financial situation? ● What types of services do CPAs perform? ● What has occurred in the business environment that has prompted the need for forensic accountants and certified fraud examiners? ● The Sarbanes-Oxley Act of 2002 (Sarbox) is a critical piece of federal legislation enacted to restore public trust in corporate accounting practices. What are some of Sarbox’s provisions?

Use In-Class Activity 1: Icebreaker: Do You Use Accounting?

Time Limit: 20 minutes

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Learning Objective 15-2: Explain the accounting equation and how it is used.

The Accounting Equation Underlying all record-keeping procedures is the most basic tool of accounting—the accounting equation.

The accounting equation states that Assets = Liabilities + Owners’ Equity.

A. Assets and Liabilities An asset is any economic resource that is expected to benefit a firm or an individual who owns it; a liability is a debt that the firm owes to an outside organization.

B. Owners’ Equity Owners’ equity refers to the amount of money that owners would receive if they sold all assets and paid all debts. Assets − Liabilities = Owners’ Equity.

KEY TEACHING TIPS ● Make sure that students understand the accounting equation: Assets = Liabilities + Owners’ Equity ● An asset is any economic resource that is expected to benefit a firm that owns it; a liability is a debt that the firm owes. What are some examples of assets and liabilities found in organizations? ● Make sure students understand that owners’ equity is the money owners would receive if they sold all of a company’s assets and paid all of its liabilities.

QUICK QUESTION ● In what way(s) do businesses benefit from intangible assets? ● How does the term net worth fit into the accounting equation? ● Why is owners’ equity meaningful to investors and lenders?

HOMEWORK What’s Your Net Worth?

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Now is a good time to assign Application Exercise 15-10 from the end-of-chapter materials as homework. This assignment asks students to identify their own assets and liabilities, to use the accounting equation to determine their own net worth, and to determine how to increase it.

At-Home Completion Time: 1 hour

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Learning Objective 15-3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.

Financial Statements Accountants summarize the results of a firm’s transactions and issue reports to help managers make informed decisions. Among the most important reports are financial statements, which fall into three broad categories—balance sheets, income statements, and statements of cash flows.

A. Balance Sheets Balance sheets display a firm’s financial condition at one point in time. They supply information about assets, liabilities, and owners’ equity.

1. Assets An asset is any economic resource that a company owns and from which it expects to get some future benefit. a. Current Assets. Current assets include cash and assets that can be converted into cash within a year. The act of converting something into cash is called liquidating. Assets are normally listed in order of liquidity—the ease of converting them into cash.

Typically, assets range from cash to marketable securities to merchandise inventory. b. Fixed Assets. Fixed assets, including land, buildings, and equipment, have long-term use or value. Accountants use depreciation to spread the cost of an asset over the years of its useful life. c. Intangible Assets. Intangible assets have monetary value in the form of expected benefits. These usually include the cost of obtaining rights or privileges, such as patents, trademarks, copyrights, and franchise fees. Goodwill is the amount paid for an existing business beyond the value of its other assets.

2. Liabilities Current liabilities are debts that must be paid within one year. Accounts payable are unpaid bills to suppliers for materials as well as wages and taxes that must be paid in the coming year. Long-term liabilities are debts that are not due for at least a year.

3. Owners’ Equity Owners’ equity is broken down into paid-in capital and retained earnings. Paid-in capital is additional money invested in the firm by its owners. Retained earnings are net profits kept by a firm rather than paid out as dividend payments to stockholders.

B. Income Statements The income statement is sometimes called a profit-and-loss statement because its description of revenues and expenses results in a figure showing the firm’s annual profit or loss.

Profit (or Loss) = Revenues − Expenses 15-9 © 2025 Pearson Education, Ltd. All rights reserved.

1. Revenues Revenues are funds that flow into a business from the sale of goods or services.

2. Cost of Revenues (Cost of Goods Sold) The cost of revenues section shows the costs of obtaining the revenues from other companies during the year (used for service providers). Cost of goods sold are costs of obtaining materials to make products sold during the year (used for goods producers). a. Gross Profit. Gross profit is calculated by subtracting the cost of revenues from revenues obtained by selling the firm’s products. b. Operating Expenses. Operating expenses are resources that must flow out of a company if it is to earn revenues. Expense categories include research development, selling, administrative, and general expenses.

3. Operating and Net Income Operating income compares the gross profit from operations against operation expenses.

Net income (net profit or net earnings) is calculated by subtracting income taxes from operating income.

C. Statements of Cash Flows Required of all firms whose stock is publicly traded, the statement of cash flows shows a company’s yearly cash receipts and cash payments. This statement shows cash flows from operating, investing, and financing activities.

D. The Budget: An Internal Financial Statement A budget is a detailed statement of estimated receipts and expenditures for a future period of time.

KEY TEACHING TIPS ● Reinforce that financial statements include the summaries of a firm’s transactions and help managers make informed decisions; financial statements include balance sheets, income statements, and statements of cash flows. Go over each of the financial statements carefully with students. ● Make sure that students understand the distinction between current assets and fixed assets, and that they can provide examples of each. ● Make sure students understand the difference between current liabilities and long-term, liabilities and that they can provide examples of each.

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● Explain that owners’ equity can be broken down into paid-in capital and retained earnings, and explain each of those concepts. ● Reinforce that you can find the company’s revenues and expenses in the income statement (or profit-and-loss statement). Revenues − Expenses = Profit (or Loss). Also point out the main areas of the income statement: revenues, cost of revenues, and operating expenses. ● Reinforce that revenues are the funds that flow into a business from the sale of goods or services; the cost of revenues (or the cost of goods sold) are the costs of obtaining materials to make products sold during the year (for goods) or the costs of obtaining the revenues from other companies (for services). ● Point out that a statement of cash flows describes yearly cash receipts and cash payments; it includes cash flows from operations, investing, and financing activities.

QUICK QUESTIONS ● What are some examples of operating expenses? ● Who might be interested in the information revealed in a statement of cash flows? Why? ● What might be included in a budget for a typical household in the United States?

HOMEWORK Using a Budget Now is a good time to assign Application Exercise 15-9 from the end-of-chapter materials as homework. This assignment asks students to create a personal budget and examine how to increase their personal net worth by using it.

At-Home Completion Time: 1 hour

Use In-Class Activity 2: Class Discussion: Interpreting Financial Statements Time Limit: 20 minutes

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Learning Objective 15-4: Explain the key standards and principles for compiling and reporting financial statements.

Reporting Standards and Practices Spelled out in GAAP, these practices and principles cover a range of issues. The purpose is to give external users confidence in the accuracy and meaning of financial information.

A. Revenue Recognition and Activity Timing Revenue recognition is the formal recording and reporting of revenues in financial statements, which takes place after the earnings cycle is completed. This occurs when 1) the sale is complete and the product has been delivered; and 2) the sale price has been collected or is collectible (accounts receivable).

B. Full Disclosure This indicates that financial statements should not include just numbers; they should include management’s interpretations and explanations of those numbers.

KEY TEACHING TIPS ● Remind students that full disclosure requires that financial statements include both the “numbers” and management’s interpretations/explanations of those numbers. ● Reinforce that two conditions must be met for an earnings cycle to be complete: the sale is complete and the product delivered; and the sale price has been collected or is collectible.

Use In-Class Activity 3: Small Group Discussion: Annual Reports Time Limit: 45 minutes

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Learning Objective 15-5: Describe how computing financial ratios can help investors and other stakeholders get more information from financial statements to determine the financial strengths of a business.

Analyzing Financial Statements Financial statements provide data, which can reveal trends and be applied to create various ratios.

These trends and ratios can be used to evaluate a firm’s financial health, its progress, and its prospects.

A. Solvency Ratios: Borrower’s Ability to Repay Debt Solvency ratios provide measures of the firm’s ability to meet its debt obligations. They can be used to estimate short-term and long-term risk.

1. The Current Ratio and Short-Term Solvency Short-term solvency ratios measure a company’s liquidity and its ability to pay immediate debts. The most commonly used of these is the current ratio, which measures a company’s ability to meet current obligations out of current assets. It is calculated by dividing current assets by current liabilities. The higher the ratio, the lower the risk to investors. A 2:1 ratio is accepted as satisfactory.

2. Long-Term Solvency Long-term solvency is calculated by dividing debt—total liabilities—by owners’ equity; this ratio illustrates the extent to which a firm is financed through borrowed money. The lower the debt, the lower the risk to investors and creditors. Sometimes, manageably high debt can be not only acceptable but also desirable. Borrowing funds gives a firm leverage, the ability to make otherwise unaffordable investments.

B. Profitability Ratios: Earnings Power for Owners Profitability ratios are used for measuring potential earnings. Earnings per Share is calculated by dividing net income by the number of shares outstanding; this determines the size of the dividend that a firm can pay shareholders. As the ratio goes up, stock value increases because investors know that the firm can better afford to pay dividends. The price earnings ratio is a comparison of a firm’s current share price to its current earnings per share.

C. Activity Ratios: How Efficiently Is the Firm Using Its Resources?

Activity ratios reveal the efficiency with which firms have used resources; an example is when annual sales revenues can increase without an increase in operating costs. These ratios are used for evaluating management’s use of assets.

KEY TEACHING TIPS ● Reinforce that the current ratio measures a company’s ability to meet current obligations out of current assets. The formula is Current Assets/Current Liabilities.

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● Reinforce that long-term solvency indicates a company’s ability to repay debts in future years; the formula is Total Liabilities/Owners’ Equity. ● Point out earnings per share determines the size of the dividend a firm can pay shareholders; this can be determined using the formula Net Income/Number of Shares of Stock Outstanding.

QUICK QUESTIONS ● What do solvency ratios measure? ● How can high debt be desirable for a company? ● Of what value is earnings per share to an investor in analyzing the quality of the investment?

Use In-Class Activity 4: Class Discussion: Choose an Investment Time Limit: 30 minutes

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Learning Objective 15-6: Discuss the role of ethics in accounting.

Bringing Ethics into the Accounting Equation The purpose of accounting ethics is to maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession.

A. AICPA’s Code of Professional Conduct. The code of professional conduct for public accountants in the United States is maintained and enforced by the AICPA; the following areas are included: responsibilities, the public interest, integrity, objectivity and independence, due care, and conduct in scope and nature of services.

B. Violation of Accounting Ethics and GAAP. The majority of recent accounting wrongdoing has related to all of the six ethics-related areas. Such adversity can be prevented if employees follow the code of professional conduct.

KEY TEACHING TIP ● It is critical that students recognize the purpose of ethics in accounting: to maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession.

QUICK QUESTIONS ● What are the six ethics-related areas outlined by the AICPA in its Code of Professional Conduct? ● What is the connection between the Sarbanes-Oxley Act of 2002 and the recent widespread violations of accounting ethics?

HOMEWORK Business Plan Now is a good time to assign Part 5 of the business plan project. In this section, students consider their IT needs and costs, and complete a balance sheet and income statement for their business.

At-Home Completion Time: 3 to 5 hours

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Learning Objective 15-7: Describe the purpose of the International Accounting Standards Board and explain why it exists.

Internationalizing Accounting. By the late twentieth century, it was apparent that the upsurge in multinational organizations and the global economy demanded more uniformity among accounting practices. The development of “universal” procedures would allow governments and investors in, say, China, Brazil, and Italy to read, interpret, and compare financial statements from all those countries, whereas such comparisons even today are difficult, if not sometimes impossible.

A. International Accounting Standards Board Established in 2001 and housed at London, England, the International Accounting Standards Board (IASB) is an independent, nonprofit organization responsible for developing a set of global accounting standards, and for gaining the support and cooperation of the world’s various accounting organizations to implement those standards.

B. Why One Set of Global Practices?

Although more than 138 countries have adopted IASB’s accounting practices, nearly 50 others continue to use their national GAAPs. U.S.-based global companies such as Google, Caterpillar, and Microsoft may prepare different financial reports using local accounting practices for each country in which they conduct business.

1. Example Areas Targeted for Aligning U.S. GAAP and IASB Among the many differences between the practices of U.S. GAAP and IASB—some reports identify more than 400 such discrepancies—the following examples illustrate some discrepancies and proposals for convergence toward universal standards in financial reporting. a. b. c. d.

In valuing assets In revenue recognition In devaluing of financial assets In fair value disclosure

2. Timetable for Implementation The U.S. Securities and Exchange Commission originally targeted 2015 as the earliest date that U.S. companies would be required to use IASB procedures for financial reporting. Some procedures were implemented that year, but others were deferred and/or targeted to be phased in over a period of years.

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: Do You Use Accounting?

Activity Overview: This activity asks students to think about the ways in which they use accounting in their personal lives.

Time Limit: 20 minutes What to Do: 1. Ask students to make a list of ways in which they use accounting in their personal lives. They might want to consider the following questions when making up their lists: (15 minutes) a. How do you keep track of what money is coming in? b. How do you keep track of what money is going out? c. How do you budget your money? d. How do you plan for unexpected expenditures? e. What types of “tools” do you use to keep track of your financial information? f. At later points in your life, do you think you will account for your money differently? If so, how?

2. Ask students to share any relevant information that might benefit other students in the class.

(5 minutes) Don’t Forget: Everyone has a unique way of keeping track of their financial situation; some will be more effective than others.

Wrap-Up: Remind students that we are all accountants to a certain degree. Bring the exercise to a close by briefly outlining accounting and previewing the types of accountants discussed in the chapter.

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In-Class Activity 2: Class Discussion: Interpreting Financial Statements Activity Overview: This activity asks students to determine in which financial statement specific pieces of information are included.

Time Limit: 20 minutes What to Do: 1. In advance, make a list of revenues, expenses, assets, debts, etc.

2. Ask students to account for each item on a balance sheet or income statement as you reveal the item; for each item, ask, “Where would this go?” (20 minutes) Don’t Forget: Another alternative is to ask students to individually write down their answers and then discuss each item revealed and the rationale for including it in either the balance sheet or income statement.

Wrap-Up: Wrap up the activity by providing a brief overview of the accounting equation, followed by a brief overview of the roles of the financial statements.

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In-Class Activity 3: Small Group Discussion: Annual Reports Activity Overview: This activity gives students a chance to review actual financial information from annual reports of real companies.

Time Limit: 45 minutes What to Do: 1. In advance, ask students to bring a copy of a recent annual report to class. Make it clear that many companies post their annual reports online, so they can access the information they need on the Web. You may also want to bring a supply of annual reports in case students can’t get to them.

2. Divide students into groups of two and ask each group to review one of the annual reports. In particular, ask students to identify financial information that has been discussed in this chapter and discuss whether that information coincides with what has been presented in this chapter.

(30 minutes) 3. Reassemble the class as a whole and ask each group to reveal the financial status of their selected company. (15 minutes) Don’t Forget: Remind students to also pay attention to the opinion of each company’s auditing firm as revealed in the annual report.

Wrap-Up: Remind students of the use of the annual report, such as how potential investors in a corporation interpret such data prior to making a stock purchase.

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In-Class Activity 4: Class Discussion: Choose an Investment Activity Overview: This activity asks students to calculate financial ratios and interpret the results.

Time Limit: 30 minutes What to Do: 1. Ahead of time, ask students to bring an annual report of a corporation of their choice to class.

2. Divide the class into groups of two, asking each group to calculate the following ratios/information based on information they find in the annual report: (15 minutes) a. Current ratio b. Long-term solvency c. Earnings per share 3. Ask each group to discuss the following questions: (15 minutes) a. What is the company’s ability to meet currency obligations out of current assets? b. Is the company likely to be able to repay debts in future years? c. What might be the size of the dividend that the firm can pay shareholders?

Don’t Forget: Information needed to calculate the above figures should be present in any financial statement.

You may want to bring a supply of annual reports in case students can’t get to them, or make it clear that many companies post their annual reports online so students can access the information they need on the Web. Wrap-Up: Bring the activity to a close by providing a brief overview of short- and long-term solvency, as well as what earnings per share indicate.

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BUSINESS PLAN PROJECT PART 5 MANAGING INFORMATION Assignment Overview: The fifth part of the business plan project asks students to think about their business in terms of their business needs and costs. Specifically, students are asked to determine their IT needs and resources and are asked to complete a balance sheet and an income statement for their business.

Many students find this part of the plan especially challenging, and will have trouble estimating their costs. Remind them that the values they calculate in this part of the plan are estimates, and there is no surefire method for accurately measuring how a business may perform. You may want to spend some class time going over each question in this part of the plan and create a list of sources that students can use when calculating their costs.

Files to Provide Students: If you would like students to complete a balance sheet and an income statement for their businesses, a sample spreadsheet file is available for them to consult in the following pages. Full Business Plan templates are also available at www.mybizlab.com.

Part 5 Estimated At-Home Completion Time: If done well, this section will require a minimum of 3 to 5 hours. Instructor feedback is critical in this part of the plan, as most students will need some direction in gathering information that will help answer the questions related to costs.

Homework Deliverable from Students: The length of this section should be somewhat consistent, although some variance can be expected. You should expect about four to five pages in this section.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 15-1. What is the function of a comprehensive accounting information system (AIS)?

Organizations engage in thousands of transactions. Thus, consistent and dependable financial information is essential for them. An AIS provides an organized procedure for identifying, measuring, recording, and retaining financial information. This information can then be used in accounting statements and management reports. (Learning Objective 1 – AACSB – application of knowledge) 15-2. Why do organizations need both financial and management accountants?

An organization’s financial accounting system is concerned with external information users, like consumer groups, unions, stockholders, suppliers, creditors, and government agencies. It prepares reports, such as income statements and balance sheets, that focus on the activities of the company as a whole rather than on individual departments or divisions. Managerial accounting, on the other hand, serves internal users. Managers at all levels need information to make departmental decisions, monitor projects, and plan future activities. Managerial accounting provides this information. (Learning Objective 1 – AACSB – application of knowledge) 15-3. Which type of accountant would be involved in providing litigation support? What do these accountants do?

A forensic accountant would be involved in providing litigation support. Forensic accountants assist in applying accounting evidence at judicial proceedings by preparing and preserving the evidence that such proceedings need. They also assist by presenting visual aids to support trial evidence, testifying as expert witnesses, and, especially, determining economic damages before the court. (Learning Objective 1 – AACSB – application of knowledge) 15-4. What is the purpose of auditing, and why is it necessary?

An audit examines a company’s AIS to determine whether its financial reports represent its operations reliably. Organizations must provide audit reports when applying for loans, selling stock, or going through a major restructuring. (Learning Objective 1 – AACSB – application of knowledge) 15-5. How would you calculate the value of owner’s equity in a business?

In business, owners’ equity is the amount of money that an owner would theoretically receive if they sold all of their company’s assets at their presumed values and paid off all of its liabilities. (Learning Objective 4 – AACSB – application of knowledge)

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QUESTIONS FOR ANALYSIS 15-6. If you were assessing the value of a business, which two factors would you take into account and in which financial statement would you find them?

The two factors would be assets and liabilities. They would be found on a balance sheet.

(Learning Objectives 4 and 5 – AACSB – application of knowledge) 15-7. Use the accounting equation to determine the net worth of a company whose assets are US$36.6 million and liabilities are US$28.2 million. What does this net worth suggest to potential investors?

The net worth or owners’ equity in the business is US$36.6 − US$28.2 million = US$8.4 million. This is the amount that would be left if the company had to pay all its liabilities. It is a reasonable sum of money, and potential investors would understand that the business could pay most of the US$8.4 million to its owners if it needed to close for any reason. (Learning Objective 4 – AACSB – application of knowledge, reflective thinking) 15-8. Modern economies routinely engage in cross-border transactions and require the free flow of capital. It is estimated that over 30 percent of all financial transactions are cross-border. In this case, why is it vital that all countries adopt the same standards for accounting procedures?

Why might a country be reluctant to do this?

Answers will vary, but students should identify the need for high-quality and internationally recognized accounting standards. These standards will bring a sense of transparency, accountability, and efficiency to accounting that involves cross-border transactions. Countries may refuse to adopt an international accounting standard for complex reasons. One reason may be the cost—it is more expensive to switch from GAAP to an international standard (requiring changes in the workforce as well as the system). Another reason may be that some countries find it difficult to understand certain accounting standards due to historical reasons.

A third reason could be that some countries believe that GAAP works well and is superior to other standards. (Learning Objective 3 – AACSB – application of knowledge, reflective thinking)

APPLICATION EXERCISES 15-9. Create a personal budget that includes a way to monitor actual monthly expenditures against budget and a way to forecast future cash balances. How could you use this budget to increase your personal net worth?

Students should demonstrate an understanding budgeting and its importance as a way to control spending and increase savings. (Learning Objective 15-3—AACSB—analytical thinking and reflective thinking)

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15-10. Identify your accounting assets and liabilities. Use the accounting equation to determine your own net worth (equity). Using this information, how would you go about increasing your net worth in the future?

Students should address the accounting equation and budget forecasting and demonstrate an understanding of equity and how to increase it. (Learning Objective 15-2—AACSB— analytical thinking and reflective thinking)

BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 15-11 TO 15-15 (Learning Objectives 15-1, 15-2, and 15-3—AACSB—interpersonal relations and teamwork, analytical thinking, application of knowledge) In this assignment, the team will have the opportunity to see how they will use the three main financial statements, how choices impact their cash flow statement, understand the role financial data plays in creating a successful business, the role financial documents play in obtaining credit, and who on the team will be responsible for creating and maintaining the necessary data.

TEAM EXERCISE: AN AMERICAN LEGEND 15-16 TO 15-19 (Learning Objectives 15-2, 15-3, and 15-5—AACSB—interpersonal relations and teamwork, analytical thinking) Answers will vary somewhat depending on what three-year-period is used. Students must use the equations provided to determine ratios, and perform other calculations, and recognize trends.

EXERCISING YOUR ETHICS: CORPORATIONS UNDER THE MICROSCOPE (Learning Objective 15-6–AACSB – ethical understanding and reasoning, analytical thinking) The Situation Working as a partner in an accounting firm means regular and reliable work. Recently, you’ve been looking at a slight career change, and you’ve been reading about forensic accounting.

The Dilemma In the beginning, the switch is partial. You work with your regular clients four days a week and take on forensic accounting jobs on the fifth working day. Soon, you begin to realize that some of your clients are not being as truthful and transparent in their financial documents as they should be. These discrepancies might not be noticed by a casual reader, but you can see that there are significant problems. You will not sign off on the accounts as being accurate. The question is: what do you do about it? You discuss it with your business partner. She believes that if you are uncomfortable with the client, then you should tell them that you aren’t prepared to handle their accounts in the future. Alternatively, you could hand their accounts over to her, and she will 15-24 © 2025 Pearson Education, Ltd. All rights reserved.

inform them about the problems with their accounting information. Something tells you that you need to take more drastic action. You feel complicit and do not want to be associated with fraudulent behavior, but you have known some of the clients for a decade.

QUESTIONS TO ADDRESS 15-20. What are the ethical issues in this situation?

There are several ethical issues; however, the key issue is whether the problem involves fraud or is just a simple mistake or misunderstanding. In either case, there is no excuse for the accountant to ignore it. By ignoring it, the accountant can be seen as being complicit, either by deliberate involvement or by not bringing the matter to anyone’s attention.

15-21. What are the basic arguments for and against your business partner’s suggestions on handling the situation?

If you ignore the situation, then you compromise ethical standards of accounting but do not lose major clients. Alternatively, telling them that you can no longer work for them will result in them being alerted and the problem remaining unsolved.

15-22. What do you think you should do in this situation?

Student answers will vary. One answer involves discreetly bringing the problem to the client’s attention. You could pass the issue off as an oversight, state that you will rectify the situation, and be upfront about it with the tax authorities. Your actions after this will depend on how the client reacts.

CASES: CSI: WALL STREET (Learning Objective 15-1—AACSB—ethical understanding and reasoning, reflective thinking) 15-23. What factors do you think are most important in choosing among various methods to protect against fraud in a firm?

When choosing various fraud protection methods, costs and effectiveness would obviously be key factors.

15-24. Suppose you are hoping for a career as a Certified Fraud Examiner (CFE). How do recent trends in fraud provide new opportunities for such a career?

If the article is correct that fraudulent activities increase during an economic downturn and fraudulent activity has become more sophisticated, then there are new opportunities for a CFE to probe electronic records and cash transfers.

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15-25. An external auditor, such as a CPA firm’s accountant, may suspect some irregularities in a client firm’s accounting practices. In what ways might a CFE be of assistance?

A CFE would have more expertise in pursuing and finding the fraud. The examiner has training in several areas that would apply in this instance, including fraud detection, evaluating accounting systems for weaknesses and fraud risks, and reviewing internal organizational controls for fraud prevention.

15-26. Consider the antifraud training for a company’s employees and create an agenda that includes four (or more) topics that should be incorporated into that training, along with descriptions of each.

The training should include asset theft, review of financial statements, checking documentation, inventory review, cash accounts, revenue recognition, and activity timing, and so on.

15-27. What ethical issues, if any, are involved in a decision to investigate a suspected case of fraud in a firm’s accounting activities?

The broad scope of fraud—its costs, who commits it and how, and how it is detected—might affect the decision to investigate a fraud case. The purpose of ethics in accounting is to maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession. Without ethics, all of accounting’s tools and methods would be meaningless because their usefulness depends, ultimately, on truthfulness in their application. Accordingly, professional accounting associations such as the AICPA and IMA enforce codes of professional conduct that include ethics-related areas, such as the accountant’s responsibilities, the public interest, integrity, and due care.

IN THE DARK (Learning Objectives 15-1 and 15-6 —AACSB—ethical understanding and reasoning, reflective thinking) 15-28. If this client approached you, what would you do?

Answers will vary but students should indicate the need for a full accounting audit and improved record keeping and transparency.

15-29. What red flags do you see in this scenario?

Answers will vary, but students may note the lack of transparency, the business owner’s lack of understanding, the bookkeeper’s unresponsiveness, the muddy record keeping, and the bookkeeper’s response to the business owner’s questions.

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15-30. Why is it essential for business owners and managers to have a basic understanding of accounting? How would you advise this client?

Business owners and managers should be able to understand a balance sheet so they can assess the financial health of their business without a full-time accountant on staff. With that understanding, they can not only make good financial decisions but they can also spot potential fraud. Student advice will vary, but should include educating the business owner, advising using a different bookkeeper, and having a third-party audit performed regularly.

15-31. What are the risks to the client if she does nothing? What are the benefits if she takes your advice?

If the client does nothing, at best, she will remain in the dark and frustrated. At worst, she will lose money to embezzlement and be bankrupt by fraud. If she takes the student’s advice, she will know where all her money is, will know if she has been defrauded, and will be better equipped to manage her business.

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PART 5 INTEGRATIVE LEARNING PORTFOLIO MANAGING INFORMATION CRAFTING A BUSINESS PLAN IT RESOURCES P5-1. What kind of IT resources will your business require?

Hint: Think about the employees in your business and what they will need in order to do their jobs. What computer hardware and software will they need? Will your business need a network and an Internet connection? What type of network? Refer to Chapter 14 for a discussion on IT resources you may want to consider.

CUSTOMER SERVICE P5-2. How will you use IT to keep track of your customers and potential customers?

Hint: Many businesses—even small businesses—use databases to keep track of their customers.

Will your business require a database? What about other information systems? Refer to Chapter 14 for more information on these topics.

COSTS OF DOING BUSINESS P5-3. What are the costs of doing business? Equipment, supplies, salaries, rent, utilities, and insurance are just some of these expenses. Estimate what it will cost to do business for one year.

Hint: The Business Plan Student Template provides a table for you to insert the costs associated with doing business. Insert the costs associated with doing business in the table below. The list below provides some hints as to where you can get this information. Note that these are just estimates—just try your best to include accurate costs for the expenses you think will be a part of doing business.

HINTS FOR EACH EXPENSE IN THE TABLE: Rent: Refer to the floor plan. How many square feet is your place of business? What is the “going rate” per square foot for office space in your community? A real estate agent or a local SBA representative (www.sba.gov) can also be helpful in answering this question.

Salaries: Refer to the organizational chart. How much will each employee earn? How many hours will each employee be needed on a weekly basis? Once you’ve determined the weekly cost, expand it to a monthly and a yearly cost.

Supplies: Refer to the floor plan. How much will all the computers, equipment, and furniture cost? What kinds of general office supplies will you need? Most prices for this information can be found on an office supply website, such as www.staples.com.

Advertising and Other Promotions: Refer to your marketing section. You have described how you wish to reach your customer—now you need to decide how much it will cost. If you are using 15-28 © 2025 Pearson Education, Ltd. All rights reserved.

television, contact the sales department at a local station. If you are using a newspaper, contact their advertising department. Salespeople are usually happy to answer your questions.

Utilities: These amounts will vary, depending on your business and what utilities you will pay. If your business looks like an office, this cost may be similar to what a homeowner pays. However, if your business involves making a product, then the costs will be significant. An SBA representative can be a good resource.

Insurance: This value will be affected by the nature of the business. More equipment will usually mean higher insurance costs. Again, contact an SBA representative for feedback.

EXPECTED REVENUE P5-4. How much will you charge for your product? How many products do you believe you can sell in one year (or how many customers do you think your business can attract)?

Multiply the price that you will charge by the number of products you hope to sell or the amount you hope each customer will spend. This will give you an estimate of your revenues for one year.

Hint: You will use the amounts you calculate in the costs and revenues questions in this part of the plan in the accounting statements in the next part, so be as realistic as you can.

INCOME STATEMENT AND BALANCE SHEET P5-5. Create a balance sheet and an income statement (profit-and-loss statement) for your business.

Hint: You will have two options for creating these reports. The first option is to use the Microsoft Word versions that are found within the Business Plan Student Template itself. The second option is to use the specific Microsoft Excel templates created for each statement, which are found on the book’s companion website at www.pearsonhighered.com/ebert. These Excel files are handy to use because they already have the worksheet calculations preset—all you have to do is “plug in” the 15-29 © 2025 Pearson Education, Ltd. All rights reserved.

numbers and the calculations will be performed automatically for you. If you make adjustments to the different values in the Excel worksheets, you’ll automatically see how changes to expenses, for example, can improve the bottom line.

This chapter has discussed income statements and balance sheets. This is a good opportunity to show students how to prepare a spreadsheet (see following pages) into which to put the financial information for an income statement and a balance sheet.

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Income Statement (Profit-and-Loss Statement) June

Jul y

Aug .

Sept.

Oct .

Nov .

Dec.

……

YEARLY

Revenue (Sales) Category 1 Category 2 Total Revenue (Sales) Cost of Goods Sold Category 1 Category 2 Total Cost of Goods Sold Gross Profit Expenses Rent Expense Salary/Wage Expenses Supplies Expense Advertising Expense Utilities Expense Telephone/Interne t Expense Insurance Expense Interest from Loans (if applicable) Other Expenses (specify) Total Expenses Net Profit

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Balance Sheet Assets Current Assets Cash Cash Value of Inventory Prepaid Expenses (insurance) Total Current Assets Fixed Assets Machinery and Equipment Furniture and Fixtures Real Estate/Buildings Total Fixed Assets Total Assets

Liabilities and Net Worth Current Liabilities Accounts Payable Taxes Payable Notes Payable (due within 12 months) Total Current Liabilities Long-Term Liabilities Bank Loans Payable (greater than 12 months) Less: Short-Term Portion Total Long-Term Liabilities Total Liabilities Owners’ Equity (Net Worth) Total Liabilities and Owners’ Equity 15-32 © 2025 Pearson Education, Ltd. All rights reserved.

CASE PART 5: STARBUCKS P5-6. Some economists posit that the only legal duty a corporation owes its shareholders is to make a profit and therefore maximize the share price. Others say that corporations have a social responsibility to the public that goes beyond just making a profit. Which position do you support, and why?

Students should be able to articulate the reasons behind their opinions and cite specific examples from the text, like responsibility toward customers and the environment, federal legislation, public trading laws, and consumer rights. (Learning Objectives 2-2, 3-6 and 15-6 —AACSB—analytical thinking) P5-7. How much of Starbucks’s success do you think is directly attributable to one person? Do you think that is true for all successful corporations?

Student answers will vary, but should show an awareness of situational approaches to leadership and transformational and charismatic perspectives on leadership, and should explore the relationship between different companies’ leaders and their business success or failure. (Learning Objectives 9-3 and 9-4—AACSB—analytical thinking) P5-8. Why would a company “go public”? What does that mean? What is involved in that process?

Students should note the increase profit-making abilities of a public company, but the initial objective of going public is to raise large amounts of capital very quickly. With some research, they should be able to determine that going public involves audited financial statements, an underwriter, and an initial public offering. (Learning Objectives 3-6 and 15-1 —AACSB—analytical thinking) P5-9. What are the roles of accountants in providing outside users with financial information?

What are the roles of accountants in providing internal users (management) with information?

How are those two different types of accounting similar, and how are they different?

Students should be able to distinguish between financial and managerial accounting. They should be able to articulate the external rules and rulemaking bodies that govern financial accounting and to differentiate that from managerial accounting, which is an internal function.

(Learning Objective 15-1—AACSB—analytical thinking) P5-10. What are a few innovative ways that information technology is being used in automobile retailing today?

Students may reference things like gift cards, rewards programs, and customized online shopping experiences. They may also note current AI-type programs that access information across application to tailor direct advertising.

(Learning Objectives 14-1 and 14-3— AACSB—analytical thinking) 15-33 © 2025 Pearson Education, Ltd. All rights reserved.

FINDING YOUR PATH Careers in Business Accounting and information technology (IT) are two of the more popular career tracks in business programs. Future job growth prospects for accounting graduates is around 6 percent overall growth by 2028. IT graduates are experiencing higher demand, with job growth expected to exceed 11 percent by 2028.

Making Yourself Employable Accounting Accounting has a clear competency standard: qualifying to become a CPA. While many people enjoy a successful career without passing the CPA exam, they may earn lower salaries or have less upward mobility. In addition to core accounting skills and competencies, accounting graduates may be more employable if they have a clear understanding of financial reporting processes and standards, forecasting competency, and IT skills.

Information Technology (IT) Information technology tends to be highly technical, as individuals in the field must understand systems analysis and database management, digital forensics, and issues associated with IT governance. To stand out, focus on IT as a business function by relating it to other areas of business.

As both accounting and IT students can be stereotyped as “nerdy” or uninteresting, do things to show that this stereotype does not apply to you.

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Chapter 16: Understanding Money and the Role of Banking Chapter Overview This chapter presents the different forms that money takes in the nation’s money supply and discusses the different types of financial institutions that compose the U.S. financial system. It also looks at how financial institutions create money and describes the means by which they are regulated. The functions of the Federal Reserve System are discussed, as are the tools it uses to control the money supply. Finally, the chapter identifies three important ways the money and banking system is changing and touches on some of the institutions and activities in international banking and finance.

Learning Objectives 16-1. Define money and identify the different forms that it takes in the nation’s money supply.

16-2. Describe the different kinds of financial institutions that compose the U.S. financial system and explain the services they offer.

16-3. Explain how financial institutions create money and describe the means by which they are regulated.

16-4. Discuss the functions of the Federal Reserve System and describe the tools that it uses to control the money supply.

16-5. Identify three important ways in which the money and banking system is changing.

16-6. Discuss some of the institutions and activities in international banking and finance.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: How Much Would That Be in, Say, Chocolate Bars?

2. Up for Debate: Your Check Is Not in the Mail

Description Students consider the characteristics of money when making purchases using something other than “money.”

Students analyze the pros and cons of traditional check writing versus electronic payments.

Time Limit 30 min.

20 min.

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CHAPTER OUTLINE Learning Objective 16-1: Define money and identify the different forms that it takes in the nation’s money supply.

What Is Money?

A. The Characteristics of Money Money has four main characteristics: 1) Portability—light and easy to handle 2) Divisibility—easily divisible into smaller parts with fixed values 3) Durability—can be replaced if it wears out; hard to counterfeit 4) Stability—while value fluctuates, on the whole is relatively stable and predictable B. The Functions of Money Money serves three functions: 1) It is a medium of exchange. We use money to buy and sell things.

2) It is a store of value. Money can be saved and used for future purchases.

3) It is a measure of worth. All products can be valued in terms of money.

Money adds convenience and simplicity to our lives, for consumers and businesses alike.

C. M-1: The Spendable Money Supply The value of money decreases when its supply is high; when the money supply is low, its value increases. A common measurement of the money supply is M-1, which counts only the most liquid forms of money, including currency (cash), checks, and checking accounts (demand deposits).

D. M-2: M-1 Plus the Convertible Money Supply M-2 includes everything in M-1 plus other forms of money that are not quite as liquid— items that are invested for the short term, but are easily converted to spendable forms. The major components of M-2 are M-1, time deposits, money market mutual funds, and savings accounts. M-2 now is viewed as a more reliable measure of the money supply than M-1.

E. Credit Cards and Debit Cards: Plastic Money?

Credit cards, however, are not money and, accordingly, are not included in M-1 or M-2 when measuring the nation’s money supply. Debit cards, however, do not create debt as money is transferred immediately from a bank account; they are included in M-1.

KEY TEACHING TIPS ● Point out that just about any object that can serve as money is portable, divisible, durable, and stable.

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● Explain each of the following characteristics of money: portability, divisibility, durability, and stability. ● Students often confuse the characteristics of money with the functions of money. At this point, a quick review of both may be helpful. ● Prior to the discussion of the M-1 and M-2, it may be helpful to point out that the value of money depends on its supply—meaning how much is in circulation. For example, the value of money drops when supply is high. ● Students should keep M-2 separate from M-1. M-2 includes M-1 plus other forms of money that are not quite as liquid, such as time deposits, money market mutual funds, and savings accounts.

QUICK QUESTIONS ● How is it that checking accounts can be counted as part of M-1? ● Different cultures “put different spins” on monetary transactions. For example, money is exchanged with a good deal of respect, even down to the way it is handled, in Japan.

What are some other ways different cultures “put different spins” on money? ● Why are credit cards not included in M-1 or M-2?

Use In-Class Activity 1: Icebreaker: How Much Would That Be in, Say, Chocolate Bars?

Time Limit: 30 minutes

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Learning Objective 16-2: Describe the different kinds of financial institutions that compose the U.S. financial system and explain the services they offer.

The U.S. Financial System A. Financial Institutions Financial institutions ease the flow of money from users with surpluses to those with deficits by attracting funds into checking and savings accounts.

1. Commercial Banks Commercial banks are companies that accept deposits that they use to make loans, earn profits, pay interest to depositors, and pay dividends to owners.

Every bank receives a major portion of its income from interest paid on loans by borrowers. Banks can set their own interest rates. Traditionally, the lowest rates were made available to the bank’s most creditworthy commercial customers. That rate is called the prime rate. Most commercial loans are set at markups over prime, like prime +1, which means 1 percent over the prime rate. Some banks offer loans below prime in order to stay competitive with foreign banks.

2. Savings Institutions Savings institutions include mutual savings banks and savings and loan institutions. They were once called thrift institutions.

3. Savings and Loan Associations Savings and loan associations (S&Ls) accept deposits, make loans, and are owned by investors.

4. Mutual Savings Banks In mutual savings banks, all depositors are considered owners of the bank. All profits, therefore, are divided proportionately among depositors, who receive dividends.

5. Credit Unions A credit union is a nonprofit, cooperative financial institution owned and run by its members. Its purpose is to promote thrift—careful management of one’s money or resources—and to provide members with a safe place to save and borrow at reasonable rates.

6. Nondeposit Institutions A variety of other organizations take in money, provide interest or other services, and make loans. They are called nondeposit institutions because, unlike commercial banks, inflowing funds are intended for purposes other than earning interest for depositors. Four of the most important institutions are pension funds, insurance companies, finance companies, and securities investment dealers (brokers).

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a. A pension fund is a pool of funds that is managed to provide retirement income for its members. Public pension funds include Social Security and retirement programs for state and local government employees. Employers, unions, and other private groups operate private pension funds. b. Insurance companies accumulate money from premiums and invest in stocks, real estate, and other assets. Earnings pay insurance claims. c. Finance companies specialize in making loans to businesses (needing capital or long-term funds) and consumers (small loans to individuals such as mortgages, personal loans). d. Securities investment dealers (brokers) buy and sell stocks and bonds for client investors and for their own accounts in hopes of reselling them later at a profit.

B. The Growth of Financial Services No longer is it enough for commercial banks to accept deposits and make loans. Most, for example, also offer bank-issued credit and debit cards, safe-deposit boxes, ATMs, electronic money transfer, online banking, and foreign currency exchange. In addition, many offer pension, trust, international, and brokerage services and financial advice.

1. Pension and Trust Services Individual retirement accounts (IRAs) are tax-deferred pension funds that wage earners and their spouses can set up to supplement other retirement funds. Many commercial banks offer trust services—the management of funds left in the bank’s trust.

2. International Services The three main international services offered by banks are currency exchange, letters of credit, and banker’s acceptances. Currency exchange exchanges U.S. dollars for another country’s currency to make a payment. A letter of credit is a promise by the bank to pay a firm a certain amount, if specified conditions are met. A banker’s acceptance promises that the bank will pay a specified amount at a future date.

3. Financial Advice and Brokerage Services Serving as financial advisors, banks help customers manage their money by recommending different investment opportunities and serving as a securities intermediary.

4. Electronic Funds Transfer Electronic funds transfer (EFT) systems transfer many types of financial information electronically. EFT systems provide automatic payroll deposit, ATM transactions, bill payment, and automatic funds transfer. 

Automated Teller Machines. Automated teller machines (ATMs) allow customers to withdraw money, make deposits, transfer funds, and check on account status.

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KEY TEACHING TIPS ● Remind students that financial institutions include commercial banks, savings and loan associations, mutual savings banks, and credit unions. ● Make sure students understand the distinction between EFT services and ATM services. ● Reinforce that financial institutions of all kinds have had to modify their services to maintain and attract customers.

QUICK QUESTIONS ● What are ways in which financial institutions have diversified in recent years? ● What was the traditional purpose of a savings and loan association? ● Who are considered the owners of mutual savings banks and credit unions? ● How are nondeposit institutions different from commercial banks? ● When might a letter of credit be used? When might a banker’s acceptance be used? ● How do consumers benefit from EFT?

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Learning Objective 16-3: Explain how financial institutions create money and describe the means by which they are regulated.

How Financial Institutions Create Money and Are Regulated As the value of money goes down, purchasing power goes down. Conversely, purchasing power goes up as the value of your money increases. Predictions of future values become possible by (1) understanding how money is created and by (2) understanding how the Federal Reserve controls the supply of money.

A. How Money Is Created Financial institutions create money by taking in deposits and making loans, which expands the money supply. The money supply expands because banks are allowed to loan out most (although not all) of the money they take in from deposits.

B. How Banks Are Regulated Banks create money; therefore, the government regulates them via the Federal Reserve System and the Federal Deposit Insurance Corporation to ensure a sound financial system.

This ensures that the failure of some will not cause the public to lose faith in the banking system itself. The Federal Deposit Insurance Corporation (FDIC) insures deposits in member banks up to $250,000.

KEY TEACHING TIPS ● Ensure students understand the purpose of the FDIC. ● Review how banks create money by taking in deposits and making loans.

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Learning Objective 16-4: Discuss the functions of the Federal Reserve System and describe the tools that it uses to control the money supply.

The Federal Reserve System The Federal Reserve System (the Fed) is the nation’s central bank.

A. The Structure of the Fed The Fed comprises a board of governors, a group of reserve banks, and member banks.

1. The Board of Governors This group comprises seven members appointed by the president for 14-year terms; the board plays a major role in controlling the money supply through reserve requirements, discount rates, and handles the Fed’s sale and purchase of government securities.

2. Reserve Banks There are 12 banks in the Fed that hold deposits from and set the discount rate for commercial banks in their respective regions; reserve banks also largely contribute to the country’s check-clearing process.

3. Open Market Committee The Federal Open Market Committee is responsible for formulating the Fed’s monetary policies to promote economic stability and growth by managing the nation’s money supply.

4. Member Banks All nationally chartered commercial banks and some state-chartered banks are members of the Fed; depositor accounts in member banks are protected by the FDIC. 5. Other Depository Institutions Although many state-chartered banks, credit unions, and S&Ls do not belong to the Fed, they are subject to its regulations, pay deposit insurance premiums, and are covered by the FDIC or NCUA. B. The Functions of the Fed The Fed functions as the government’s bank and the “banker’s bank” and controls the money supply.

1. The Government’s Bank The Fed produces the nation’s currency and lends money to the government by buying bonds issued by the Treasury Department to finance the national deficit.

2. The Bankers’ Bank Individual banks that need money can borrow from the Fed and pay interest on the loans.

In addition, the Fed provides storage for commercial banks, which are required to keep funds on reserve at a Federal Reserve Bank.

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3. Check Clearing The Fed also clears checks. With electronic payments, however, the number of paper checks processed is falling. In 2000, the Fed cleared 60 billion paper checks. By 2022 this number had dropped to 14.7 billion plus 4.1 billion in checks cleared via mobile apps.

4. Controlling the Money Supply The Fed is responsible for the implementation of U.S. monetary policy—the management of the nation’s economic growth by managing money supply and interest rates. Controlling these influences the ability and willingness of banks to loan money. a. Inflation is a period of widespread price increases throughout an economic system. It occurs if the money supply grows too large. Demand for goods and services increases, and the price of everything rises. b. Deflation occurs when the supply of goods outpaces the supply of money, so demand for goods and services falls. Decreasing prices lead businesses to cut output and also lead to rises in unemployment.

C. The Tools of the Fed In controlling the money supply, the Fed uses these main tools: reserve requirements, interest rate controls, and open-market operations.

1. Reserve Requirements The reserve requirement is the percentage of its deposits that a bank must hold, in cash or on deposit, with a Federal Reserve Bank. High reserve requirements reduce the money available to lend; low requirements allow the money supply to expand.

2. Interest Rate Controls As the bankers’ bank, the Fed loans money to banks. The discount rate is the interest rate that the Fed charges on loans made to member banks. An increased discount rate reduces the money supply; a low rate encourages borrowing and lending. The federal funds rate (key rate) is the rate at which commercial banks lend reserves overnight to each other.

3. Open-Market Operations Open-market operations refer to the Fed’s sale and purchase of securities (usually U.S. Treasury notes and short-term bonds) in the open market, as directed by the open-market committee. The Fed buys government securities from a commercial dealer, whose bank account is credited for the transaction, thus giving that bank more money to lend. This action expands the money supply. When the Fed sells securities, the opposite occurs as it allows the U.S. government to raise money and contract the money supply.

KEY TEACHING TIPS

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● Reinforce that monetary policy is the management of the nation’s economic growth by managing money supply and interest rates; the Fed is responsible for monetary policy. ● Remind students that the discount rate is the interest rate charged by the Fed for loans made to banks. ● Make sure students understand that the Federal Reserve System (the Fed) is the central bank of the United States; it comprises a board of governors, 12 reserve banks, and thousands of member banks. ● Point out that some financial institutions don’t belong to the Federal Reserve System; however, they are still subject to the Fed’s regulations, pay deposit insurance premiums, and are covered by the FDIC. QUICK QUESTIONS ● How does the Fed serve as the “government’s bank?” ● How does the Fed serve as the “bankers’ bank?” ● What typically happens to demand for goods and services, and their prices, during inflationary times? ● How does increasing the reserve requirement help to reduce inflation? ● Remind students that the discount rate is the interest rate charged by the Fed for loans made to banks. ● How does the Fed control the nation’s money supply through open-market operations?

16-11 © 2025 Pearson Education, Ltd. All rights reserved.

Learning Objective 16-5: Identify three important ways in which the money and banking system is changing.

The Changing Money and Banking System The U.S. money and banking system continues to change today. Government emergency intervention aims to stabilize a troubled financial system. Enforcement of antiterrorism regulations deters criminal misuse of the financial system. And with the expansion of banking services, electronic technologies affect how you obtain money and how much interest you pay for it.

A. Government Intervention for Stabilizing the U.S. Financial System With a goal of stabilizing the fractured financial system, the government continues its unprecedented infusion of funding for U.S. financial institutions.

1. Government Emergency Investment During the recent recession, the Fed invested heavily, mostly in lending programs to commercial banks, to allow them to get rid of bad investments and gain cash for lending to bank customers. The Troubled Asset Relief Program (TARP) was another source of funds to businesses and banks.

2. Assurances of Repayment In return for these investments, the loans to banks were secured by the banks’ assets, such as commercial loans, mortgages, and asset-backed securities.

B. Anticrime and Antiterrorism Regulations The Bank Secrecy Act requires financial institutions to formulate methods, such as monitoring and keeping records of customer transactions, to deter funding of crimes.

Enforcement includes tracking and reporting on suspicious transactions, such as a sudden increase in wire transfers or cash transactions exceeding $10,000, to cut off funding of criminal and terrorist activities.

USA PATRIOT Act and the Customer Identification Program (CIP). The USA PATRIOT Act requires that financial institutions obtain and verify four pieces of information for every customer: name, address, date of birth, and social security number. A customer identification program (CIP) verifies identities, keeps records of customer activities and, for new customers, compares identities with government lists of terrorists.

C. The Impact of Electronic Technologies Investing in new technologies allows banks to improve their efficiency and customer service levels.

1. Automated Clearing House (ACH) Network ACH is an electronic funds transfer system that provides interbank clearing of electronic payments for the nation’s financial institutions.

2. Check 21: Making the Paper Check Go Away

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Check 21 allows banks to present a substitute electronic check for payment instead of the original check. The result is much faster transactions.

3. Blink Credit Cards This “contactless” payment system allows consumers to wave a card in front of the merchant’s terminal and be on his or her way.

4. Debit Cards Debit cards allow the transfer of money between accounts and can be used to make retail purchases. In stores with point-of-sale (POS) terminals, customers insert cards that transmit information relevant to their purchases to terminals, after which the bank automatically transfers funds from the customer’s account to the store’s account.

5. Smart Cards Smart cards are plastic cards with an embedded computer chip that can be programmed with “electronic money.” Embedded chip technology is also replacing standard magnetic strips on traditional credit cards and debit cards, providing greater security for both parties during transactions.

QUICK QUESTIONS ● How might check writers benefit from Check 21? How might financial institutions benefit from Check 21?

HOMEWORK Interview a Manager Now is also a good time to assign Application Exercise 16-10 from the end-of-chapter materials of the textbook as homework. This assignment asks students to interview the local manager of a bank and determine how requirements of various regulations have affected the bank.

At-Home Completion Time: 1–2 hours

Use In-Class Activity 2: Up for Debate: Your Check Is Not in the Mail Time Limit: 20 minutes

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Learning Objective 16-6: Discuss some of the institutions and activities in international banking and finance.

International Banking and Finance Electronic technologies permit nearly instantaneous financial transactions around the globe.

These business exchanges—the prices asked and paid—are affected by values of the currencies among the various nations involved in the transactions.

A. Currency Values and Exchange Rates With today’s global activities, travelers, shoppers, investors, and businesses often rely on banks to convert their dollars into other currencies. When it comes to choosing one currency over others, the best choice changes from day to day. Every currency’s value changes, reflecting global supply and demand—what traders are willing to pay—for one currency relative to others. The resulting exchange rate, the value of one currency compared to the value of another, reveals how much of one currency must be exchanged for another.

1. Strong Currency or Weak: Which Is Better?

Most people would prefer a “strong” currency, right? But it depends on how it will be used. “Strong” means that the currency is selling at a higher price and worth more, while “weak” means that it is selling at a lower price and is worth less. This impacts any transaction involving multiple currencies and impacts prices for items in the countries involved, whether domestic or imported products. A weaker dollar makes foreign imports more expensive, so U.S. consumers can afford fewer imported products. However, U.S.based companies or factories could sell more exported products to other countries.

2. Bank Policies Influence Currency Values In managing the money supply and interest rates, the Fed strongly influences the dollar’s strength against other currencies. The European Central Bank fills the role for the euro zone. Europe’s economic recovery is slower than desired when the euro is strong because euro-zone companies are less competitive against global counterparts.

Currency exchange rates matter to companies when they buy, sell, and invest with other companies around the globe. Those exchange rates can be the difference between making a living and losing money during any year. Prices for consumer products, such as electronics by Samsung and autos made in Sweden or Germany, depend on currency exchange rates, too.

B. The International Payments Process International payments are simplified through the services provided by their local banks.

Payments from U.S. buyers start at a local bank that converts them from dollars into the seller’s currency, such as into euros, for example, to be sent to a seller in, say, France. At the same time, payments and currency conversions from separate transactions also are flowing between French businesses and U.S. sellers in the other direction. When money inflows and outflows remain equal for both countries, as a result of international transactions, money does not have to “flow” between the two countries. If inflows and outflows are not in balance, then the flow of money—in either direction—is made to cover the difference.

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C. International Bank Structure Worldwide banking stability relies on a loose structure of agreements among individual countries.

1. The World Bank The World Bank provides only a very limited scope of services, such as funding national improvements by making loans to build roads, schools, power plants, and hospitals. The resulting improvements eventually enable borrowing countries to increase productive capacity and international trade.

2. The IMF The International Monetary Fund (IMF) promotes the stability of exchange rates, provides temporary loans to member countries, encourages members to cooperate on international monetary issues, and encourages the development of a system for international payments. The IMF makes loans to nations suffering from temporary negative trade balances. By making it possible for these countries to continue buying products from other countries, the IMF facilitates international trade.

QUICK QUESTIONS ● For what purposes has the International Monetary Fund been designed? ● How do changes in currency exchange rates affect business decisions and results?

HOMEWORK Creating Money Now is a good time to assign Application Exercise 16-9 from the end-of-chapter materials of the textbook as homework. This assignment asks students to calculate exchange rates.

At-Home Completion Time: 20 minutes

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IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: How Much Would That Be in, Say, Chocolate Bars?

Activity Overview: This exercise asks students to consider the characteristics of money when making purchases using something other than “money.”

Time Limit: 30 minutes What to Do: 1. Divide the class into groups of two.

2. Ask each group to consider making the following purchases: a. X number of cans of soda for X number of gallons of gasoline b. X number of hours of overtime for X number of extra vacation days per year c. X number of days without the use of a cell phone for X number of days use of a car 3. Ask each group member to interview his or her partner to determine just how many cans of soda he or she would be willing to “pay” for a gallon of gas; how many hours of overtime would be worth an extra one day of vacation from work; and how many days he or she would be willing to give up the use of a cell phone in order to have access to a car. (15 minutes) 4. Ask each group to discuss whether any “characteristics” of money are evident in these transactions. (5 minutes) 5. Reassemble the class and share some of the groups’ responses. (10 minutes) Don’t Forget: Students’ perceived values in each of the above transactions will vary greatly; for example, a student without a cell phone would not miss it much, etc.

Wrap-Up: Bring the activity to a close by providing a brief overview of the characteristics of money, relating them to the previous transactions.

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In-Class Activity 2: Up for Debate: Your Check Is Not in the Mail Activity Overview: This activity asks students to consider the advantages and disadvantages of replacing traditional check writing with electronic payments.

Time Limit: 20 minutes What to Do: 1. Ask students to work independently to make a list of pros and cons of using traditional check writing and a list of pros and cons of using debit cards. (10 minutes) 2. Bring the class together to discuss the pros and cons of each option. Which option does the class prefer? Why? (10 minutes) Don’t Forget: To come up with an overall class preference, you may want to take a vote.

Wrap-Up: Bring the debate to a close by highlighting some of the advantages and disadvantages mentioned for each option; remind students that check writing is expected to be completely replaced by electronic payments.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 16-1. What are the four characteristics of money?

Money must be portable or light to carry. Money must be divisible, meaning that it can be divided into smaller parts—such as four quarters or ten dimes to equal one dollar. Money must also be durable and stable, giving it somewhat limited capability to fluctuate.

(Learning Objective 16-1—AACSB—application of knowledge) 16-2. What are the components of M-1 and M-2?

M-1 consists of currency, demand deposits, and other checkable deposits. M-2 includes M-1 as well as time deposits, money market mutual funds, savings deposits, and overnight transactions. (Learning Objective 16-1—AACSB—application of knowledge) 16-3. What is the role of banking, and do you think cryptocurrencies will make banks obsolete?

Why or why not?

The main function of financial institutions is to facilitate the flow of money from users with surpluses to those with deficits by attracting funds into checking and savings accounts.

Commercial banks use deposits to make loans and to earn profits. Savings and loan associations accept deposits and make loans primarily for home mortgages. Nondeposit institutions, including pension funds, insurance companies, finance companies, and securities investment dealers, take in money, provide interest, and/or make loans. Though answers will vary, students may note that cryptocurrencies are unregulated and volatile, that banks are generally seen as less stable than they used to be (though they will perhaps still appeal to older customers), and that cryptocurrencies are more flexible. (Learning Objective 16-3— AACSB—application of knowledge) 16-4. How and why does the federal government try to control the money supply?

The federal government controls the money supply through fiscal policy while the Federal Reserve controls the money supply through monetary policy. Students should note that both entities are interested in monitoring and controlling the economy and use their powers to influence things like inflation and gross domestic product. (Learning Objective 16-4— AACSB—analytical thinking) QUESTIONS FOR ANALYSIS 16-5. As a consumer, when would you favor a strong dollar? What about a weak dollar? Would you consider these factors differently as an employee or employer?

The true answer is “it depends” as a consumer about whether a weak or strong dollar is preferable. For the consumer, if he or she has no international activities, there is no direct

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impact. While prices on items will fluctuate, it will not be apparent that the value of the dollar is the reason for those changes. If the consumer is traveling internationally, a strong dollar will purchase more overseas than a weak dollar. On the other hand, that strong dollar will likely cut down on the number of travelers from other countries traveling to the United States, as their currency will not buy as much.

It’s unlikely that you would consider these factors differently as an employee or employer.

The same conditions exist. As a business, though, the currency value impacts the pricing of the product you want to buy from another country, or that you want to sell in another country.

A weak dollar will result in higher prices in the United States on products made elsewhere but sold in the state. However, if an international company manufactures the product in the United States, it pays for that manufacturing using the weaker dollars, and then exports the product to other countries, with stronger currencies, and boosts its profits. (Learning Objective 16-6—AACSB—reflective thinking) 16-6. Should commercial banks be regulated, or should market forces be allowed to determine the kinds of loans and the interest rates for loans and savings deposits? Why? Answers will vary. This is a particularly good question to ask in light of the 2008 government bail-out of the banking sector. (Learning Objective 16-5—AACSB—reflective thinking) 16-7. If you were choosing a new bank, would you prefer a completely online bank or a more traditional bank with physical locations in the community? Explain your reasoning.

Online banks can offer higher returns because they do not have the same fixed assets required by main street banks. They also have the opportunity to offshore significant portions of their processes, thus keeping costs to a minimum. The disadvantage is that it is not possible to meet a bank representative face-to-face to discuss issues of personal finance.

(Learning Objective 16-5—AACSB—reflective thinking) 16-8. Start with a $1,000 deposit and assume a reserve requirement of 10 percent. How much would the money supply increase after five lending cycles?

Cycle 1: $1,000 X 0.90 = $900.00 Cycle 2: $900.00 X 0.90 = $810.00 Cycle 3: $810.00 X 0.90 = $729.00 Cycle 4: $729.00 X 0.90 = $656.10 Cycle 5: $656.10 X 0.90 = $590.49 TOTAL = $3,685.59 (Learning Objective 16-3—AACSB—application of knowledge) Cycle 1: $1,000.00

APPLICATION EXERCISES

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16-9. The Federal Reserve Bank maintains historical and current data on exchange rates. Find detailed historical rates by going to http://www.federalreserve.gov/releases/h10/Hist/. If you used $5,000 to purchase Chinese yuan five years ago, how many yuan would you have received? What would those yuan be worth today? (Use the data on the Fed site to calculate these values and explain your calculations.)

The calculation will depend on current exchange rates. As of October 19, 2020, the exchange rate was 6.68 yuan for each U.S. dollar. Five years earlier, the exchange rate (October 19, 2015) was 6.36 yuan for each U.S. dollar. Therefore, $5,000 five years ago would buy 31,800 yuan. That same $5,000 would buy 33,400 yuan today. This, of course, does not take into account the overall effects of inflation in either China or the United States. (Learning Objective 16-6—AACSB—application of knowledge) 16-10. Interview the manager of a local commercial bank. Identify and list some of the newer regulations that the bank has to comply with, like the Dodd-Frank Act. Does the bank feel that these regulations are just a burden, or do they provide value? How do you feel about the regulations?

Answers will vary, but most managers willing to discuss this topic will mention how the Bank Secrecy Act requires financial institutions to formulate methods to deter funding of crimes and how the USA PATRIOT Act requires that banks know customers’ true identities.

(Learning Objective 16-5—AACSB—application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 16-11 TO 16-15 (Learning Objectives 16-4 and 16-5—AACSB—interpersonal relations and teamwork, analytical thinking, application of knowledge) This exercise helps students focus on what they need to know to stay up to date on business news and keep track of how fiscal and monetary policy changes (including currency exchange rates, credit policies, etc.) and other external events might affect the company. The challenge is to make sense of what’s going on in the world and keep the company afloat.

TEAM EXERCISE: VIRTUAL BANKING: AN IDEA WHOSE TIME HAS COME? 16-16 TO 16-20 (Learning Objective 16-5 –AACSB – interpersonal relations and teamwork, ethical understanding and reasoning, analytical thinking, reflective thinking, application of knowledge) The Situation Bank4U2 is a financial technology startup that uses a novel smartphone payment app. It has over 16 million customers worldwide who make more than 150 million transactions a month. It provides customers with a prepaid debit card that can be used to verify purchases, make contactless and online payments, and withdraw money from bank ATMs using a PIN. Its mobile app monitors and projects customer spending by category, merchant, and country. The app allows customers to set spending limits, set up spending vaults, make peer-to-peer payments,

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exchange currency (including cryptocurrency), make charitable donations, and get their salaries credited to their account.

The Dilemma The company, recently valued at US$33 billion, has announced plans for business banking. Its individual customers make over 100 million transactions per month. However, the company continues to make annual losses and has only begun to break even on a monthly basis at the end of 2025. It has expanded its operations to the United States as part of its endeavor to become a global bank, and it plans to acquire one million American users by the end of 2028.

Team Activity Assemble a group of three students and assign each group member one of the following roles:   

Jane Smith (bank customer) Peter Martin (bank employee) Stefan Harrison (Chief Operating Officer)

Action Steps 16-16. Before hearing any member’s opinion on this situation, what are the advantages and disadvantages of becoming a business bank from the perspective of your assigned role?

16-17. Join your group and share the advantages and disadvantages of becoming a business bank.

16-18. Do you think that the startup will be successful in attracting new customers? What types of customers would be most interested in using this app?

16-19. What are the potential risks of this expansion for the company? How can it protect itself?

16-20. What new services might Bank4U2 be able to offer in the field of business banking?

This could be a really interesting discussion. The students’ responses to the Action Steps will vary widely due to differences in perception. Many students will argue that a virtual bank will better serve customers and permit the bank to continue operations and employment for at least some employees. Other students will argue that a virtual bank will be attractive to younger customers but will not appeal to customers from older generations, and the majority of employees will lose their jobs.

EXERCISING YOUR ETHICS: TELLING THE ETHICAL FROM THE STRICTLY LEGAL (Learning Objective 16-2—AACSB—ethical understanding and reasoning, reflective thinking) 16-21. From the standpoint of a commercial bank, can you find any economic justification for ATM access fees?

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From an economic standpoint, the fees can be justified since the bank is offering a service to noncustomers, and should be compensated for the cost of that service plus a fair profit margin. However, since the cost of the service is likely fairly minimal (as a comparison, processing an EFT is $0.105 and an electronic direct deposit is $0.925), students may find a $3 fee to be more than a fair profit. Perhaps continuing to charge the fee, but reducing it to a more palatable figure would be justified.

16-22. Based on the scenario described for our bank, do you find any ethical issues in this situation? Or do you find the main issues legal and economic rather than ethical?

Answers will vary, and certainly legal and economic issues are present. Potential ethical issues revolve around the bank’s responsibility to the communities in which it operates.

Questions might include: ● Is it right to charge people exorbitant fees (from a percentage standpoint) to access their own money? ● What if no other ATMs were available in certain communities?

16-23. As an officer for this bank, how would you handle this situation?

Answers will vary, but students will likely point out that ATM fees are legal and that banks must make money in order to operate. On the other hand, some students will mention how officers in a bank may be concerned with the bank’s image in the community and industry as a result of being targeted by groups, such as the U.S. Public Interest Research Group. Other banks have backed off after being targeted.

CASES: MONETARY POLICY HITS HOME (Learning Objectives 16-1, 16-2, 16-3, and 16-4—AACSB—analytical thinking, reflective thinking, application of knowledge) 16-24. Describe the differences between fiscal policy and monetary policy. What effects do you think each have on the day-to-day operations of a business? Should a business owner be concerned with these kinds of macroeconomic issues? If so, why?

Fiscal policy focuses on taxation and spending by a government while monetary policy is the management of the nation’s economic growth by managing the money supply and interest rates. The government is responsible for fiscal policy, while the Fed is responsible for monetary policy in the United States. Fiscal policy affects businesses by determining the taxes they are required to pay. Monetary policy affects businesses as interest rate changes affect the cost to a business to loan or borrow money. Business owners should try to be aware of these issues, but they will not be able to affect the decisions the government or the Fed make.

16-25. The Fed is supposedly a nonpolitical body. Do you agree with this observation? Do you think it should be, or shouldn’t be? Why?

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Answers may vary. But students should consider whether decisions affecting the economy, and even the global economy, should be made with politics in mind, rather than economic stability as the goal.

16-26. In 2017, the U.S. government was $20 trillion in debt, and by mid-2023 that had ballooned to over $30 trillion. Should the government try to pay off that debt? If so, how, and what effect would such a strategy have on consumers and business?

Since this is based on opinion, student answers may vary, as will the reasoning behind those answers. However, students should be aware that paying off that debt may lead to increasing the money supply, which would then lead to inflation. If the money supply grows too large, demand for goods and services increases, and the prices on everything rise. Therefore, the effect on consumers and businesses would be negative. In addition, spending by the government, such as with coronavirus relief, will increase demand and also increase, rather than decrease, the national debt (which by March 2024 had reached $34.5 trillion.)

16-27. Why do economically stressed countries with massive debt have difficulty borrowing outside money needed for economic recovery? What solutions could you propose?

The first obstacle is difficulty borrowing outside money for economic recovery, although some have received emergency financing from the International Monetary Fund. Second, when national debt increases, the value of its currency falls on foreign exchange markets and its money then buys less than before, so each of its citizens suffers lower real wealth. Student proposals for solutions will vary, but may include more intervention by the world monetary fund and more flexible loans from wealthier nations in order to improve the global economy.

16-28. What are the functions of the Federal Reserve Bank, and how do they affect the average worker and consumer?

The functions of the Federal Reserve are: to conduct monetary policy, supervise and regulate financial institutions and activities, promote consumer protection and community development, promote financial system stability, and foster payment and settlement system safety and efficiency. Students should note that the Fed sets the prime rate, which guides lending rates for banks GLOBAL TRADING PARTNER RESETS ITS ECONOMIC COMPASS (Learning Objectives 16-1, 16-2, 16-3, and 16-4—AACSB—analytical thinking) 16-29. Why would a national tendency toward saving cause deflation?

Deflation occurs when the supply of goods outpaces the supply of money, so if people are saving money instead of spending it, demand for goods and services falls.

16-30. Why would the Bank of Japan pump money into the Japanese economy using tactics similar to the Federal Reserve Bank in the United States?

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Students should explain how adding money to the economy could increase demand for goods and services.

16-31. What does it mean for Japan to be “weakening” the yen, and how would that happen?

Compare and discuss the positive implications and the negative implications for both a strong and a weak yen.

When the yen is strong, it is selling at a higher price and is worth more. When it is weak, it is selling at a lower price and is worth less. When the yen is strong, Japanese companies are less competitive against global competitors. Conversely, when it is weak, Japanese companies are more competitive, which strengthens the economy, relative to global counterparts.

16-32. Why would a country want to encourage inflation (increasing consumer prices) rather than deflation (decreasing consumer prices)?

Students should be able to articulate the relationship between a robust, growing economy and inflation and may note that deflation signals a contracting economy rather than an expansion of gross domestic product. They may also note how increased demand for goods and services creates a healthier economy and increases standard of living. A rapidly growing economy would see rapidly growing inflation, so governments and the banking system work to keep inflation in check, but not to eliminate it.

16-33. Consider Japan’s trading status as the fourth-largest source of U.S. imports and the fourth-largest market for U.S. goods exports. Would you expect that status to change soon relative to other U.S. trading partners such as Canada, China, Germany, Mexico, and others?

Explain.

It is likely that at least one of the two rankings will change. If Japanese exports to the United States increase, then it is possible for Japan to become the third largest supplier. It is not likely that it can move ahead of China, but may be able to move ahead of Canada or Mexico, at least in certain categories of goods. As the third largest GDP in the world, it could become certainly moved up as an importer, but that will have to occur in spite of the lower purchasing power of a weaker yen, and rely on the desire of the Japanese to spend more easily than they have in the past.

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Chapter 17: Managing Business Finances Chapter Outline This chapter introduces us to the concept of the time value of money and the principle of compound growth that is central to our creation of wealth—wealth needed to fund retirement.

The chapter introduces the student to the investment opportunities offered by mutual funds and exchange-traded funds. It describes the role of securities markets and identifies the major stock exchanges in the world. The chapter introduces students to the concept of the risk-return relationship and discusses the value of diversifying an investment portfolio. Finally, the chapter examines how a firm can raise funds through equity or debt financing.

Learning Objectives 17-1. Explain the concept of the time value of money and the principle of compound growth, and discuss the characteristics of common stock.

17-2. Identify reasons for investing and the investment opportunities offered by mutual funds and exchange-traded funds.

17-3. Describe the role of securities markets and identify the major stock exchanges and stock markets.

17-4. Describe the risk–return relationship and discuss the use of diversification and asset allocation for investments.

17-5. Describe the various ways that firms raise capital and identify the pros and cons of each method.

17-6. Identify the reasons a company might make an initial public offering of its stock, explain how stock value is determined, and discuss the significance of market capitalization.

17-7. Explain how securities markets are regulated.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Icebreaker: What Should I Buy? 2. Up for Debate: What’s Wrong with a Little Inside Scoop?

Description Students make preliminary purchasing decisions about stocks based on what they already know about the companies and the stock market in general.

Students are divided into teams to debate the ethics of insider trading.

Time Limit 30 min.

30 min.

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CHAPTER OUTLINE Learning Objective 17-1: Explain the concept of the time value of money and the principle of compound growth and discuss the characteristics of common stock.

Maximizing Capital Growth Wise investments are the key to growing your money, especially if you are seeking to build capital to start your own business or simply as a cushion for a sound financial future. A number of concepts come into play when searching for investment opportunities.

A. The Time Value of Money and Compound Growth The time value of money is a concept that recognizes that if we invest money, it makes more money over time by earning interest or yielding some other form of return. Compound growth is the cumulative growth from interest paid to the investor over given time periods.

With each additional time period, an investment grows as interest payments accumulate and earn more interest, thus multiplying the earning capacity of the investment.

1. The Rule of 72 The Rule of 72 is a handy rule of thumb to estimate how long it will take to double an investment. You can find the number of years it will take to double an investment by dividing 72 by the annual interest rate of the investment (in percent). Thus, a 10 percent investment will take 7.2 years to double. Bottom line for investors: seek higher interest rates because money will double more frequently.

2. Making Better Use of Your Time Value Each year, interest is added to our investments. If we continually reinvest the principal amount and the interest, the growth of our money will become larger each year.

B. Common Stock Investments A stock is a portion of the ownership of a corporation. The company’s total ownership is divided into small parts, called shares, which can be bought and sold to determine how much of the company (how many shares of stock) is owned by each shareholder.

1. Common Stock. A share of common stock is the most basic form of ownership in a company. Individuals and other companies purchase a firm’s common stock in the hope that it will increase in value, provide dividend income, and enable shareholders to vote on major issues that are brought before the shareholders. a. Market value is the current share price in the stock market. b. Book value of common stock is owners’ equity (from the balance sheet) divided by the number of common shares.

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2. Investment Traits of Common Stock. Common stocks are among the riskiest of all investments, though historically stock values rise over time. Growth prospects in various industries change periodically.

3. Dividend. A dividend is a payment to shareholders, on a per-share basis, out of the company’s earnings. Blue chip stocks are stocks of well-established firms that consistently provide investors with steady income from dividend payouts. Not all strong firms pay dividends, however. Some focus on reinvesting in the company toward future growth.

KEY TEACHING TIPS ● Remind students that compound interest will either work for them or against them. It works for them when they invest, but against them when they borrow. ● Reiterate that continued reinvestment of interest and principal maximizes the return achieved by the investment. ● Reinforce the point that a stock is a portion of the ownership of a corporation. Common stocks represent the most basic form of ownership in a company. ● Common stocks are risky securities, but blue-chip stocks are issued by the strongest, most financially sound firms that often provide investors with steady income.

QUICK QUESTIONS ● What is meant by the time value of money? What is meant by compound growth? ● What is common stock? ● What is different about the market value and the book value of a share? ● What is a dividend? Why do some investors receive dividends?

Use In-Class Activity 1: Icebreaker: What Should I Buy? Time Limit: 30 minutes

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Learning Objective 17-2: Identify reasons for investing and the investment opportunities offered by mutual funds and exchange-traded funds.

Investing to Fulfill Financial Objectives Mutual funds and exchange-traded funds are popular alternatives to stocks because they offer attractive investment opportunities for various financial objectives and often do not require large sums of money for entry.

Mutual Funds Mutual funds are created by companies such as T. Rowe Price and Vanguard that pool cash investments from individuals and organizations to purchase a portfolio of stocks, bonds, and other securities. The portfolio is expected to increase in value and produce income for the fund and its investors. Investors in no-load funds pay no sales commissions when they buy into or sell out of funds, while investors in load funds pay commissions of 2 percent to 8 percent.

A. Reasons for Investing Mutual funds are flexible in their investment goals. It is relatively easy to open a mutual fund account. The three most common objectives for opening a mutual fund account are: 1. Stability and Safety Funds stressing safety seek only modest growth with little fluctuation in principal value regardless of economic conditions. These funds include money market mutual funds and other funds that preserve the fund holders’ capital and reliably pay current income.

2. Conservative Capital Growth Preservation of capital and current income, alongside some capital appreciation, can be gained through balanced funds. These funds invest in a mix of municipal bonds, corporate bonds, and common stocks.

3. Aggressive Growth Aggressive growth funds seek maximum long-term capital growth; they sacrifice current income and safety by investing in stocks of new and sometimes troubled companies, firms developing new products and technologies, and other high-risk securities.

B. Most Mutual Funds Don’t Match the Market Many, but not all, mutual funds are managed by “experts” who select the stocks, bonds, and securities in which the fund will invest. Some estimates indicate that up to 80 percent of mutual funds underperform a market’s average return due to management expenses and underperforming stocks. This has led to the development of passively managed or index funds to reduce the management costs of funds.

C. Exchange Traded Funds An exchange-traded fund (ETF) is a bundle of stocks (or bonds) that are in an index that tracks the overall movement of a market. ETFs can be traded like a stock.

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1. Advantages of ETFs ETFs offer three advantages over mutual funds: a. They can be traded throughout the day like a stock. b. They have low operating expenses. c. They do not require high initial investments.

KEY TEACHING TIPS ● Students often confuse mutual funds and exchange-traded funds. While both are bundles of stocks or bonds, ETFs can be traded like a stock. Each share of the ETF rises and falls as the market process changes. ● Remind students that securities include stocks as well as corporate and municipal bonds and mutual funds; they represent secured, financially valuable claims on the part of investors. ● Reinforce that mutual funds are an attractive investment since a drop in the price of one or two stocks in the pool is likely to have little impact on the total value of the fund; this is especially true with index funds.

QUICK QUESTIONS ● What are mutual funds? ● Why might an investor find mutual funds attractive? ● What are the advantages of ETFs? HOMEWORK Mutual Funds Now is a good time to assign Application Exercise 17-9 from the end-of-chapter materials in the textbook as homework. This assignment asks students to research mutual funds.

At-Home Completion Time: 1 hour

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Learning Objective 17-3: Describe the role of securities markets and identify the major stock exchanges and stock markets.

The Business of Trading Securities Stocks and bonds are referred to as securities because they represent secured, or financially valuable, claims on the part of investors. Stocks and bonds are sold in securities markets. By facilitating the buying and selling of securities, the securities markets provide the capital that companies rely on for survival.

A. Primary and Secondary Securities Markets Newly issued stocks and bonds are bought and sold in primary securities markets. To bring a new security to market, the issuing firm must get approval from the Securities and Exchange Commission (SEC)—the government agency that regulates U.S. securities markets.

Investment Banks issue and resell new securities, as well as create the distribution networks for selling the securities. Investment banks provide three important services: 1. They advise companies on the timing and financial terms of new issues.

2. They underwrite (buy and assume liability for) new securities, providing an issuing firm with 100 percent of the money (less commission and fees).

3. They create distribution networks to move new securities through groups of banks and brokers to individual investors.

New securities, however, represent only a small portion of traded securities. Existing stocks and bonds are sold in the much larger secondary securities market, which is handled by such familiar bodies as the New York Stock Exchange.

B. Stock Exchanges A stock exchange is an organization of individuals that provides an institutional auction setting in which stock can be bought or sold.

1. The Trading Floor Each exchange governs the places and times when trading occurs. Trading is allowed only on the trading floor, which can be a physical location, or an electronic market.

Trading floors today are equipped with a vast array of electronic communication equipment to display buy and sell orders. In addition, a variety of news services provide up-to-the-minute information relevant to the business world. Any change in world events may affect share prices.

2. The Major Stock Exchanges

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Among the stock exchanges that operate on trading floors in the United States, the New York Stock Exchange is the largest. It faces stiff competition from electronic trading, and large foreign exchanges such as those in London and Tokyo. a. The New York Stock Exchange (NYSE). The NYSE is a hybrid market that utilizes both electronic transfers as well as a trading floor in New York. b. Global Stock Exchanges. The value of shares listed on foreign exchanges continues to grow. Major overseas stock exchanges are found in Shanghai, Tokyo, London, Hong Kong, and other locations. c. The NASDAQ. The NASDAQ was the first electronic stock market. NASDAQ orders are gathered and executed solely on a worldwide computer network. NASDAQ is working to replace trading floors of traditional exchanges. d. International Consolidation and Cross-Border Ownership. Technological advances and regulatory factors have driven together the separate stock markets in various parts of the world. Stock exchanges that didn’t have strong enough digital presences have merged or partnered with those having more advanced trading systems. Competition has brought faster transactions and lower transaction fees for investors.

C. Nonexchange Trading: Electronic Communication Networks. ECNs are electronic systems that bring buyers and sellers together at specified prices outside traditional stock exchanges. Their popularity has grown rapidly, primarily because they have made the transfer of shares easier and less costly.

D. Individual Investor Trading.

While many investors rely heavily on the advice they receive from brokers, more experienced and well-informed investors often prefer to invest independently without outside guidance.

1. Stock Brokers Stock brokers receive and execute orders from nonexchange members and earn commissions as a result.

2. Discount Brokers.

Discount brokers are fast and low cost, providing no advice or sales consultations. They do offer online services such as stock research and industry analysis.

3. Full-Service Brokers Full-service brokers provide consulting advice and personal financial planning.

4. Online Investing.

Online investing stems from convenient access to online information, fast, no-nonsense transactions making it ideal for self-directed investors.

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E. Tracking the Market Using Stock Indexes Investors have used stock indexes to track market performance for decades. Market indexes provide some summaries of overall market price trends.

Bull Markets. Bull markets are periods of rising stock prices in which investors are motivated to buy because they are confident of continuing rising prices. Bear Markets. Bear markets are periods of falling stock prices during which investors sell, anticipating lower prices in the future. To qualify as a bear market usually means prices are about 20 percent lower than the peak prices.

1. The Dow Jones The Dow Jones Industrial Average (simply referred to as the Dow) is the oldest and most widely used index. It tracks the performance of the U.S. industrial sector by focusing on 30 blue-chip, large-cap companies. It is used as a barometer of the market’s overall movement and economic health, though it only considers 30 companies.

2. The S&P 500 The S&P 500 is a broad index that tracks 500 large-cap companies from a number of sectors including IT, energy, industrials, financials, health care, consumer staples, and telecommunications.

3. The NASDAQ Composite Unlike the Dow and the S&P 500, the NASDAQ Composite includes all NASDAQ companies, totaling some 3,100 in its index. Because of its company roster, it is overweighted in technology firms.

4. The Russell 2000 The Russell 2000 is a specialized index that tracks the performance of the smallest U.S. companies based on their market capitalization.

5. Index-Matching ETFs ETFs are available that track the performance of various indexes. For example, the Fidelity NASDAQ Composite Index Tracking Stock holds a portfolio of equities for tracking the NASDAQ Composite Index.

KEY TEACHING TIPS ● Remind students that a stock exchange is an organization of individuals formed to provide an institutional auction setting in which stock can be bought and sold. ● Students may not know that each stock exchange regulates the places and times at which trading may occur; the trading floor is the physical location where trading takes place, though much trading occurs electronically today.

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● Make sure students understand the distinction between stock brokers, discount brokers, and full-service brokers.

QUICK QUESTIONS ● What is the role of an investment bank with regard to new issues of stock? ● What type of investor is most likely to be attracted to online trading? ● What type of investor would prefer the services of a full-service broker? ● Reinforce that the NASDAQ system gathers and executes orders on an intranet connecting more than 350,000 terminals worldwide; NASDAQ offers no trading floor. ● What are some differences between the NYSE and NASDAQ?

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Learning Objective 17-4: Describe the risk–return relationship and discuss the use of diversification and asset allocation for investments.

The Risk-Return Relationship Each type of investment has a risk-return (risk-reward) relationship, which reflects the notion that safer investments tend to offer lower returns, and riskier investments tend to offer higher returns.

A. Investment Dividends (or Interest), Appreciation, and Total Return. Investors invest for different reasons. In evaluating a potential investment, investors examine returns from dividends, price appreciation, and total returns.

1. Dividends The rate of return from stock dividends is known as the current dividend yield. This figure is generated by dividing the yearly dollar amount of the dividend income by the investment’s current market value. The dividend yield is expressed as a percentage. It can be compared against yields from other investments.

2. Price Appreciation Price appreciation is an increase in the dollar value (share price) of an investment. The profit realized from the increased market value of an investment is a capital gain.

3. Total Return Total returns are the sum of the dividend yield plus the stock’s capital gain. It is calculated by the formula: Total Returns (%) = (Current dividend payment + Capital gain) / Original investment X 100 B. Fantasy Stock Markets Fantasy stock markets are popular for learning how securities markets work, for trying various investment strategies, and earning a fantasy fortune (or going broke!). Internet-based games, including free ones such as Wall Street Survivor and How the Market Works, provide an investment experience that is educational, challenging, and entertaining. These learn-bydoing experiences can be a valuable resource for learning the “how to” of online investing.

C. Managing Risk with Diversification and Asset Allocation Most investors select a mixed portfolio of investments that provides an overall level of risk and return that feels comfortable.

1. Diversification Through diversification, investors buy several kinds of investments rather than just one kind; this strategy reduces investor risk by “not having all one’s eggs in one basket.”

2. Asset Allocation

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Asset allocation is the proportion of funds invested in each of the investment alternatives.

These proportions can be changed at any time.

3. Performance Difference for Different Portfolios A portfolio is the combined holdings of all financial investments of any individual or company. These investments include stocks, bonds, mutual funds, and real estate.

Investment portfolios have different objectives ranging from aggressive growth/high-risk portfolios to stable income/low-volatility portfolios.

KEY TEACHING TIPS ● Reinforce that safer investments tend to offer lower returns; riskier investments tend to offer higher returns. ● Remind students that diversification cuts risk, if only because not all of the funds invested are in one place.

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Learning Objective 17-5: Describe the various ways that firms raise capital and identify the pros and cons of each method.

Financing the Business Firm Although the business owner’s savings may be enough to get a firm up and running, businesses depend on sales revenues to survive. When current sales are insufficient to cover expenses, firms turn to other sources of funding. These typically begin with the owner’s personal savings, but often involve borrowing from banks, soliciting cash from private investors, or selling bonds to the public.

A. Secured Loans for Equipment Money to purchase new equipment often comes in the form of loans from commercial banks.

The borrower guarantees repayment of the loan by pledging the asset as collateral.

The amount of money that is loaned and has to be repaid is the principal. Borrowers will also pay interest, expressed in the form of an annual percentage rate (APR). The interest amount is found by multiplying the APR by the loan principal.

B. Working Capital and Unsecured Loans from Banks Firms need more than fixed assets; they also need current, liquid assets available to meet short-term operating expenses. The firm’s ability to meet these expenses is measured by its working capital. Working capital is calculated as follows: Working capital = Current assets − current liabilities Positive working capital means the firm’s current assets are large enough to pay off current liabilities. When the firm has negative working capital, it may need to borrow money from a commercial bank in the form of an unsecured loan. With an unsecured loan, the borrower does not have to put up collateral. But the bank will require the borrower to maintain a portion of the loan on deposit with the bank, known as a compensating balance. Firms with poor credit cannot qualify for unsecured loans.

Small-business entrepreneurs underestimate the value of establishing bank credit as a source of funds, financial analysis, cash flow planning, and other services. Once a small business has credit, it can seek more liberal credit policies from other sources. Start-up firms can expect to pay higher interest rates than established companies, because they don’t have a track record. Evidence of a sound financial plan can help show the firm is a good credit risk.

Cash flow planning shows lenders that the borrower is using available financial resources prudently.

C. Angel Investors and Venture Capital When a firm needs additional sources of funds to pay for growth, it often seeks out angel investors. An angel investor invests some money in the firm, typically expecting a sizable ownership in the company in return for the investment. Angel investors can help firms grow

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rapidly by providing venture capital—private funds from wealthy individuals or companies that seek investment opportunities.

D. Sale of Corporate Bonds Corporations can raise funds by issuing corporate bonds. A corporate bond is an IOU guaranteeing the payment of interest during the life of the bond and the repayment of the principal when the bond matures (on a pre-set date).

1. Characteristics of Corporate Bonds The bondholder (the lender) has no claim to ownership of the company and does not receive dividends. However, interest payments and repayment of principal are financial obligations. Each new bond has specific terms and conditions spelled out in the bond indenture. The conditions include the maturity date when the bond’s face value must be repaid.

2. Default and Bondholder’s Claim If the borrower fails to make a payment then the bond is said to be in default. The lender may request a court order to enforce the terms of the bond. This is known as a bondholder’s claim. If a firm cannot pay the lender, it may have to file for bankruptcy.

3. Risk Ratings To aid investors in making purchase decisions, several services measure the default risk of bonds. A rating of AAA is the best and safest rating. Lower ratings do not necessarily mean that the bond issue will not be successful, but the lower the rating the higher the interest rate charged is likely to be.

4. Flawed Ratings Misread Recession Risks The financial crisis of 2008 raised many questions about whether the credit rating agencies are serving any good purpose. The nation’s largest public pension fund, the California Public Employees Retirement Fund (CalPERS) filed a suit against the top three agencies—Moody’s, Standard & Poor’s, and Fitch. CalPERS officials relied on these credit ratings to make investments that turned sour or failed. Furthermore, the collapse of highly rated institutions such as Lehman Brothers, Goldman Sachs, and Citigroup also raised questions about the credit rating agencies. a. Mortgage-backed securities became a trillion-dollar investment industry during the pre-2007 housing market boom. Financial institutions bundled home mortgages into packages and resold them as securities. These investments were given favorable risk ratings by credit rating agencies. Unbeknownst to investors, some $3 trillion of mortgage-backed securities contained subprime mortgages—high-risk loans to applicants with bad credit, low income, and low down payments. These subprime mortgages had received high ratings (AAA) from the agencies. When a significant number of these mortgage holders defaulted in the housing market crash, investors were left with little or nothing for their investment, leading to a collapse of worldwide financial markets.

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KEY TEACHING TIPS ● Students often confuse stocks and bonds. A stock represents ownership in a corporation.

A bond represents debt, an issuer’s promise to pay the buyer a certain amount of money by a specified future date. ● Make sure that students understand the differences between government bonds, municipal bonds, and corporate bonds. ● Point out that secured bonds are “backed” by company assets in case of default, whereas unsecured bonds—or debentures—pledge no property as security.

QUICK QUESTION ● What are some circumstances under which a firm might want to issue bonds?

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Learning Objective 17-6: Identify the reasons a company might make an initial public offering of its stock, explain how stock value is determined, and discuss the significance of market capitalization.

Becoming a Public Corporation An Initial Public Offering (IPO) is a firm’s first sale of its stock to the public. Corporations consider various issues before deciding to take the firm public.

A. Going Public Means Selling Part Ownership of the Company Private owners lose some control when shares are sold to the public. Anyone owning a large proportion of the company’s shares gains a powerful position in determining who runs the corporation and how. While an extreme case, this is particularly seen if the stock price falls and another investor (a corporate raider) mounts a hostile takeover. Corporations are vulnerable to hostile takeovers if their stock prices become undervalued and the firm’s assets still have high value.

B. Stock Valuations Most investors look for long-term value in stocks, rather than their short-term price. In determining long-term value, investors typically examine the company’s financial health, its past history of results and future forecasts, its record for managerial performance, and overall prospects for competing successfully in the coming years.

1. Why Shares Are Different Prices Share prices can differ substantially from one stock to another for various reasons. These include the supply and demand of the stock and the desire of corporations to have their shares sell within certain price ranges. A company can restore shares to the desired range by a stock split, a stock dividend paid in additional shares to shareholders.

2. Comparing Prices of Different Stocks When evaluating the price of Pepsi and Coca-Cola an investor would compare dividends, price/earnings ratios, and historical performance consistency over a period of several years, along with indicators of each firm’s prospects for the future. An investor should not simply compare share prices.

C. Market Capitalization Market capitalization is the total value of the company’s outstanding shares, calculated by the current stock price multiplied by the number of outstanding shares. Firms with larger market caps are considered to be less risky investments than firms with smaller market caps.

D. Choosing Equity Versus Debt Capital Firms can meet their capital needs through equity financing (putting the owners’ capital to work) or debt financing (from outside the firm). These both have pros and cons.

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1. Pros and Cons of Debt Financing: a. Long-term Loans. Long-term loans are attractive because the number of parties involved is limited, they can be arranged quickly, and there is no need for public disclosure to account for how the loan is being used. On the other hand, long-term loans have the disadvantage that borrowers may not easily be able to find lenders and may face some restrictions as a condition for the loan. b. Corporate Bonds. The advantage of bonds is that they can raise large amounts of money when the company needs it. The disadvantage is that they can incur high administration costs and stiff interest payments.

2. Pros and Cons of Equity Financing Equity financing is sometimes a favorable option for companies. Equity financing includes issuing common stock or using the company’s retained earnings. a. The Expense of Common Stock. Issuing new stock can be expensive when dividend payments need to be made. It may be more costly than paying bond interest. b. Retained Earnings as a Source of Capital. Using retained earnings for capital projects means that this money is not available for dividend payments; this may reduce the stock price and the total market capitalization. However, the firm will not have to borrow money and pay interest.

QUICK QUESTIONS ● What is market capitalization? ● When might a fall in market capitalization leave a company open to a hostile takeover?

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Learning Objective 17-7: Explain how securities markets are regulated.

Regulating Securities Markets A. The Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is the regulation and enforcement agency that oversees the markets’ activities, including the ways securities are issued. The SEC was created in 1934 to prevent the kinds of abuses that led to the stock market crash in 1929. The SEC regulates the public offering of new securities by requiring that all companies file a prospectus before proposed offerings commence. To protect investors from fraudulent issues, a prospectus contains pertinent information about both the offered security and the issuing company.

B. Regulations Against Insider Trading The SEC also enforces laws against insider trading—the use of special knowledge about a firm for profit or gain. It is illegal, for example, for an employee of a firm to tell others about an anticipated event that may affect the value of the firm’s stock before the information is made public. The SEC offers a reward to any person who provides information leading to a civil penalty for illegal insider trading.

Along with the SEC’s enforcement efforts, the stock exchanges and securities firms have adopted self-regulation by participating with the Financial Industry Regulatory Authority (FINRA) in detecting and stopping insider action, and violations of other industry regulations.

QUICK QUESTIONS ● In light of the crash in 2009, do you think the SEC is doing a good job regulating financial markets? ● What are the primary roles of the Securities and Exchange Commission?

Use In-Class Activity 2: Up for Debate: What’s Wrong with a Little Inside Scoop?

Time Limit: 30 minutes

HOMEWORK Researching Insider Trading Now might be a good time to assign Application Exercise 17-10 from the end-of-chapter materials in the textbook as homework. This assignment asks students to research Series A Preferred Stock as an investment structure.

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At Home Completion Time: 1 hour

IN-CLASS ACTIVITIES In-Class Activity 1: Icebreaker: What Should I Buy? Activity Overview: This activity asks students to make preliminary purchasing decisions about stocks based on what they already know about the companies and the stock market in general.

Time Limit: 30 minutes What to Do: 1. Ask students to assume that they are being given $20,000 to invest in four company stocks, but that they must choose from the following companies: ● McDonald’s Corporation ● Microsoft ● Corning ● Chesapeake Energy ● Marketing Technologies, Inc. ● JDS Uniphase ● Walmart ● Amazon.com ● Google 2. Divide the class into three-member groups so students can discuss these companies before making their investment decisions. As students make their decisions, ask them to write down their rationale for selecting the stocks they did as well as how much they invested in each one. (15 minutes) 3. Assemble the class as a whole to discuss their choices. (15 minutes) a.

How did students select their stocks?

b.

How much did they know about the companies in which they invested?

c.

Did the discussion with other group members affect their decisions?

d.

What factors affected the allocation of the $20,000?

Don’t Forget: Some students will know more about investing than others.

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Wrap-Up: Bring the activity to a close by discussing the importance of doing “homework” on a particular company before investing in it. Very few students (or potential investors) would know enough about any of the above companies to make a sound investment. Company reputation can mean a lot when an individual chooses to make an investment, but this type of investing is not always prudent.

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In-Class Activity 2: Up for Debate: What’s Wrong with a Little Inside Scoop?

Activity Overview: This activity asks students to debate the pros and cons and the key issues surrounding insider trading.

Time Limit: 30 minutes What to Do: 1. Divide the class into four-member groups and ask each group to make a list of the disadvantages of insider trading. Then ask each group to make a list of the advantages facing the market, brokers, and stockholders if insider trading were to be declared legal. Students can consider the following questions as conversation starters in their groups. (15 minutes) a.

Would insider trading actually make the market more efficient?

b.

Who is really hurt in most cases of insider trading?

c.

Why is insider trading illegal?

2. Assemble the class as a whole and debate the pros and cons of insider trading. (15 minutes) Don’t Forget: In advance, consider giving students some time to research specific cases of insider trading as a supplement to this debate. The class can then discuss specific cases and the levels of perceived fairness in the results of each case.

Wrap-Up: Bring the debate to a close by outlining some of the major arguments presented in the debate.

Then, provide reasons for the illegal nature of insider trading.

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BUSINESS PLAN PROJECT PART 6 THE FINANCIAL SYSTEM AND ISSUES IN FINANCIAL MANAGEMENT Assignment Overview: The final part of the business plan project asks students to consider how they’ll finance their businesses as well as how to create an executive summary for their plan. Remind students that although the executive summary is the final step in the project, it should be placed at the beginning of their completed business plans. Encourage your students to be concise as they write the executive summary, as investors look at the summary before reading the details of the plan.

Because this is the final part of the plan, you will probably want to ask students to submit not just Part 6, but the entire plan at this point.

Files to Provide Students: For this part of the project, students will be asked to complete Part 6: Financial Issues.

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ANSWERS FOR END-OF-CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 17-1. What is the time value of money?

The time value of money stems from the principle of compound growth. With each additional time period, interest payments accumulate and earn more interest, thus multiplying the earning capacity of the investment. (Learning Objective 17-1—AACSB—application of knowledge) 17-2. What are the major securities markets and how are they regulated?

Students should be able to identify major stock exchange markets like the New York Stock Exchange and the NASDAQ as well as other foreign exchange markets like London and Tokyo. They should note that these markets are regulated by governmental bodies specific to that purpose like the Securities and Exchange Commission and other regulatory agencies.

They may also note how those agencies work with the accounting profession. (Learning Objective 17-3—AACSB—application of knowledge) 17-3. What is the relationship between risk and return on investment, and how would you explain that relationship?

Students should note the direct relationship: higher risks may garner higher returns, but come with commensurate potential for loss. (Learning Objective 17-4—AACSB—analytical thinking) 17-4. How is the market value (price) of a stock determined?

The market value of a stock is the current price of the share in the stock market, which is determined by what investors are willing to pay for a share of a particular company.

Students may also note that stock price may have very little direct relationship to the actual value of the assets of the company and may also note that the price of a stock is highly subjective. (Learning Objective 17-6—AACSB—application of knowledge) 17-5. What is the difference between debt financing and equity financing?

In order to fund expansion, firms might use debt or equity financing. Debt financing is when a firm enters into a long-term loan or issues a corporate bond. Equity financing is where the firm uses retained earnings or offers additional stock for sale. (Learning Objective 17-5— AACSB—application of knowledge)

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QUESTIONS FOR ANALYSIS 17-6. Research several stocks online. You will notice that they continually fluctuate in price.

What might be the reason for this? Is a higher-priced stock a better investment than a lowerpriced stock? What factors would you consider in purchasing stocks?

Stock prices can vary enormously depending upon a number of factors, including the company’s recent performance, future expectations, changes in the company’s competition, inflation rates, and general economic expectations for the economy. Market price is only one factor to be considered in a stock purchase. Investors also look at the track record of the company. (Learning Objective 17-6—AACSB—analytical thinking) 17-7. Suppose that you are a business owner and you need new equipment and immediate funds to meet short-term operating expenses. From what sources could you gain the capital you need, and what are some of the characteristics of these sources? Are you limited by your form of doing business, and if so, how?

A business owner in need of short-term funds can either opt for debt financing or equity financing. Debt financing in this case would most likely take the form of an operating line of credit or short-term secured loan collateralized by the equipment or even by inventory or receivables. The advantage of borrowing is that there are relatively few parties involved, so they can be often quickly arranged. If the firm opts for equity financing, it might issue new stock or use retained earnings. Students should note that small general partnerships and sole proprietors will find it more difficult, if not impossible, to raise equity capital or sell longterm bonds. (Learning Objective 17-5—AACSB—analytical thinking) 17-8. Suppose that you are a business owner and you are seeking funds for long-term expansion.

From what sources could you gain the capital you need, and what are some of the characteristics of these sources? Are you limited by your form of doing business, and if so, how? How do these kinds of funding sources differ from funding sources for new equipment and short-term operating expenses?

A business owner in need of capital can either opt for debt financing or equity financing.

Debt financing includes taking on long-term loans or issuing corporate bonds. The advantage of long-term loans is that there are relatively few parties involved, so they can be often quickly arranged. Bonds are slower to arrange and can have high service interest rates depending upon the firm’s credit rating. If the firm opts for equity financing, it might issue new stock or use retained earnings. The advantage of bonds is that they can give the organization funds over a long period of time. Students should note that small general partnerships and sole proprietors will find it more difficult, if not impossible, to raise equity capital or sell long-term bonds. (Learning Objective 17-5 – AACSB – analytical thinking) APPLICATION EXERCISES 17-9. Research several mutual funds. What are the investment goals of each fund? What do they invest in? How are they similar, and how are they different? Which ones would you invest in, if any, and why?

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Though answers will vary widely, students should note some specific resources for research, including the website of the Securities and Exchange Commission (www.sec.gov), various stock exchange market reports, current financial news reporting, and specific company financial statements. Students should note the risk profile of their chosen fund and its potential payoff. (Learning Objective 17-4—AACSB—analytical thinking, reflective thinking) 17-10. Many venture capitalists structure the initial investment in a company using Series A Preferred Stock. What is that, and what are the attributes of such an investment structure that make it useful? Could you, as an individual, buy Series A Preferred Stock? Why or why not?

Students should be able to research Series A Preferred Stocks and summarize how they are used by angel investors and venture capitalists to fund a start-up before an initial public offering. They should recognize some of the common terms associated with Series A Preferred Stock, like convertibility to common stock. They may address the value of holding preferred stock instead of common stock and should note that Series A Preferred Stocks are only available to the so-called sophisticated investors, who have met specific criteria.

(Learning Objective 17-5—AACSB—analytical thinking)

BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 17-11 TO 17-15 (Learning Objectives 17-1, 17-3, 17-5, and 17-6—AACSB—interpersonal relations and teamwork, analytical thinking, application of knowledge) Students should be encouraged to undertake a careful analysis of the pros and cons of debt and equity financing with an emphasis on a realistic analysis of the markets.

TEAM EXERCISE: FACTORS THAT INFLUENCE STOCK PRICES 17-16 TO 17-19 (Learning Objective 17-1, 17-2, 17-6–AACSB – interpersonal relations and teamwork, analytical thinking, application of knowledge) Background Information Stock prices can be affected by many variables. It is important to understand the variables and keep a close watch on events as they unfold. Many factors could have a direct or indirect impact on stock prices. These can be:  

Internal factors: Announcements of poor or favorable earnings; earnings that don’t match expectations; earning dividends; major layoffs and labor issues; new products and services; management problems; accounting errors; mergers; takeovers; and acquisitions.

External factors: Political or social instability; currency fluctuations; factors affecting sales; interest rate adjustments; balance-of-trade issues; and employment figures that don’t match expectations.

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By analyzing these factors, you will often learn a lot about why a stock did well or why it performed poorly. Being aware of these influences will help you anticipate future stock movements.

QUESTIONS FOR ANALYSIS 17-16. Choose a company that is publicly traded on your national or regional stock exchange.

You can pick separate subsidiaries, but to make the exercise more interesting, choose a company that has seen a large fluctuation in its stock price over the last few years. You should be able to find the stock prices for most businesses in their annual reports, financial disclosures, or archived press releases.

17-17. Create a graph using Excel or another graph-making software. Plot the stock price over the past three or four years and identify all the peaks and troughs over that period, marking each key incident with the date.

17-18. Using the Internet, focus on the business pages of the national and regional press and identify the general business environment during the key peaks and troughs on the graph you had plotted. Are there any correlations between incidents you may have found and stock price changes? What are the correlations?

17-19. Based on your research, what are the most significant internal and external incidents that have had a direct or an indirect impact on the stock price of your chosen business?

Many factors, both internal and external, affect stock prices. Examples of such factors are the firm’s earnings, layoffs, labor problems, management issues, and mergers. Other factors include the general state of the industry, threats of political crises, weather conditions, changes in interest rates, and data and forecasts on inflation and unemployment.

Global corporations are often affected by numerous external factors, some of which have little impact on our own domestic market. Certain external factors, such as oil prices, can impact stock in the long run. In some cases, however, a mere change in who the CEO is can impact the price of a stock, and this impact is likely to last for a shorter time. Political or legal changes within a country can also impact businesses. Various actions from competitors—external factors—can be both long- and short-lasting, depending on their nature.

Students should provide some assessment of both internal and external factors that can impact the stock they chose to analyze. They should remember that “impact” can be positive or negative. They should acknowledge the difficulty in having comprehensive information about factors that affect stock price as well as in judging the nature of their influence.

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EXERCISING YOUR ETHICS: ARE YOU ENDOWED WITH GOOD JUDGMENT? (Learning Objective 17-4—AACSB—ethical understanding and reasoning, reflective thinking) 17-20. Why might a conservative versus risky choice be different at a not-for-profit organization than at a for-profit organization?

The choice might be different, since the ultimate goal of a business is to maximize profit, while the ultimate goal of a nonprofit organization is to provide a service efficiently.

17-21. What are the main ethical issues in this situation?

The main ethical issues in this situation are how to best fulfill YDC’s responsibility to the students it serves, while most effectively stewarding the money entrusted to the organization through charitable donations.

17-22. What options/alternatives/actions would you recommend to the board?

Answers will vary. Given the purpose of the organization and the intrinsic value of the funds being invested, many students may opt to remain conservative in their investment strategies.

However, given the disparity between the current return and the potential return, students could recommend the board follow the strategy of a mixed portfolio. This would involve diversifying from a current very conservative strategy but not moving fully to the other, more aggressive strategy.

CASES:

FIRE ON THE GROUND (Learning Objective 3—AACSB—analytical thinking) 17-23. When the Coser and Ongaratto brothers started Fogo de Chão, what do you suppose were their primary sources of financing?

Since it started simply as the two pairs of brothers in a shed with a grass roof, they began with self-financing, using their own funds.

17-24. After the Coser brothers acquired the Ongaratto brothers’ shares of the company, they brought in GP Investments, a Brazilian venture capital firm. What are the advantages and disadvantages of using venture capital to build a business venture?

Venture capital provides private funds from the investment firm. This can stabilize the financial situation for a business, allow it to pay down debt, or provide funds that enhance its ability to grow. However, the venture capital firm typically gains a significant ownership share of the business. This means the founders may be giving up some control in determining how the firm is run.

17-25. After the sale of Fogo de Chão to Thomas H. Lee Partners, the board and management team decided to issue an IPO of common stock. What were the goals of the IPO?

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The goals of the IPO were to repay some of the debt associated with the acquisition of Fogo de Chão and to fund additional expansion of the restaurant chain.

17-26. What are the benefits of an IPO as a source of financing? What other options did the company have?

The benefits of an IPO include reaching far more potential investors, thus providing access to a larger pool of funds. Debt financing and equity financing are the two options of acquiring more capital. Debt financing includes borrowing via long-term loans and issuing corporate bonds. However, these options create binding obligations on the company. Once a company has issued an IPO, issuing more common stock or increasing retained earnings are options.

These result in smaller dividends for shareholders and may decrease the stock price.

17-27. Would you have considered investing in Fogo de Chão in June 2015 when it went public?

Why or why not?

Answers will vary. Students should examine numerous factors, not simply the performance of the stock since the IPO. These factors include the company’s overall financial health, its past history of results and future forecasts, its record for managerial performance, and overall prospects for competing successfully in the coming years. What is the competitive situation?

What are the expansion plans, and where? Are there political or economic factors to consider in expansion?

17-28. If an investor had bought $1,000,000 of stock during the IPO, what would that investment have been worth when Rhone bought the company for $15.75 per share?

Students should be able to find through research that the stock was offered at $20 per share at the IPO in June 2015, and Rhone purchased the stock at $15.75 in 2018, and be able to demonstrate appropriate calculations.

TIME TO GOGO?

(Learning Objectives 17-4, 17-5, and 17-6—AACSB—analytical thinking) 17-29. Given the risk, what would motivate an investor to purchase stock in Gogo?

An investor would be motivated by the large return on investment should Gogo be able to penetrate the international market. Students should note the risk/return relationship.

17-30. Why would Gogo sell stock rather than taking on additional debt financing? Do you think that this was a good decision?

They would sell stock because they are already highly leveraged and probably would not have gotten preferable credit terms. Additionally, they do not have to pay interest to the stockholders.

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17-31. What role did underwriters, such as Morgan Stanley, JPMorgan, and UBS, play in the Gogo IPO? Underwriters buy and assume liability for new securities. This provided Gogo with 100 percent of the money raised by the IPO, less commission. At that point, it also put the risk for the ability to sell the stock to the underwriters, not Gogo.

17-32. Using a web source, such as Yahoo! Finance or www.nasdaq.com, obtain the current price of Gogo stock. What has happened to the price of the stock over the past six months?

What about the past two years? What do you predict will happen in the future, and why?

The answers will vary depending on when the student researches the stock.

17-33. Would you invest in Gogo right now? Why or why not?

Answers will vary but should note such factors and risk acceptability, motivations for investing, and other investment philosophies.

PART 6 INTEGRATIVE LEARNING PORTFOLIO FINANCIAL ISSUES CRAFTING A BUSINESS PLAN START-UP COSTS P6-1. How much money will you need to get your business started?

Hint: Refer back to Part 5 of the plan, where you analyzed the costs involved in running your business. Approximately, how much will you need to get your business started?

FINANCING P6-2. How will you finance your business? For example, will you seek out a bank loan?

Borrow from friends? Sell stocks or bonds initially or as your business grows?

Hint: Refer to Chapter 17 for information on securities, such as stocks and bonds. Refer also to Appendix I: Financial Risk and Risk Management and Chapter 3 for more information on sources of short-term and long-term funds.

EXECUTIVE SUMMARY P6-3. Now, create an executive summary for your business plan. The executive summary should be brief—no more than two pages long—and should cover the following points:    

The name of your business Where your business will be located The mission of your business The product or service you are selling

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   

Who your ideal customers are How your product or business will stand out in the crowd Who the owners of the business are and what experience they have An overview of the future prospects for your business and industry

Hint: At this point, you’ve already answered all these questions, so what you need to do here is put the ideas together into a “snapshot” format. The executive summary is really a sales pitch— it’s the investor’s first impression of your idea. Therefore, as with all parts of the plan, write in a clear and professional way.

Once you have written the executive summary, copy and paste it at the beginning of your business plan—as the very first element.

CASE PART 6: STARBUCKS P6-4. Compare and contrast Schultz’s leadership style with Johnson’s. Which do you think is better for a mature organization like Starbucks? Which do you think would be better for a start-up company, and why?

Student answers should refer back to the differences between transformational leaders like Schultz and transactional leaders like Johnson. (Learning Objective 9-3—AACSB— analytical thinking) P6-5. Do some research on your own and prepare a brief memo on why you do or do not see Starbucks as a socially responsible corporation.

The memo should identify several of Starbucks’s social responsibility initiatives, including initiatives to benefit the environment and employee working conditions, as well as community improvement and other needs-based initiatives. (Learning Objective 2-6— AACSB—analytical thinking) P6-6. Do you think opening more stores in more countries is mission-driven? Is the company’s actual mission different than the one presented to the public? Do you think it’s appropriate for a company to include financial profits, growth objectives, and even profits and the role of shareholders in the mission? Craft a mission statement based on your objective external opinion of the business.

Student mission drafts will vary, but should reflect the reality of Starbucks rather than its aspirations. For instance, growth seems to be a factor of the actual mission of the company.

(Learning Objective 5-4—AACSB—analytical thinking) P6-7. Research Starbucks on the web and determine the current share price and the price/earnings ratio. How many shares are outstanding, and what is the market capitalization (share price times number of shares outstanding)?

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Student answers will be based on the most current information available but should demonstrate an understanding of market cap and price/earnings. (Learning Objective 176—AACSB—analytical thinking) P6-8. Many companies borrow money to fund their ventures. Just before Howard Schultz bought Starbucks from the three original founders, the company had gone seriously into debt to purchase Peet’s coffee and was struggling financially. Howard hit the streets and talked to every mover and shaker he could get an audience so that he could raise enough capital to fund the purchase. Which do you think is the better options, debt or equity financing, and why?

Student answers will vary based on personal experience and opinion. Students should list the advantages of debt financing and equity financing as well as the disadvantages (for instance, debt requires repayment of principal plus interest where equity financing does not).

(Learning Objective 17-5—AACSB—analytical thinking) P6-9. Starbucks has posted an annual return without regard to dividends (which is significant) of 22 percent. If risk and return are correlated, why do you think the return on investment (ROI) is so robust?

Students may point to the inherent risk of the stock market. In addition, they may point to Starbucks’s increasing stock price as an indication that it is a good investment with high returns and relatively low risk. (Learning Objective 17-4—AACSB—analytical thinking)

FINDING YOUR PATH Careers in Business Finance is a very popular major that requires strong technical and quantitative abilities, along with a strong background in economics. Job opportunities include investment banking, commercial banking, real estate, insurance, and financial planning. Salaries vary significantly by industry.

Making Yourself Employable Getting a job in finance can be enhanced through internships, especially if you can secure more than one during your university studies. It can make you even more appealing as a job candidate if these internships are in different areas of finance.

Looking for a new job may be attractive for a multitude of reasons, including (but not limited to) your job or industry becoming obsolete because of changes in technology, the fact that the personal costs of your job outweigh its benefits, or the fact that your financial needs have changed.

However, changing jobs may not make as much sense as you think. If you see a friend with a job that seems better than yours but you do not really know all the details, you are

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considering a new job in which extra money or job security is the only plus, or you hear that a certain field is growing but you have not looked at the evidence.

After assessing your motivation and moving forward, revisit Finding Your Path at the end of Part 5. Update your “features” and “product description.” Is moving on the only path, or is there an opportunity at your current organization that you could pursue? If you move on, be prepared to explain why you are leaving, and do not burn bridges with your current employer.

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