Instructor Solution Manual For Business A Changing World 8CE

Instructor’s Manual—Chapter 2

Ferrell et al: Business: A Changing World 8ce

Instructor Solution Manual For Business A Changing World 8CE O. C. Ferrell, Geoffrey A. Hirt, Linda Ferrell, Suzanne Chapter 1-14

Chapter 1: The Dynamics of Business and Economics SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Wes Hall: Making Big Things Happen Going Green: Hitting the Brakes on EVs Responding to Business Challenges: Taylor Swift Fights Scalpers Business Disruption: Competition is Brewing in Kombucha Market Entrepreneurship in Action: Threads' Strategic Pivot So You Want a Job in the Business World END OF CHAPTER TEACHING RESOURCES Team Exercise Build Your Business Plan: The Dynamics of Business and Economics See for Yourself Case: Tesla: More Than a Car Company SUPPLEMENTAL TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: The Forces of Supply and Demand Solve the Dilemma: Mrs. Acres Homemade Pies CONNECT ACTIVITIES GrubHub Excels Amidst the Changing Business Environment Uber and Its Effect on the Sharing Economy iSeeIt! Video Case: Supply and Demand BONUS TEACHING RESOURCES Additional Discussion Questions Quiz Controversial Issue 02-1 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

Instructor’s Manual—Chapter 2

Ferrell et al: Business: A Changing World 8ce

Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions SUMMARY We begin our study of business in this chapter by examining the fundamentals of business and economics. First, we introduce the nature of business, including its goals, activities, and participants.

Next, we describe the basics of economics and apply them to the Canadian economy. Finally, we establish a framework for studying business in this text.

LEARNING OBJECTIVES LO 1-1

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

LO 1-2

Identify the main participants and activities of business.

LO 1-3

Define economics and compare the four types of economic systems.

LO 1-4

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

LO 1-5

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

LO 1-6

Outline the evolution of the Canadian economy.

LO 1-7

Explain the role of government, the entrepreneur, and ethics and social responsibility in the economy.

LO 1-8

Explain why studying business is important

KEY TERMS AND DEFINITIONS artificial intelligence (AI)

Relates to machine (computer) learning that is able to perform activities and tasks that usually require human intelligence.

big data

Large volumes of structured and unstructured data that are transmitted at very fast speeds.

blockchain

A decentralized record-keeping technology that stores linked.

budget deficit

The condition in which a nation spends more than it takes in from taxes.

budget surplus

The condition in which a nation spends less than it takes in from taxes.

business

Individuals or organizations who try to earn a profit by providing products that satisfy people’s needs.

capitalism (free enterprise)

An economic system in which individuals own and operate the majority of businesses that provide goods and services.

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Instructor’s Manual—Chapter 2

Ferrell et al: Business: A Changing World 8ce

communism

First described by Karl Marx as a society in which the people, without regard to class, own all the nation’s resources.

competition

The rivalry among businesses for consumers’ dollars.

demand

The number of goods and services that consumers are willing to buy at different prices at a specific time.

depression

A condition of the economy in which unemployment is very high, consumer spending is low, and business output is sharply reduced.

drones

unmanned aerial devices, can be programed with AI to perform human tasks such as delivering products or collecting environmental data and imagery.

economic contraction

A slowdown of the economy characterized by a decline in spending and during which businesses cut back on production and lay off workers.

economic expansion

The situation that occurs when an economy is growing and people are spending more money; their purchases stimulate the production of goods and services, which in turn stimulates employment.

economic system

A description of how a particular society distributes its resources to produce goods and services.

economics

The study of how resources are distributed for the production of goods and services within a social system.

entrepreneur

An individual who risks their wealth, time, and effort to develop for profit an innovative product or way of doing something.

entrepreneurship

The process of creating and managing a business to achieve desired objectives.

equilibrium price

The price at which the number of products that businesses are willing to supply equals the amount of products that consumers are willing to buy at a specific point in time.

financial resources (capital)

The funds used to acquire the natural and human resources needed to provide products; also called capital.

free market system

Pure capitalism, in which all economic decisions are made without government intervention.

gross domestic product (GDP)

The sum of all goods and services produced in a country during a year.

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Instructor’s Manual—Chapter 2

Ferrell et al: Business: A Changing World 8ce

human resources (labour) The physical and mental abilities that people use to produce goods and services; also called labour. inflation

A condition characterized by a continuing rise in prices.

mixed economies

Economies made up of elements from more than one economic system.

monopolistic competition The market structure that exists when there are fewer businesses than in a pure competition environment and the differences among the goods they sell are small. monopoly

The market structure that exists when there is only one business providing a product in a given market.

natural resources

Land, forests, minerals, water, and other things that are not made by people.

non-profit organizations

Organizations that may provide goods or services but do not have the fundamental purpose of earning profits.

oligopoly

The market structure that exists when there are very few businesses selling a product.

open economy

An economy in which economic activities occur between the country and the international community.

products

A good or service with tangible and intangible characteristics that provide satisfaction and benefits.

profit

The difference between what it costs to make and sell a product and what a customer pays for it.

pure competition

The market structure that exists when there are many small businesses selling one standardized product.

recession

A decline in production, employment, and income.

socialism

An economic system in which the government owns and operates basic industries, but individuals own most businesses.

stakeholders

Groups that have a stake in the success and outcomes of a business.

standard of living

Refers to the level of wealth and material comfort that people have available to them.

supply

The number of products—goods and services—that businesses are willing to sell at different prices at a specific time.

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Instructor’s Manual—Chapter 2

Ferrell et al: Business: A Changing World 8ce

technology

includes the methods and processes creating applications to solve problems, perform tasks, and make decisions.

unemployment

The condition in which a percentage of the population wants to work but is unable to find jobs.

CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course. There is also a reminder on when CONNECT activities can be used. This feature was created to facilitate in-class or online discussions more effectively.

LO 1-1

Define basic concepts such as business, product, and profit.  Introduction  The Nature of Business o The Goal of Business

Key Terms:  Business  Products  Profit  Non-profit organizations  Stakeholders

Lecture Outline and Notes: I. The Nature of Business A. Business refers to the individuals and organizations seeking a profit by providing products that satisfy people’s needs.

B. Products refer to goods or services with tangible and intangible attributes that provide satisfaction and benefits. A product can be a good, service, or idea.

1. Examples of tangible goods include an automobile, smartphone, jeans, and so on.

2. Examples of services include dry cleaning, a checkup with your doctor, a movie, a sports event, and so on.

3. A product can also be an idea. Accountants and attorneys, for example, generate ideas for solving problems.

C. The Goal of Business: to earn a profit, the difference between what it costs to make and sell a product and what a customer pays for it.

1. Businesses have a right to keep their profits as they choose—within legal limits—because profit is the reward they take in providing products.

2. Earning profits contributes to society by providing employment, which in turn provides money that is reinvested in the economy.

3. Non-profit organizations do not have the fundamental purpose of earning profits, although they may provide goods or services.

4. Both nonprofit organizations and businesses require management skills, marketing expertise, and financial resources; and they must abide by laws and regulations, act in an ethical and socially responsible manner; and adapt to economic, technological, and social changes.

5. Earning a profit requires: a. Management skills to plan, organize, and control the activities of the business and to find and develop employees so that it can make products consumers will buy.

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Instructor’s Manual—Chapter 2

LO 1-2

LO 1-3

Ferrell et al: Business: A Changing World 8ce

b. Marketing expertise to learn what products consumers need and want and to develop, manufacture, price, promote, and distribute those products. c. Financial resources and skills to fund, maintain, and expand its operations. d. The ability to face challenges such as abiding by laws and government regulations. e. Acting in an ethical and socially responsible manner. f. Adapting to economic, technological, political, and social changes.

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

Identify the main participants and activities of business.

Key Terms: o The People and Activities of Business II. The People and Activities of Business 1. The people involved in business activities are the owners, employees, and customers.

(Note that owners, employees, and customers are the main stakeholders, whereas the external environment consists of competition, the economy, information technology, legal and political forces, and social responsibility.) a. Owners have to put up the resources to start a business. They can manage the business themselves or have employees as managers. b. Employees are responsible for the work that goes on within the business. c. The major role of a business is to satisfy the customers who buy its goods and services.

2. The activities of businesses include primarily management, marketing, and finance. a. Management is included in the same part of the circle (Figure 1.1) as employees because managers coordinate employees’ actions to achieve the firm’s goals, organize people to work efficiently, and motivate them to achieve business goals. i.

Production and manufacturing is another element of management.

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

Management is also concerned with acquiring, developing, and using resources effectively and efficiently in a business. b. Marketing and consumers are in the same segment (Figure 1.1) because the focus of all marketing activities is satisfying consumers. i. Marketing involves all activities designed to provide goods and services that satisfy consumers’ needs and wants, including gathering information and conducting research to determine customer wants; planning and developing products; and determining price, distribution, and promotion (Table 1.1). c. Finance: Owners and finance are in the same part of the circle (Figure 1.1) because although management and marketing deal with financial considerations, it is primarily the responsibility of the owners to provide financial resources for the operation of the business. i.

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

Define economics and compare the four types of economic systems.

Key Terms:  The Economic Foundations of Business  Economics o Economic Systems  Natural resources (land) o The Free Enterprise System  Human resources (labour)

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Instructor’s Manual—Chapter 2

Ferrell et al: Business: A Changing World 8ce  Financial resources (capital)  Entrepreneurship  Entrepreneurs  Economic system  Communism  Socialism  Capitalism (freeenterprise)  Free-market system  Mixed economies

III. The Economic Foundations of Business A. Economics is the study of how resources—or factors of production—are distributed for the production of goods and services within a social system.

1. Natural resources are land, forests, minerals, water, and other things not made by people.

2. Human resources are the physical and mental abilities that people use to produce goods and services.

3. Financial resources, or capital, are the funds used to acquire the natural and human resources needed to provide products.

4. Natural resources, human resources, and financial resources are related to the factors of production.

5. Factors of production are: Land, labour, capital, and enterprise used to produce goods and services (Table 1.2).

6. The firm can also have intangible resources such as a good reputation for quality products or being socially responsible.

B. An economic system describes how a society distributes its resources to produce goods and services that satisfy the needs of its people. All economic systems must answer three questions: 1. What goods and services and how much of each will satisfy the needs of the consumer?

2. How will the goods and services be produced? Who will produce them and with what resources?

3. How are the goods and services to be distributed?

C. Types of economic systems found in the world: communism, socialism, and capitalism (Table 1.3).

1. Karl Marx described communism as a society in which the people, without regard to class, own all the nation’s resources. Also called command economies (China & Cuba). a. Central government planning determines what products will satisfy citizens’ needs, how they are produced, and how they are distributed. b. In theory, communism appears efficient and equitable, but in practice, communist economies have been marked by low standards of living, critical shortages of consumer goods, high prices, and little personal freedom. c. Many countries have turned away from communism and begun to experiment with economic systems governed by supply and demand rather than by central planning.

2. Socialism is an economic system in which the government owns and operates basic industries, but individuals own most businesses (Norway, Israel, & India). a. Central planning determines what and how basic goods and services are produced 02-7 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

Instructor’s Manual—Chapter 2

LO 1-4

Ferrell et al: Business: A Changing World 8ce

and distributed, but individuals and small businesses provide other products based on consumer demand and the availability of resources. b. Most socialist nations are democratic and recognize basic individual freedoms. c. Socialist economies profess egalitarianism—equal distribution of income and social services. d. Taxes and unemployment are generally higher in socialist countries.

3. Capitalism, or free-enterprise, is an economic system in which individuals own and operate most of the businesses that provide goods and services (the United States, Canada, & Japan). a. Competition, supply, and demand determine which goods and services are produced, how they are produced, and how they are distributed. b. There are two forms of capitalism: i.

Pure capitalism, or a free-market system, exists when all economic decisions are made without government intervention. Adam Smith, the father of capitalism, believed that the invisible hand of competition would best regulate the economy. ii.

Modified capitalism differs from pure capitalism in that the government intervenes and regulates business to a certain extent.  One way of regulating business is through laws.  Federal Trade Commission Act created the Federal Trade Commission.  Business laws illustrate the importance of government’s role in economy. c. Mixed economies have elements from more than one economic system. No country practices a pure form of communism, socialism, or capitalism. i.

Many large economies are free enterprise—including the United States, Canada, and Japan. ii.

Many communist and socialist countries apply free enterprise principles— including China and Russia. d. The free-enterprise system provides an opportunity for a business to succeed or fail on the basis of market demand. A number of basic individual and business rights must exist for free enterprise to work and businesses to succeed. i.

Individuals must have the right to own property. ii.

Individuals and businesses must have the right to earn and use profits, within constraints of society’s laws. iii.

Individuals and businesses must have the right to make decisions that determine how the business operates, within the limits of the law. iv.

Individuals must have the right to decide what career to pursue, where to live, what goods and services to purchase, and more. Businesses can decide where to locate, what goods and services to produce, what resources to use in the production process, and so on.

Describe the role of supply, demand, and competition in a free Key Terms: enterprise system.  Demand  The Forces of Supply and Demand  Supply  The Nature of Competition  Equilibrium price  Competition  Pure competition

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Instructor’s Manual—Chapter 2

Ferrell et al: Business: A Changing World 8ce  Monopolistic competition  Oligopoly  Monopoly

LO 1-5

A. The Forces of Supply and Demand (Figure 1.2) 1. Demand is the quantity of goods and services that consumers are willing to buy for different prices at a specific time. Consumers will usually buy more of an item as its price falls.

2. Supply is the quantity of goods and services that businesses are willing to sell for different prices at a specific time. Usually, sellers are willing to sell more of a product at higher prices.

3. Supply and demand is the force that drives the distribution of resources (goods and services, labour, and money) in a free enterprise economy.

4. An equilibrium price is the point at which supply and demand curves intersect, indicating that supply and demand are equal at that point.

5. The supply and demand process is constantly changing in response to economic conditions, availability of resources, and degree of competition.

6. Critics of supply and demand say that the system does not distribute resources equally among the wealthy and the poor.

B. The Nature of Competition 1. Competition is the rivalry among businesses for consumers’ dollars. It is a vital element of free enterprise.

2. Free enterprise systems offer four types of competitive environments (Table 1.4): a. Pure competition exists when there are many small businesses selling one standardized product. The trade in agricultural commodities, such as wheat, corn, and cotton, is an example. b. Monopolistic competition exists when there are fewer businesses than in a pure competition system and the differences between the goods they sell are small.

Aspirin, soft drinks, and vacuum cleaners are examples. c. An oligopoly exists when very few businesses sell a product, and it is expensive for new firms to enter the marketplace. The airline industry is an example. d. A monopoly exists when there is only one producer of a product in a given market.

Utility companies are examples of monopolies.

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

Key Terms:  Economic Cycles and Productivity  Economic expansion o Expansion and Contraction  Inflation o Measuring the Economy  Economic contraction  Recession  Unemployment  Depression  Gross domestic product (GDP)  Budget surplus  Budget deficit A. Economic Cycles and Productivity 1. Economic expansion occurs when an economy is growing and people are spending more money.

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Instructor’s Manual—Chapter 2

2.

3.

4.

5.

LO 1-6

Ferrell et al: Business: A Changing World 8ce

a. Rapid economic expansion may result in inflation, a continuing rise in prices (Figure 1.3).

Economic contraction occurs when spending declines. a. It can lead to recessions, which are marked by a decline in production, employment, and income (Figure 1.4). b. Unemployment is measured as the percentage of the population that wants to work but is unable to find jobs. i. Rising levels of unemployment tend to stifle demand, forcing prices down, a condition known as deflation. c. A depression is a severe recession in which unemployment is very high, consumer spending is low, and business output is sharply reduced.

Economies constantly expand and contract in response to changes in consumer, business, and government spending.

Measuring the Economy: countries measure the state of their economies to determine whether they are expanding or contracting and whether corrective action is necessary to minimize fluctuations. a. Gross domestic product (GDP) is the sum of all goods and services produced in a country during a year (Figure 1.5). i.

GDP measures only those products made within a country not profits earned from companies’ overseas operations. It does include profits earned by foreign companies within the country being measured. ii.

It also does not take into account the sum relative to the country’s population; GDP per capita does. b. Budget deficits occur when a nation spends more than it takes in from taxes. The national debt exceeds $1 trillion.

Other Ways of Measuring the Economy (Table 1.5) c. Trade balance: The difference between our exports and our imports. If the balance is negative it is called a trade deficit and is generally viewed as unhealthy for our economy. d. Consumer Price Index: Measures changes in prices of goods and services purchased for consumption by typical urban households. e. Per capita income: Indicates the income level of “average” Canadians. Useful in determining how much “average” consumers spend and how much money Canadians are earning. f. Unemployment rate: Indicates how many working age Canadians are not working who otherwise want to work. (Canadians who do not work in a traditional sense, such as stay-at-home moms or dads, are not counted as unemployed.) g. Inflation: Monitors price increases in consumer goods and services over specified periods of time. Used to determine whether costs of goods and services are exceeding worker compensation over time. h. Worker productivity: The amount of goods and services produced for each hour worked.

Outline the evolution of the Canadian economy.  The Canadian Economy o The Importance of the Canadian Economy o A Brief History of the Canadian Economy o Technology and the Economy

Key Terms:  Standard of living  Open economy  Technology

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Instructor’s Manual—Chapter 2

Ferrell et al: Business: A Changing World 8ce  Artificial Intelligence  Big Data  Blockchain  Drones

IV. The Canadian Economy A. The Importance of the Canadian Economy 1. The Canadian economy is an open economy. As an open economy, Canada is a major player in international trade.

2. Standard of living refers to the level of wealth and material comfort that people have available to them.

3. Open economies tend to have a higher standard of living than economies that do not engage in international trade.

4. International trade is positively related to efficiency and productivity.

5. A positive relationship exists between a country’s employment rate and economic growth.

6. Government public policy also drives the economy through job creation.

7. The vast majority of taxes come from individuals.

8. Businesses are also an important form of tax revenue.

B. A Brief History of the Canadian Economy 1. The Early Economy a. Colonists established an agricultural economy. b. Most people were self-sufficient and produced almost everything they needed.

2. The Industrial Revolution a. Machines and job specialization increased the speed and efficiency of production.

3. The Manufacturing and Marketing Economies a. Industrialization brought about the manufacturing economy, which was devoted to producing goods and services. b. The marketing economy emerged as businesses became more concerned with the needs and wants of consumers.

4. The Service and New Digital Economy a. As quality of life improved, people had enough income to hire others to provide services for them, which ushered in the service economy. b. Advanced technology contributes to new service products based on technology and digital media that provide: i.

Smartphones ii.

Social networking iii.

Virtual worlds iv.

Online Retailing and E-Commerce C. Technology and the Economy 1. Includes the methods and processes creating applications to solve problems, perform tasks, and make decisions. a. Artificial intelligence (AI) relates to machine (computer) learning that is able to perform activities and tasks that usually require human intelligence. i.

AI is moving rapidly across business functions because it can resolve predictable business activities. ii.

While it has the potential to provide greater productivity and higher quality service, it also creates new challenges.

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Instructor’s Manual—Chapter 2

Ferrell et al: Business: A Changing World 8ce

iii.

LO 1-7

LO 1-8

Tracking communication, profiles, and other searchable information will accelerate with AI. b. Big data to large volumes of structured and unstructured data this is transmitted at very fast speeds. c. Blockchain is a decentralized record keeping technology that stores linked block of ordered transactions over time. i.

Blockchain has the potential to make databases and the digital infrastructures more secure and trustworthy. d. Drones are unmanned aerial devices can be programmed with AI to perform human tasks such as delivering products or human tasks such as delivering products, collecting environmental data and imagery. Drones can be beneficial in a variety of industries such as construction, farming, defense, insurance, outdoor entertainment, and retail.

Explain the role of government, the entrepreneur, and ethics and Key Terms: social responsibility in the economy.  Entrepreneur  The Role of Government  The Role of the Entrepreneur  The Role of Ethics and Social Responsibility A. The Role of Government 1. Canada is a modified capitalism system.

2. Federal, provincial, and municipal governments sometimes intervene with regulations aimed at promoting competition and consumer safety.

3. Government agencies such as the Bank of Canada measure the economy’s health and intervene when economic health is at stake.

B. The Role of the Entrepreneur 1. An entrepreneur risks their wealth, time, and effort to develop for profit an innovative product or way of doing something.

2. The free-enterprise system provides the conditions for entrepreneurs to succeed.

3. Modern Canadian entrepreneurs are frequently changing business practices with innovative technologies.

C. The Role of Ethics and Social Responsibility in Business 1. Recent scandals undermined public confidence in corporate America and sparked a new debate about ethics in business.

2. Business ethics generally refers to the standards and principles used by society to define appropriate and inappropriate conduct in the workplace. In many cases, these standards have been codified as laws.

3. Society is increasingly demanding that businesspeople behave ethically and socially responsibly toward customers and other stakeholders.

4. Businesses should determine what society wants and attempt to predict the long-term effects of their decisions.

Explain why studying business is important.

Key Terms:  Can You Learn Business in a Classroom?

A. Can You Learn Business in a Classroom? (Figure 1.6) The Organization of This Book 1. Absolutely! To be successful in business, you need knowledge, skills, experience, and good judgment.

2. This book can help students gain some of the knowledge, skills, and experience needed to be successful in business.

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Ferrell et al: Business: A Changing World 8ce

3. Why Study Business? i.

It can help you develop skills and acquire knowledge to prepare you for your future career. ii.

It can help you better understand the many activities necessary to provide goods and services and appreciate the costs associated with these activities. iii.

Business activities help create jobs and contribute to the health of local and global economies.

BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Wes Hall: Making Big Things Happen Wes Hall is an entrepreneur and the founder of Kingsdale Advisors. The company caters to activist investors—shareholders who try to influence significant change within a public company. Hall serves on multiple boards of non-profit organizations and founded the BlackNorth Initiative which he believes can end racism and create more opportunities for emerging entrepreneurs by using a business-first mindset.

Hall’s faith, family and upbringing are powerful forces in his life. He says he learned entrepreneurship by watching his grandmother work multiple jobs to raise thirteen grandchildren.

1. Describe Kingsdale Advisors' business strategy. Why do you think it was so successful?

Wes Hall saw an opportunity in Canada’s lack of firms dedicated to servicing the needs of activist investors. Kingsdale Advisors was launched in response.

Although the answers will vary, many students will state Hall’s success has come from his entrepreneurship. Others will focus on his strategy of starting and investing in companies that he thought would perform well. Others will point to his success coming from hard work.

2. How has Wes Hall leveraged his business success?

Hall has leveraged his business success to benefit others with impactful charitable initiatives. Given the sheer size of his interests and investments, it would be impossible for one person to successfully manage all of the individual companies. It would require specific expertise in a broad range of industries. Hall has an empowered team of executives.

Risks include having the correct managers to run such a vast, diverse organization; possible logistical issues with running such a large company; and keeping abreast of the changes and trends in such a large number of industries.

3. What factors led to Wes Hall’s success?

Factors include his education, negotiating skills, drive, and determination. His personal work ethic appears to have been instilled from an early age – mainly hard work and good values.

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Ferrell et al: Business: A Changing World 8ce

Going Green: Hitting the Brakes on EVs 1. Is the building of electric cars by carmakers a good business decision?

Demand is increasing as policymakers and customers view electric vehicles (EVs) as a way towards a cleaner future.

2. What are the environmental impacts of electric car batteries?

Electric car batteries have increased the demand for critical minerals such as lithium. Llithium mining can be environmentally damaging as it requires huge amounts of groundwater. It also causes soil contamination and other forms of environmental degradation, and forces local communities to abandon ancestral settlements.

3. Who are the stakeholders in the electric vehicles industry?

Stakeholders include customers, policymakers, NGOs, carmakers, local communities, the environment, and so on.

Responding to Business Challenges: Taylor Swift Fights Scalpers 1. Describe how the supply-demand problem is offering opportunities for scalpers.

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

This situation creates opportunities for ticket scalpers.

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

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

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

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

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

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Ferrell et al: Business: A Changing World 8ce

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

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

Consumer interest in the beverage is skyrocketing and the demand is encouraging the entrance of new competitors. Coca-Cola has a stake in a kombucha company and Pepsi doesn’t want to miss a market opportunity.

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

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

Entrepreneurship in Action: Threads' Strategic Pivot 1. Is addressing the customer concerns of quality, price and convenience enough to be successful?

Flexibility and adapting to change are also needed in business.

2. Was pivoting (shifting to a new strategy) high risk?

Any change in strategy is risky. However, Chen says that the long-run business strategy has not changed and her business model has staying power.

3. How will the business change when the pandemic ends?

Chen sees other essentials that could be made better. She plans to be the leader for all wardrobe staples.

So You Want a Job in the Business World Why is it important to seriously consider what kind of job you want to have, and how do you help keep it once you have been hired?

Because you spend most of your waking hours at work, it is imperative that you explore all avenues when determining what line of work you would like to enter. Most jobs are not with large corporations but are in small companies, nonprofit organizations, government, and even as selfemployed individuals.

The fast pace of technology today means that students have to be prepared to take advantage of emerging job opportunities and markets. Once you have found a suitable position, you must learn to be flexible and to adapt quickly. You need to consider all of the changes in the workplace and the work that might affect your long-term position within your company, and what will help you be successful.

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

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

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

Suggestions for Group Formation If this is a first-year course, it probably makes sense to assign students to groups since they do not know each other. An ideal group size is four or five students. From Appendix A, you can see that the first assignment is to develop their business proposals. If you are on a 15-week semester, this should be due around the fourth week of the semester. At that point, you will not have covered the marketing chapters, but the idea of the business proposal is just to get the groups to start thinking about what lies ahead for the group. In order to avoid a disaster, require the groups to submit their idea of a good or service to you within the first 10 days/2 weeks of the course. This allows you to steer them in the right direction if they are in over their heads, or if their idea is not feasible.

History has shown that rotating the leadership of the group helps everyone to be more accountable for their actions (or lack of action). You might suggest that each week one student serve as the leader and coordinate/lead meetings, while the other serves as a recorder of meeting notes and 02-16 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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tasks assigned to each group member. Over the course of the semester, students should be able to have each role at least once. Inform the students that they will be completing an evaluation of each group member’s contribution to the group after the project is completed.

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

See for Yourself Case: Tesla: More Than a Car Company Case Overview Tesla, an all-electric vehicle and energy generation products company, is widely admired for its industry-altering innovation built around its core vision of moving the world toward sustainable energy. Tesla did not invent the EV, but it was the first to create a viable EV for consumers and has set the standard of what an electric car should be. In 2003, Martin Eberhard and Marc Tarpenning set out to create a high-end performance EV, targeting wealthy car enthusiasts. Elon Musk joined the company in 2004 after investing $30 million and becoming the chair of the board of directors.

The company launched three successful vehicles and began to focus on the energy side of its business, unveiling Solar Roof solar tiles as well as Powerwall and Powerpack industry batteries to store converted solar energy. The company changed its name from Tesla Motors to Tesla, Inc., in 2017, signifying the company’s shift from a car manufacturer to a sustainable energy solution company.

In addition to addressing more of the consumer market, Tesla is investing in heavy-duty trucks and high-passenger-density urban transport. The company has made significant gains and has firmly established itself as a leader in EVs. 1. What benefits do Tesla’s products provide?

Tesla created a battery that could sufficiently power a vehicle and a motor that was effective and affordable. Their vehicles feature autopilot for partial autonomous driving enabling the cars to selfdrive with active driver supervision, have the longest driving range of any EV, and are more affordable and safer.

2. As competition grows, do you think demand for Tesla’s vehicles will decline? Why or why not?

Answers will vary but students should support their answers.

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3. How has Tesla pushed the car industry forward?

Answers will vary—Tesla pushed the car industry forward by for its focus on industry-altering innovation built around its core vision of moving the world toward sustainable energy. Their efforts have resulted in more car companies focusing on renewable and sustainable energy.

SUPPLEMENTAL TEACHING RESOURCES Check Your Progress 1. What is the fundamental goal of business? Do all organizations share this goal?

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

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

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

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

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

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

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

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

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

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

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These forces interact in the Canadian economy, causing the distribution of resources and products to be determined by supply and demand. Supply and demand change in response to changes in economic conditions, availability of resources, and degree of competition.

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

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

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

8. Why are fluctuations in the economy harmful?

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

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

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

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

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

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

Russia and eastern European countries have turned away from communism and toward economic systems governed by supply and demand rather than by central planning. Before the Soviet Union fell, the economy was stagnant and there was serious political unrest. After the Soviet Union fell, many of the countries that had been taken over by the Soviet Union also began to move away from communism. Despite the potential inequalities that might lie in supply and demand relationships, many feel it is the best way to create an efficient marketplace.

In many communistic countries without competition, growth tends to stagnate.

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

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

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

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

Many students will probably say the economy is in a period of mixed results with the economy expanding but with higher unemployment. Unemployment was at historically low levels before the COVID pandemic but shot up during the pandemic. It has declined and there is a current shortage of workers. The inflation rate was 2.1% before the pandemic. The supply chain was significantly disrupted during the pandemic and inflation has increased. These numbers will likely have changed by the time this book comes out.

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Build Your Skills: The Forces of Supply and Demand Background WagWumps are a new children’s toy with the potential to be a highly successful product.

WagWumps are cute and furry, and their eyes glow in the dark. Each family set consists of a mother, a father, and two children. Wee-Toys’ manufacturing costs are about $6 per set, with $3 representing marketing and distribution costs. The wholesale price of a WagWump family for a retailer is $15.75, and the toy carries a suggested retail price of $26.99.

Task Assume you are a decision maker at a retailer, such as Target or Walmart, that must determine the price the stores in your district should charge customers for the WagWump family set. From the information provided, you know that the SRP (suggested retail price) is $26.99 per set and that your company can purchase the toy set from your wholesaler for $15.75 each. Based on the following assumptions, plot your company’s supply curve on the graph provided in Figure 1.8 and label it “supply curve.”

Quantity 3,000 5,000 7,000

Price $16.99 21.99 26.99

Using the following assumptions, plot your customers’ demand curve on Figure 1.8 and label it “demand curve.”

Quantity 10,000 6,000 2,000

Price $16.99 21.99 26.99

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

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Prices of WagWumps

Equilibrium Price Supply Curve

Demand Curve

Equilibrium Price = $22.99

Quantity of WagWumps (in thousands)

Solve the Dilemma: Mrs. Acres Homemade Pies Shelly Acres, whose grandmother gave her a family recipe for making pies, loved to cook, and she decided to start a business she called Mrs. Acres Homemade Pies. The company produces specialty pies and sells them in local supermarkets and select family restaurants. In each of the first six months, Shelly and three part-time employees sold 2,000 pies for $4.50 each, netting $1.50 profit per pie. The pies were quite successful and Shelly could not keep up with demand. The company’s success results from a quality product and productive employees who are motivated by incentives and who enjoy being part of a successful new business.

To meet demand, Shelly expanded operations, borrowing money and increasing staff to four full-time employees. Production and sales increased to 8,000 pies per month, and profits soared to $12,000 per month. However, demand for Mrs. Acres Homemade Pies continues to accelerate beyond what Shelly can supply. She has several options: (1) maintain current production levels and raise prices; (2) expand the facility and staff while maintaining the current price; or (3) contract the production of the pies to a national restaurant chain, giving Shelly a percentage of profits with minimal involvement.

1. Explain and demonstrate the relationship between supply and demand for Mrs. Acres Homemade Pies.

When Shelly Acres started selling her pies, she had to find her own customers. None of the local restaurants and supermarkets knew her products, so she had to offer an affordable product to interest restaurants and supermarkets in her products. As demand increased, Shelly started producing more pies to meet this demand. At the moment, she cannot supply all the demand. A 02-22 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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way to decrease this demand is to increase prices. She can also increase the production level to meet the demand.

2. What challenges does Shelly face as she considers the three options?

The first option implies that Shelly’s company is not going to grow since its current size will be maintained by keeping an artificially high price. The second solution requires Shelly to find the resources to finance the expansion of her activities. The third option leads Shelly to lose her specific know-how by providing it to the national restaurant chain. It also implies that Shelly does not own her business any longer.

3. What would you do in Shelly’s position?

Answers will vary, but students should be able to defend the choices they have made.

CONNECT ACTIVITIES GrubHub Excels Amidst the Changing Business Environment Learning Objective: 1-2: Identify the main participants and activities of business.

Activity Summary: GrubHub has been on a mission to change the way we eat since its founding in 2004. This scenario illustrates the story of GrubHub’s founding, its evolution, and value proposition as it looks to grow in the years ahead by hearing the perspectives of leaders in the organization.

How to Use Activity: This activity allows students to get inside the minds of GrubHub leaders— understanding what they do and why they do it. Beyond answering the video case questions, students can apply the same concepts and vocabulary terms GrubHub leaders reference (competitive advantage, global business environment, legal environment) and relate them to another familiar brand of their choosing.

Class Discussion: GrubHub is a business that has succeeded by not being stagnant. How has GrubHub evolved as time progressed? Why is this important? The four components of the business environment impact the success of GrubHub’s operation. What are some examples of aspects in the economic and legal environment, technological environment, competitive environment, and social environment that could affect GrubHub? Share reasoning behind your response.

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Uber and Its Effect on the Sharing Economy Learning Objective: 1-4: Describe the role of supply, demand, and competition in a free enterprise system.

Activity Summary: The rapid rise of sharing economy has shaped consumer behavior and spurred the development of new businesses in less than one decade. With evolving consumer preferences and businesses entering markets at new angles, the result creates natural economic implications.

How to Use Activity: Divide students into five groups (one for each question) and assign each a question from the case. Give each group 5 min to read the case, and 5 min together to collaborate on the response to their question. After they’ve aligned on an answer, invite a student from each group to share their response and justification. Allow the class to agree or disagree with the group’s answer, self-grading each group. Provide expertise and arbitrate when necessary.

Class Discussion: How would you explain the concept of the sharing economy? Other than Uber, can you think of other companies whose businesses are founded on this principle of collaborative consumption? (Note to Professor: Common examples may include Lyft, Airbnb, WeWork, Kickstarter, GoFundMe.) iSeeIt! Video Case: Supply and Demand Learning Objective: 1-4: Describe the role of supply, demand, and competition in a free enterprise system.

Activity Summary: Explore how one of the most fundamental economic concepts, supply and demand, is brought to life through a pair of jeans.

How to Use Activity: The Broadway blockbuster, Hamilton, continues to gross over $3 million each week in New York City. Its average ticket price is $300, more than double the second highest grossing show on Broadway (Disney’s The Lion King). Ask students to research on the internet the Hamilton ticketing scarcity and connect its pricing to the concepts of supply and demand.

(Note to Professor: Hamilton uses a new technique in musical theater ticketing, dynamic pricing, where ticket prices are automatically adjusted based on supply and demand. Prices depend on a number of factors: time of day, seasonality, number of seats available, desirability of specific seat, and so on. In addition, scalpers often acquire almost every primarily sold tickets and increase the price even higher than what’s reported on the primary market. Yet, rooted in the basics of economics, this philosophy validates the basic economic concept: supply is low, and demand is high.)

Class Discussion: How can the ticketing of the musical Hamilton relate to supply and demand? Some products have a steady price that don’t change too significantly over time (e.g., groceries); other products have pricing that adjusts wildly similarly to Hamilton. What examples can you think for each of these two classes of products—ones when price doesn’t seem to fluctuate often due to demand and conversely examples of when it does?

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BONUS TEACHING RESOURCES Additional Discussion Questions 1. Which economic system provides for central government planning to determine what goods and services will satisfy needs of citizens?

Under communism, central government plans what goods and services will satisfy the needs of its citizens. Central government planning also plays an important role in socialism, at least for basic goods and services.

2. How did the Industrial Revolution affect the economy in Canada?

The Industrial Revolution affected farmers in several ways. The factories provided a market for raw products and agricultural products. Second, the factories produced farm equipment and implements that helped to increase farm productivity. Railroads made it possible for farmers to sell their goods all over the nation. More and more farmers began seeking jobs in factories.

3. What characteristics of modern Canadian entrepreneurs are similar to those of early Canadian entrepreneurs?

All entrepreneurs, whether early Canadians or present-day Canadians, risk their money, time, and effort to develop an innovative product or way of doing something.

Quiz 1.

2.

3.

4.

The activities designed to provide goods and services that satisfy customers are known as A. management.

B. marketing.

C. finance.

D. gross national product.

Which of the following best describes inflation?

A. A continuing decrease in product prices B. A moderate decrease in demand C. A continuing increase in unemployment D. A continuing increase in prices The airline business in Canada is an example of what form of competition?

A. Pure competition B. Monopolistic competition C. Oligopoly D. Monopoly The quantity of products and services that consumers are willing to buy at different prices at a specific time is termed A. supply.

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B. demand.

C. competition.

D. gross national product.

Answers to quiz:

1. B

2. D

3. C

4. B

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

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

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

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

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

Wavemaster ruined the firms because its decision makers knew nothing of the businesses in which the three firms operated.

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

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be a success.

Discussion Questions 1. What does “knowing business” mean?

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

2. How does “knowing the business” differ from “knowing business?”

The phrase “knowing the business” refers to an accumulated knowledge of a particular field.

There is a lot of value in knowing a particular field well.

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

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

Term Paper or Project Topic These topics may be assigned as individual or collaborative projects: 1.

2.

3.

4.

5.

6.

The Life and Influence of Karl Marx The Life and Influence of Adam Smith How Railroad Transportation in the 1800s Affected the Canadian Economy Advantages and Disadvantages of Small Business Entrepreneurship The life and times of a Canadian Entrepreneur A brief overview of Canada’s Innovation Strategy (see Strategis.gc.ca)

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

2. Students usually enjoy hearing about the experiences of international students and many instructors already have an international student in their classes. The instructor could set up a panel of students to discuss the economies and what life was like in their home country. If the instructor does not any international students, most colleges have a campus international association who could provide access to speakers to discuss the differences in Canadian business practices and those of other cultures.

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Teaching Suggestions 4. Instructors may use the materials provided in this Instructor’s Manual in a variety of ways. Many prefer to give a lecture interspersed with PowerPoint slides and/or transparencies. These have been designed to add to student understanding of the chapter content.

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

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

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

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

9. Instructors also have a variety of options in giving in-class and out-of-class assignments. The following are some possibilities: a. Instructors may assign a brief “writing to learn” exercise in which students summarize their thoughts or write answers. This may be a short in-class exercise in which students write answers to one or all of the Additional Discussion Questions and Exercises. The instructor may call on a random number of students to read their written exercises or to discuss answers in class. b. A list of suggestions for guest speakers is provided for the chapter. The instructor may arrange for a speaker, although some instructors give class members or teams the responsibility of arranging for speakers. The number of speakers planned for the entire course and the amount of time allowed for each speaker must be considered by the instructor in planning the sequence of the course. c. Some students are not test wise. One suggestion that may help students prepare for tests is to have each student develop one test question (multiple choice, true/false, completion, etc.) based on the key terms and concepts. These questions and answers may be shared in pairs or in teams of individuals. For a unit test, some instructors use one or two questions submitted by students.

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d. Term paper or project topics may be assigned to be completed over a long period of time.

An option to a written term paper is to have a short oral presentation on the term paper or project topics. Many instructors give students a choice of topics from different chapters, allowing them the flexibility of choosing from the topics.

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Chapter 2: Business Ethics and Social Responsibility SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Greenlid: Doing Well by Doing Good Business Disruption: Are COVID Benefits Helping or Hurting the Economy?

Consider Ethics and Social Responsibility: Lululemon vs. Peloton Consider Ethics and Social Responsibility: Ticketmaster Consider Ethics and Social Responsibility: WE Charity Scandal - Allegations of Conflict of Interest Prematurely End a Student Focused COVID-19 Relief Program Business Disruption: Restaurant delivery services have seen COVID-19 sales soar as they continue to take a huge bite out of restaurant profits Responding to Business Challenges: Indigenous Entrepreneur Jeff Ward: Successful Management through a Social Responsible Lens So You Want a Job in Business Ethics and Social Responsibility END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Business Ethics and Social Responsibility See for Yourself Case: Hershey Finds a Sweet Spot in Sustainability Team Exercise SUPPLEMENTAL TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Making Decisions about Ethical Issues Solve the Dilemma: Customer Privacy Recycling: A Dilemma for Business Firms CONNECT ACTIVITIES Cocoa Exchange Values Social Responsibility The Dilemma of Cross-Selling Insurance Policies Bombas’ Business Model—Buy One Give One BONUS TEACHING RESOURCES 02-30 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Additional Discussion Questions Controversial Issue Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions SUMMARY In this chapter, we take a look at the role of ethics and social responsibility in business decision making.

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

LEARNING OBJECTIVES LO 2-1

Define business ethics and social responsibility, and examine their importance.

LO 2-2

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

LO 2-3

Specify how businesses can promote ethical behaviour.

LO 2-4

Explain the four dimensions of social responsibility.

LO 2-5

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

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KEY TERMS AND DEFINITIONS bribes

Payments, gifts, or special favors intended to influence the outcome of a decision.

business ethics

Principles and standards that determine acceptable conduct in business.

codes of ethics

Formalized rules and standards that describe what a company expects of its employees.

consumerism

The activities that independent individuals, groups, and organizations undertake to protect their rights as consumers.

corporate citizenship

The extent to which businesses meet the legal, ethical, economic, and voluntary responsibilities placed on them by their stakeholders.

ethical issue

An identifiable problem, situation, or opportunity that requires a person to choose from among several actions that may be evaluated as right or wrong, ethical or unethical.

plagiarism

The act of taking someone else’s work and presenting it as your own without mentioning the source.

social responsibility

A business’s obligation to maximize its positive impact and minimize its negative impact on society.

whistleblowing

The act of an employee exposing an employer’s wrongdoing to outsiders, such as the media or government regulatory agencies.

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CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, and KEY TERMS learners will need to take away from the course.

LO 2-1

Define business ethics and social responsibility, and examine their Key Terms: importance.  Business ethics  Introduction  Social responsibility  Business Ethics and Social Responsibility  The Role of Ethics in Business Lecture Outline and Notes: V. Business Ethics and Social Responsibility D. Business ethics are principles and standards that determine acceptable conduct in business.

E. Acceptable behavior is determined by: 1. The organization 2. Stakeholders and interest groups 3. Competitors 4. Government regulators 5. The public 6. The individual’s personal principles F. Global Trust in Different Industries 1. In business, trust is the glue that holds the customer relationship together.

2. The recent global financial crisis took a toll on consumer trust of financial services companies.

G. “Tone at the top” 1. Managers must show a strong commitment to ethics and compliance.

2. “Tone at the top” requires top managers to acknowledge their own role in supporting ethics and compliance.

3. Top managers must: a.

Create strong relationships with ethics and compliance department. b.

Clearly communicate expectations for ethical behavior to all employees. c.

Educate managers/supervisors about the company’s ethics policies. d.

Train managers and employees on what to do if an ethics crisis occurs.

H. Social responsibility is a business’s obligation to maximize its positive impact and minimize its negative impact on society.

1. Social responsibility and ethics are not the same. a.

Ethics refers to individual’s or work group’s decisions. b.

Social responsibility is the impact of the entire organization’s activities on society.

I. Laws and regulations 1. A Timeline of Ethical and Socially Responsible Activities (Table 2.1) 2. The most basic ethical and social responsibility concerns have been codified as laws and regulations that encourage businesses to conform to society’s standards, values, and attitudes.

3. Most legal issues arise as choices that society deems unethical, irresponsible, or otherwise unacceptable.

4. All actions deemed unethical are not necessarily illegal, and both legal and ethical

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concerns change over time.

5. Business ethics, social responsibility, and laws together act as a compliance system requiring that businesses and employees act responsibly in society.

VI. The Role of Ethics in Business 1. If society judges an action to be unethical or wrong, whether correctly or not, that judgment directly affects an organization’s ability to achieve its goals.

2. Well-publicized incidents of unethical and illegal activity strengthen the public’s perceptions that ethical standards and the level of trust in business need to be raised.

3. Charges of misconduct often start as ethical conflicts but evolve into legal disputes when cooperative conflict resolution cannot be accomplished.

4. Many activities deemed unethical by society have been outlawed through legislation.

5. Business ethics goes beyond legal issues, and ethical conduct builds trust among individuals and business relationships.

6. Ethical issues are not limited to for-profit organizations; they also occur in government, science, sports, and nonprofit organizations.

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

Key Terms:  Recognizing Ethical Issues in Business  Ethical issue  Making Decisions about Ethical Issues  Bribes  Plagiarism A. Recognizing ethical issues in business 1. An ethical issue is an identifiable problem, situation, or opportunity that requires a person to choose from among several actions that may be evaluated as right or wrong, ethical or unethical.

2. Recognizing ethical issues is the most important step in understanding business ethics.

3. Best way to judge the ethics of a decision is to look at a situation from a customer’s or competitor’s viewpoint.

4. Types and Incidences of Observed Misconduct (Table 2.2) B. Bribes are payments, gifts, or special favors intended to influence the outcome of a decision.

1. Many business issues seem straightforward and easy to resolve on the surface but are in reality very complex.

2. Experience with the culture in which a business operates is critical to understanding what is ethical or unethical.

3. One of the principal causes of unethical behaviour in organizations is overly aggressive financial or business objectives.

C. Misuse of Company Time 1. Theft of time is a common area of misconduct observed in the workplace.

2. Many employees spend an average of 1 hr/day using social media sites or watching YouTube.

3. Time theft costs are estimated to cost companies hundreds of billions of dollars annually.

D. Abusive or intimidating behaviour is the most common ethical problem for employees.

1. Bullying is associated with a hostile workplace when a person or group is targeted and is threatened, harassed, belittled, verbally abused, or overly criticized. a. Within the concept of abusive behaviour, intent should be a consideration. b. Abusive behaviour is difficult to assess and manage because of diversity in

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culture and lifestyle.

E. Actions Associated With Bullies (Table 2.3) F. Misuse of company resources has been identified as a leading issue in observed misconduct in organizations.

1. Issues might include: a. Spending an excessive amount of time on personal emails b. Submitting personal expenses on company expense reports c. Using the company copier for personal use 2. Many companies have implemented official policies delineating acceptable use of company resources.

G. Conflict of Interest 1. Exists when a person must choose whether to advance their own personal interests or those of others.

2. To avoid, employees must be able to separate their personal financial interests from their business dealings.

3. Inside trading is the buying or selling of stocks by insiders who possess material that is still not public.

4. Least Corrupt Countries (Table 2.4) H. Fairness and Honesty 1. Employees must: c. Abide by the laws. d. Cause no harm through dishonesty. e. Use company resources fairly and honestly. f. Be aware of company policies. g. Recognize ethical behaviour. h. Use fair competition practices. i. Give full disclosure of potential harm by a product.

2. Communications a. Be truthful in advertising b. Product safety c. Product labelling 3. Business Relationships a. Keep company secrets. b. Meet obligations. c. Avoid undue pressure forcing others to act unethically. d. Plagiarism is taking someone else’s work and presenting it as your own without mentioning the source.

I. Making Decisions About Ethical Issues 1. It can be difficult to recognize specific ethical issues.

2. People often need years of experience to accurately recognize and react to ethical situations.

3. Questions to Consider in Determining Whether an Action is Ethical (Table 2.5) Specify how businesses can promote ethical behaviour.

Key Terms:  Improving Ethical Behaviour in Business  Codes of ethics  Whistleblowing A. Improving Ethical Behaviour in Business 1. Three factors that influence business ethics (Figure 2.1):

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a. Individual Standards and Values b. PLUS Managers’ and Co-Workers’ Influence c. PLUS Opportunity: Codes and Compliance Requirements d. EQUAL Ethical/Unethical Choices in Business 2. Many employees use different ethical standards at work than they do at home.

3. The activities and examples set by managers and coworkers are critical in gaining consistent ethical compliance.

4. If a company fails to provide good examples and direction, confusion and conflict will develop. a. This can lead to unethical choices in business.

B. Key Things to Consider in Developing a Code of Ethics (Table 2.6) C. Codes of ethics are formalized rules and standards that describe what a company expects of its employees.

1. Employees must have established ethics policies if employees are expected to determine acceptable conduct.

2. Codes and policies on ethics encourage the creation of an ethical culture in the company.

3. The enforcement of ethical codes and policies through rewards and punishments increases the acceptance of ethical standards by employees.

D. Whistleblowing is the act of an employee exposing an employer’s wrongdoing to outsiders such as the media or government regulatory agencies.

1. One of the most important components of an ethics program is a means through which employees can report observed misconduct anonymously.

2. More companies are establishing programs to encourage employees to report illegal or unethical practices internally.

Explain the four dimensions of social responsibility.

Key Terms:  The Nature of Social Responsibility  Corporate citizenship  Social Responsibility Issues A. Ethical Trends in Business 1. The current trend is to move away from legally based ethical programs to cultural or integrity-based programs that make ethics a core organizational value.

2. Effective business ethics programs are good for business performance.

3. Firms that develop higher levels of trust function more efficiently and effectively and avoid damaged company reputations and product images.

VII. The Nature of Social Responsibility A. The Pyramid of Social Responsibility (Figure 2.2) 1. Economic Responsibilities: Being profitable 2. Legal Responsibilities: Obeying the law (society’s codification of right and wrong); playing by the rules of the game 3. Ethical Responsibilities: Being ethical; doing what is right, just, and fair; avoiding harm 4. Voluntary Responsibilities: Being a “good corporate citizen”; contributing to the community and quality of life B. Corporate citizenship is the extent to which businesses meet the legal, ethical, economic, and voluntary responsibilities placed on them by their stakeholders.

1. Commitment to corporate citizenship indicates a strategic focus on fulfilling the social responsibilities expected of it by its stakeholders.

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2. Involves action and measurement of the extent to which a firm embraces corporate citizenship philosophy and following through by implementing appropriate initiatives.

C. The Arguments For and Against Social Responsibility (Table 2.7) Debate an organization’s social responsibilities to owners, employees, Key Terms: consumers, the environment, and the community.  Consumerism VIII. Social Responsibility Issues A. Managers consider social responsibility on a daily basis.

1. Among the many social issues that managers must consider are their firms’ relations with: a. Owners and stockholders b. Employees c. Consumers d. Environmental advocates e. Communities B. Relations with Owners and Stockholders 1. Maintain proper accounting procedures.

2. Provide investors with all relevant information.

3. Protect owner’s rights and investments.

C. Employee Relations 1. Provide a safe workplace and pay them adequately.

2. Provide equal opportunities for all employees.

3. Keep them informed of what is happening in the company.

4. Listen to their grievances and treat them fairly.

D. Consumer Relations 1. Consumerism involves the activities that independent individuals, groups, and organizations undertake to protect their rights as consumers. Consumer activities include writing letters to companies, lobbying government agencies, making public service announcements, and boycotting companies.

2. The right to be informed gives consumers the freedom to review complete information about a product before they buy it.

3. The right to choose ensures that consumers have access to a variety of products and services at competitive prices.

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Greenlid: Doing Well by Doing Good Brothers Morgan and Jackson Wyatt, founders of Greenlid, a socially responsible recycling and mosquito-trap company. After inventing the product, the brothers opted to use the crowdfunding site Kickstarter to determine if people would buy the product and received 14,000 pre-orders totaling $26,000. Others saw another use for the product as a mosquito trap and when the product was repositioned they raised an additional $55,000 through crowdfunding their BioTrap. a. Greenlid represents a new kind of company, a company that wants to make money, but also wants to be proactive in protecting Earth. Do you think all companies will eventually act proactively toward protecting our planet? Why or why not?

Students answers will vary. Students will likely answer that most companies will eventually do this but there will always be outliners. b. What do you think are some of the potential advantages and disadvantages of a proactive socially responsible approach?

Student answers will vary. Students should recognize that proactive companies are likely in the best position to respond to new laws and regulations and such companies may be viewed more favorably by the public and their employees. c. Greenlid’s most successful product is their compost bins. The BioTrap has been slower to develop as it requires substantial investment in testing and many underdeveloped countries with the most pressing mosquito problems lack the funds to make sizeable investments in traps. Based on this information, do you think Greenlid should abandon BioTraps and focus solely on its composting bins? Why or why not?

Student answers will vary. Some students will make the financial argument for focusing on compost bins while others will likely argue the BioTrap makes sense long term and fulfills the mission for the company. d. Greenlid relied on some non-traditional funding including both crowdfunding and an investment from angel investors on Dragons’ Den. Why do you think the founders pursued this type of investment? What are the advantages and disadvantages of non-traditional financing?

Student answers will vary. Students should note that crowdfunding helps verify a market for a product and appearing on the Dragon’s Den helps with publicity. Students may note that disadvantages include an investment in time in non-traditional financing may not always pay off.

Business Disruption: Are COVID Benefits Helping or Hurting the Economy?

1. Do you think the government was correct in extending their benefits even as unemployment rates declined? Why or why not?

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The Canada Economic Response Plan, a plan to help millions of Canadians survive the economic hardships of the pandemic. As employment levels have returned to pre-pandemic levels, some businesses are struggling to find employees. Proponents of continuing the benefits note that jobs have not returned as quickly in some industries and regions.

2. Do you think it's ethical for someone to continue to collect government benefits if they can find a job? Why or why not?

Students answers will vary. What is ethical or unethical often depends on what stakeholder group you belong to.

3. Many social advocates have called for a drastic increase of minimum wage to a living wage.

Do you think this is a good idea? Why? What are some of the potential advantages and disadvantages to society and businesses?

Social advocates have noted that finding employees would not be so problematic if firms were paying a living wage and not minimum wage as many do.

Consider Ethics and Social Responsibility: Lululemon vs. Peloton 1. Based on the facts in the case, do you think other firms will be less likely to partner with Lululemon or Peloton? Why or why not?

After the legal issues are settled, the ethical issues will remain and firms might be hesitant to partner with either of them.

2. Part of Peloton's arguments that they have done nothing wrong is their claim that all athletic clothing companies make similar products. Do you think this is valid defense to Lululemon's claims? Why or why not?

Lululemon is countersuing, stating Peloton has not invested the time or research into crafting its products and are simply copying Lululemon styles, which Lululemon has patented. Is similarity of products a justifiable defense?

3. Which business, Peloton or Lululemon is acting ethically? Why? As discussed in the text, what is ethical or unethical often depends on what stakeholder group you belong to.

4. Use Internet resources to determine the current state of the lawsuit.

Students have to provide research.

Consider Ethics and Social Responsibility: Ticketmaster 1. Do you think Ticketmaster's business is ethical? Why or why not?

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Student answers will vary. Some students may note the company is not doing anything illegal.

Other students may find their high fees, especially hidden fees and their work with scalpers as ethically questionable behaviour.

2. Ticket brokers will often point out that what they are doing amounts to capitalism. They are purchasing a product, which in this case is an event ticket, and reselling the product at a higher price. If a market doesn’t exist they will lose money. Do you think ticket brokers are ethical or unethical? Would you buy a ticket from a broker?

Student answers will vary.

3. Many artists continue to be happy to work with Ticketmaster as some of Ticketmaster’s sales mechanisms allow them to make more money from their shows. For example, Ticketmaster can raise the price of tickets as demand increases, increasing an artist’s revenue. Do you think the artists are ethical or unethical for using Ticketmaster?

Student answers will vary.

4. Do you think governments should intervene in the ticket sales market? Why or why not?

What solutions would you propose?

Student answers will vary. Students will likely identify high hidden fees as one area where the government should perhaps step in and ensure transparency.

Consider Ethics and Social Responsibility: WE Charity Scandal 1. What do you see as some of the advantages and disadvantages of the proposed CSSG program?

As part of the government‘s plan to assist students negatively impacted by the pandemic, the Canada Student Service Grant (CSSG) paid students who could not find a summer job could earn money by volunteering.

2. Given the potential benefits to students were you surprised to read that the opposition was quick to question the program? Why or Why not?

The administration of the contract was awarded to WE Charity and not through a normal competitive bidding process. Opposition leaders quickly pointed out that both Trudeau and then Finance Minister Bill Morneau had ties to the organization.

3. Were you surprised that Trudeau canceled the program? Why? Would you like to see a similar national volunteered program established? Why or why not?

Student answers will vary.

Business Disruption: Restaurant delivery services have seen COVID-19 sales soar as they continue to take a huge bite out of restaurant profits 03-40 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Do you think food delivery services are running an ethical business? Why or why not?

Students should consider that most delivery services charge restaurants 30 percent of the sales price to deliver the food, and most restaurants make less than 30 percent per order, so they are losing money on all deliveries. Also many delivery people make less than minimum wage.

2. Why do you think restaurants are participating in the food delivery service? What are some potential benefits?

Research with consumers indicates that ordering online and through apps is a trend that will continue. COVID-19 does not appear to be going away, and even though lockdowns are becoming rare, people enjoy the added safety and comfort of eating from home.

3. Do you think people who deliver food are employees and should be treated as such, or do you think they are independent contractors? Why? Delivery people have been complaining that they are not treated as employees. For example, delivery people do not receive minimum wage, receive no overtime pay, do not have access to benefits such as Workers Compensation if they are hurt on the job, and so forth.

4. Some restaurants have been caught charging higher prices for delivered food. Do you think the restaurant owners are acting ethically when they do this? Why or why not?

Student answers will vary. Students will likely identify high hidden fees as one area where the government should perhaps step in and ensure transparency.

Responding to Business Challenges: Indigenous Entrepreneur Jeff Ward: Successful Management through a Social Responsible Lens 1. What do you see as some of the strengths of Jeff Ward's approach to business?

Jeff Ward is a social and serial entrepreneur who is spiritual and community-driven. Students can discuss that his strengths are derived from his values, which are based on the 7 Grandfather Teachings from Anishinaabe culture, including Humility, Truth, Honesty, Wisdom, Respect, Courage, 2. Why do you think it's important that Animikii attract like minded employees?

Animikii’s employees want to work in an environment that embraces social enterprise and social responsibility.

3. Previous to reading the case, have you heard about B-Corp certification. The process to be BCorp certified is a rigorous one. Do you think its a worthwhile investment for businesses?

Why or Why not? Students may want to use Internet resources to read about the B-Corp approval process and some of the advantageous and disadvantageous of the designation.

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In order to be a certified B-Corp a company must meet the highest standard for verified social and environmental performance. The process evaluates a company's operations and it's impact on employees, environment and customers.

So You Want a Job in Business Ethics and Social Responsibility What has helped drive the increasing awareness of the importance of business ethics and social responsibility?

Under pressure from employees and consumers, businesses understand the importance of ethical and social responsibility issues. They recognize that being socially responsible and ethical is good for the business’s bottom line, as well as for its reputation. As the trend continues to grow, more and more businesses are likely to employ individuals who are experts in these areas.

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

Ask the students for volunteers to discuss the industry they are considering for their business plan.

Probe them to identify any environmental violations, product defects, recalls, and so on that they need to be aware of as they proceed to gather information on this industry.

See for Yourself Case: Hershey Finds a Sweet Spot in Sustainability With more than $8.1 billion in annual sales, the Hershey Company is one of the world’s largest producers of chocolate and candy products. Hershey’s products are sold in more than 70 countries and include Hershey’s Kisses and Hershey’s Milk Chocolate Bars, as well as brands such as Reese’s, Whoppers, Almond Joy, and Twizzlers. Although Hershey strives to be a model company and has several philanthropic, social, and environmental programs, the company has struggled with ethical problems related to labor issues.

The company incorporates its values into its programs and initiatives. Hershey uses its value chain to categorize its social responsibility activities into four groups: Shared Futures, Shared Planet, Shared Business, and Shared Communities. 1. Hershey’s Shared Futures pillar focuses on helping children succeed through education and nutrition. 2. Maintaining the environment is important to Hershey, and it is taking many steps to reduce its impact on the environment under its Shared Planet pillar. 3.

Maintaining the environment is important to Hershey, and it is taking many steps to reduce its impact on the environment under its Shared Planet pillar. 4. Hershey’s idea of Shared Communities begins with employee engagement and volunteerism and extends to investing in the communities in which Hershey operates.

Although The Hershey Company strives to engage in ethical and responsible behaviour, the realities of the cocoa industry present several ethical challenges related to the fair and safe treatment of workers, especially children. The global cocoa market is currently supplied mostly by lesser 03-42 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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developed countries, with 70% supplied by Africa (Ivory Coast, Ghana, Nigeria, and Cameroon). This has brought about the booming business of child labor, slavery, and human trafficking across African borders.

1. How does the Hershey Company support communities in Africa?

Hershey provides ViVi, a fortified nutritional supplement, to students in Ghana to improve nutrition as well as increase school attendance. A study by the University of Ghana showed that anemia rates decreased and attendance rates improved in the 57,700 children that received ViVi daily. Hershey introduced a human rights policy in 2019 as a sign of its commitment to human rights issues in the supply chain such as child labor, women’s rights and empowerment, living wage and income, and forced labor.

2. What ethical challenges does the cocoa industry present?

Ethical challenges include sustainable cocoa farming, child labor, slavery, and human trafficking.

3. What stakeholders does the Hershey company prioritize?

Hershey stakeholders are the “people and the planet”. Its program focuses on four groups: Shared Futures, Shared Planet, Shared Business, and Shared Communities. These programs focus on employees, children, the environment, and the communities in which Hershey operates.

Team Exercise Sam Walton, founder of Walmart, had an early strategy for growing his business related to pricing.

The “Opening Price Point” strategy used by Walton involved offering the introductory product in a product line at the lowest point in the market. For example, a minimally equipped microwave oven would sell for less than anyone else in town could sell the same unit. The strategy was that if consumers saw a product, such as the microwave, and saw it as a good value, they would assume that all the microwaves were good values. Walton also noted that most people don’t buy the entrylevel product; they want more features and capabilities and often trade up.

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

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

Strategy as unethical: Walmart is using a penetration pricing strategy to drive competitors out of business. Its entire strategy is to draw consumers away from the competition into its stores and then upsell them to higher priced products. Although this might not be illegal as long as the lower 03-43 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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priced products are available, this practice is unfair to local businesses that cannot compete and is an underhanded way of persuading consumers to come to its stores.

SUPPLEMENTAL TEACHING RESOURCES Check Your Progress 1. Define business ethics. Who determines whether a business activity is ethical? Is unethical conduct always illegal?

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

2. Distinguish between ethics and social responsibility.

Ethics relates to an individual’s values and standards and the decisions they make. Social responsibility concerns the impact of a business’s activities on society.

3. Why has ethics become so important in business?

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

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

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

5. What is a code of ethics? How can one reduce unethical behaviour in business?

A code of ethics is a set of formalized rules and standards that describes what a company expects of its employees. One can reduce unethical behaviour in business by developing and promoting a code of ethics, and by using different methods such as training, group discussions, or corporate communications.

6. List and discuss the arguments for and against social responsibility by business (Table 2.9). Can you think of additional arguments (for or against)?

Arguments for social responsibility include (1) business helped create problems and should help to solve them; (2) business has the financial and technical resources to help solve problems; (3) 03-44 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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as a member of society, business should do its fair share to help others; (4) social responsibility can help prevent increased government regulation; and (5) social responsibility helps to ensure economic survival. Arguments against social responsibility include (1) social responsibility detracts from the profit-making objectives of business; (2) participation in social responsibility programs gives business power at the expense of other segments of society; (3) business may not have the expertise to solve social problems; and (4) social problems are the responsibility of government agencies.

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

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

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

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

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

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

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

Get Involved 1. Discuss some recent examples of businesses engaging in unethical practices. Classify these practices as issues of conflict of interest, fairness and honesty, communications, or business relationships. Why do you think the businesses chose to behave unethically? What actions might the businesses have taken?

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

Sample student answer: The Environmental Protection Agency discovered that Volkswagen had been installing defeat devices in its diesel vehicles to fool regulators during emissions testing.

The defeat device was able to detect when the vehicle was being tested for emissions and caused the vehicle to operate at less than maximum capacity so it would pass the test. In reality, on the road the vehicles gave off many times the allowable limit of emissions. This caused a massive recall for VW, a major loss in reputation, and likely fines from governments that had been deceived by VW.

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Potential ethical issues include fairness and honesty. Employees at VW purposefully installed the defeat devices to fool regulators, a dishonest activity used to increase sales of its vehicles. It also was dishonest with dealers and consumers. VW released advertising promoting the environmental benefits of its vehicles, when in reality its emissions far surpassed accepted standards. There was likely insufficient communication inside the company since the misconduct went on for so long unchecked. VW also neglected its legal and environmental responsibilities.

Its use of defeat devices to fool regulators violated laws. Additionally, it neglected its responsibilities to the environment by developing vehicles that heavily polluted the environment with its high emissions. In this example, students might assume that certain employees at VW were more concerned with short-term gains than long-term viability. Some proposed actions would have been to spend longer periods of time developing diesel vehicles that did meet emissions standards. Also, those who found out about the misconduct could have become whistleblowers and alerted authorities to the deception before the situation worsened.

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

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

3. Find some examples of socially responsible businesses in newspapers or business journals.

Explain why you believe their actions are socially responsible. Why do you think the companies chose to act as they did?

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

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

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

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

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

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

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

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

But which is most correct? In a few mini-cases, none of the posed answers are correct. But one will be the best selection from the options listed.

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

Materials 

Four mini-case cards (in-textbook exercise)



Four each A-B-C-D answer flags (instructor can use 3 × 5 index cards where the answer letters (A-B-C-D) are written one per card)

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

For each mini-case, the group should be allowed 5 min for discussion among themselves. At the end of 5 min, the leader will ask each group spokesperson to hold up an answer flag pertaining to the group’s selected answer. The answers will be recorded by the instructor. Each group will then be asked to explain their answer in 1 min. Based on the answer flag presented, each group will be awarded points according to the answers given below. (You may want the groups to keep track of their own scores or you may wish to photocopy and use the score sheet at the end of this section.)

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

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Answers, Point Values, and Rationale CASE NO.

ANSWER A

POINTS 0

B

5

C

10

D

-5

4

RATIONALE May solve the workload problem if you can physically and mentally carry this double workload over a long period. Does not solve the ethical issue, so no credit.

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

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

Pushes the problem-solving onto someone else. The problem is between you, your supervisor, and your colleague. Solve it there.

CASE NO. ANSWER POINTS A 5 B 5 7 C 0 D 10

RATIONALE May do some good.

May do some good.

Too confrontational.

Gets the right people involved in solving the problem.

CASE NO.

RATIONALE How many other company policies do you also ignore?

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

In that case you deserve −10 points.

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

ANSWER A

POINTS −10

B

5

C D

−10 10

ANSWER A B C D

POINTS −10 0 10 5

36

CASE NO.

40

RATIONALE That makes you also guilty of theft.

He probably knows that.

Ethics will have it investigated.

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

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

CASE NO. 4

7

36

40

ANSWER A B C D A B C D A B C D A B C D

POINTS 0 5 10 −5 5 5 0 10 −10 5 −10 10 −10 0 10 5

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

Solve the Dilemma: Customer Privacy 

Checkers Pizza was one of the first to offer home delivery service, with overwhelming success.



Major pizza chains soon followed suit, taking away Checkers’s competitive edge.



Checkers’s founder, Jon Barnard, needed a new gimmick to beat the competition.



Developed a computerized information database that would make Checkers the most efficient competitor and provide insight into consumer buying behavior.



Telephone customers were asked their phone number, if they had ordered before, and their address and previous order information came up on the computer screen.



The new system was successful: - After 3 months, Barnard decided to give an award to the family that ate the most Checkers pizza.

- As Barnard began to plan for the event, however, he began to think that maybe the family might not want all the attention and publicity.

1. What are some of the ethical issues in giving customers an award for consumption behaviour without notifying them first?

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In such a situation, the consumption behaviour of the rewarded customer is communicated to the public. It violates the right of the consumer to be informed. The company should know what the effect of this award might have on the winner: negative consequences may be as likely as positive ones.

2. Do you see this as a potential violation of privacy? Explain.

The publicity given to the customer violates privacy: it reveals to the public some of their behaviours (here, pizza eating habits). However, the family might not mind the publicity or feel like it violates their privacy. Students might have different opinions regarding the seriousness of this issue.

3. How would you handle the situation if you were Barnard?

Barnard should contact the family concerned and inform them that an award rewarding Checkers’ best customer may be given to them if the family accepts the award. The program of the award (especially the news story associated with it) should be described in detail. If the family refuses the award, the next best customer could be contacted.

Recycling: A Dilemma for Business Firms The amount of consumer and industrial waste has been increasing regularly. Ecological authorities frequently tout recycling as a means of slowing down waste and the need for landfill space.

Biodegradable products, those which decompose, are also recommended.

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

Similarly, Recycline offers toothbrushes and other household and personal grooming products made from recycled Stonyfield Farm yogurt containers.

Many large retailers offer recycling centers for paper, plastics, and aluminum. Best Buy even offers electronics recycling at many of its stores. Large grocery chains frequently give consumers discounts on their purchases if they bring their own bags with them. While recycling has become increasingly widespread, recycling centers can be problematic for two reasons: (1) the lack of a market for recycled products in some areas and (2) the cost of maintaining the recycling centers.

For example, one manager of a major retailing firm pointed out that people used the recycling bins to dispose of all kinds of unwanted trash and garbage, disregarding the specific types of materials to be placed in the bins. Every morning, employees had to clean the parking lot of debris from the recycling bins. People would toss in glass, metal, cloth, and garbage in plastic sacks—materials not to be deposited in the recycling bins.

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

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

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

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

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

Sources: Kristina Dell, “The Promise and Pitfalls of Bioplastic,” Time, May 3, 2010, http://content.time.com/time/magazine/article/0,9171,1983894,00.html; “The Home Depot and the Environment,” Home Depot, Inc. corporate website, http://corporate.homedepot.com/sites/default/files/image_gallery/The%20Home%20Depot%20an d%20the%20Environment%202018.pdf; Jacquelyn Ottman, “A Little Creativity Could Lead to a Big Advantage,” Marketing News, March 27, 1995, p. 11; Kevin Kelly, “It Really Can Pay to Clean Up Your Act,” Business Week, November 7, 1994, p. 141; Johanna Powell, “Companies Get Their Due for Public Service,” The Financial Post, November 12, 1994, p. s15; Seventh Generation website, https://www.seventhgeneration.com.

1. Why has recycling become more popular and widespread?

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

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

Recycling can be expensive because people must be hired to sort the recycled goods. There must also be a market for recyclables. In recessionary periods, oftentimes it becomes too 03-51 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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expensive to continue to offer recycling programs because companies seek to cut back on extra expenses. Additionally, some cities and towns have found that recycling programs can be expensive to maintain.

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

Some companies are turning to energy saving measures like using renewable energy. They are also looking toward cutting-edge materials to help reduce waste that ends up in landfills.

Biodegradable plastics in packaging are relatively new and, while they are not in widespread use, are growing in acceptance and popularity.

CONNECT ACTIVITIES Cocoa Exchange Values Social Responsibility Learning Objective: 2-1: Describe the importance of business ethics and social responsibility.

Activity Summary: The Cocoa Exchange is a direct-to-consumer subsidiary of Mars Inc., the global manufacturer of confectionery and other food products. Specifically, the Cocoa Exchange is a marketplace for its salespeople to connect with chocolate-loving consumers, offering tasty chocolate and sugar-based products. As a nature-related business, operating in an ethically and in a socially responsible manner is important for leadership of the company.

How to Use Activity: After watching the video, divide the class into four groups. Have each group spend 15 min responding to a specific prompt: 1. What behaviours contribute to an ethical business?

2. What behaviours detract from an ethical business?

3. What behaviours contribute to a business being socially responsible?

4. What behaviours detract from a business being socially responsible?

5. Then, invite each group to share their responses with the class.

Class Discussion: What are the benefits of working in an organization which is ethical and socially responsible? How would you define ethical behaviour? What are the positive benefits of being socially responsible? Are there any drawbacks?

The Dilemma of Cross-Selling Insurance Policies Learning Objective: 2-5: Evaluate an organization’s social responsibilities to owners, employees, consumers, the environment, and the community.

Activity Summary: Cross-selling is a common sales technique that can benefit a salesperson’s book of business when done correctly. Conversely, it can also damage their (and their company’s) creditability when done with malicious intent. In this case, students read about a common scenario in which they understand and apply an ethical dilemma in cross-selling.

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How to Use Activity: Today’s students often come to the classroom with a variety of work experiences. After assigning this activity as a homework assignment, facilitate a discussion around the term ethical dilemma. Invite students to share their own experiences; it is likely that they will have observed or at least been made aware of similar examples supporting the term.

Class Discussion: Have you ever observed, or been a part of an ethical dilemma? What did you do?

What news headlines have you seen recently relating to social responsibility or workplace ethics?

(Note to Professor: Examples include Enron, Facebook, and Online Privacy.)

Bombas’ Business Model—Buy One—Give One Learning Objective: 2-4: Explain the four dimensions of social responsibility.

Activity Summary: Many social issues managers have to consider revolve around relations with stakeholders, including owners, stockholders, employees, consumers, regulators, communities, and environmental issues. While there are many arguments for and against social responsibility, many studies show that social responsibility is associated with improved business performance. Students will read the Bombas case and demonstrate their understanding of social responsibility and the role it plays in how consumers’ decisions.

Class Discussion: Focus the discussion on how Bombas’ business model and its slogan of “Buy One Give One” is an integral part of its philosophy and has impacted its success.

BONUS TEACHING RESOURCES Additional Discussion Questions 1. Why is it important to act ethically?

Answers may vary. Instructors should reinforce that ethical conduct builds trust among individuals and in business relationships this validates and promotes confidence about fair treatment.

2. List and describe some of the major ethical issues that are common in organizations.

Common ethical issues include the following: Abusive and Intimidating Behaviour - Abusive or intimidating behaviour is the most common ethical problem for employees. The concepts can mean anything from physical threats, false accusations, being annoying, profanity, insults, yelling, harshness, or ignoring someone, to unreasonableness Conflict of Interest - A conflict of interest exists when a person must choose whether to advance his or her own personal interests or those of others.

Fairness and Honesty - Fairness and honesty are at the heart of business ethics and relate to the general values of decision makers. At a minimum, businesspersons are expected to follow all applicable laws and regulations. But beyond obeying the law, they are expected not to harm customers, employees, clients, or competitors knowingly through deception, misrepresentation, coercion, or discrimination.

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Communications - Communications is another area in which ethical concerns may arise. False and misleading advertising, as well as deceptive personal-selling tactics, anger consumers and can lead to the failure of a business. Truthfulness about product safety and quality are also important to consumers.

Business Relationships - The behaviour of businesspersons toward customers, suppliers, and others in their workplace may also generate ethical concerns. Ethical behaviour within a business involves keeping company secrets, meeting obligations and responsibilities, and avoiding undue pressure that may force others to act unethically.

Plagiarism - taking someone else’s work and presenting it as your own without mentioning the source is another ethical issue.

3. Each year major newspapers and trade periodicals review ethics in business. Ask students to use Internet resources to find some of the more recent ethical issues being discussed in the news and have students present a synopsis of the case to the class or submit the information in writing. Students should identify the major people involved in the case, the ethical issue at hand and the result to date.

Answers may vary Controversial Issue Would You Be the One to Blow the Whistle?

Ethics is concerned not only with an individual’s conduct but also with how an individual responds to the actions of others. An employee who takes action upon observing improper conduct by a fellow employee is often referred to as a whistleblower. Having read of the harassment that most often comes to a whistleblower, however, a person will probably think long and carefully before blowing the whistle. The case below is a fictitious example used to discuss the ethical problems for employees.

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

One day while talking to a sales representative of one of his firm’s suppliers, Adam discovered that Martin Cooper and his wife had received a free trip to the Bahamas, with all air, hotel, and meal expenses paid by the sales representative’s company. Adam knew that Martin had not won the trip in a drawing or sweepstakes, and he realized it was an “under the table” gift to Martin for buying the sales representative’s products. Accepting such a gift from a supplier was strictly against company policy. Adam likes Martin, and Adam has no evidence that Martin had given special consideration to the supplier in selecting the supplier’s products. Also, the supplier’s products have met or exceeded all the engineering specifications. Adam rationalizes that most likely the trip was just an expression of appreciation from the supplier, but he still agonizes about what he should do.

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Discussion Questions 1. Was Martin Cooper’s free trip an example of unethical business behavior?

While answers may in fact vary for this the answer should be yes.

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

Answers may vary but Adam should report the trip.

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

Answers may vary. By not reporting the incident students should recognize that Adam is breaching ethics.

Term Paper or Project Topic These topics may be assigned as individual or collaborative projects: 1. Advantages and Disadvantages of Social Responsibility Programs for Business 2. A Study of Unethical Business Practices 3. A Survey of Social Responsibility Programs in Corporations (can do a questionnaire survey of local firms) 4. Environmental Issues and Their Solutions Guest Speaker Suggestions 1. A professor or teacher to talk about ethics in business.

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

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

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

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

Teaching Suggestions As indicated in “Teaching Suggestions” for Chapter 1, instructors may wish to vary the daily organization of the lesson. Varying the sequence of activities adds variety to class presentation.

At the beginning of the chapter in the textbook and in this Instructor’s Manual, objectives are provided. Many instructors write the objectives on the chalkboard or on an overhead at the beginning of the class session and then at the end of the session check off each objective to determine if all the objectives have been achieved. Educational research indicates students learn 03-55 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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more effectively when there is a summarization or review of the textbook content at the end of class sessions.

10. As a “writing to learn” exercise, allow approximately 5 min for students to write their thoughts or summary on this topic: What is the importance of ethics and social responsibility in business today?

The writing exercise can be done with or without the use of the textbook. The purpose of the exercise is for students to consider the topic and apply the knowledge learned in the reading assignment. Research indicates that the act or process of writing helps students to retain information. Feedback may be done by calling on a few students at random to read their writing. Remember, not all feedback need be for a letter grade; instead, the feedback may be treated as an activity to enhance learning. For large classes, an alternative to calling on individual students is to break into small groups and have them share their writing within the small group.

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

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

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

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

Chapter 3: Business in a Borderless World SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Spotify: Streaming Everywhere Going Green: Measuring "Green" 03-56 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Responding to Business Challenges: Harley-Davidson Gets Up to Speed In International Markets Entrepreneurship in Action: Kenya Counts on Mobile Banking Technology and the Economy: Data Privacy Concerns Take the World by Storm Business Disruption: Chinese Airlines Soaring to Great Heights So You Want a Job in Global Business END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Business in a Borderless World See for Yourself Case: Why McDonald’s Fast Food had Slow Growth in Vietnam Team Exercise SUPPLEMENTAL TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Global Awareness Solve the Dilemma: Global Expansion or Business as Usual?

CONNECT ACTIVITIES India’s Comparative Advantage End of Chapter Video Case: Electra Bikes ConveyerPape: Supplying Conveyer Belts Internationally BONUS TEACHING RESOURCES Additional Discussion Questions Controversial Issue Controversial Issue: High Dollar, Low Dollar—Which Is Better?

Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions SUMMARY In this chapter, we explore business in this exciting global marketplace. First, we look at the nature of international business, including barriers and promoters of trade across international boundaries. Next, we consider the levels of organizational involvement in international business. Finally, we briefly discuss strategies for trading across national borders.

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LO 3-1

Explore some of the factors within the international trade environment that influence business.

LO 3-2

Assess some of the economic, ethical, legal, political, social, cultural, and technological barriers to international business.

LO 3-3

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

LO 3-4

Summarize the different levels of organizational involvement in international trade.

LO 3-5

Contrast two basic strategies used in international business.

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KEY TERMS AND DEFINITIONS absolute advantage

A monopoly that exists when a country is the only source of an item, the only producer of an item, or the most efficient producer of an item.

Asia-Pacific Economic Cooperation (APEC)

An international trade alliance that promotes open trade and economic and technical cooperation among member nations.

Association of Southeast Asian Nations (ASEAN)

A trade alliance that promotes trade and economic integration among member nations in Southeast Asia.

balance of payments

The difference between the flow of money into and out of a country.

balance of trade

The difference in value between a nation’s exports and its imports.

cartel

A group of firms or nations that agrees to act as a monopoly and not compete with each other, in order to generate a competitive advantage in world markets.

comparative advantage

The basis of most international trade, when a country specializes in products that it can supply more efficiently or at a lower cost than it can produce other items.

contract manufacturing

The hiring of a foreign company to produce a specified volume of the initiating company’s product to specification; the final product carries the domestic firm’s name.

countertrade agreements

Foreign trade agreements that involve bartering products for other products instead of for currency.

direct investment

The ownership of overseas facilities.

dumping

The act of a country or business selling products at less than what it costs to produce them.

embargo

A prohibition on trade in a specific product.

European Union (EU)

A union of European nations established in 1958 to promote trade among its members; one of the largest single markets today.

exchange controls

Regulations that restrict the amount of currency that can be bought or sold.

exchange rate

The ratio at which one nation’s currency can be exchanged for another nation’s currency.

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exporting

The sale of goods and services to foreign markets.

franchising

A form of licensing in which a company—the franchiser—agrees to provide a franchisee a name, logo, methods of operation, advertising, products, and other elements associated with a franchiser’s business in return for a financial commitment and the agreement to conduct business in accordance with the franchiser’s standard of operations.

General Agreement on Tariffs A trade agreement, originally signed by 23 nations in 1947, that provided a forum for tariff negotiations and a place where international trade and Trade (GATT) problems could be discussed and resolved. global strategy (globalization) A strategy that involves standardizing products (and as much as possible, their promotion and distribution) for the whole world, as if it were a single entity. import tariff

A tax levied by a nation on goods imported into the country.

Importing

The purchase of goods and services from foreign sources.

Infrastructure

The physical facilities that support a country’s economic activities, such as railroads, highways, ports, airfields, utilities and power plants, schools, hospitals, communication systems, and commercial distribution systems.

international business

The buying, selling, and trading of goods and services across national boundaries.

International Monetary Fund (IMF)

Organization established in 1947 to promote trade among member nations by eliminating trade barriers and fostering financial cooperation.

joint venture

A partnership established for a specific project or for a limited time.

licensing

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

multinational corporation (MNC)

A corporation that operates on a worldwide scale, without significant ties to any one nation or region.

multinational strategy

A plan, used by international companies, that involves customizing products, promotion, and distribution according to cultural, technological, regional, and national differences.

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offshoring

The relocation of business processes by a company or subsidiary to another country. Offshoring is different than outsourcing because the company retains control of the offshored processes.

outsourcing

The transferring of manufacturing or other tasks—such as data processing—to countries where labour and supplies are less expensive.

quota

A restriction on the number of units of a particular product that can be imported into a country.

strategic alliance

A partnership formed to create competitive advantage on a worldwide basis.

trade deficit

A nation’s negative balance of trade, which exists when that country imports more products than it exports.

trade surplus

A nation’s positive balance of trade, which exists when that country exports more products than it imports.

trading company

A firm that buys goods in one country and sells them to buyers in another country.

United States–Mexico– Canada Agreement (USMCA)

Agreement that eliminates most tariffs and trade restrictions on agricultural and manufactured products to encourage trade among Canada, the United States, and Mexico.

World Bank

An organization established by the industrialized nations in 1946 to loan money to underdeveloped and developing countries; formally known as the International Bank for Reconstruction and Development.

World Trade Organization (WTO)

International organization dealing with the rules of trade between nations.

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CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, and KEY TERMS learners will need to take away from the course.

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Explore some of the factors within the international trade environment that influence business.  Introduction  The Role of International Business  Why Nations Trade  Trade between Countries  Balance of Trade

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

Lecture Outline and Notes: I. The Role of International Business A. International business refers to the buying, selling, and trading of goods and services across national boundaries. o Falling political barriers and new technology are making it possible for more companies to sell their products in new markets. a. For example, brands such as Starbucks’s are becoming increasingly popular in places like China. o Most of the world’s population and two-thirds of its total purchasing power are outside Canada. o Global marketing requires balancing global brands with the need of local consumers.

B. Why Nations Trade 1. Nations and businesses engage in trade: a. To obtain raw materials and goods that might otherwise be unavailable to them or that are available elsewhere at a lower price. b. To sell surplus materials or goods to acquire funds to buy the goods, services, and ideas its people need 2. An absolute advantage exists when a country is the only source of an item, the only producer of an item, or the most efficient producer of an item.

3. A comparative advantage occurs when a country specializes in products that it can supply more efficiently or at a lower cost than it can produce other items.

4. As a result of some countries gaining a comparative advantage over Canada in the provision of some services, many companies are outsourcing, or transferring manufacturing and other tasks to countries where human resources, labour, and supplies are less expensive. a. Outsourcing has become a controversial practice in Canada because many jobs have moved overseas, where those tasks can be accomplished for lower costs.

C. Trade between Countries 1. Exporting is the sale of goods and services to foreign markets.

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2. Importing is the purchase of goods and services from foreign sources.

D. Balance of Trade 1. A nation’s balance of trade is the difference in value between its exports and imports. a. A trade deficit—a negative balance of trade—is potentially harmful because it can mean the failure of businesses, the loss of jobs, and a lowered standard of living. i. Canada has a trade deficit (Table3.1). ii. Canada has a trade deficit with China; although its exports to China have been increasing, it has not been sufficient enough to keep up with the increase in imports from China (Table3.2). b. When a nation exports more goods than it imports, it has a favorable balance of trade or trade surplus.

2. The balance of payments is the difference between the flow of money into and out of a country (Table 3.2). a. A country’s balance of trade, foreign investments, foreign aid, loans, military expenditures, and money spent by tourists comprise its balance of payments. b. A country with a trade surplus generally has a favorable balance of payments because it is receiving more money from trade with foreign countries than it is paying out.

Assess some of the economic, ethical, legal, political, social, cultural, and Key Terms: technological barriers to international business.  Infrastructure  International Trade Barriers  Exchange rate  Economic Barriers  Import tariff  Ethical, Legal, and Political Barriers  Exchange controls  Social and Cultural Barriers  Quota  Technological Barriers  Embargo  Dumping  Cartel II. International Trade Barriers A. Completely free international trade seldom exists, and there are numerous challenges to conducting business across international borders.

B. Economic Barriers 1. Economic Development a. When considering doing business abroad, businesspeople need to recognize that they cannot take for granted that other countries offer the same things as found in Canada. i. Industrialized nations are economically advanced countries such as Canada, the United States, Japan, and Great Britain. ii. Less developed countries (LDCs) are less economically advanced than industrialized nations and are characterized by low per capita income. iii. LDCs are a huge and growing market for many products, and many companies are realizing the huge profit potential there. b. A country’s level of development is determined by its infrastructure, the physical facilities that support its economic activities.

2. Exchange Rates a. The ratio at which one nation’s currency can be exchanged for another nation’s currency is the exchange rate.

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i. Influences the cost of imports and exports. b. Devaluation occurs when a government decreases the value of its currency in relation to other currencies. ii. Encourages other nations to buy more of a country’s goods and services. c. Reevaluation increases the value of a currency relative to other currencies. It occurs rarely.

C. Ethical, Legal, and Political Barriers 1. A company that enters the international marketplace must contend with potentially complex relationships among the different laws of its own nation, international laws, and the laws of the nation with which it will be trading; various trade restrictions imposed on international trade; changing political climates; and different ethical values.

2. Laws and Regulations a. Canada has many laws governing activities of firms engaged in international trade. b. Laws in other countries differ from Canadian laws and businesspeople need to be aware of the differences before conducting business there. i. Some countries have laws limiting the amount of local currency that can be taken out of the country and the amount of currency that can be brought in. ii. Although countries such as China and Vietnam have and enforce their copyright laws, controlling the amount of counterfeit products sold in their countries is very challenging.

3. Tariffs and Trade Regulations a. Tariffs and other trade restrictions are part of a country’s legal structure. b. An import tariff is a tax levied by a nation on imported goods. i. A fixed tariff is a specific amount of money levied on each unit of product brought into the country. ii. An ad valorem tariff is based on the value of the item. iii. Countries sometimes levy tariffs for political reasons. iv. Import tariffs are more commonly employed to protect domestic products by raising the price of imported ones. v. Critics of tariffs argue that their use inhibits free trade and competition; others believe they are necessary to keep domestic wages high and unemployment low. c. Exchange controls restrict the amount of currency that can be bought or sold. d. A quota limits the number of units of a particular product that can be imported into a country. e. An embargo prohibits trade in a specific good. It may be established for political, economic, health, or religious reasons. f. A common reason for setting quotas or tariffs is to prohibit dumping, the selling of products for less than it costs to produce them. i. A company may dump its products because it permits quick entry into a market; the domestic market for the firm’s product is too small to support an efficient level of production; or because technologically obsolete products are no longer salable in the country of origin. ii. Dumping is difficult to prove, but even the suspicion of dumping may lead to the imposition of tariffs or other trade controls, sometimes prompting trade 03-64 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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wars.

4. Political Barriers a. Businesses must consider the political instability of the countries where they want to set up operations: Political unrest may create a hostile or even dangerous environment for business. b. Political considerations may lead to the formation of a cartel, a group of firms or nations that agree to act as a monopoly and not compete with each other, to create a competitive advantage in world markets. i. OPEC is an example of a cartel.

D. Social and Cultural Barriers 1. Most businesspeople engaged in international trade underestimate the importance of social and cultural differences. (Table 3.3) 2. Differences in spoken and written language may create problems for businesses; even when words are correctly translated, cultural differences may affect the meaning of translated words.

3. Differences in body language and personal space may generate uncomfortable feelings and misunderstanding when businesspeople of different countries negotiate with each other. a. Body language is nonverbal, usually unconscious communication through gestures, posture, and facial expression. b. Personal space is the distance at which one person feels comfortable talking to another. c. Acceptable gestures also vary from culture to culture.

4. Differences in family roles also influence business activities, especially with regard to marketing and advertising to children.

5. The people of other nations often have a different perception of the importance of time.

6. Companies engaged in foreign trade must observe the national and religious holidays and local customs of the host country.

7. Unlike Canada, most countries use the metric system for measurement.

8. Problems linked to cultural and social differences may be minimized through research.

E. Technological Barriers 1. Lack of technological infrastructures can be viewed as a barrier or as an opportunity. a. For example, lack of infrastructure for landlines in places like Africa are creating opportunities for cell phone companies.

2. Changes in technology also bring new challenges and competition.

Specify some of the agreements, alliances, and organizations that may Key Terms: encourage trade across international boundaries.  General Agreement  Trade Agreements, Alliances, and Organizations on Tariffs and trade (GATT)  General Agreement on Tariffs and Trade  World Trade  The North American Free Trade Agreement Organization (WTO)  The European Union  The United States–  Asia-Pacific Economic Cooperation Mexico–Canada  Association of Southeast Asian Nations Agreement  World Bank

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Instructor’s Manual—Chapter 3 

International Monetary Fund

Ferrell et al: Business: A Changing World 8ce  European Union (EU)  Asia-Pacific Economic Cooperation (APEC)  Association of Southeast Asian Nations (ASEAN)  World Bank  International Monetary Fund (IMF)

III. Trade Agreements, Alliances, and Organizations A. General Agreement on Tariffs and Trade (GATT) 1. The General Trade Agreement on Tariffs and Trade (GATT), originally signed by 23 nations, provided a forum for tariff negotiations and discussions of international trade problems. More than 100 nations abide by its rules.

2. The World Trade Organization, an international organization dealing with the rules of trade between nations, was created in 1995 by the Uruguay Round of GATT negotiations.

3. The WTO provides legal ground rules for international commerce and helps producers of goods and services and exporters and importers conduct business.

4. The WTO serves as a forum for trade negotiations, monitors national trade policies, provides technical assistance and training for developing countries, cooperates with other international trade organizations, and perhaps most importantly, negotiates trade disputes among member nations.

B. The United States–Mexico–Canada Agreement (USMCA): The North American Free Trade Agreement (NAFTA) went into effect in 1994 and merged Canada, the United States, and Mexico into one market.

1. NAFTA eliminated most tariffs and trade restrictions on agricultural and manufactured products among the three countries.

2. NAFTA made it easier for the U.S. businesses to invest in Mexico and Canada.

3. Canada and Mexico are crucial trading partners to the United States.

4. Many Canadian companies have taken advantage of Mexico’s low labour costs and proximity to Canada to set up production facilities, sometimes called maquiladoras.

5. NAFTA has been controversial.

6. NAFTA was replaced by the United States–Mexico–Canada Agreement (USMCA) which includes major changes in auto manufacturing and new policies on labour and environmental standards, intellectual property protections, and some digital trade provisions.

C. The European Union (EU) 1. Was established in 1958 to promote trade among its members.

2. To facilitate free trade among its members, the EU is working toward standardization of business regulations, import duties, and value-added taxes; elimination of customs checks; and has a standardized currency (the euro) for use by all members.

3. The long-term goals are to eliminate all trade barriers within the EU, improve the economic efficiency of the EU nations, and stimulate economic growth.

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4. The EU has enacted some of the world’s strictest laws concerning antitrust issues.

5. The prosperity of the EU has suffered in recent years. a. Greece, Ireland, and Portugal required steep bailouts from the IMF. Spain and Cyprus also requested bailouts. b. Greece was forced to default, which negatively impacts other EU nations because it makes them appear riskier as well. c. Standard & Poor’s downgraded the sovereign debt of several EU nations. d. Germany, however, has largely avoided the economic woes. It was not downgraded but maintained its high ratings.

D. Asia-Pacific Economic Cooperation (APEC) 1. Promotes open trade and economic and technical cooperation among its 21 member nations.

2. Differs from other international trade alliances in its commitment to facilitating business and its practice of allowing the business/private sector to participate in a wide range of APEC activities.

3. Despite some economic turmoil, companies of the APEC have become increasingly competitive and sophisticated in global business. a. China has become a manufacturing powerhouse. b. Less visible Pacific Rim nations, such as Thailand, Singapore, Vietnam, and Hong Kong, have also become major manufacturing and financial centers.

E. Association of Southeast Asian Nations (ASEAN) 1. A trade alliance that promotes trade and economic integration among member nations in Southeast Asia.

2. ASEAN’s goals include the promotion of free trade, peace, and collaboration between its members.

3. In 1993, ASEAN began to reduce or phase out tariffs among countries and eliminate nontariff trade barriers.

4. However, ASEAN is facing challenges as a unified trade bloc. Unlike members of the European Union, the economic systems of ASEAN members are quite different. Major conflicts have also occurred between member-nations.

5. Despite these challenges, ASEAN plans to increase economic integration by 2015, but unlike the European Union, it will not have a common currency or fully free labour flows between member-nations.

F. World Bank 1. Also known as the International Bank for Reconstruction and Development.

2. Was established by industrialized nations in 1946 to loan money to underdeveloped and developing countries.

G. International Monetary Fund (IMF) 1. Was established in 1947 to promote trade among member nations by eliminating trade barriers and fostering financial cooperation.

2. The IMF tries to avoid financial crises and panics by alerting the international community about countries that will not be able to repay their debts.

Summarize the different levels of organizational involvement in Key Terms: international trade.  Countertrade  Getting Involved in International in International Business agreements  Exporting and Importing  Trading company

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Instructor’s Manual—Chapter 3     

Trading Companies Licensing and Franchising Contract Manufacturing Outsourcing Offshoring

Ferrell et al: Business: A Changing World 8ce  Licensing  Franchising  Contract manufacturing  Offshoring  Joint venture  Strategic alliance  Direct investment  Multinational corporation (MNC)

IV. Getting Involved in International Business A. Businesses get involved in international trade at many levels, and the degree of resources and effort required increases according to the level at which a firm involves itself in international trade.

B. Exporting and Importing 1. Many companies first get involved in international trade when they import goods from other countries for their own businesses. A business may first get involved in exporting when it is called upon to supply a foreign company with a particular product. a. Some of the world’s largest exporting countries are shown. (Figure 3.1) 2. Exporting sometimes takes place through countertrade agreements, which involve bartering products for other products instead of currency.

3. Many firms choose to export through an export agent, an intermediary that handles international transactions for other firms. a. An advantage of using an agent is that the company does not have to deal with foreign currencies or the red tape of international business. b. A major disadvantage of export agents is that, because the agent must make a profit, either the price of the product must be increased or the domestic company must provide a larger discount than it would in a domestic transaction.

C. Trading Companies 1. Buy goods in one country and sell them to buyers in another country.

2. They perform all activities that are required to move products from one country to another.

D. Licensing and Franchising 1. Licensing is a trade arrangement in which one company, the licensor, allows another company, the licensee, to use its company name, products, patents, brands, trademarks, raw materials, and/or production processes in exchange for a fee, or royalty. a. Licensing is an attractive alternative to direct investment when the political stability of a foreign country is in doubt or when resources are unavailable for direct investment. b. Licensing is especially advantageous for small manufacturers wanting to launch a well-known brand internationally.

2. Franchising is a form of licensing in which a company, the franchiser, agrees to provide a franchisee a name, logo, methods of operation, advertising, products, and other elements associated with the franchiser’s business in return for a financial 03-68 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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commitment and the agreement to conduct business in accordance with the franchiser’s standard of operations. a. McDonald’s and KFC are the top two global franchises. McDonald’s has to adapt its menu somewhat to appeal to local tastes. (Table 3.4) 3. Licensing and franchising enable a company to enter the international marketplace without spending large sums of money abroad or transferring personnel to handle overseas operations.

E. Contract Manufacturing 1. Contract manufacturing occurs when a foreign company produces a specified volume of a firm’s product to specifications and uses the domestic firm’s name on the final products.

F. Outsourcing 1. Outsourcing is controversial.

2. Insourcing, when foreign companies transfer jobs and business to North America is becoming more common.

G. Offshoring 1. Offshoring is the relocation of business processes by a company or subsidiary to another country.

2. Different than outsourcing because the company retains control of the process— not subcontracting to a different company.

3. Reasons to offshore involve lower wages, skilled labour, and taking advantage of different time zones.

H. Joint Ventures and Alliances 1. Many countries do not permit direct investment by foreign companies or individuals. A company may also lack sufficient resources or expertise to operate in another country.

2. A joint venture is a partnership between a foreign company and a domestic business or government.

3. A strategic alliance is a partnership formed to create a competitive advantage on a worldwide basis. It is especially useful in industries where the costs of competing alone are too high for a single company.

I. Direct Investment 1. Direct investment is the ownership of overseas production and marketing facilities. a. General Motor’s Cadillac brand was so successful in exporting to China, it opened a $1.2 billion plant in Shanghai to build the CT6 Sedan and XT5 SUV. Cadillac doubled its dealerships and avoided a 25% import tariff because the vehicles are locally built.

2. Multinational corporations (MNCs) operate on a worldwide scale, without significant ties to any one nation or region and represent the highest level of international business involvement. (Table 3.5) a. Many MNCs are targeted by antiglobalization activists who contend they increase the gap between rich and poor, misuse scarce resources, exploit labour in lessdeveloped countries, and harm the environment.

Contrast two basic strategies used in international business.

Key Terms:  International Business Strategies  Multinational strategy  Developing Strategies

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Instructor’s Manual—Chapter 3 

Managing the Challenges of Global Business

Ferrell et al: Business: A Changing World 8ce  Global strategy (globalization)

V. International Business Strategies A. Developing Strategies 1. Companies doing business internationally have traditionally used a multinational strategy, customizing their products, promotion, and distribution according to cultural, technological, regional, and national differences.

2. More and more companies are moving from this customization strategy to a global strategy (globalization), which involves standardizing products (and, as much as possible, promotion and distribution) for the whole world, as if it were a single entity.

3. Before moving outside their own borders, companies must conduct environmental analyses to evaluate the potential of and problems associated with various markets and to determine which strategy is best for doing business in those markets.

4. Astute businesspeople today “think globally, act locally.”

B. Managing the Challenges of Global Business 1. Many barriers to global trade have fallen.

2. Managers who meet the challenges of creating and implementing effective and sensitive business strategies can be successful.

3. Benchmarking of international best practices can help firms.

4. Being globally aware is essential for today’s managers.

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Streaming Everywhere Spotify, the world’s most popular audio streaming service, sees its mission as supporting human creativity by giving recording artists an opportunity to make money while giving fans access to music. Spotify is eyeing international growth as a way to maintain its lead in streaming.

Spotify believes by working with local distributors and establishing regional partnerships, it can act more local than other global competitors and act more global than local competitors, offering the best of both worlds. In markets where Spotify’s presence is long-established, Spotify plans to increase subscription prices to pull in higher revenues.

1. How is Spotify attempting to increase earnings?

Spotify is eyeing international growth as a way to maintain its lead in streaming and increase revenue. It also plans to increase subscription prices to pull in higher revenues.

2. Do you think users will continue to see the value Spotify provides?

Answers will vary depending on students’ view Spotify.

3. What are Spotify’s strengths as it expands globally?

It has 354 million users under its belt in 93 markets and provides a growing library of original and exclusive content in 16 markets. The company believes it is offering more value in mature markets than it did in the past.

Going Green: “Measuring "Green" 1. What does the EPI measure nations across?

The EPI provides a summary of sustainability around the world. Using 32 performance indicators across 11 issue categories, the EPI ranks 180 countries on environmental health and ecosystem vitality.

2. The top-ranked countries share a similar economic indicator. What is it?

It appears the world’s greenest countries tend to focus on all areas of sustainability.

3. How would a benchmark, like the EPI, help guide environmental policies across nations?

Answers will vary. According to the EPI website: “EPI indicators provide a way to spot problems, set targets, track trends, understand outcomes, and identify best policy practices.”

Responding to Business Challenges: Harley-Davidson Gets Up to Speed in International Markets 1. What barriers does Harley-Davidson face in marketing its motorcycles internationally?

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

2.

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

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

3. What opportunities does Harley-Davidson have in other countries?

Harley-Davidson markets a small electric bike, Livewire, designed to compete with electric bike brands like Honda. Europe could be a lucrative market for Harley-Davidson’s Livewire because the top 10 most “environmentally conscious” countries are European. Additionally, about 80% of households in Indonesia, Thailand, and Vietnam own a motorcycle or scooter.

Entrepreneurship in Action: Kenya Counts on Mobile Banking M-Pesa, a mobile transfer payment system was launched by Safaricom in Kenya in 2007. M-Pesa now has 30 million users in 10 countries. Its revolutionary technology permitted it to leapfrog existing barriers permitting millions of Kenyans the opportunity to make secure transfers and payments. It has been so successful that the company has expanded to nine other countries.

1. What conditions in Kenya created the ideal conditions for a mobile banking service?

Banks tended to avoid catering to lower-income populations, and the distance to financial institutions could be far thus most Kenyans were not being served by a bank. The technology of a mobile banking service overcame those barriers.

2. In what ways has M-Pesa paved the way for entrepreneurship in Kenya?

M-Pesa paved the way for entrepreneurship by permitting Kenyan residents to quickly and securely transfer funds to merchants and family members. This technology gave Kenyans the opportunity to start small businesses.

3. How can businesses in different industries profit from opportunities in less-developed countries?

Businesses needed to look for underserved customers, opportunities to innovate, and logistical barriers that new, low-cost technology can overcome.

Technology and the Economy: Data Privacy Concerns Take the World by Storm 1. What type of international barriers are companies like Facebook and Google facing in the realm of user privacy?

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

2. Describe the global implications of the GDPR law.

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

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

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

Business Disruption: Chinese Airlines Soaring to Great Heights 1. What advantages do Chinese airlines have over other airlines?

Currently, Chinese airlines do not have the infrastructure to handle all the flights, leading to significant layovers, delays, and cancellations. China also needs more airports. Local Chinese governments are paying so airlines will come to their cities. These subsidies are allowing China’s airlines to grab market share, negatively affecting nearby countries.

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

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

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

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

So You Want a Job in Global Business What are some of the skills required to be a successful businessperson in the borderless world of the 21st century?

To be successful you must have an idea not only of the differing regulations from country to country, but of different languages, ethics and communication styles, and the varying needs and wants of international markets. From a regulatory side, you may need to be aware of laws related to 04-73 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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intellectual property, copyrights, antitrust, advertising, and pricing in every country. Translating is never only about translating the language. Perhaps even more important is ensuring that your message gets through. Whether on a product label or in advertising or promotional materials, the use of images and words varies widely across the globe.

END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Business in a Borderless World This chapter allows students to have fun as they learn about living in a global environment. Ask the students where they have traveled outside Canada. What cultural differences did they notice? Did they have any problems communicating with the locals?

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

Challenge the students to consider whether their good/service (or the idea) could ever be exported.

What problems would they encounter? What countries would be the easiest to enter?

See for Yourself Case: Why McDonald’s Fast Food had Slow Growth in Vietnam This case describes McDonald’s and the challenges it faced in Vietnam. In 2014, McDonald’s capitalized on the opportunity that was presented when Vietnam opened trade to outsiders. At first, it appeared that McDonald’s move into the country was a huge success, with more than 400,000 customers visiting the restaurant within its first month of operation. Originally, McDonald’s planned to open more than 100 stores in a 10-year period. However, nearly 6 years later, McDonald’s only had 22 stores in the entire country. McDonald’s failed for the same reason that it is successful everywhere else. Known for being fast and cheap, the famous chain learned the hard way that Vietnamese culture and native food options weren’t easy to compete against.

1. Why is speed of service not a competitive advantage in Vietnam?

The concept of fast food has existed for a long time among traditional Vietnamese food outlets, and Vietnamese restaurants are often faster than McDonald’s.

2. Why did McDonald’s pricing strategy not work in Vietnam?

In Vietnam it is viewed as a luxury because monthly income is lower in Vietnam compared to the United States. The vast majority of customers aren’t able to visit McDonald’s frequently and would much rather opt for a complete meal from a local vendor.

3. Describe family-style dining and explain why McDonald’s menu is at odds with this concept.

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Locals are known to enjoy meals in a “family-style” atmosphere, which is common in Asian countries. This is the concept of having dishes and sides all at the disposal of those who have gathered to eat rather than each person having their own respective meal which is the exact opposite of McDonald’s trademark menu items.

Team Exercise Visit Transparency International’s Country Corruption Index website: https://www.transparency.org/research/cpi/overview. Form groups and select two countries.

Research some of the economic, ethical, legal, regulatory, and political barriers that would have an impact on international trade. Be sure to pair a country with a high level of perceived corruption (lower scores) with a country that has a low level of perceived corruption (higher scores). Report your findings.

Check Your Progress 1. Distinguish between absolute advantage and comparative advantage. Cite an example of a country that has an absolute advantage and one with a comparative advantage.

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

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

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

Devaluations decrease the value of a currency in relation to other currencies. They make that country’s goods less expensive for foreign buyers. Revaluations increase the value of a currency in relation to other currencies. They make that country’s goods more expensive for foreign buyers, but foreign goods would cost the country’s consumers less. Examples provided by students to the second part of the question will vary, but many will cite Mexico as a country that has devalued its currency. This devaluation has increased the number of Mexican products sold in Canada and has favored tourism from Canada.

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

Less developed countries are likely to have much less infrastructure than developed countries.

Thus, it may be difficult to develop operations in these countries. The wages offered for routine 04-75 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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jobs in less developed countries are lower than the minimum wages existing in industrialized countries. Consequently, many businesses from industrialized countries open assembly plants in less developed countries to reduce labour costs.

4. How do political issues affect international business?

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

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

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

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

A country or firm that practices dumping harms local businesses by offering a product at a much cheaper price. In order to limit the access to its market by the dumping firm or country, the local government might decide to constrain the imports of the product considered. Thus, the government is likely to impose tariffs and quotas.

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

Social and cultural differences create barriers to international trade through: a. Differences in language, body language, perception of personal space, and perception of time. b. Differences in local customs, national holidays, and religious holidays.

Another cultural or social difference not mentioned in the textbook includes communication variations. For example, the format and physical features of letters, memos, and fax messages vary from one country to another. And just as social customs involving greetings and body motions vary, so do the communication approaches used in letters. Communications in the United States and Canada are much more direct and shorter than messages sent by other 04-76 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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countries. Students may be able to suggest additional barriers based on their own knowledge and experiences.

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

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

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

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

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

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

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

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

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

Licensing and franchising lower the costs of business development by involving third parties in the opening and management of new facilities.

Contract manufacturing is an arrangement in which a foreign company produces a specified volume of a firm’s product to specifications and uses the domestic firm’s name on the final 04-77 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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products. Contract manufacturing enables a company to benefit from the lower production costs offered in a foreign country without investing in that country.

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

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

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

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

Get Involved 1. If Canada were to impose additional tariffs on cars imported from Japan, what would happen to the price of Japanese cars sold in Canada? What would happen to the price of Canadian cars? What action might Japan take to continue to compete in the Canadian automobile market?

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

2. Although United States–Mexico–Canada Agreement has been a positive factor for Canadian. firms desiring to engage in international business. What industries and specific companies have had the greatest potential for expanding into the United States and Mexico? What opportunities exist for small businesses that cannot afford direct investment in Mexico and the United States?

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

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

Student answers will vary based on which business they choose.

Build Your Skills: Global Awareness Background As Canadian businesspeople travel the globe, they encounter and must quickly adapt to a variety of cultural norms quite different from Canada. When encountering individuals from other parts of the world, the best attitude to adopt is, “Here is my way. Now what is yours?” The more you see that you are part of a complex world and that your culture is different from, not better than, others, the better you will communicate and the more effective you will be in a variety of situations. It takes time, energy, understanding, and tolerance to learn about and appreciate other cultures. Naturally you’re more comfortable doing things the way you’ve always done them. Remember, however, that this fact will also be true of the people from other cultures with whom you are doing business.

Task You will “travel the globe” by answering questions related to some of the cultural norms that are found in other countries. Form groups of four to six class members and determine the answers to the following questions. Your instructor has the answer key, which will allow you to determine your group’s Global Awareness IQ, which is based on a maximum score of 100 points (10 points per question).

Match the country with the cultural descriptor provided: A. Saudi Arabia B. Japan C. Great Britain D. Germany E. Venezuela F. China G. Greece H. Korea I.

India

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Mexico

1. When people in this country table a motion, they want to discuss it. In Canada, “to table a motion” means to put off discussion.

2. In this country, special forms of speech called keigo convey status among speakers.

When talking with a person in this country, one should know the person’s rank. People from this country will not initiate a conversation without a formal introduction.

3. People from this country pride themselves on enhancing their image by keeping others waiting.

4. When writing a business letter, people in this country like to provide a great deal of background information and detail before presenting their main points.

5. For a man to inquire about another man’s wife (even a general question about how she is doing) is considered very offensive in this country.

6. When in this country, you are expected to negotiate the price on goods you wish to purchase.

7. While North Americans want to decide the main points at a business meeting and leave the details for later, people in this country need to have all details decided before the meeting ends to avoid suspicion and distrust.

8. Children in this country learn from a very early age to look down respectfully when talking to those of higher status.

9. Until recently in this country, the eldest male was legally the ruler of the household, and the custom was to keep the women hidden.

10. Many businesspeople from the United States experience frustration because yes does not always mean the same thing in other cultures. For example, the word yes in this country means, “OK, I want to respect you and not offend you.” It does not necessarily show agreement.

Answers to this exercise are as follows.

1. C

6. J

2. B

7. F

3. E

8. H

4. D

9. I

5. A

10. G

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Solve the Dilemma: Global Expansion or Business as Usual?

Audiotech Electronics, founded in 1959 by a father and son, currently operates a 35,000-square-foot factory with 75 employees. The company produces control consoles for television and radio stations and recording studios. It is involved in every facet of production—designing the systems, installing the circuits in its computer boards, and even manufacturing and painting the metal cases housing the consoles. The company’s products are used by all the major broadcast and cable networks. The firm’s newest products allow television correspondents to simultaneously hear and communicate with their counterparts in different geographic locations. Audiotech has been very successful meeting its customers’ needs efficiently.

Audiotech sales have historically been strong in the United States, but recently, growth is stagnating.

Even though Audiotech is a small, family-owned firm, it believes it should evaluate and consider global expansion.

1. What are the key issues that need to be considered in determining global expansion?

Audiotech needs to assess whether there is a demand for its products in different countries. It also has to inquire about the existence of entry barriers. The infrastructure of the countries considered must be examined to determine whether it allows for the use of Audiotech’s products. For example, many countries do not have cable networks and thus could not accommodate a product based on this technology. The level of economic development of the countries could also be an important barrier. For example, TV remains essentially a luxury item in some countries.

Legal and political barriers may also exist in countries where TV and radio activities are highly regulated. Tariffs and trade restrictions may exist in countries where a business offers the same product as Audiotech.

If the barriers to entry on foreign markets are not too high, then Audiotech has to consider the best way of entering these markets. Knowledge of foreign countries and costs should be factors considered in making this decision.

2. What are some of the unique problems that a small business might face in global expansion that larger firms would not?

Smaller firms are more likely to find the costs of launching international operations prohibitive.

They may find it difficult to finance the research needed to make the first investigations about international market conditions. Business trips abroad may also be too costly. Small businesses may encounter more difficulties in hiring sufficiently skilled personnel to make negotiations abroad. Personnel with foreign language proficiency and past experiences abroad are desirable.

It may also be more difficult for small businesses to find local partners. Local companies are less likely to be interested in allying with a small venture than with an established corporation.

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3. Should Audiotech consider a joint venture? Should it hire a sales force of people native to the countries it enters?

A joint venture would enable Audiotech to lower the cost of developing its operations abroad.

However, it would have to share with its partner the specificities of its technology. Audiotech may be reluctant to have such a partnership for fear of having its knowledge stolen.

Audiotech could hire a sales force of people native to the countries it enters to become more knowledgeable about the local conditions and to overcome the language barrier. However, this solution may be very expensive, and it may be difficult to find the appropriate employees. A better solution may be to rely on export agents who would handle Audiotech’s international transactions.

CONNECT ACTIVITIES India’s Comparative Advantage Learning Objective: 3-1 Explore some of the factors within the international trade environment that influence business.

Activity Summary: Nations and businesses engage in international trade to obtain raw materials and goods that are otherwise unavailable to them or available elsewhere at a lower price than that at which they themselves can produce. The international business environment includes various factors—social, political, regulatory, cultural, legal, and technological—that encompass a business’ overall international strategy. Students explore concepts from the chapter using an example focused on India.

How to Use Activity: After students complete this activity, the class can discuss the various advantages and disadvantages each country has within the international business landscape. Have students select a country of their own choosing and consider how the various concepts and vocabulary of international business apply to their selected country. For example, students could respond with their perception on a country’s comparative advantage, legal barriers, cultural norms, and so on.

Class Discussion: How do the forces within the international business environment affect trade? To what degree does a country’s economy have an effect on international business?

Video Case: Electra Bikes Learning Objective: 3-4 Summarize the different levels of organizational involvement in international trade.

Activity Summary: Students explore how Electra Bikes is expanding its previously U.S.-only presence to selling bicycles all across the world. As the brand expands, the company learns the best ways to produce its product globally, while also balancing the duality of benefitting from and remaining compliant with the legal and regulatory environment.

How to Use Activity: Electra Bikes is just one of many companies who have expanded internationally.

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Form groups and have students explore the international business strategies of select brands. Either allow students to select their own companies or provide examples for each section to work on. Ask groups to present what they’ve found. (Note to Professor: For a variety of presentation content and to reinforce the difficulty of expanding internationally, you might want to select some companies that have experienced a degree of failure in international expansions.)

Class Discussion: What are the benefits to expanding internationally? What are the drawbacks? What are the risks?

ConveyerPape: Supplying Conveyer Belts Internationally Learning Objective: 3-4 Summarize the different levels of organizational involvement in international trade.

Activity Summary: ConveyerPape creates conveyer belts used to make paper. The company is determining how to best provide its products in regions all across the world. Students explore the various circumstances that arise as ConveyerPape thinks through the decision.

How to Use Activity: This case walks students through the various considerations needed before entering a new market. When students complete the activity, extend the concepts from this case by exploring brands like Pizza Hut, McDonalds, and KFC. Each have expanded internationally and have done so under a different set of considerations and strategies. This activity can be conducted as a facilitated discussion, an independent research project, or groupwork.

Class Discussion: What are some aspects a brand should consider when expanding internationally?

What are the risks associated with international expansion compared to doing business confined within Canada?

BONUS TEACHING RESOURCES Additional Discussion Questions 1.

Look at the foreign exchange section of the business section of a newspaper. What nation’s currency or exchange rate is listed? If you were traveling to Germany, how many euros would equal one dollar? How many Swiss francs would you need to equal one dollar?

This answer will vary depending on the current rates given in your newspaper.

2. Assume your firm wishes to do business by selling manufactured products in other countries but does not wish to do actual manufacturing in Canada or the other country. What options are available?

Several possibilities would be available. The company could employ any of the following options: trading companies, licensing, manufacturing, or contract manufacturing. For each of these options, the Canadian firm does not have to be involved in the actual manufacturing of the products being sold in other countries.

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3. Consider the world situation in general. What are the political hot spots or areas of unrest in which doing business would be risky? What would be the possible advantage for a company trying to set up a business venture in these areas of unrest or in these areas at the first sign of political stability?

The answers will vary. As this publication is going to press, some of the East European countries such as Yugoslavia would be extremely risky to do business in because of warfare and lack of political stability, as would some Middle Eastern countries.

A possible advantage of a company doing business is getting a foot in the door and getting ahead of competitors. Many times, the first suppliers in a market may get a dominant share of that market. Also, countries coming out of warfare or political instability may have a pent-up demand for consumer goods.

4. What are some of the reasons for the Canadian trade surplus?

Canadian consumers and businesses purchase far fewer foreign products than Canadian companies export abroad. This is in part due to the fact that Canadian businesses offer products that are as or are more competitive as the foreign products offered in Canada. Also, Canadian companies manage to sell enough of their products in foreign countries partially supported by our advantageous exchange rate.

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

In the 1950s, it took 4.2 German marks to equal a dollar. At that same time, a dollar was worth more than 350 Japanese yen. At this writing, a dollar is worth about 79 yen, and the German mark was replaced years ago by the European Union’s euro. One dollar is equivalent to about 0.77 euros. These figures reflect radical change. There are both benefits and negative consequences of this change.

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

There are positive aspects to a falling dollar. Although it makes it more difficult for Canadians to purchase foreign goods, at the same time, the declining dollar makes it easier for foreign firms or citizens to make purchases in Canada. The increase in more foreign purchases of Canadian products (increased exports) helps Canadian business. If a low dollar persists over a long period of time, increased purchases by other countries and decreased buying of foreign products by Canadians will eventually help the trade balance. Improving the trade balance means helping to reduce Canada’s balance of payments deficit. Today’s business firms must be competitive in the global economy. What is positive for one nation may be negative for another. Thus, one nation’s exchange rate in relation to the value of another nation’s currency continues to be a matter of debate. As arguments can be made for both the strong dollar and the weak dollar, most trade negotiators will probably seek a middle-of-the-road position.

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1. What are the effects of a strong dollar for Canada?

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

2. What are the effects of a relatively weak dollar for Canada?

A weak dollar will prevent Canadians from buying as much products from foreign countries.

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

3.

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

Students’ answers will vary.

Term Paper or Project Topic These topics may be assigned as individual or collaborative projects: 1.

2.

3.

4.

5.

6.

History of Trade Legislation in Canada Business Opportunities and Barriers to Entry in China Study of the Trade Relationships between Canada and Japan Case Study of Canadian Businesses Engaged in International Trade Examples of Recent Countertrade Exchanges (select approximately five examples) Impact of the Global Trade War on the Local Economy

Guest Speaker Suggestions 1. A representative of Export Development Canada to speak about opportunities for Canadian firms in the global economy. Or, a professor of international business or international marketing could also speak about similar topics.

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

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

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

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

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Teaching Suggestions 1. This chapter has much information and many terms to be mastered. Consider different approaches for imparting information to students. One outside assignment is to have students write the definitions of the “Key Terms and Concepts.” Probably a better assignment is to have students write an example for each of the “Key Terms and Concepts”; this approach places less stress on rote memory and forces students to synthesize information.

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

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

4. Again, because of the importance of this chapter, make a point of going over the answers to “Check Your Progress.”

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

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

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

Chapter 4: Options for Organizing Business SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Lynn-Marie and Melissa-Rae Angus and Sister Sage Consider Ethics a Social Responsibility: Should Partners Have a Shotgun?

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Responding to Business Challenges: Heartland Farm Foods Co-op Helps Preserve Beef—and a Way of Life So You Want to Start a Business END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Options for Organizing Business See for Yourself Case: Investors Sleep on Casper’s IPO Team Exercise SUPPLEMENTAL TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Selecting a Form of Business Solve the Dilemma: To Incorporate or Not to Incorporate CONNECT ACTIVITIES Project Athena: Amazon Acquires Whole Foods Hardware House: Finding Sources of Cash for Expansion BONUS TEACHING RESOURCES Additional Discussion Questions Controversial Issue Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions SUMMARY This chapter examines three primary forms of business ownership—sole proprietorship, partnership, and corporation—and weighs the advantages and disadvantages of each. These forms are the most often used whether the business is a traditional bricks and mortar company, an online-only one, or a combination of both. We also take a look at S corporations, limited liability companies, and cooperatives, and discuss some trends in business ownership. You may wish to refer to Table 4.1 to compare the various forms of business ownership mentioned in the chapter.

LEARNING OBJECTIVES LO 4-1

Define and examine the advantages and disadvantages of the sole proprietorship form of organization.

LO 4-2

Identify three types of partnership, and evaluate the advantages and disadvantages of the partnership form of organization.

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LO 4-3

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

LO 4-4

Define and debate the advantages and disadvantages of mergers, acquisitions, and leveraged buyouts.

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KEY TERMS AND DEFINITIONS acquisition

The purchase of one company by another, usually by buying its shares.

board of directors

A group of individuals, elected by shareholders to oversee the general operation of the corporation, who set the corporation’s longrange objectives.

common shares

Shares whose owners have voting rights in the corporation, yet do not receive preferential treatment regarding dividends.

cooperative (or co-op)

An organization composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization.

corporation

A legal entity, created by the state, whose assets and liabilities are separate from its owners.

Crown corporations

Corporations owned and operated by government (federal or provincial).

dividends

Profits of a corporation that are distributed in the form of cash payments to shareholders.

general partnership

A partnership that involves a complete sharing in both the management and the liability of the business.

initial public offering (IPO)

Selling a corporation’s shares on public markets for the first time.

joint venture

A partnership established for a specific project or for a limited time.

leveraged buyout (LBO)

A purchase in which a group of investors borrows money from banks and other institutions to acquire a company (or a division of one), using the assets of the purchased company to guarantee repayment of the loan.

limited liability partnership (LLP)

Form of ownership that provides limited liability and taxation like a partnership but places fewer restrictions on members.

limited partnership

A business organization that has at least one general partner, who assumes unlimited liability, and at least one limited partner, whose liability is limited to his or her investment in the business.

merger

The combination of two companies (usually corporations) to form a

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new company. non-profit corporations

Corporations that focus on providing a service rather than earning a profit but are not owned by a government entity.

partnership

A form of business organization defined by the Uniform Partnership Act as “an association of two or more persons who carry on as coowners of a business for profit.”

partnership agreement

Document that sets forth the basic agreement between partners.

preferred shares

A special type of share whose owners, though not generally having a say in running the company, have a claim to profits before other shareholders do.

private corporation

A corporation owned by just one or a few people who are closely involved in managing the business.

public corporation

A corporation whose shares anyone may buy, sell, or trade.

shares

Shares of a corporation that may be bought or sold.

sole proprietorships

Businesses owned and operated by one individual; the most common form of business organization in the United States.

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CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, and KEY TERMS learners will need to take away from the course.

LO 4-1

Define and examine the advantages and disadvantages of the sole proprietorship form of organization.  Introduction  Sole Proprietorships o Advantages of Sole Proprietorships o Disadvantages of Sole Proprietorships

Key Terms:  Sole proprietorships

Lecture Outline and Notes: VI. Introduction

A. There are three principal forms of organizing a business, whether it is a traditional “brick and mortar” organization or a virtual corporation that does business exclusively through the internet.

B. The three primary forms of business that we will examine are sole proprietorship, partnership, and corporation (Table 4.1).

1.

2.

3.

Proprietorships far outnumber corporations, but they net far fewer sales and less income.

Partnerships are the least used form of business.

Corporations account for the majority of all Canadian sales and income but represent a relatively small number of organizations in Canada.

II. Sole Proprietorships A. Sole proprietorships are businesses owned by one person.

1. The most common form of business organization in Canada.

2. Typically, small businesses employing fewer than 50 people.

B. Advantages of Sole Proprietorships 1. They have the advantage of a simple management structure and the ability to make quick decisions.

2. Ease and Cost of Formation a. Forming a proprietorship is easy and inexpensive, requiring only state and local licenses and permits where applicable. b. An entrepreneur starting a new sole proprietorship must find a suitable site from which to operate the business. c. Many small businesses started out in their founders’ garages.

3. Secrecy a. Sole proprietorships have the advantage of secrecy as operating plans and financial reports do not have to be disclosed to others.

4. Distribution and Use of Profits a. All profits from the business belong to the owner.

5. Flexibility and Control of the Business a. The proprietor has complete control over how the business is run. b. This control allows the proprietor to respond quickly to competitive conditions or to changes in the economy.

6. Government Regulation a. Sole proprietorships have the greatest degree of freedom from government regulation. b. Nonetheless, proprietors must ensure that they follow all laws that apply to their business.

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

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b.

The sole proprietor can also establish a tax-exempt retirement or profit-sharing account, which is exempt from current income tax.

8. Closing the Business a. a. A sole proprietorship can be dissolved easily; the only legal condition is that all loans must be paid off.

C. Disadvantages of Sole Proprietorships 1. Unlimited Liability a. The sole proprietor has unlimited liability in meeting the debts of the business; if the business cannot pay its obligations, the owner’s personal, non-business holdings might have to be used to pay the debt.

2. Limited Sources of Funds a. There are a limited number of financial sources from which the sole proprietor can borrow (bank, friends, family, and some government programs). b. Additionally, sole proprietors might have to pay higher interest rates on funds borrowed from banks than do large corporations because they are considered higher risks. c. The proprietor may have to pledge personal assets to guarantee loans.

3. Limited Skills a. The sole proprietor must be able to perform many functions and possess skills in diverse areas such as management, marketing, finance, accounting, and personnel.

4. Lack of Continuity a. The life expectancy of a sole proprietorship is directly related to that of the owner and their ability to work.

5. Lack of Qualified Employees a. It is sometimes difficult for a small sole proprietorship to offer the same wages, benefits, and advancement possibilities that are often found in a large corporation.

6. Taxation a. Under current tax rates, sole proprietors pay a higher marginal tax rate than do small corporations. b. The tax effect often determines whether a sole proprietor incorporates the business.

D. An example of a sole proprietorship might be an entrepreneur opening up a delicatessen. As a sole proprietor, he keeps his profits but is personally responsible for all risks and financial obligations.

LO 4-2

Identify three types of partnership, and evaluate the advantages and disadvantages of the partnership form of organization.  Partnerships o Types of Partnership o Articles of Partnership o Advantages of Partnerships o Disadvantages of Partnerships o Taxation of Partnerships

Key Terms:  Partnership  General partnership  Limited partnership  Articles of partnership

III. Partnerships

A. Most states have a model law governing partnerships based on the Uniform Partnership Act, which defines a partnership as “an association of two or more persons who carry on as co-owners of a business for profit.”

1. Partnerships are the least used form of business organization.

B. Keys to success in a partnership include: (Table 4.2) 1. Keeping profit sharing and ownership equal.

2. Partners’ skill sets should complement each other.

3. Honesty is critical.

4. Maintain face-to-face communication.

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C.

D.

E.

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5. Maintain transparency.

6. Be aware of funding constraints so one partner does not get stuck with additional debt.

7. To be successful, you need experience. So, tailor your business to your skills.

8. Family should be a priority; try to minimize business problems so you can enjoy your family.

9. Do not fall in love with “the idea” and forget to actually implement the idea.

10. Be optimistic but also realistic in terms of sales, growth, and planning.

Types of Partnership 1. A general partnership involves partners sharing completely in the management of a business and the liability for its debts.

2. A limited partnership has at least one general partner who assumes unlimited liability and at least one limited partner whose liability is limited to the amount of investment in the business. a. Limited partnerships exist for risky investment projects where the chance of loss is great. i. Limited partners are barred from participating in the management of the business, but they share in the profits.

Articles of Partnership (Table 4.3) 1. Articles of partnership are legal documents that set forth the basic agreement between partners.

2. Usually specify the money or assets each partner has contributed to the partnership (called partnership capital); each partner’s individual management role or duty; how the profits and losses of the partnership will be divided among the partners; and how a partner may leave the partnership and any other restrictions that might apply to the agreement.

Advantages of Partnerships 1. Ease of Organization a. Starting a partnership requires little more than drawing up articles of partnership. b. The name of the partnership should be registered with the state.

2. Availability of Capital and Credit a. When a business has several partners, the partnership can rely on a combination of talents and pooled financial resources. b. Partnerships tend to be larger than sole proprietorships and thus have greater earning power and higher credit ratings.

3. Combined Knowledge and Skills a. Partnerships can provide diverse skills because partners are able to specialize in their areas of expertise.

4. Decision Making a. Small partnerships can react quickly to changes in the business environment.

5. Regulatory Controls a. The partnership has fewer regulatory controls over its activities than the public corporation.

Disadvantages of Partnerships 1. Limited partners have no voice in management and bear most of the risk of the business.

2. Partnerships may be subject to disagreements when the goals and objectives of one

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partner change; many partnership disputes wind up in court (Table 4.4).

3. Unlimited Liability a. In general partnerships, the general partners have unlimited liability for total debts the business incurs; this disadvantage increases if one partner has greater personal financial resources. b. The disadvantage is reduced for limited partners, who can only lose their initial investment.

4. Business Responsibility a. All partners are responsible for the business actions and decisions of all other partners.

5. Life of the Partnership a. A partnership is terminated upon the death or withdrawal of a partner. b. In very large partnerships, provisions for continuation of the partnership may be provided for in the articles of partnership. c. Selling a partnership interest has the same effect as the death or withdrawal of a partner, and it is difficult to place a value on the partner’s share of the partnership.

6. Distribution of Profits a. The distribution of the profits as specified in the articles of partnership may not reflect each partner’s contribution.

7. Limited Sources of Funds 1. There are limits to sources of funds (capital) available to a partnership because there is no public value placed on the business.

2. be considered greater risks.

G. Taxation of Partnerships 1. Partnerships are a quasi-taxable organization, which means they do not pay taxes; the individual partners report their share of the profits on their individual tax returns and are taxed at the ordinary income tax rate for individuals.

Describe the corporate form of organization and its advantages and Key Terms: disadvantages. Corporations  Corporation o Creating a Corporation  Shares o Types of Corporations  Dividends o Elements of a Corporation  Certificate of o Advantages of Corporations incorporation o Disadvantages of Corporations  Private corporation  Other Types of Ownership  Public corporation o Joint Ventures  Initial public offering o S Corporations (IPO) o Limited Liability Companies  Crown corporations  Non-profit corporations  Board of directors  Preferred shares  Common shares  Joint Venture  Limited liability company

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IV. Corporations

A. A corporation is a legal entity, created by the state, whose assets and liabilities are separate from its owners.

1. Legally, a corporation has many of the rights, duties, and powers of a person, including the right to receive, own, and transfer property. They can enter into contracts with individuals or with other legal entities, and they can sue and be sued in court.

2. Represent the majority of sales and income in Canada.

3. Corporations are typically owned by many individuals and organizations who own shares of the business, called shares. Thus, corporate owners are called shareholders or shareholders. a. Shareholders can buy, sell, give or receive as gifts, or inherit their shares. b. Shareholders are entitled to all profits that are left after all the corporation’s other obligations have been paid; these are distributed in the form of cash payments called dividends. c. However, some corporations may retain profits to expand the business. d. Table 4.5 Market Cap: Top 10 Snapshot B. Creating a Corporation 1. A corporation is created under the laws of the state in which it incorporates, a procedure sometimes referred to as chartering. a. In most states, the company name must end in “company,” “corporation,” “incorporated,” or “limited” to show that the owners have limited liability. b. The individuals who create the corporation are known as the incorporators. c. Articles of incorporation must be completed and filed with the appropriate state office (often the secretary of state). d. Articles of incorporation contain basic information about the business, including: 1) Name and address of the corporation.

2) Objectives of the corporation.

3) Classes of shares (common, preferred, voting, nonvoting) and the number of shares of each class of shares to be issued.

4) Expected life of the corporation (usually forever).

5) Financial capital required at the time of incorporation.

6) Provision for transferring shares between owners.

7) Provisions for the regulation of internal corporate affairs.

8) Address of the business office registered with the state of incorporation.

9) Names and addresses of the initial board of directors.

10) Names and addresses of incorporators.

2. Based on the information in the articles of incorporation, a certificate of incorporation is issued by the state to create the corporation. The then owners establish the corporation’s bylaws and elect a board of directors.

C. Types of Corporations 1. A private corporation is owned by only one person or a few people closely involved in its management. a. Private corporations do not offer shares for sale to the public. b. Privately owned corporations are not required to publicly disclose financial information, but they must pay taxes.

2. A public corporation is one whose shares anyone may buy, sell, or trade.

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a. Publicly owned corporations must disclose financial information to the public under specific laws that regulate the trade of shares and other securities. b. A private corporation may “go public” through an initial public offering (IPO) by selling its shares so that it can be traded in public markets. c. Public corporations may be “taken private” when one or a few individuals purchase all of the firm’s shares so that it can no longer be traded publicly.

3. Crown corporations are corporations owned and operated by federal or provincial governments. These provide a service to citizens, rather than earn profits. Examples are Via Rail and Canada Post.

4. Non-profit corporations focus on providing a service rather than earning a profit, but are not owned by a government entity. Examples are the Children’s Wish Foundation, the United Way, the Canadian Cancer Society, museums, and private schools.

D. Elements of a Corporation 1. The Board of Directors a. The board of directors is elected by the shareholders to oversee the general operation of the corporation. b. The board of directors sets the long-range objectives of the corporation and sees that the objectives are achieved on schedule. c. The board members are legally liable for the mismanagement of the firm or for any misappropriation of funds. d. One of the board’s most important duties is to elect or hire the chairman of the board, the president of the company, and the chief executive officer (CEO). e. Directors can be from both inside and outside the company. Most boards include outside directors because they are thought to be less biased in their assessment of the company’s progress.

2. Share Ownership‒corporations issue two types of shares: preferred and common. a. Preferred shares usually allow no voting rights but confer preference in the distribution of company profits. i. Owners of preferred shares are a special class of owners because, although they generally do not have any say in running the company, they have a claim to profits before other shareholders do. ii. Most preferred shares carry a cumulative claim to dividends, which means that if preferred share dividends are not paid in 1 year, they accumulate to the next year. b. Common shares allow the owner voting rights. i. Owners of common shares do not get any preferential treatment with regard to dividends, but they do get some say in the operation of the corporation by voting on board members and other important issues. ii. Common shareholders have a preemptive right to purchase new shares of the common shares directly from the corporation.

E. Advantages of Corporations 1. Limited Liability a. The owners’ maximum liability or potential loss is equal to their original investment.

2. Ease of Transfer of Ownership a. Shareholders can sell or trade shares without causing the termination of the corporation.

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3. Perpetual Life a. The corporation may continue its existence forever or until the owners agree to sell it or to liquidate its assets.

4. External Sources of Funds a. Long-term funds can be raised more easily by a public corporation than by partnerships or sole proprietorships. b. The firm can raise new funds by selling new shares or bonds to the public.

5. Expansion Potential a. Readily available external financing makes it easier for large public corporations to expand into national and international markets.

F. Disadvantages of Corporations 1. Double Taxation a. The corporation pays taxes on its income, and shareholders pay taxes on the dividend distributions they receive from the company.

2. Forming a Corporation a. The formation of a corporation can be costly and may require the services of an attorney.

3. Disclosure of Information a. Financial and other proprietary information must be disclosed to shareholders, creditors, and the Securities and Exchange Commission (SEC)—which oversees the securities of corporations—and competitors may be able to access these documents.

4. Employee–Owner Separation a. Non-owner employees may feel that their work benefits only the owners. b. Employee share ownership plans (ESOPs) give shares of the company’s shares to employees to help create more of a partnership between the company and the employees and to boost productivity.

V. Other Types of Ownership

A. Joint Ventures 1. A joint venture is a partnership established for a specific project or for a limited time.

2. The partners in a joint venture may be individuals or organizations, as in the case of international joint ventures.

3. Control of a joint venture may be shared equally, or one partner may control decision making.

B. Limited Liability Companies 1. A limited liability company (LLC) is a form of business ownership that provides limited liability but is taxed like a partnership.

2. A major reason for using the LLC form is to protect members’ personal assets; they are also flexible, simple to run, and do not require the members to hold meetings, keep minutes, or make resolutions.

C. Cooperatives 1. A cooperative (co-op) is an organization composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization.

Examples are Oglethorpe Power Corp., Ocean Spray, and REI. 2. The co-op is set up not to make money for itself but to help its members make money.

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3. The most common example of a co-op is found in farming or agricultural organizations.

4. Purchasing, distribution, and advertising savings can benefit the co-op members.

Define and debate the advantages and disadvantages of mergers, Key Terms: acquisitions, and leveraged buyouts.  Merger  Trends in Business Ownership: Mergers and Acquisitions  Acquisition  Leverage buyout (LBO) VI. Trends in Business Ownership: Mergers and Acquisitions

A. Companies achieve growth and improve profitability by expanding their operations, often by developing and selling new products or by merging with or purchasing other companies.

B. A merger occurs when two companies combine to form a new company 1. Horizontal merger: When firms that make and sell similar products merge.

2. Vertical merger: When companies operating at different but related levels of an industry merge.

3. Conglomerate merger: When firms in unrelated industries merge.

C. Not all mergers are pleasant. When Duke Energy and Progress decided to merge, it was initially decided that Progress CEO Bill Johnson would lead the newly merged company.

However, shortly after the merger, the board of directors ousted Bill Johnson and reinstalled Duke CEO Jim Rogers as CEO in a move that result in widespread criticism.

E. An acquisition occurs when one company purchases another usually by buying its shares.

1. Corporate raider: A company or individual who wants to acquire or take over another company and first offers to buy some or all of its shares at a premium in a tender offer.

2. Poison pill: The firm allows shareholders to buy more shares at lower prices than the current market value to head off a hostile takeover.

3. Shark repellant: Management requires a large majority of shareholders to approve a takeover.

4. White knight: A more acceptable firm that is willing to acquire a threatened company.

F. A leveraged buyout (LBO) is the purchase of a company by a group of investors with borrowed money, using the assets of the company to guarantee repayment of the loan.

1. Merger mania is what happened in the 1980s and 1990s during a prolonged wave of mergers and acquisitions.

2. Some people view mergers and acquisitions favorably, pointing out that they boost corporations’ share prices and market value, to the benefit of their shareholders.

3. Mergers can be controversial, with critics arguing that they hurt companies because management has to focus excessively on avoiding takeovers.

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Lynn-Marie and Melissa-Rae Angus and Sisters Sage 1. What do you think are some of the advantages and disadvantages of working in a partnership? Do you think working with a family member would be more or less challenging?

Why? Partnerships offer the following advantages: (1) They are easy to organize, (2) partners can complement their skills, (3) may have more access to capital, (4) partnerships can make decisions faster than larger businesses, and (5) government regulations are few. Partnerships also have several disadvantages, (1) All partnerships have to deal with disagreements, (2) general partners have unlimited liability for the debts of the partnership, (3) partners are responsible for each others’ decisions, (4) the death or termination of one partner requires a new partnership agreement to be drawn up, (5) it is difficult to sell a partnership interest at a fair price, (6) the distribution of profits may not correctly reflect the amount of work done by each partner, and (7) partnerships may be taxed at a higher rate than corporations.

2. Why do you think social media has worked so well for the company?

Most students will answer that it is often faster and more cost-effective to use social media.

3. Use online technology to visit the company's website and some of its social media channels.

What do you think the company is doing well? What recommendations would you make for improvements?

Answers will vary.

Consider Ethics a Social Responsibility: Should Partners Have a Shotgun?

1. If you were to ever join a partnership would you want to have a shotgun clause?

Answers will vary.

2. Do you think using a shotgun clause is ethical? Why or why not?

Answers will vary. Some argue that they are useful tools, which allow for a quick end to a partnership that is no longer working. Furthermore, the cash offer is usually at a premium.

Others argue that shotgun clauses are often used too quickly when other dispute resolutions could be used to save partnerships, and that shotguns favour the partner with the most resources.

3. What are some of the advantages and disadvantages of a shotgun clause?

Advantages of a shotgun clause - can be useful tools which allow for a quick end to a partnership that is no longer working - cash offer is usually at a premium as the person making the offer risks getting removed from the business if they make a low offer

Disadvantages of a shotgun clause - can be used too quickly when other dispute resolutions could be used to save partnerships - shotguns favour the partner with the most resources

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4. What alternatives would you suggest to using a shotgun clause?

Answers will vary, but students may mention that partners could have a neutral third party decide the process of the business.

5. Would exercising the shotgun clause negatively impact Aryzta AG's ability to form partnerships in the future? Why or why not?

Answers will vary, but students may mention that future partners may be less likely to enter into a partnership with the company.

Entrepreneurship in Action: Good Coffee Plus Clean Drinking Water 1. Why do you think Birch Bark Coffee has been successful?

Birch Bark’s is a social-enterprise. The company is both for-profit and for society. The business is purpose-driven and is designed to give back to communities, the environment, and employees.

Specifically, the company donates some of the revenue to provide clean drinking water, creates jobs, and helps First Nations people. Success could be attributed to: leading a movement, differentiating the company, and attracting talent, customers, and investors.

2. Why would Marsolais-Nahwegahbow opt for this form of ownership? What are the advantages and disadvantages?

Birch Bark is a private corporation. Advantages include: ease and cost of formation; secrecy; use of profits; flexibility and control; and government regulation. Disadvantages include: Unlimited Liability; limited sources of funds; limited skills; lack of continuity; lack of qualified employees; and taxation.

3. Given Birch Bark’s rapid expansion, do you think Marsolais-Nahwegahbow may someday consider an alternate form of business ownership? Why or why not?

As a privately held company, Mark is able to retain tight control over the direction of the company while choosing who it partners with. As he hopes to eventually expand to coffee shops across Canada he should consider incorporating. The advantages of a corporation include: limited liability, ease of transfer of ownership, perpetual life, external sources of funds, and expansion potential.

4. Do you think Marsolais-Nahwegahbow should expand by opening up physical stores? Why or why not?

Answers will vary. Managing physical stores, like Starbucks, is a different business model and challenging. As the company has interest in expanding internationally (United States and Switzerland), it is more advantageous to expand the online sales and subscription services.

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Going Green: CSAs for Everyone Community-supported agriculture (CSA) is becoming a popular alternative to large-chain grocery stores. A CSA is a way for local farmers to bypass the bureaucracy of traditional corporate grocery stores and to conduct business directly with consumers.

1. What are some of the benefits gained by farmers by switching to the CSA model?

A CSA is a way for local farmers to bypass the bureaucracy of traditional corporate grocery stores and to conduct business directly with consumers. In addition, farmers, knowing that their basic costs are covered, can focus their full attention on growing high-quality produce rather than searching for distributors 2. Why are people opting to use CSAs over traditional grocery stores?

People receive a portion of local, often organic, produce each week during the growing season.

The CSA creates a sustainable relationship in which members receive quality produce and farmers have a reliable method for distributing their crops. People know that the farms offering CSAs are usually small and dedicated to ecologically sound farming practices, such as permaculture and avoiding chemical pesticides. Because the cost of distribution is lower for these farmers, members often receive produce at prices competitive with conventional produce sold in grocery stores.

3. Can you think of any drawbacks to the CSA model?

Answers may vary Responding to Business Challenges: Heartland Farm Foods Co-op Helps Preserve Beef—and a Way of Life Jim Farmer, a lifelong livestock producer wants his son and two daughters to be able to carry on the family farm. To help achieve this goal, he formed the Heartland Farm Foods Co-op with about three dozen beef producers to turn 1000 cattle a year into canned beef. The co-op’s canned, precooked ground and chunked beef products contain just one ingredient—beef, with no preservatives, not even salt.

1. Why did Heartland Foods employ a cooperative form of organization?

Answers will vary, but students may mention that this type of organization is not unusual for small businesses that band together to obtain the benefits of a larger organization. Some benefits for Heartland Foods and their co-op include a 415-square meters plant on 4 hectares which processes the beef, the construction of which was partially funded by a grants that the coop received. Also, the co-op recently released five new products to the market.

2. What are the advantages for ranchers who belong to the cooperative?

Answers will vary, but students may mention use of the newly constructed shared processing facility, the development and marketing of five new products, shared buyers (including supermarkets, convenience stores, restaurants and markets), shared online website and market.

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3. Can you think of any other industries where the co-operative form of business ownership would be beneficial?

Answers will vary, but students may mention grocery stores, credit unions and environmental projects.

So You’d Like to Start a Business If you have a good idea and want to turn it into a business, you are not alone. Small businesses are popping up all over Canada and the concept of entrepreneurship is hot. Sole proprietorships are the most common form of business organization in Canada. Other entrepreneurs may prefer a partnership. Partnerships can be either general or limited. General partnerships have unlimited liability and share completely in the management, debts, and profits of the business. Other entrepreneurs may form a corporation. Corporations tend to be larger businesses, but do not need to be. A corporation can consist of nothing more than a small group of family members.

Why would you choose to form a limited partnership?

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

END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Options for Organizing Business Ask the students how many of their families are involved in a family business. Why did their family decide to start their own business? How have the students been affected by the involvement of the family in the business? Perhaps their family vacations are limited because there is a feeling that “they can’t be away from the business.” It would be interesting to see if these students would like to start their own business, or if they have been turned off by how this has affected their family life.

For those who have never experienced a family business, why would they like to own their own business? Have them debate the pros and cons of having a partnership instead. If they elect to have a partnership, as many business plan teams do, what do they have to resolve at the inception of their business?

See for Yourself Case: Investors Sleep on Casper’s IPO Known for its “bed-in-a-box” concept, Casper Sleep Inc. was considered a so-called unicorn company leading up to its initial public offering (IPO). Casper slashed its IPO price from $17 to $12. Within a few months of the IPO, investors filed a lawsuit against the company for allegedly misleading them and not disclosing material information prior to the IPO. Shareholders have claimed that Casper violated Section 11 of the Securities Act by omitting facts that were material (i.e., information that would have potentially made an investor decide another way to invest) in the registration statement. Analyzing whether a material fact was omitted became much more difficult considering the impact of COVID-19 on the company’s financial statements in 2020. Should the shareholders prove to a jury that Casper is at fault, the company would be liable for a significant amount of money 05-102 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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1. Why do you think a company would mislead investors?

Students’ answers will vary but students will focus on the profit motive.

2. Why do companies file initial public offerings?

Students’ answers will vary but students will focus on securing additional capital for expansion.

A private corporation that needs more money to expand or to take advantage of opportunities may have to obtain financing by “going public. Privately owned firms are occasionally forced to go public with share offering when a major owner dies and the heirs have large estate taxes to pay.

3. Explain why Casper’s IPO got a lower valuation than initially expected.

Leading up to the IPO, Casper’s revenue was up 20% from the year prior, but losses were also up 5%. Additionally, focused on stealing business from traditional mattress brands, the company spent more than $400 million in less than 3 years on marketing alone. The bigger issue was that Casper’s true value was much less than $1 billion.

Team Exercise Students will form groups and find examples of mergers and acquisitions. Mergers can be broken down into traditional mergers, horizontal mergers, and conglomerate mergers. When companies are found, students will note how long the merger or acquisition took, if there were any requirements by the government before approval of the merger or acquisition, and if any failed mergers or acquisitions were found that did not achieve government approval. They will report their findings to the class, and explain what the companies hoped to gain from the merger or acquisition.

SUPPLEMENTAL TEACHING RESOURCES Check Your Progress 1. Name five advantages of a sole proprietorship. a. Sole proprietorships are easy and inexpensive to form. b. Sole proprietors do not have to discuss their operating plans with anyone. c. All profits from a sole proprietorship belong to the owner. d. A sole proprietor has direct control of the sole proprietorship and can make decisions without anyone else’s approval. e. Sole proprietorships have the most freedom from government regulations.

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

A general partnership is a complete sharing in the management of the business, and each partner has unlimited liability for the debts of the business. A limited partnership has at least 05-103 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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one general partner who assumes unlimited liability and at least one limited partner whose liability is limited to their initial investment. A limited partner does not participate in the management of the business.

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

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

The shares of a public corporation is not held in the hands of a few persons. Instead, its shares may be bought, sold, or traded by anyone. Walmart, IBM, Sears, and ExxonMobil are public corporations.

Crown corporations such as Via Rail or Canada Post are owned and operated by the federal government.

Non-profit corporations are not owned by the government and focus on providing a service rather than earning a profit. The Red Cross, and Greenpeace are examples of such organizations.

4. Would you rather own preferred shares or common shares? Why? The answer depends on what type of involvement in the firm the shareholder desires. Preferred share owners receive a fixed dividend before common shareholders can receive any dividends on their shares. The disadvantage of preferred shares is that their owners have no voting right to elect the board of directors. Although common shares owners receive no preferential treatment in the distribution of profits, they do get to vote on members of the board of directors and other important issues relevant to the operation of the firm.

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

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

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

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

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

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

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

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

9. Which form of business requires the most specialization of skills? Which requires the least?

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

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

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

Get Involved 1. Select a publicly owned corporation and bring to class a list of its subsidiaries. These data should be available in the firm’s corporate annual report, or SEDAR. Ask your librarian for help in finding these resources.

Students’ responses will vary depending upon the companies they chose.

2. Select a publicly owned corporation and make a list of its outside directors. Information of this nature can be found in several places in your library; the company’s annual report; its list of corporate directors; and various financial sources. If possible, include each director’s title and the name of the company that employs him or her on a full-time basis.

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Students’ responses will vary depending upon the companies they choose.

Build Your Skills: Selecting a Form of Business Suggestions for Use: Suggestions for Use: You could broaden the focus of this exercise, depending on class size and time available, by asking students to elaborate on the points of their outline. For example, you could break the class into groups and assign “Sole Proprietorships—Advantages” to one group, “Sole Proprietorships—Disadvantages” to another group, and so on. Let them decide how they will present the information when you get to the part in the lecture where you ask them to discuss their assigned subject area.

Answers will vary but students need to justify their answers taking into consideration Ali’s resources, goals, and opportunities.

      

SOLE PROPRIETORSHIPS Advantages Disadvantages Ease and low cost of formation  Unlimited liability Secrecy  Limited sources of funds Control over profits  Limited skills Control of the business  Lack of continuity Freedom from government regulation  Difficulty keeping qualified employees Taxation  Taxation issues Ease of business dissolution

     

Advantages Ease of organization Availability of capital and credit Combined knowledge and skills Faster decision making Fewer regulatory controls Fixed distribution of profits

PARTNERSHIPS      

Disadvantages Unlimited liability Mutual business responsibility Limited life of the partnership Difficulty selling a partnership interest Potential for unfair sharing of profits Limited sources of funds

CORPORATIONS     

Advantages Limited liability Ease of transfer of ownership Perpetual life External sources of funds Expansion potential

   

Disadvantages Double taxation Cost of forming a corporation Disclosure of information Employee–owner separation

Solve the Dilemma: To Incorporate or Not to Incorporate Thomas O’Grady and Bryan Rossisky have decided to start a small business buying flowers, shrubs, and trees wholesale and reselling them to the general public. They plan to contribute $5,000 each in start05-106 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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up capital and lease a 2.5- acre tract of land with a small, portable sales office.

Thomas and Bryan are trying to decide what form of organization would be appropriate. Bryan thinks they should create a corporation because they would have limited liability and the image of a large organization. Thomas thinks a partnership would be easier to start and would allow them to rely on the combination of their talents and financial resources. In addition, there might be fewer reports and regulatory controls to cope with.

1. What are some of the advantages and disadvantages of Thomas and Bryan forming a corporation?

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

Disadvantages include: double taxation, cost of forming a corporation, disclosure of information, and employee–owner separation.

2. What are the advantages and disadvantages of their forming a partnership?

Advantages include: ease of organization, availability of capital and credit, combined knowledge and skills, faster decision making, fewer regulatory controls, and fixed distribution of profits.

Disadvantages include: unlimited liability, mutual business responsibility, limited life of partnership, difficulty selling a partnership interest, potential for unfair sharing of profits, and limited sources of funds.

3. Which organizational form do you think would be best for Thomas and Bryan’s company and why?

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

CONNECT ACTIVITIES Project Athena: Amazon Acquires Whole Foods Learning Objective: 4-4 Assess the advantages and disadvantages of mergers, acquisitions, and leveraged buyouts.

Activity Summary: Amazon’s takeover of Whole Foods in 2017 renewed interest and momentum in the grocery segment—often thought of as dwindling due to the rise in e-commerce. In this case, students explore the terms associated with mergers while applying the concepts to Amazon’s famous $13.4 billion acquisition.

How to Use Activity: Use this activity to supplement your lecture of the vocabulary concepts associated with this chapter. This exercise serves as a solid reinforcement to the terms presented in the text. It can also be extended by having students explore other acquisitions—both friendly and hostile.

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Class Discussion: What could be attractive to Amazon by purchasing Whole Foods? With Whole Foods now being owned by Amazon, what are some disadvantages from either the customer’s or businesses’ point of view? With a successful brand like Amazon acquiring Whole Foods, is there any risk in the transaction? Why or why not?

Hardware House: Finding Sources of Cash for Expansion Learning Objective: 4-2 Describe the two types of business partnership and their advantages and disadvantages.

Activity Summary: There are distinct advantages and disadvantages associated with each form of business ownership. Through following the growth of the Hardware House, students apply the concepts of business ownership to its evolution.

How to Use Activity: After completing this video case, students should be comfortable with understanding and applying the forms of business ownership. If there continues to be a knowledge gap, students can create a table of the various forms and list characteristics of each, advantages, and disadvantages. Beyond reflection, students can apply the business formation concepts to either a company they work for, have worked for, or a company they’d like to work for.

Class Discussion: Consider the types of business formations you just learned about. Do you have a preference to work for a particular type? Reflect on your work experiences. What types of business formations have you worked for? Suppose you are starting up a new company, what form of organization would you select?

BONUS TEACHING RESOURCES Additional Discussion Questions 1. What are the advantages and disadvantages of partnerships?

Partnerships offer the following advantages: (1) They are easy to organize, (2) partners can complement their skills, (3) may have more access to capital, (4) partnerships can make decisions faster than larger businesses, and (5) government regulations are few. Partnerships also have several disadvantages, (1) All partnerships have to deal with disagreements, (2) general partners have unlimited liability for the debts of the partnership, (3) partners are responsible for each others’ decisions, (4) the death or termination of one partner requires a new partnership agreement to be drawn up, (5) it is difficult to sell a partnership interest at a fair price, (6) the distribution of profits may not correctly reflect the amount of work done by each partner, and (7) partnerships may be taxed at a higher rate than corporations.

2. What is the biggest advantage of corporations?

Because a corporation is a separate legal entity, it has some very specific advantages over other forms of ownership. The biggest advantage may be the limited liability of the owners 3.

What are all the advantages of corporations?

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The advantages of corporations include unlimited liability, ease of transfer of ownership, perpetual life, external sources of funds, expansion potential, tax advantages.

4. What are the disadvantages of corporations?

The disadvantages of corporations include double taxation, forming a corporation, disclosure of information and regulations, impact on management decisions, and employee–owner separation.

5. Describe the two types of shares corporations issue.

Corporations issue two types of shares: preferred and common. Owners of preferred shares are a special class of owners because, although they generally do not have any say in running the company, they have a claim to any profits before any other shareholders do. Other shareholders do not receive any dividends unless the preferred shareholders have already been paid.

Common shareholders are the voting owners of a corporation. They are usually entitled to one vote per share. During an annual shareholders’ meeting, common shareholders elect a board of directors. Because they can choose the board of directors, common shareholders have some say in how the company will operate.

6. Define a board of directors.

Board of directors is a group of individuals, elected by the shareholders to oversee the general operation of the corporation, who set the corporation’s long-range objectives 7. Describe a joint venture and in what industries are joint ventures common?

A joint venture is a partnership established for a specific project often for a limited time. The partners in a joint venture may be individuals or organizations. Control of a joint venture may be shared equally, or one partner may control decision making. Joint ventures are especially popular in situations that call for large investments, such as extraction of natural resources and are quite common in the Alberta oil patch 8. Define and debate the advantages and disadvantages of mergers, and acquisitions.

A merger occurs when two companies (usually corporations) combine to form a new company.

An acquisition occurs when one company buys most of another company’s stock.. They can help merging firms to gain a larger market share in their industries, acquire valuable assets such as new products or plants and equipment, and lower their costs. Consequently, they can benefit shareholders by improving the companies’ market value and stock prices. However, they also can hurt companies if they force managers to focus on avoiding takeovers at the expense of productivity and profits. They may lead a company to take on too much debt and can harm employee morale and productivity.

9. Define and explain how leveraged buyouts (LBO) commonly occur.

In a leveraged buyout (LBO), a group of investors borrows money from banks and other institutions to acquire a company (or a division of one), using the assets of the purchased company to guarantee repayment of the loan. In some LBOs, as much as 95 percent of the buyout price is paid with borrowed money, which eventually must be repaid. The new 05-109 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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management then engages in a number of strategies including the selling of assets, cutting costs including termination of employees, and/or breaking up businesses to restore value to the acquired business. The company uses its improved balance sheet to pay off the debt and the business is often sold at a much higher price than the original purchase price.

Controversial Issue What Is a Partnership Worth?

The textbook relates that a disadvantage of a partnership is the sometimes difficult situation that arises when a partner wants to sell his or her interest in the business. The tough question arises about how much one partner’s interest in the firm is worth. This issue tells of an impasse reached by two partners, with names disguised. Ask students to decide what would be the fairest settlement of the problem of the partnership.

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

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

Still, Nancy professed a determination to get out of printing. At the end of the third year, Nancy and Arthur each held a $41,000 interest in the business—thanks to a sales boom in the third year.

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

When asked to explain her demand, Nancy said: “I can see now that this firm has great potential and massive future earnings. If I sell out for $41,000, I know that someday I will feel like a fool. I’d have to tell my friends, ‘Can you believe that Arthur’s $2,000,000 business was once half mine, and I sold my half for just $41,000?’ No, Arthur, I must have $80,000.”

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

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

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

Term Paper or Project Topic These topics may be assigned as individual or collaborative projects: 1.

2.

3.

4.

Requirements for Incorporation (in your province) Advantages and Disadvantages of Leveraged Buyouts A History of Cooperatives in Canada A Study of Successful Sole Proprietorships (or Partnerships)

(Note to instructor: This study could be done by interviewing a number of sole proprietors or partners in your area. The number to be interviewed can be determined by the instructor.)

Guest Speaker Suggestions 1. A sole proprietor from a local firm to discuss formation, management, advantages, and disadvantages of sole proprietorships.

2. A member of a partnership in your local area to discuss formation, management, advantages, and disadvantages of partnerships.

3. An executive from a private or public corporation in your local area to discuss formation, management, advantages, and disadvantages of corporations.

4. A representative of a bank or financial institution to speak—from a lender’s perspective—about the differences between sole proprietorships, partnerships, and corporations.

5. An attorney to talk about some of the legal aspects of forming a business.

Teaching Suggestions 15. This chapter is very important to students’ understanding of business organizations. Most instructors will stress the chapter content in lectures by using the “Lecture Outline and Notes.”

16. Focusing on the boxed material and the case study will help students achieve the objectives of the chapter. Answers for both the boxed material and case studies are provided in this Instructor’s Manual.

17. The “Check Your Progress” section in the textbook will help in understanding chapter content.

These topics may be assigned as an outside class assignment. One of the problems in giving textbook questions as outside assignments is that students frequently do not do the assignments and wait for the instructor to give them the answers. Instructors can avoid these problems in several ways: (1) collecting assignments at random and assigning a grade; (2) occasionally giving some of the same questions as a quiz, thus rewarding students who have 05-111 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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done their assignments; (3) having students hand in assignments and giving credit for work submitted (or penalties for work not submitted); and (4) calling on students at random to write on the chalkboard their answers to specific questions (giving a small number of points for correct answers).

Chapter 5: Small Business, Entrepreneurship, and Franchising SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Snack Dating App – Tinder meets TikTok and has a Baby Consider Ethics and Social Responsibility: Social Entrepreneurs Entrepreneurship in Action a Growing Success: Luv Ur Culrs — A Google search and Curly Hair Leads to the Creation of Luv Ur Curls Responding to Business Challenges: Crowdfunding Success Consider Ethics and Social Responsibility: Are these angels from heaven or greedy dragons?

So You Want to Be an Entrepreneur or Small Business Owner END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Small Business, Entrepreneurship, and Franchising See for Yourself Case: Small Business Fight to Survive the Pandemic Team Exercise SUPPLEMENTAL TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Creativity Solve the Dilemma: The Small Business Challenge CONNECT ACTIVITIES Entrepreneurs Reinvent Pizza The Ruffled Hem: Shopping as an Experience The Buzz About Burt’s Bees BONUS TEACHING RESOURCES Additional Discussion Questions Controversial Issue Term Paper or Project Topic 05-112 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Guest Speaker Suggestions Teaching Suggestions

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SUMMARY This chapter surveys the world of entrepreneurship and small business. First, we define entrepreneurship and small business and examine the role of small business in the American economy.

Then, we explore the advantages and disadvantages of small business ownership and analyze why small businesses succeed or fail. Next, we discuss how an entrepreneur goes about starting a business and the challenges facing small businesses today. Finally, we look at entrepreneurship in larger organizations.

LEARNING OBJECTIVES LO 5-1

Define entrepreneurship and small business.

LO 5-2

Investigate the importance of small business in the Canadian economy and why certain fields attract small business.

LO 5-3

Specify the advantages of small-business ownership.

LO 5-4

Summarize the disadvantages of small-business ownership, and analyze why many small businesses fail.

LO 5-5

Describe how you go about starting a small business and what resources are needed.

LO 5-6

Evaluate the demographic, technological, and economic trends that are affecting the future of small business.

LO 5-7

Explain why many large businesses are trying to “think small.”

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KEY TERMS AND DEFINITIONS angel investors

Investors who invest capital in start-up businesses. The term angel is in reference to the fact that traditional lenders will not normally lend to companies at the early stages of their operations.

business plan

A precise statement of the rationale for a business and a step-by-step explanation of how it will achieve its goals.

entrepreneurship

The process of creating and managing a business to achieve desired objectives.

External shock

Events that occur in a company’s external environment that the company could not control.

franchise

A license to sell another’s products or to use another’s name in business or both.

franchisee

The purchaser of a franchise.

franchisor

The company that sells a franchise.

intrapreneurs

Individuals in large firms who take responsibility for the development of innovations within the larger organization.

small business

Any independently owned and operated business that is not dominant in its competitive area and does not employ more than 500 people.

undercapitalization

The lack of funds to operate a business normally.

venture capitalists

Persons or organizations that agree to provide some funds for a new business in exchange for an ownership interest or stock.

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CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, and KEY TERMS learners will need to take away from the course.

LO 5-1

LO 5-2

Define entrepreneurship and small business.

Key Terms:  Introduction  Entrepreneurship  The Nature of Entrepreneurship and Small Business  Small Business o Entrepreneur Characteristics o What is a Small Business?

Lecture Outline and Notes: I. Introduction A. Small businesses embody the vision of entrepreneurial owners to succeed by providing new or better goods, services, or ideas.

B. Small businesses are at the heart of the Canadian economic and social systems because they offer opportunities and express the freedom of people to make their own destinies.

II. The Nature of Entrepreneurship and Small Business A. Entrepreneurship is the process of creating and managing a business to achieve desired objectives. The entrepreneurship movement has been accelerating over the past few years.

B. Entrepreneur Characteristics a. Intuitive b. Productive c. Resourceful d. Charismatic e. Innovative f. Risk-taker g. Persistent h. Friendly C. What Is a Small Business? o The textbook’s definition of small business is any independently owned and operated business that is not dominant in its competitive area and employs fewer than 500 people.

Investigate the importance of small business in the Canadian Key Terms: economy and why certain fields attract small business.  The Role of Small Business in the Canadian Economy  Industries that Attract Small Business A. The Role of Small Business in the Canadian Economy 1. Small businesses are vital to the soundness of the Canadian economy. More than 98 percent of Canadian businesses are small (Table 5.1).

2. Employ 88.4% of the total private sector labour force.

3. Small businesses fuel job creation and innovation and provide significant opportunities for minorities and women to succeed in business.

4. Job Creation a. Small businesses are believed to generate 61.2 percent of all new jobs (Table 5.2).

5. Innovation b. Small businesses contribute highly to innovation, and bring significant changes and benefits to customers. Small firms produce 58.3 percent of innovations and invest

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significant resources in the development of new services.

B. Industries That Attract Small Business 1. Small businesses are found in every industry, but some areas are especially attractive because they are relatively easy to enter, require low initial financing, and/or relatively easy to target a specific group of customers.

2. Retailing and Wholesaling a. A retailer acquires goods from producers or wholesalers and sells them to consumers. Retailing is attractive to small business owners because it is easy to gain experience and exposure in the field, and the financial cost of opening a retail store is relatively low. b. Wholesalers supply products to industrial, retail, and institutional users for resale or for use in making other products. Small businesses are successful in wholesaling activities because they are close to final customers and know how to keep them satisfied.

3. Services a. Service providers work for others but do not actually produce tangible goods. b. Services represent the fastest growing sector of the Canadian and United States economy. c. Many service providers are also retailers because they provide their services to ultimate consumers.

4. Manufacturing a. Small businesses can often customize products to meet specific customer needs and wants.

5. Technology a. High-technology businesses depend heavily on advanced scientific and engineering knowledge.

Specify the advantages of small business ownership.  Advantages of Small Business Ownership o Independence o Enjoyment o Financial Rewards o Low Start-Up Costs o Management o Focus o Reputation III. Advantages of Small Business Ownership A. Independence 1. Independence is the leading reason that entrepreneurs choose to go into business for themselves.

B. Enjoyment 1. Entrepreneurs commonly cite that they enjoy being an entrepreneur. In fact 90 percent of entrepreneurs say they would start their business again.

C. Financial Rewards 1. Entrepreneurs often dream about achieving financial independence through entrepreneurship.

D. Low Start-up Costs 1. People can start small businesses with limited money down.

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E. Management 1. Owners have flexibility to pursue the markets and opportunities they want to pursue as there is often only one level of management.

F. Focus 1. Small businesses can focus on market niches or areas of the market which the entrepreneur is particularly interested in.

G. Reputation 1. Small businesses can establish a reputation for quality and service.

LO 5-4

Summarize the disadvantages of small-business ownership, and Key Terms: analyze why many small businesses fail.  External Shocks  Disadvantages of Small Business Ownership  Undercapitalization o High Stress Level o Limited Financial Rewards o Time Demands o High Failure Rate o External Shocks o Inability to Cope With Growth IV. Disadvantages of Small Business Ownership (Table 5.3) A. High Stress Level 1. Worries about the business, competition, or changing market demand cause stress.

2. Long work days are the norm.

B. High Failure Rate 1. There is no guarantee of small business success.

2. Half of all small businesses fail within 5 years.

3. Small businesses fail for many reasons. (Table 5.4). a. External shocks are events that occur in a company’s external environment that the company could not control. b. Poor business management causes many failures. c. Other causes include a poor business concept, burdens imposed by government regulation, insufficient funds during slow sales periods, and competition from others.

4. Undercapitalization a. The shortest path to failure in business is undercapitalization—lacking sufficient funds needed to operate the business normally.

5. Managerial Inexperience or Incompetence a. Poor management is the cause of many business failures: Just because an entrepreneur has a brilliant vision for a small business does not mean they have the knowledge or experience to manage a growing business effectively. b. Expanding a hobby into a business may work if a genuine market niche exists, but all too often people start such a business without identifying a real need for the goods or services.

6. Inability to Cope With Growth a. Growth requires specialized management skills that the owner may neither have nor have the time to acquire. b. Growth often requires the owner to give up a certain amount of direct authority, and it can be hard for someone who has called all the shots to give up control.

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Inabi

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Describe how you go about starting a small business and what Key Terms: resources are needed.  Business plan  Starting a Small Business  Angel investors o Idea Generation  Venture capitalists o Opportunity Identification and Assessment  Franchise o The Business Plan  Franchiser o Forms of Business Ownership  Franchisee o Financial Resources o Approaches to Starting a Small Business o Help for Small Business Managers V. Starting a Small Business A. Creating a small business involves starting out with a concept or idea. Then, it involves creating a business plan. Next, the entrepreneur must devise a strategy to guide planning and development.

B. The Business Plan 1. A business plan is a precise statement of the rationale for the business and a step-bystep explanation of how it will achieve its goals.

2. It should include an explanation of the business, an analysis of the competition, estimates of income and expenses, a strategy for acquiring sufficient funds to keep the business going, and other information.

3. The business plan should act as a guide and reference document.

4. It should be revised periodically to ensure that the firm’s goals and strategies can adapt to changes in the environment.

5. Business plans also allow companies to assess market potential, determine price and manufacturing requirements, identify optimal distribution channels, and refine product selection.

C. Forms of Business Ownership 1. After developing a business plan, the entrepreneur has to decide on an appropriate legal form of business ownership, such as a sole proprietorship, partnership, or corporation.

D. Financial Resources 1. To make money from a small business, the owner must provide or obtain money (capital) to start the business and to keep it running smoothly. Financing options include loans, stocks, or equity financing (Table 5.5).

2. Equity Financing a. Equity financing occurs when the owner uses real personal assets rather than borrowing funds from outside sources to get started in a new business. b. Small businesses can also obtain equity financing by finding investors for their operations. i. They may sell stock in the business to family members, friends, employees, or other investors. ii. Angel investors and venture capitalists are persons or organizations that agree to provide some funds for a new business in exchange for an ownership interest or stock. iii. This form of equity financing requires that the small business owner share the profits or the control of the business.

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3. Debt Financing a. Banks are the main suppliers of external debt financing to small businesses. b. The Small Business Administration offers financial assistance to qualifying businesses. c. Small business owners can look to family and friends as sources for loans of longterm funds or other assets, such as computers or automobiles that are exchanged for an ownership interest in a business. d. The amount a financial institution is willing to loan depends on its assessment of the venture’s likelihood of success and of the entrepreneur’s ability to repay the loan. i. The owner is often required to put up collateral—a financial interest in the property or fixtures of the business—to guarantee payment of the debt. ii. The small business owner may also have to offer some personal property as collateral, such as a home, in which case the loan is called a mortgage. e. Financial institutions can also grant a small business a line of credit—an agreement by which a financial institution promises to lend a business a predetermined sum on demand. f. Small businesses may also obtain funding from their suppliers in the form of trade credit; suppliers allow the business to take possession of the needed goods and services and pay for them at a later date or in installments. g. Occasionally, small businesses engage in bartering, trading their own products for the goods and services offered by other businesses. h. Some community groups, state, and local agencies sponsor loans, especially to minority businesspeople or for development in certain areas.

E. Approaches to Starting a Small Business 1. Starting From Scratch Versus Buying an Existing Business a. Buying an already existing business has the advantage of providing a network of existing customers and suppliers. b. However, the entrepreneur must deal with the problems the business already has.

2. Franchising a. A license to sell another’s products or to use another’s name in business, or both, is a franchise. i. The company that sells a franchise is the franchiser. ii. The purchaser of a franchise is called a franchisee. b. The franchisee acquires the rights to a name, logo, methods of operation, national advertising, products, and other elements associated with the franchiser’s business in return for a financial commitment and the agreement to conduct business in accordance to the franchiser’s standard of operations. c. The initial fee to join a franchise varies greatly. In addition, franchisees buy equipment, pay for training, and obtain a mortgage or lease. The franchisee also pays the franchiser a monthly or annual fee based on the percentage of sales or profits. d. Advantages of franchising i. Franchising allows a franchisee the opportunity to set up a small business relatively quickly, and a franchise outlet often reaches the break-even point faster than an independent business would because of its association with an established brand. ii. Management training and support 07-120 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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iii. Brand-name appeal iv. Standardized quality of goods and services v. National and local advertising programs vi. Financial assistance vii. Proven products and business formats viii. Centralized buying power ix. Site selection and territorial protection x. Greater chance for success e. Disadvantages of franchising i. Franchise fees and profit sharing with the franchiser ii. Strict adherence to standardized operations iii. Restrictions on purchasing iv. Limited product line v. Possible market saturation vi. Less freedom in business decisions f. The practice of franchising first began in the United States in the 19th century when Singer used it to sell sewing machines. The concept of franchising grew especially rapidly during the 1960s, when it expanded to diverse industries. g. Fastest Growing Franchises (Table 5.6) F. Help for Small Business Managers 1. Many organizations exist to help small businesses a. Business Development Centre b. College courses and seminars c. Chambers of commerce d. National publications such as Inc. and Entrepreneur, as well as weekly business journals/newspapers. e. Advice and help from other small businesses f. Networking—building relationships and sharing information with colleagues—is vital for any businessperson.

Evaluate the demographic, technological, and economic trends that are affecting the future of small business.  The Future for Small Business o Demographic Trends o Technological and Economic Trends VI. The Future for Small Business A. Demographic Trends 1. The baby boom generation (those born between 1946 and 1964) is wealthy and aging but not actively pursued by most small businesses.

2. Another market with huge potential for small business is the millennials (those born between 1981 and 1997). They number around 83 million. Millennials are not solely concerned about money; they are also concerned with advancement, recognition, and improved capabilities.

3. The growing number of immigrants represents another potential market for small business.

4. Top cities for doing business in Canada (Table 5.6).

B. Technological and Economic Trends 1. Technological advances have opened many new markets to small business.

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2. Small businesses can react quickly to changes in the economy.

3. Changes in communication and technology can allow small companies to customize their services quickly for international customers.

4. Deregulation of the energy market and interest in alternative fuels and in fuel conservation has spawned many small businesses.

Explain why many large businesses are trying to “think small.”

Key Terms:  Making Big Businesses Act “Small”  Intrapreneurs

VII. Making Big Businesses Act “Small” A. The success and competitiveness of small businesses have led many large corporations to take a closer look at what makes their smaller rivals tick.

B. Many large corporations are focusing on downsizing. This process involves the reduction of management layers, corporate staff, and work tasks in order to make the firm more flexible, resourceful, and innovative like a smaller business.

C. Many companies are trying to instill a spirit of entrepreneurship. In major corporations, intrapreneurs, like entrepreneurs, are employees who take responsibility for the development of innovations of any kind within the large organization.

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Snack Dating App – Tinder meets TikTok and has a Baby Snack is a dating app founded as a mesh of TikTok, Tinder, and flirting. Snack users post videos to a feed that other users can like, resulting in matches. For a match to occur, the users must like each other‘s videos, which stream like TikTok videos. Once there are likes, users will continue to see videos from their matches and connect using direct messaging. The founder, Kimberly Kaplan, believes videos give potential matches a better chance to highlight their personalities and interests than photos.

1. Do you think the concept of video dating is enough to allow Snack to replace Tinder as the dominant dating app in the marketplace?

Snack has the potential to replace Tinder. It has excellent design features and a new dating app more or less takes over the marketplace every ten years, and Tinder is eight years old.

2. What do you see as some of the advantages of Snack as an app and as a company? What are some of the disadvantages?

Advantages: Snack uses direct messaging, matching algorithms, and TikTok's third partying sharing ability; allows users to showcase what is going on in their lives; appeals to the openness of Gen Z-ers; is more fun than traditional dating apps Disadvantages: Snack appeals to Gen Z-ers, but may not appeal to other demographics.

3. Do you think Match.com will modify a current app or create a new one to compete with Snack?

They are likely to compete with Snack. BumbleMatch.com controls roughly 80 percent of the online dating industry as they own Tinder, Match, Plenty of Fish, Grinder, and so forth.

4. Kaplan is not a Gen Z-er. Do you think she can learn enough about what appeals to the age group to be successful? Why or why not? Do you think it‘s ethical for her to start a business solely based on appealing to a group of people she doesn’t belong to?

Answers will vary. Kaplan did discuss the concept directly with Gen Z daters, who loved the idea and provided valuable feedback. She also used focus groups with Gen Z-ers to learn about how they date and developed the logo for Snack using a $10,000 design competition on TikTok. 5. Use Internet resources to look up the current state of Snack. How many users do they have?

Are they successful? Have you heard of Snack? Do you or your peers use it? Why or why not?

Answers will vary.

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Consider Ethics and Social Responsibility: Social Entrepreneurs A social entrepreneur is someone who is driven to create social change by identifying and implementing solutions to social problems. Emphasis is being placed on the social entrepreneur as a necessary component for future economic growth. Although social entrepreneurship has long been privately funded, governments are recognizing its importance. For example, the Canadian government and many of its provincial counterparts are in the process of implementing Social Impact Bonds (SIB). The bonds would have private investors lend money to organizations that are trying to make improvements in society, such as increasing literacy rates for prisoners. If the organization succeeds, the government would then pay for the service and the organization could pay back its investors plus interest.

1. What are the potential benefits of social entrepreneurship in our society?

Social entrepreneurs can apply the skills associated with entrepreneurship to solve some of society's problems. Given the complexity of some of society’s problems, an innovative entrepreneur, may be best suited to come up with solutions. Students may cite that SIBs are a good idea as citizens will be funding businesses to help solve some of society's problems.

Disadvantages may include problems proving the organization was successful in meetings its goals.

2. Either individually or in groups, develop a definition for social enterprises and social entrepreneurship.

Answers will vary.

3. Can a for-profit business like Animikii Indigenous Technology or Smooth 42 be considered a social enterprise? Why or why not?

A social entrepreneur is someone who is driven to create a positive social/societal change by identifying and implementing solutions to problems. Given how broadly the term social entrepreneur can be applied, people sometimes debate what constitutes a social entrepreneur.

Animikii Indigenous Technology donates money to social causes, while Smooth 42 promotes rural entrepreneurship.

4. Do you consider the owners of Smooth 42 to be social entrepreneurs? Why or why not?

Smooth 42 promotes rural entrepreneurship and puts a social emphasis on their business. For example, the company donated $75,000 worth of hand sanitizer to the local community during the pandemic.

5. Numerous examples of socially responsible entrepreneurs exist in this chapter, including Sahar Saidi and the concluding case about Jenn Harper. Quickly read the cases. Do you think they should be considered social entrepreneurs? Why or why not?

Answers will vary.

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6. Should the government do more to encourage social enterprise? Why or why not? Provide some suggestions to encourage social entrepreneurship.

While some students may say that social entrepreneurs clearly benefit society one could argue that the same benefit would hold true of a lot of professions.

Entrepreneurship in Action a Growing Success: Luv Ur Culrs — A Google search and Curly Hair Leads to the Creation of Luv Ur Curls 1. What do you think are some of the advantages of LUS Brands? What potential disadvantages or threats exist for the company?

Advantages include a three-product kit including shampoo, conditioner, and styling product that retails for $45; the lack of organic hair care products in the marketplace for curly hair; nonorganic products that did work involved the use of multiple products and hours of work.

Disadvantages include a limited product range.

2. Why do you think Saidi originally struggled to raise money for her company?

Saidi originally created a business plan but could not raise any money in the first year. After a year in business, she successfully raised one million dollars from professional and angel investors. Investors may have been hesitant to invest in an unproven product and someone with no entrepreneurial experience.

3.

Assume that she gave up some equity in her business. What are the advantages and disadvantages of her decision?

Taking on investors and giving up equity provided her with smart money, investors who could advise her about running and managing a fast-growing DTC company. Disadvantages include sharing of profits; disclosure of information; and loss of control over the business.

4. LUS Brands has relied on social media and the DTC model to grow. Do you think they will eventually sell their products through more traditional retail channels? Why or why not?

LUS Brands spends money and time to generate awareness for their customers' posts on socal media, which results in new followers for customers. As the company expands sand the product becomes better known, customers will want to buy it in retail stores.

Responding to Business Challenges: Crowdfunding Success Canadian entrepreneurs have been very successful in using crowdfunding to raise funds for a variety of businesses over several years. Some of the most successful initiatives include:   

Neptune Pine (https://www.neptune.co/) smart watch raised $802,1224.

Bulat (www.bulatkitchen.com), a kitchen knife, raised $942,716.

Smart Parka (https://northaware.ca), a winter coat, raised $3.2 million.

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Smart Halo (www.smarthalo.bike), a GPS for bikes built into the handlebars, raised $538,723.

1. Based on the text and Internet resources what do you think are some of the advantages and disadvantages of using crowdfunding sites from a business and consumer perspective?

Advantages – proof of business concept; allow new companies to sell and consumers to access innovative products, enable people to invest in businesses they believe in; enable entrepreneurs access to capital.

Disadvantages – most campaigns do not reach their targets; consumers do not always understand the process; campaigns can be both costly and timely.

2. Use Internet resources to review some of the products and companies cited above. What is the current state of the company's business and their products?

Answers will vary.

3.

Use Internet resources to visit some of the more popular crowdfunding sites. Select a product that you would pre-purchase and present it to your peers. Be sure to explain to your peers why you would purchase the product including its strengths compared to competitor products.

Answers will vary.

4. Use Internet resources to visit some of the more popular equity based crowdfunding sites.

Select a firm you would be willing to invest in and present the opportunity to your peers. Be sure to explain why you think the business will be successful.

Answers will vary.

Consider Ethics and Social Responsibility: Are these angels from heaven or greedy dragons?

In the boxed feature, students are asked exposed to angel investors through the popular CBC television series Dragon’s Den. Students are asked to consider the merits of the business opportunities and the reaction from the angel investors.

1. If you represented PeerFX or Atomic Tea would you have agreed to the deals proposed by the Dragons?

Answers will vary, but students may mention some of these details: PeerFX was asking for $200,000 for 25% of their business and received the money, but for 50.1% Atomic Tea was asking for $120,000 for 25% of their business. Several offers were made ($225,000 for 50.1% and $120,000 for 40%), but while the siblings stepped aside to discuss their 07-126 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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choices privately, one dragon convinced the others that they should withdraw both offers and counter with a new take-it-or-leave-it offer from all five dragons: $120,000 for 50.1%.

2.

Did the investors act ethically?

Answers will vary.

3. Using Internet resources such as YouTube, review some Dragon's Den episodes. What were the pitches about? Were they successful? What were the terms of offer? Communicate your findings to the class.

Answers will vary.

So You Want to Be an Entrepreneur or Small Business Owner As long as there are unfulfilled needs from consumers, there will be a demand for entrepreneurs and small businesses. Entrepreneurs and small-business owners have been, and will continue to be, a vital part of the Canadian economy, whether in retailing, wholesaling, manufacturing, technology, or services. Creating a business around your idea has a lot of advantages. For many people, independence is the biggest advantage of forming their own small business, especially for those who do not work well in a corporate setting and like to call their own shots. Smaller businesses are also cheaper to start up than large ones in terms of salaries, infrastructure, and equipment. Smallness also provides a lot of flexibility to change with the times. If consumers suddenly start demanding new and different products or services, a small business is more likely to deliver quickly.

Students need to understand the demographics and needs of their community. On a macro level, ask them about the economic forecast for their area. Have them determine the level (number and quality) of new businesses entering the area.

What is one of the most common reasons people become entrepreneurs?

Independence is one of the main reasons why people turn to entrepreneurship. People who do not do well in an office setting and who prefer to set their own hours and have more freedom tend to prefer entrepreneurship.

END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Small Business, Entrepreneurship, and Franchising Intuitively, students turn to the internet for their information first. While this is a good idea, you don’t want them to neglect the resources available to them locally. The Chamber of Commerce, Economic Development Authority, and City Planning Office are all possible sources for information on the community. Perhaps you might want to invite a local employee of one of these organizations to class as a guest lecturer.

Students need to understand the demographics and needs of their community. On a macro level, ask them about the economic forecast for their area. Have them determine the level (number and quality) of new businesses entering the area 07-127 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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See for Yourself Case: Small Businesses Fight to Survive the Pandemic The COVID-19 pandemic disrupted the operations of America’s more than 30 million small businesses, from nail salons and restaurants to gyms and tattoo shops. Additionally, it shifted consumer behaviour and created new business opportunities. Many businesses struggled to adapt, while others thrived from new patterns in consumer behaviour.

The CDC encouraged social distancing measures, many state and local governments issued temporary stay-at-home orders that closed nonessential businesses and ones where close contact with others was likely (e.g., gyms, movie theaters, and salons), and urged people to leave their homes only for essential needs.

Even as the temporary lockdowns ended, business did not return to normal. Some called the pandemic the “retail apocalypse.” Consumer spending across nearly every category declined, except for alcohol and groceries. As sales for brick-and-mortar stores slowed to a halt, many small businesses shuttered for good. Small businesses that were able to shift their businesses online had a greater chance of survival. Roughly one quarter of small businesses closed during the pandemic.

While many small business owners struggled, the high rate of unemployment during the COVID-19 recession led to a boom in entrepreneurship. Based on data from the U.S. Census Bureau, new business formations during the pandemic hit a record high. In the long term, many of these small business owners will turn into employers, which will improve the unemployment rate.

1. How did the pandemic disrupt business operations?

Businesses had to observe new social distancing protocols, local governments issued temporary stay-at-home orders that closed nonessential businesses, and even after reopening businesses many businesses had to shift to online/delivery.

2. In what ways did consumer behaviour change during the pandemic? How has consumer behaviour changed long term?

Many consumers shifted to online purchases and limited their in-person purchases and delivery.

Long term it is projected that many consumers will continue to use apps for purchasing and having the items delivered. This has fueled the growth of businesses like Grubhub and Uber Eats.

3. Why do you think new business formations during the pandemic hit a record high?

Many individuals lost their jobs and had to pivot. Many of those individuals decided to start their own businesses believing that they will have more control in future recessions.

Team Exercise Have students explore successful global franchises. They should go to the companies’ websites and find the requirements for applying for three franchises. The chapter provides examples of successful franchises. Students should ask themselves: What do the companies provide, and what is expected to be provided by the franchiser? They will compare and contrast each group’s findings for the franchises researched. For example, at Subway, the franchisee is responsible for the initial franchise 07-128 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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fee, finding locations, leasehold improvements and equipment, hiring employees and operating restaurants, and paying an 8% royalty to the company and a fee into the advertising fund. The company provides access to formulas and operational systems, store design and equipment ordering guidance, a training program, an operations manual, a representative on site during opening, periodic evaluations and ongoing support, and informative publications SUPPLEMENTAL TEACHING RESOURCES Check Your Progress 1. Why are small businesses so important to the Canadian economy?

More than 98 percent of all Canadian firms are classified as small businesses. Small businesses are fuelling job creation and innovation.

2. Which fields tend to attract entrepreneurs the most? Why? The fields of retailing, wholesaling, services, manufacturing, high technology, and the sharing economy tend to attract small businesses because these fields (except for high technology) are relatively inexpensive to enter. They generally do not require a large initial investment or a lot of experience.

3. What are the advantages of starting a small business? The disadvantages?

Advantages of small business ownership include independence and flexibility in terms of the location and operating hours of the business. Additional advantages include lower costs, flexibility to adapt to changing market conditions, focus on a limited market niche, and the chance to build a reputation on quality and service. Among the disadvantages of small businesses are the high stress level and the high failure rate.

4. What are the principal reasons for the high failure rate among small businesses?

The main reasons for the high rate of failure among small businesses are undercapitalization, inability to cope with growth, poor business management, over-optimism, burdens imposed by government regulation, insufficient reserves to withstand slow sales, and vulnerability to competition.

5. What decisions must an entrepreneur make when starting a small business?

When starting a small business, an entrepreneur must first conceive and write a business plan.

They must then select a specific form of business ownership and secure sufficient financial resources.

6. What types of financing do small entrepreneurs typically use? What are some of the pros and cons of each?

Few small business owners have the funds necessary to start a business. Small business owners can obtain financing from friends and family. However, the relationship may suffer if the business fails. Small businesses may seek financing from banks or other financial institutions. A bank may require collateral or a mortgage, and the bank can repossess the property if the business fails to repay the loan.

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A financial institution may grant a line of credit, an agreement by which the financial institution promises to lend the business a predetermined sum of money on demand.

Other sources of financing include provincial and federal agencies, and venture capitalists.

7. Describe the franchising relationship.

Franchisees purchase a franchise for a fee, plus start-up costs. Franchisees may also pay a fee, based on a percentage of sales, for advertising and promotion.

8. What demographic, technological, and economic trends are influencing the future of small businesses?

Aging baby boomers, echo boomers, and an increasing number of immigrants living in the United States represent potentially huge markets for small businesses. Technological advances have opened many new markets to small businesses. Small businesses can adapt to changing trends faster than large corporations.

9. Why do large corporations want to become more like small businesses?

The continuous success of small businesses, their capacity to innovate, their flexibility, and their ability to adapt quickly to market changes are some of the reasons why large corporations want to become more like small businesses.

Get Involved 1. Interview a local small business owner. Why did they start the business? What factors have led to the business’s success? What problems has the owner experienced? What advice would they offer a potential entrepreneur?

Students’ answers will vary depending upon the business they choose.

2. Using business journals, find an example of a company that is trying to emulate the factors that make small businesses flexible and more responsive. Describe and evaluate the company’s activities. Have they been successful? Why or why not?

Students’ answers will vary depending upon the business they choose.

3. Using the business plan outline in Appendix A, create a business plan for a business idea that you have. (A man named Frederick Smith once did a similar project for a business class at Yale.

His paper became the basis for the business he later founded: Federal Express!)

Students’ answers will vary depending upon their business idea.

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Build Your Skills: Creativity The Build Your Skills exercise allows students to measure their Creativity Quotient, which comes from exercising the right brain hemisphere. Students might find this interesting in determining their own creativity and relating this to their possible success in entrepreneurship.

Michelangelo, the great Renaissance artist and creative genius, best known for his Sistine Chapel ceiling frescoes and his colossal 18-ft marble sculpture of David, is supposed to have said that he didn’t create his sculptures. He only uncovered what was already there, and that’s exactly what creativity is— uncovering what’s already there.

Here are some additional ideas for giving your students some help in developing their creativity skills: a. Between now and the next class session, ask students to select three items from the list of mental aerobic exercises presented below. b. At the next class session, have them report on the results of this creativity conditioning exercise using one of the following formats: i.

Have students write a two- to three-paragraph paper highlighting some positive/negative results of these mental conditioning exercises.

ii. Take a few minutes at the beginning of class and ask several students to describe the results of these mental conditioning exercises. iii. Break into groups of three to four students and have them share some outcomes of these mental conditioning exercises.

Mental Aerobic Exercises 

If you’re right-handed, try using your left hand to do things. If you’re left-handed, switch to your right for a while.



Do a jigsaw or crossword puzzle.



Try a new way of expressing your creativity (cook something you’ve never made before, paint a picture, write a poem, throw a party that has an interesting theme).



Guess at measurements rather than using a ruler, tape measure, or measuring cup. Then, measure and see how close you were.



Watch three-quarters of a movie on video, stop the tape, and think of your own ending.



Stretch your thinking beyond what might be your typical approach to solving problems. See whether you can solve one of these brain teasers (answers provided below): i.

Arrange the letters below into one word: NEW DOOR

ii. Change the Roman numeral that represents the number 9 (IX) into a 6 using only one line.

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iii. Determine in what order the numbers below are arranged: 8, 5, 4, 9, 1, 7, 6, 3, 2, 0 

Go to the library and look up an article or find a biography about a famous creative person (Thomas Edison, Walt Disney, Steven Spielberg, etc.) and spend 20 min skimming the book or reading the article, looking for insights into the creative process. For example, Thomas Edison is considered to be the most prolific inventor the world has ever seen. Among his inventions are the incandescent light bulb, the phonograph, and the motion picture projector. One quotation attributed to Edison is, “*Creative+ genius is 99% perspiration and 1% inspiration.”



Go to a day care center and spend half an hour observing 2-, 3-, and 4-year-olds at play. Jot down any “creative” things you observe the children doing. (“Tests show that a child’s creativity plummets 90% between ages 5 and 7. By the age of 40, most adults are about 2% as creative as they were at 5.”)

Answers to brain teasers: (If no one gets the answer for any of these brain teasers, you may want to give the hint provided in parentheses before giving the answer.) i.

ONE WORD (HINT: Are you taking the instructions very literally?)

ii. SIX (HINT: The instructions did not say it had to be a Roman numeral six) iii. Alphabetically (HINT: Is there another way to think of these numbers besides as figures?)

Solve the Dilemma: The Small Business Challenge Jack Gray and his best friend, Bruce McVay, decided to start their own small business. Jack had developed recipes for keto cookies and muffins in an effort to satisfy his personal health needs. Bruce had extensive experience in managing food-service establishments. They knew that a startup company needs a quality product, adequate funds, a written business plan, some outside financial support, and a good promotion program. Jack and Bruce felt they had all of this and more and were ready to embark on their new store. Each had $35,000 to invest, and with their homes and other resources, they had borrowing power of an additional $125,000.

However, they still have many decisions to make, including what form of organization to use, how to market their product, and how to determine exactly what products to sell— whether just cookies and muffins or additional products.

1. Evaluate the idea of a low-fat cookie and muffin retail store.

A low-fat cookie and muffin retail store certainly meets the demand of an increasing portion of the population that is concerned both with health and weight issues. However, lovers of such products are likely to believe that low-fat cookies and muffins cannot taste good. Thus, Jack and Bruce will have to make a special effort to convince consumers of the contrary.

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2. Are there any concerns in connection with starting a small business that Jack and Bruce have not considered?

Jack and Bruce have not tackled the question of the location of the store; it could be located in a mall, as an independent store along a main road, or in some other place. They also need to determine whether they intend to limit their activities to one store or to several stores. In the second case, the question of the form of development (e.g., by franchises) needs to be answered. In addition, personnel issues have to be addressed.

3. What advice would you give Jack and Bruce as they start up their business?

Interactions with local authorities and associations dealing with small business management may be advisable for Bruce and Jack to create ties with other small business owners. Also, Bruce and Jack should maintain a very strict management of their operations and ensure that they forecast their financial situation regularly. They should probably not hesitate to rely on outside providers (accountants or financial advisors) to perform some of the managerial tasks that they may not be able to conduct themselves.

CONNECT ACTIVITIES Entrepreneurs Reinvent Pizza Learning Objective: 5-2 Explain the importance of small business in the U.S. economy and why certain fields attract small business.

Activity Summary: Believe it or not, pizza, long an American food staple, has been losing popularity since 2000. Shifts in lifestyles and eating habits have influenced the downturn and are also influencing its reinvention. Review the three segments of the case and write your responses as instructed.

No matter how you define small business, one fact is clear: Small businesses are vital to the soundness of the American economy. Small firms are also important as exporters, representing 97.5% of U.S. exporters of goods and contributing 31% of the value of exported goods. In addition, small businesses are largely responsible for fueling job creation and innovation. With their small size comes the flexibility to adapt to changing market demand.

How to Use Activity: Have the students reflect on the pros and cons of purchasing a franchise versus starting a pizza restaurant from “scratch.” Have them focus on the trade-offs that Darren will face and his success or failure as an independent pizza purveyor.

Class Discussion: What challenges will Darren face? How will the demographic changes in pizza consumption possibly impact his decisions? What are his financing options and what are the pros and cons of each?

The Ruffled Hem: Shopping as an Experience Learning Objective: 5:-Activity Summary: This activity is important because as an entrepreneur, you must be able to identify your motivation to start your own business and know what advantages are going to keep you inspired. At the same time, you must recognize the disadvantages of entrepreneurship and what resources are available to help you overcome them.

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The goal of this exercise is to demonstrate understanding of the advantages and disadvantages of owning your own business and how to start a business.

How to Use Activity: After reading the case, have students focus on Shanna’s advantages as a small business owner including her excellent reputation and knowledge of her customer base. Have the students reflect on the disadvantages that could impact her business and cause possible failure.

Class Discussion: What does Shanna need to continue doing to be successful? How have Shanna’s financing choices impacted her business? What should her business include to help her continue her success?

The Buzz about Burt’s Bees Learning Objective: 5-3 Specify the advantages of small business ownership.

Activity Summary: Roxanne Quimby met Burt Shavitz at his roadside honey stand in Maine. Twenty years later, their multimillion-dollar business is thriving. Burt’s Bees is the top all-natural, earthfriendly manufacturer of personal care products. Students explore what it took for Burt’s Bees to grow from a small start-up to a company with over $250 million in revenue.

How to Use Activity: After viewing the video case, have students create a word cloud with “entrepreneur” in the center. Have them list words and phrases to describe the profile of an entrepreneur. The video case mentions traits such as frugality, patience, and productivity. Allow students to share their opinions on what they think an entrepreneur needs to succeed.

Class Discussion: What are the traits someone needs to be successful when opening a small business? Is it possible that a business leader could need different personality traits at different points in their business journeys? Why or why not? Could what one person thinks is a successful business leader trait be deemed unsuccessful by someone else?

BONUS TEACHING RESOURCES Additional Discussion Questions 1. Assume you wanted to go into business for yourself. What kind of business would you prefer?

What would be the financial requirements for entering the business? What type of work or managerial experience would you need?

The answers to this question will vary with each student. The purpose of this exercise is to get students to think about the process of going into business.

2. What should be included on a business plan? What is the importance of a business plan to the small business entrepreneur?

A business plan is a meticulous statement of the rationale for a business and a step by step explanation of how it will achieve its goals. The business plan should include an explanation of the business, an evaluation of the competition, estimates of income and expenses, and other information. It must set forth a strategy for acquiring sufficient financing to keep the business going.

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The business plan is important to the small business owner because many financial institutions base their decision to grant a loan to small businesses on a business plan. In addition, having a business plan is important in helping the entrepreneur think through all the ramifications of going into business.

3. What are the goals of venture capitalists when they invest in new businesses?

Venture capitalists are the person(s) or organizations that agree to provide funds for a new business in exchange for ownership or stock in the new business. The venture capitalists hope to sell the ownership or stock after the business has grown successful. Thus, they hope to make a profit.

4. Think of your local community. Can you name five new businesses that have started up recently? Would you consider these new businesses to be small businesses? Are these new businesses franchises?

The answers will vary, depending on the students. Most of the new businesses will probably be considered small businesses. In some cases, the students will not know if the businesses are franchises. Discussing whether the businesses are franchises or not will add to students’ knowledge of what goes into a franchise.

Controversial Issue Are Small Businesses Dependent on the Presence of the Owner?

Many small businesses begin as one person operations. Most small business owners put in extremely long hours and seldom take vacations. Although such firms later employ other workers, the management style and personality of the owner seem to be necessary to the survival of the firm. Here are some examples.

Ted and Ralph formed a partnership to operate a service station in a Prairie city. Both were on the premises from 7 a.m. until closing at 8 p.m. Both were skilled at greeting the public and they made many friends as business boomed. Although they maintained ownership of the station, Ted and Ralph began to spend time away from work, leaving capable subordinates in charge. But the firm just wasn’t the same without Ted and Ralph on hand, and business dropped. Ted and Ralph realized that to keep the station highly successful, they both had to be on the premises.

For many years, Mabel and Theo Harker operated Harker’s Cafe in a large city in the East. Theo was the chief cook, and Mabel waited on customers who sat at the counter. Although they hired several other cooks and waitresses, Mabel and Theo were the stable core of the business. The two worked long hours, and business seemed to go more smoothly when the owners were there. Realizing how important they were personally to the success of the cafe, the Harkers never took a vacation and never left the cafe in the hands of the hired staff. Instead, in late summer and around Christmas, the Harkers closed down the entire cafe for a week at a time. Customers agreed that the place would not be Harker’s Cafe without Mabel and Theo.

Discussion Questions 1. Why does it seem to be necessary for the owner(s) to be on the premises all the time?

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Answers may vary. Students will likely note that no employee can ever care about a business as much as the owner.

2. Can there be personality cults in small business? Is it possible for customers to create a personality cult around the owners of a business?

While answers may vary, the likely answer is yes.

3. How might the owner go about reducing customers’ dependency upon the presence and/or personality of the owner and leading customers to depend more on the business itself?

Answers may vary. One of the most likely answers is to hire and train employees who are motivated and care about customer service.

Term Paper or Project Topic These topics may be assigned as individual or collaborative projects: 1. The Small Business Administration: Past and Present 2. A Study of a Successful Franchiser 3. Why Women Entrepreneurs Are Attracted to Small Business Guest Speaker Suggestions 1. A small business owner to speak about the start-up, management, advantages, and disadvantages of going into business for himself or herself.

2. A local franchisee to speak about the start-up, operation, advantages, and disadvantages of obtaining a franchise.

Teaching Suggestions 18. For a writing exercise, begin by asking students to write for approximately 5 min on the topic of: What Are the Advantages of Franchises for the Small Business Owner?

(Stop students at the end of the allotted time. Now have students give their writing to a student sitting next to them; have them compare answers. Do they agree? Talk about answers in class.)

19. Again, depending on time available, instructors may wish to review the additional boxed material using the discussion questions provided in this Instructor’s Manual.

20. Spend a short amount of time going over the answers to the questions for the video case.

Students should have read these cases, and they should have either written the answers or have considered the answers. Call upon volunteers for answers.

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CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Inside the Zoom Boom Going Green: Ruffling Feathers Responding to Business Challenges: Lowe’s Undergoes a Remodel Business Disruption Stripe: Potbelly Sandwiched in a Crowded Market Entrepreneurship in Action: Stripe CEO Rethinks Decision Making So You Want to Be a Manager END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: The Nature of Management See for Yourself Case: Stakeholders See Through Everlane’s Radical Transparency Team Exercise SUPPLEMENTAL TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Functions of Management Solve the Dilemma: Making Infinity Computers Competitive CONNECT ACTIVITIES iSeeit! Video Case: SMART Goals iSeeIt! Video Case: Management and Leadership Growth and Crisis at Marriott International BONUS TEACHING RESOURCES Additional Discussion Questions Controversial Issue Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY For any organization—small or large, for profit or nonprofit—to achieve its objectives, it must have resources to support operations, employees to make and sell the products, and financial resources to purchase additional goods and services, pay employees, and generally operate the business. To accomplish this, it must also have one or more managers to plan, organize, staff, direct, and control the work that goes on. This chapter introduces the field of management. It examines and surveys the various functions, levels, and areas of management in business. The skills that managers need for success and the steps that lead to effective decision making are also discussed.

LEARNING OBJECTIVES LO 6-1

Explain management’s role in the achievement of organizational objectives.

LO 6-2

Describe the major functions of management.

LO 6-3

Distinguish among three levels of management and the concerns of managers at each level.

LO 6-4

Specify the skills managers need in order to be successful.

LO 6-5

Summarize the systematic approach to decision making used by many business managers.

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KEY TERMS AND DEFINITIONS administrative managers

Those who manage an entire business or a major segment of a business; they are not specialists but coordinate the activities of specialized managers.

agenda

A calendar, containing both specific and vague items, that covers shortterm goals and long-term objectives.

analytical skills

The ability to identify relevant issues, recognize their importance, understand the relationships between them, and perceive the underlying causes of a situation.

brainstorming

A technique in which group members spontaneously suggest ideas to solve a problem.

conceptual skills

The ability to think in abstract terms and to see how parts fit together to form a whole.

controlling

The process of evaluating and correcting activities to keep the organization on course.

crisis management or contingency planning

An element in planning that deals with potential disasters such as product tampering, oil spills, fire, earthquake, computer virus, airplane crash, or even a reputation crisis.

directing

Motivating and leading employees to achieve organizational objectives.

downsizing

The elimination of a significant number of employees from an organization.

employee empowerment

When employees are provided with the ability to take on responsibilities and make decisions about their jobs.

financial managers

Those who focus on obtaining needed funds for the successful operation of an organization and using those funds to further organizational goals.

first-line managers

Those who supervise both workers and the daily operations of an organization.

high-level managers

The president and other top executives of a business, such as the chief executive officer (CEO), chief financial officer (CFO), chief operating officer (COO), who have overall responsibility for the organization.

human relations skills

The ability to deal with people, both inside and outside the organization.

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human resources managers

Those who handle the staffing function and deal with employees in a formalized manner.

information technology (IT) managers

Those who are responsible for implementing, maintaining, and controlling technology applications in business, such as computer networks.

leadership

The ability to influence employees to work toward organizational goals.

management

A process designed to achieve an organization’s objectives using its resources effectively and efficiently in a changing environment.

managers

Those individuals in organizations who make decisions about the use of resources and are concerned with planning, organizing, staffing, directing, and controlling the organization’s activities to reach its objectives.

marketing managers

Those who are responsible for planning, pricing, and promoting products and making them available to customers.

middle managers

Those members of an organization responsible for tactical and operational planning that will implement the general guidelines established by top management.

mission

The statement of an organization’s fundamental purpose and basic philosophy.

networking

The building of relationships and sharing of information with colleagues who can help managers achieve the items on their agendas.

operational plans

Very short-term plans that specify what actions individuals, work groups, or departments need to accomplish in order to achieve the tactical plan and ultimately the strategic plan.

organizing

The structuring of resources and activities to accomplish objectives in an efficient and effective manner.

planning

The process of determining the organization’s objectives and deciding how to accomplish them is the first function of management.

production and operations managers

Those who develop and administer the activities involved in transforming resources into goods, services, and ideas ready for the marketplace.

staffing

Hiring people to carry out the work of the organization.

strategic plans

Those plans that establish the long-range objectives and overall strategy or course of action by which a firm fulfills its mission.

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tactical plans

Short-range plans designed to implement the activities and objectives specified in the strategic plan.

technical expertise

The specialized knowledge and training needed to perform jobs that are related to particular areas of management.

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CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, and KEY TERMS learners will need to take away from the course.

LO 6-1

Explain management’s role in the achievement of organizational objectives.  Introduction  The Importance of Management

Key Terms:  Management  Managers  Staffing  Downsizing

Lecture Outline and Notes: VII. The Importance of Management A. Any organization, small or large, public or private, needs managers to plan, organize, staff, direct, and control the work that goes on.

1. In short, managers help organizations achieve their objectives.

B. Management is a process designed to achieve an organization’s objectives using its resources effectively and efficiently in a changing environment.

1. Effectively means having the intended result.

2. Efficiently means accomplishing the objectives with a minimum of resources.

C. Managers make decisions about the use of the organization’s resources and are concerned with planning, organizing, staffing, directing, and controlling the organization’s activities to reach its objectives (Figure 6.1).

D. Every organization, in the pursuit of its objectives, must acquire resources (employees, suppliers, and financial resources) and coordinate their use to turn out a final good or service.

1. Employees are one of the most important resources, and successful companies foster employee loyalty. Downsizing is sometimes required.

2. Suppliers are another important consideration because a good supplier maximizes efficiencies and reduces expenses.

3. Financial resources pay for essential activities.

4. Primary funding comes from owners and shareholders, banks, and other financial institutions 5. Managers must carefully coordinate and control all of these resources in order for the organization to meet its objectives.

LO 6-2

Describe the major functions of management.  Management Functions o Planning o Organizing o Directing o Controlling

Key Terms:  Planning  Mission  Strategic plans  Tactical plans  Operational plans  Crisis management (contingency planning)  Organizing  Directing  Controlling

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VIII.

Management Functions A. To harmonize the use of resources so that businesses can develop, produce, and sell products, managers engage in a series of activities: planning, organizing, directing, and controlling (Figure 6.1).

B. Planning 1. Planning is the process of determining the organization’s objectives and deciding how to accomplish them. a. Designs the map that is the groundwork for all other functions. b. Involves forecasting events and determining the best course of action from a set of options or choices. c. The plan specifies what should be done, by whom, where, when, and how. d. All organizations need to develop plans for achieving success, but before an organization can plan a course of action, it must first determine what it wants to achieve.

2. Mission a. An organization’s mission is the statement of an organization’s fundamental purpose and basic philosophy. b. Answers the question: What business are we in? c. Clear and concise statement that describes an organization’s reason for existence.

3. Goals 1. A goal is the result that a firm wishes to achieve.

2. Companies usually have multiple goals.

3. A goal has three key components: an attribute sought, a target to be achieved, and a time frame in which the goal is to be achieved.

4. Objectives a. Objectives, the ends or results desired by the organization, derive from the organization’s mission(Table 6.1). b. Can be simple or elaborate. Profit, competitive advantage, efficiency, and growth are examples of objectives. c. The principal difference between goals and objectives is that objectives are generally stated in such a way that they are measurable. d. Objectives provide direction for all managerial decisions and establish criteria by which performance can be evaluated.

5. Plans a. There are three general types of plans for meeting objectives. b. Strategic plans are long-range plans developed by top-level managers. i. Strategic plans generally cover periods ranging from one year or longer and may relate to plans to add products, purchase companies, sell unprofitable segments of the business, issue stock, and move into international markets. ii. Strategic plans must take into account the firm’s capabilities and resources, the changing business environment, and organizational objectives. iii. A framework that helps to identify the organization’s strengths, weaknesses, opportunities, and threats is the SWOT analysis (Figure 6.2) iv. An industry analysis can be performed using a framework known as Porter’s five forces. (Figure 6.3) c. Tactical plans are short-range plans designed to implement the activities and objectives specified in the strategic plan. i. They usually cover a period of one year or less and help keep the organization

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on the course established in the strategic plan. ii. Because tactical plans allow the organization to react to changes in the environment while continuing to focus on the company’s overall strategy, management must periodically review and update them. iii. Because of their short-term nature, tactical plans are easier to adjust or abandon if changes in the environment or the firm’s performance so warrant. d. Operational plans are very short term and specify what actions specific individuals, work groups, or departments need to accomplish in order to achieve the tactical plan and ultimately the strategic plan. i. They apply to details in executing activities in one month, week, or even day. e. Another element in planning is the idea of crisis management or contingency planning, which deals with potential disasters such as product tampering, oil spills, fire, earthquake, computer viruses, or even a reputation crisis. i. Companies that have contingency plans tend to respond more effectively when problems occur than do firms that lack such planning. ii. Many businesses do not have updated contingency plans to handle the types of crises that their companies might encounter.

C. Organizing 1. Organizing is the structuring of resources and activities to accomplish objectives in an efficient and effective manner. a. Structure helps organizations accomplish goals. Rarely are individuals in an organization able to achieve common goals without some form of structure.

2. Managers organize by reviewing plans and determining what activities are necessary to implement them.

3. Managers divide the work into small units and assign it to specific individuals, groups, or departments. a. As companies reorganize for efficiency, they are organizing work into teams to handle core processes such as new product development instead of the more traditional departments. b. Organizing is continuous because change is inevitable.

4. Organizing is important for the following reasons. a. Helps create synergy. b. Establishes lines of authority c. Improves communication d. Helps avoid duplication of resources e. Improves competitiveness by speeding up decision making D. Directing 1. Directing is motivating and leading employees to achieve organizational objectives.

Managers tell their employees what to do and when to do it using deadlines, and then encourage them to do their work.

2. All managers are involved in directing, but it is especially important for lower-level managers.

3. Directing also involves determining and administering rewards and recognition.

4. Managers motivate employees with incentives and in allowing employees to participate, morale improves. Recognition and appreciation are often the best motivators.

E. Controlling 1. Controlling is the process of evaluating and correcting activities to keep the 07-144 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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organization on course.

2. Controlling involves five activities: a. Measuring performance b. Comparing present performance with standards or objectives c. Identifying deviations from the standards d. Investigating the causes of deviations e. Taking corrective action when necessary 3. Controlling and planning are closely linked: Planning establishes goals and standards for performance, while controlling helps firms ensure that performance toward those goals is achieved.

4. The control process also helps managers deal with problems arising from outside the firm.

LO 6-3

Distinguish among three levels of management and the concerns of Key Terms: managers at each level.  High-level managers  Types of Management  Middle managers  Levels of Management  First-line managers  Areas of Management IX. Types of Management A. Levels of Management (Figure 6.4) 1. There are usually three levels of management, which form a pyramid—top management, middle management, and first line or supervisory management (Figure 6.5). a. Managers at all three levels perform all five management functions, but the amount of time they spend on each function varies. b. For high-level managers, the most important management function is planning. c. For middle managers, the most time-consuming function is organizing. d. For first line managers, the most time-consuming functions are directing and controlling.

2. High-level managers include the president, the chief executive officer, the chief financial officer, the chief operations officer, and other top executives, such as the chief privacy officer, who have overall responsibility for the organization. a. In publicly owned corporations, the CEO’s boss is the firm’s board of directors. b. High-level managers also represent their company to the public and to government regulators. c. High-level managers generally have many years of experience and command top salaries. In addition to top salaries, top management typically gets bonuses, longterm incentive awards, stock, and stock options (Table 6.2). i. Executive compensation has been criticized. ii. Compensation committees and boards of directors are now seeking ways to keep compensation commensurate with performance. d. Workforce diversity is also an important issue in today’s corporations, and effective managers have found that diversity is good for workers and for the bottom line. ii. A diverse workforce is better at making decisions regarding issues related to consumer diversity. iii. The five rules of successful diversity recruiting include the following: get

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employees involved, communicate your diversity, support diversity groups within your community, delegate resources, and promote your diversity (Table 6.3).

3. Middle managers are responsible for tactical and operational planning that will implement the general guidelines established by top management (e.g., plant managers, division managers, and department managers). a. Responsibility is more narrowly focused on top managers. b. Middle managers are involved in the specific operations of the organization and spend more time organizing than other managers. c. The ranks of middle managers have been shrinking as more companies downsize to be more productive.

4. First-line managers supervise workers and day-to-day operations of the organization. a. They spend most of their time directing and controlling. b. Foremen, supervisors, and office managers are examples of first line management.

B. Areas of Management (Table 6.4) 1. At each level of management, managers specialize in the areas of finance, production and operations, human resources, marketing, IT, and administration.

2. Financial manager focuses on obtaining the funds needed for the successful operation of the organization and using those funds to further organizational goals.

3. Production and operations manager develops and administers the activities involved in transforming resources into goods, services, and ideas ready for the marketplace.

4. Human resources manager handles the staffing function and deals with employees in a formalized manner.

5. Marketing manager is responsible for planning, pricing, and promoting products and making them available to customers.

6. Information technology (IT) manager is responsible for implementing, maintaining, and controlling technology applications in business, such as computer networks.

7. Administrative manager manages an entire business or a major segment of a business; they do not specialize in a particular function.

LO 6-4

Specify the skills managers need in order to be successful.  Skills Needed by Managers o Technical Expertise o Conceptual Skills o Analytical Skills o Human Relations Skills  Leadership  Employee Empowerment

Key Terms:  Technical expertise  Conceptual skills  Analytical skills  Human relations skills  Leadership  Employee empowerment

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X. Skills Needed by Managers A. Managers are typically evaluated using the metrics of how effective and efficient they are.

Necessary skills include technical expertise, conceptual skills, analytical skills, human relations skills, and leadership(Table 6.5).

B. Technical expertise, the specialized knowledge and training needed to perform jobs that are related to particular areas of management.

1. Technical skills are most needed by first line managers and are least critical to toplevel managers.

C. Conceptual skills, the ability to think in abstract terms and to see how parts fit together to form the whole.

1. Top management must be able to evaluate continually where the company will be in the future.

2. Conceptual skills also involve the ability to think creatively.

D. Analytical skills refer to the ability to identify relevant issues, recognize their importance, understand the relationships between them, and perceive the underlying causes of a situation.

1. All managers need to think logically, but this skill is probably most important to the success of top-level managers.

E. People skills, or human relations skills, are the ability to deal with people, both inside and outside the organization.

1. People skills are especially important in hospitals, airline companies, banks, and other organizations that provide service.

XI. Leadership A. Leadership is the ability to influence employees to work toward organizational goals.

There are three basic styles of leadership: 1. Autocratic leaders make all the decisions and then tell employees what must be done and how to do it.

2. Democratic leaders allow their employees to get involved in decisions. Employees involved in decision making generally require less supervision.

3. Free-rein leaders let their employees work without much interference.

B. Tips for successful leadership (Table 6.6).

C. The effectiveness of each leadership style depends on several factors.

1. An autocratic style is generally needed to stimulate unskilled, unmotivated employees.

2. Highly skilled, trained, and motivated employees may respond better to democratic or free-rein leaders.

3. Other considerations are the manager’s abilities and the situation itself.

4. When a situation requires a quick decision, for example, an autocratic style of leadership may be best because the manager does not have to consider input from a lot of people.

5. The “best” style depends on specific circumstances, and effective managers strive to adapt their style as warranted.

D. Authentic Leadership 1. It is a bit different from the other three leadership styles because it is not exclusive.

2. Both democratic and free-rein leaders could qualify as authentic leaders.

3. Authentic leaders are passionate about the goals and mission of the company, display corporate values in the workplace, and form long-term relationships with 07-147 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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stakeholders.

E. Employee Empowerment 1. Employee empowerment occurs when employees are provided with the ability to take on responsibilities and make decisions about their jobs.

2. Participative corporate culture has been found to be beneficial because employees feel like they are taking an active role in the firm’s success.

3. Leaders must adopt systems that support an employee’s ability to provide input and feedback on company decisions.

4. Managers should be trained in ways to empower employees to make decisions even in challenging situations in which the right decision may not be so clear.

F. Leadership in Teams 1. In today’s business world, decisions made by teams are becoming the norm.

2. An effective way to encourage employee empowerment.

3. Decision making in teams is collective. a. Most effective teams are when all employees are encouraged to contribute their ideas and recommendations.

4. Common for more outspoken employees to dominate the team and engage in groupthink, in which team members go with the majority rather than what they think is the right decision. a. Training employees how to listen to one another and provide relevant feedback can help to prevent these challenges.

LO 6-5

Summarize the systematic approach to decision making used by many Key Terms: business managers.  Brainstorming  Decision Making  Agenda o Recognizing and Defining the Decision Situation  Networking o Developing Options o Analyzing Options o Selecting the Best Option o Implementing the Decision o Monitoring the Consequences  Management in Practice XII. Decision Making A. Decision making is important in all management functions and all levels, whether the decisions are on a strategic, tactical, or operational level. A systematic approach includes a six-step process (Figure 6.6).

B. Recognizing and Defining the Decision Situation 1. The first step in decision making is recognizing and defining the situation—whether the situation is positive or negative.

2. Situations calling for small-scale decisions often occur without warning; situations requiring large-scale decisions generally occur after some warning signals.

3. Once a situation has been recognized, managers must define it.

C. Developing Options 1. The next step is to develop a list of possible courses of action.

2. Creativity is very important.

D. Analyzing Options 3. Next, managers should analyze the practicality and appropriateness of each option.

4. When assessing appropriateness, a decision maker should consider whether the

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Instructor’s Manual––Chapter 7

E.

F.

G.

XIII. A. B.

C.

D.

E.

Ferrell et al: Business: A Changing World 8ce

proposed option adequately addresses the situation.

Selecting the Best Option 1. Selection is often a subjective procedure because many situations do not lend themselves to quantitative analysis.

2. It may be possible to select a combination of several options.

Implementing the Decision 1. Implementation can be fairly simple or very complex, depending on the nature of the decision.

2. Managers should be ready to deal with unexpected consequences.

Monitoring the Consequences 1. Without proper monitoring, the consequences of decisions may not be known quickly enough to make efficient changes.

2. If the desired result was not achieved, managers may discover that the situation was incorrectly defined, or the decision was good even though the desired result has not yet shown up, or that implementation was flawed.

Management in Practice Management is not exact and calculated.

John P. Kotter says that management functions can be condensed into two basic activities: 1. Figuring out what to do despite uncertainty, great diversity, and an enormous amount of potentially relevant information.

2. Getting things done by a large and diverse set of people without having direct control over most of them.

Managers spend as much as 75% of their time working with others.

1. Managers spend a lot of time establishing and updating an agenda of vague and specific items that pertain to short-term goals and long-term objectives.

2. Managers also spend a lot of time networking—building relationships and sharing information with colleagues.

3. Networks are not limited to immediate subordinates and bosses; they include other people in the company as well as customers, suppliers, and friends.

4. Networking helps managers carry out their responsibilities.

5. Websites like LinkedIn are helping managers and employees network with one another to achieve their professional goals.

Managers spend a great deal of time confronting the complex and difficult challenges facing business today.

1. Some of the challenges relate to rapidly changing technology, increased scrutiny of individual and corporate ethics and social responsibility, impact of social media, changing nature of the workforce, new laws and regulations, increased global competition, declining education standards, and making the best use of time.

It is only through creativity and imagination that managers can make effective decisions that benefit their organizations.

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Inside the Zoom Boom Founded in 2011, Zoom entered the video conference technology market at a time when consumer and business demand was just starting to ramp up. It wasn’t until the COVID-19 pandemic struck the United States nearly a decade later that Zoom experienced an unprecedented surge in demand and became widely recognized as an industry leader.

The software company attracts many users to its free Basic account and attempts to convert these users into paying customers, a pricing model known as freemium pricing. Zoom has experienced record profits and has signed on big-name clients such as ExxonMobil and Activision Blizzard.

1. How did the COVID-19 pandemic contribute to Zoom’s success?

Social distancing and isolation in 2020 fueled the demand for video communication and dramatically increase new Zoom user registrations.

2. What value and benefits does Zoom offer?

Zoom offers high-quality, easy-to-use video conferencing tool with modern features that would operate on slow internet connections.

3. What are the advantages of a freemium pricing model? Disadvantages?

Although the answers will vary, but most students will state that it is an easy method to attract a large number of customers quickly. Disadvantages: Freemium pricing can be expensive for companies because it costs money to acquire new customers and to offer free access, making it especially painful when customers discontinue service after a free trial.

Going Green: Ruffling Feathers Canada Goose and other popular brands like North Face and Patagonia say their businesses operate with animal welfare in mind. However, controversy has arisen over cruel animal practices at those companies.

1. What assurances does Canada Goose give to consumers regarding animal welfare?

The company has a Fur and Down Policy and maintain that they use ethical sourcing and responsible use of all animal materials in their products. They also have a ‘Transparency Standard’ which is a commitment to support the ethical sourcing and responsible use of down used in products.

2. Describe why consumers tend to be more loyal to sustainable and ethical brands.

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Consumers have begun to care more about the environment and social responsibility. When purchasing from “green” companies, they can feel more comfortable that their purchases are not harmful to animals or to the environment.

3. With comparable down-free options, why do consumers still flock to brands like Canada Goose?

Answers will vary and may include corporate marketing strategies, popularity, trends, peer pressure etc.

Responding to Business Challenges: Lowe’s Undergoes a Remodel 1. What type of managerial skills is Tony Hurst exhibiting?

Hurst has used his analytical skills to determine that retail tactics were insufficient to promote higher performing products.

2. How does Hurst demonstrate the four management functions?

Planning: He provided the strategic plan and direction for Lowes and created a tactical plan to harmonize the store network.

Organizing: He invested in a number of different technologies.

Directing: He made it a priority to ensure the health and safety of its customers and associates.

Controlling: He monitored the performance of Lowes before, during, and after the pandemic.

3. What did the retailer understand as a result of the pandemic?

Hurst recognized that the disruptions highlighted some of the improvements that Lowe’s Canada needed to make in order to become an omnichannel retailer.

Responding to Business Challenges: Potbelly Sandwiched in a Crowded Market 1.

Describe how Potbelly, under Johnson’s leadership, is engaging in the four management functions.

Answers will vary, but Johnson had to focus on planning to differentiate Potbelly from its competitors, organizing and controlling to determine how many and which stores to close, and directing to overall the management team.

2. Do you think Johnson’s plans are more operational, tactical, strategic, or a combination?

Explain your reasoning.

Answers will vary, but most students will state that Johnson is using a combination of plans.

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3. As Johnson works to increase sales and revamp the company, do you think an autocratic, democratic, or free-rein leadership style would be most effective? Explain your reasoning.

Answers will vary, but most students will probably lean toward a democratic leadership style.

Business Disruption: Stripe CEO Rethinks Decision Making 1. What is lateral thinking?

Lateral thinking refers to the ability to problem solve using an indirect, creative approach to come up with original solutions to difficult questions.

2. In what ways is creativity important in decision making?

Creativity is important in decision making because it depends on new and useful ideas regardless of where they originate or the method used to create them. Creativity helps decision makers generate and explore multiple options.

3.

Why did the Collison brothers want Stripe to appeal to software engineers?

They realized software engineers would ultimately be the most important group to appeal to rather than individuals working in finance. Engineers love Stripe because its products simplify the complex task of payment processing.

So You Want to Be a Manager—What Kind of Manager Do You Want to Be? What factors are leading to the increasing difficulty of management jobs?

The requirements for management jobs become more demanding with every passing year—with the speed of technology and communication increasing by the day, and the stress of global commerce increasing pressures to perform. There is also the consideration of restructuring and downsizing, which has changed where jobs are available and has in some cases reduced the number of available positions.

END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: The Nature of Management Start a discussion on what leadership skills are necessary to be an effective leader. What national figures (government official or corporate figure) do students believe are the best example of a true leader? If students have a hard time thinking of someone, use Jack Welch of GE as an example. Jack Welch led GE for 20 years utilizing the strategy of retaining only GE divisions that are #1 or #2 in the market and growing the company by an aggressive acquisition strategy. Jack instituted creative and revolutionary ideas such as Six Sigma, the 70/20/10 employee evaluation process, and an open dialog within the management structure.

While it may be difficult for students to relate to Welch’s successes, all students can relate to bosses who have exhibited strong leadership skills. Query students on what those leadership skills were and 07-152 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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how their bosses were able to command and not demand respect.

See for Yourself Case: Stakeholders See Through Everlane’s Radical Transparency Building a Strong and Healthy Business Everlane, a clothing retailer, was founded in 2010 by Michael Preysman with the promise of radical transparency. The company said it would reveal the cost to make each clothing item, pricing markups, its clothing suppliers, and its ecological impact. Current and former Everlane employees say the retailer’s ethical image is just an illusion.

Employees accused Everlane of promoting poor working conditions and selling a false ethical image to the world.

The company was also accused of anti-Black behavior, the company lacked consistent promotion policies, new hires felt isolated and unwelcome, leaders used inappropriate terms when referring to people of color, employees’ personal space was violated by leaders, and there was no official procedure harassment and discrimination claims.

In response to the complaints and a subsequent investigation, Everlane fired a senior employee and committed to several diversity initiatives such as hiring a Black board member, diversifying the senior leadership team, working with racism accountability organizations, and introducing anti-racism training.

Everlane’s commitments to ethical labor and sustainability have also attracted criticism. Everlane is on track to meet certain supply chain targets, such as eliminating virgin plastic, but many say Everlane falls short in other ways. Brand ratings platform Good on You gave Everlane a “not good enough” overall rating for failing to adequately track greenhouse gas emissions, reduce water use, and guarantee living wages 1. In what ways did Everlane fall short of its promise of radical transparency?

Everlane fell short of its promise of radical transparency in multiple ways including the following: promoting poor working conditions and selling a false ethical image to the world. It was also accused of anti-Black behavior and rejecting Black models.

The company also failed to meet its ecological impact goal and report its shortfalls.

2. How did top management contribute to a weak corporate culture?

Allegedly, management teams discouraged employees from unionizing and attempted to prevent employees from discussing their salaries with one another, a right that is protected by law. Leaders were accused of using inappropriate terms when referring to people of color, violating employees’ personal space, and there was no official procedure for submitting harassment and discrimination claims.

3. How do you think Everlane could improve its sustainability and social responsibility efforts?

Answers will vary, but students need to support their answers.

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Team Exercise Students will form groups and assign the responsibility of locating examples of crisis management implementation for companies dealing with natural disasters (explosions, fires, earthquakes, etc.), technology disasters (viruses, plane crashes, compromised customer data, etc.), or ethical or legal disasters. They should ask themselves the following questions: How did these companies communicate with key stakeholders? What measures did the company take to provide support to those involved in the crisis? Report your findings to the class.

SUPPLEMENTAL TEACHING RESOURCES Check Your Progress 1. Why is management so important, and what is its purpose?

Management is the process of coordinating human, physical, and financial resources to achieve an organization’s objectives. Management is important because people in an organization must work together to achieve some stated or implied objective. Management takes place in any organization calling for the coordination of resources.

2. Explain why the Canadian Heart Association would need management, even though its goal is not profit related.

All organizations whether profit or nonprofit are involved with the process of coordinating human, physical, and financial resources to achieve their objectives. Managers and employees of nonprofit organizations work together to achieve the objectives of their organizations.

3. Why must a company have financial resources before it can use human and physical resources?

An organization must have financial resources in order to purchase human resources (hire people) and to purchase physical resources.

4. Name the four functions of management and briefly describe each function.

The four functions of management include planning, organizing, directing, and controlling.

Planning is the process of selecting a course of action to achieve organizational objectives.

Organizing consists of structuring all resources and activities to accomplish objectives in an efficient and effective manner. Directing is motivating and leading employees to achieve organizational objectives. Controlling is evaluating and correcting activities to keep the organization on course.

5. Identify the three levels of management. What is the focus of managers at each level?

The three levels of management include top management, middle management, and first line management. Top management includes the president and other top executives who have overall responsibility for the organization. Middle management includes plant managers, 07-154 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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division managers, and other managers who have a narrower focus under top managers. First line management includes all the managers who supervise workers. These managers are involved in the everyday operations of the organization.

6. In what areas can managers specialize? From what area do top managers typically come?

The areas of management include financial management, production and operations management, human resources (personnel) management, marketing management, information technology management, and administrative management. Financial managers deal primarily with an organization’s financial resources. Production and operations managers are concerned with the transformation of an organization’s resources into goods, services, and ideas. Human resources managers deal with employees in a formalized manner as related to hiring, training, and administering benefits. Marketing managers are responsible for planning, pricing, promoting products, and making them available to customers. Information technology managers deal primarily with establishing, maintaining, and controlling computer networks.

Administrative managers do not specialize in any particular area but manage an entire business or major segment of a business.

Many top executives come from financial management, production and operations management, or marketing management. Most top managers are actually administrative managers.

7. What skills do managers need? Give examples of how managers use these skills to do their jobs.

Skills needed by managers include technical expertise, conceptual skills, analytical skills, human relations skills, and leadership. Technical expertise is the specialized knowledge needed to perform a job, such as managing an auto production line. Conceptual skills are the ability to think in abstract terms so that a manager can fit parts together to form a whole perspective of a business operation. Analytical skills are the ability to identify relevant issues and recognize their importance, understand the relationships between them, and perceive their underlying causes.

Human relations skills involve dealing with people both inside and outside the organization.

Leadership is the ability to influence and motivate employees to work toward the achievement of organizational goals.

8. What are the three styles of leadership? Describe situations in which each style would be appropriate.

There are three styles of leadership: autocratic, democratic, and free-rein. Autocratic leaders make all decisions and then tell employees what must be done and how to do it. Autocratic leaders work best when dealing with lower level employees who are poorly motivated and require more supervision to accomplish the task.

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Democratic leaders allow their employees to get involved in decision making. Democratic leaders work well in organizations that allow people to participate in decisions, such as accounting firms, consulting agencies, middle- and upper management areas, or corporations.

Free-rein leaders let their employees work without much interference. Free-rein leaders work well in research and development firms where employees are highly educated and need freedom to conduct research projects.

9. Explain the steps in the decision-making process.

Decision making is a six-step process that occurs at all management levels. The first step involves recognizing and defining the situation. Step 2 involves developing possible courses of action, both standard and creative ones. Step 3 involves analyzing the feasibility, appropriateness, and consequences of each option. Step 4 involves selecting the best option from the list of options.

The decision is implemented in Step 5. Step 6 requires the monitoring of the decision’s consequences.

These steps should be viewed only as a broad framework to help people in their approaches to decision making.

10. What is the mathematical formula for perfect management? What do managers spend most of their time doing?

There is no mathematical formula for perfect management. Most management decisions are largely subjective.

Most managers spend as much as 75% of their time working with others. They also spend a lot of time establishing and updating an agenda of goals, networking with their colleagues, and confronting the complex and difficult challenges in the business world today.

Get Involved 1. Give examples of the activities that each of the following managers might be involved in if they worked for the Coca-Cola Company:  Financial manager  Production and operations manager  Personnel manager  Marketing manager  Administrative manager  Information technology manager  Foreman Sample student answer (answers will vary): 

Financial manager: Project income and expenses over Coca-Cola’s next quarter, project income and expenses for the next year; investigate feasibility of new Coca-Cola projects and investments from a financial standpoint, collect data on company finances and operations;

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develop financial and operational reports, determine long-term and short-term financing needs for Coca-Cola and its different subsidiaries, analyze the financial contributions of Coca-Cola’s product lines to ensure and provide recommendations to top management. 

Production and operations manager: Develop business plans to support objectives of various product lines, purchase necessary supplies for product development, plan and design new plants and Coca-Cola production facilities, improve production and operational performance efficiency at different facilities, ensure that Coca-Cola products meet relevant quality standards.



Personnel manager: Engage in the recruiting of new employees, interview and hire qualified individuals to be a part of Coca-Cola’s various teams, oversee Coca-Cola’s performance appraisal system, properly store and retrieve personnel files, oversee Coca-Cola benefit systems, ensure confidentiality of employee information.



Marketing manager: Plan the promotion of new Coca-Cola products, select relevant media for promotional campaigns, appropriate the costs of advertising and other promotional campaigns, develop pricing objectives of Coca-Cola products, determine effectiveness of pricing strategies, determine product features, aid in product development and test marketing; oversee commercialization of new Coca-Cola products, delete products that do not reach certain profit objectives.



Administrative manager: Oversee the work performance of one of Coca-Cola’s companies, collect and distribute information throughout the company, manage quality and cost control of the company, frequently meet with managers from the different departments to go over planning and forecasting, direct the different administrative functions within the company.



IT manager: Create safeguards to protect company information in computer systems from unauthorized sources, create a streamlined process for people inside the company who have legitimate reasons to use the system, create contingency plans for protecting the system’s data during a crisis situation; develop efficient methods to communicate to global employees, partners, and suppliers through Coca-Cola’s IT system, provide support for training to help employees understand how to use the system.



Foreman: Supervise and direct workers in a particular department or business segment, implement plans by top and middle managers, evaluate performance of Coca-Cola employees, develop plans for correcting performance shortcomings, support employees in their daily operations.

2. Interview a small sample of managers, attempting to include representatives from all three levels and all areas of management. Discuss their daily activities and relate these activities to the management functions of planning, organizing, directing, and controlling. What skills do the managers say they need to carry out their tasks?

Students’ answers will vary depending upon the sample of managers they choose.

3. You are a manager of a firm that manufactures conventional ovens. Over the past several years, sales of many of your products have declined; this year, your losses may be quite large.

Using the steps of the decision-making process, briefly describe how you arrive at a strategy for correcting the situation.

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First, students will have to recognize and define the decision situation. Students should recognize the problem is that sales of conventional ovens have declined. They might define the decision situation as something like, “Investigate options to reduce the losses from decreasing sales of conventional ovens.” The second step is to develop options to resolve the situation. As part of this process, students might choose to launch an investigation to find out why sales have declined. Are there new substitutes for the conventional ovens that consumers are choosing instead? Depending upon the why, students might come up with alternatives such as to investigate ways to upgrade the conventional oven, engage in heavier promotion to increase awareness of the benefits of the conventional oven, look into changing the current pricing strategy, and so on. They must then analyze the options, the third step of the process. After analyzing the options, including the advantages and disadvantages of each, students will choose the option they think is best. They should provide support for why they feel a particular option is the best choice. Then, they must implement the decision. Students should be detailed regarding how they plan on implementing the proposed solution. Afterward, they should state how they plan to monitor the consequences of the decision. For instance, they might investigate whether sales are beginning to rise again, whether sales are meeting the company’s sales goals, and so on.

Build Your Skills: Functions of Management Background Although the text describes each of the four management functions separately, you learned that these four functions are interrelated, and managers sometimes perform two or more of them at the same time. Here you will broaden your perspective of how these functions occur simultaneously in management activities.

Task Imagine that you are the manager in each scenario described in the following table and you have to decide which management function(s) to use in each.

Mark your answers using the following codes: Codes P O D C No. 1

Management Functions Planning Organizing Directing Controlling

Scenario Your group’s work is centered on a project that is due in two months. Although everyone is working on the project, you have observed your employees involved in what you believe is excessive socializing and other time-filling behaviors. You decide to meet with

Answers(s)

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the group to have them help you break down the project into smaller subprojects with mini-deadlines. You believe this will help keep the group members focused on the project and that the quality of the finished project will then reflect the true capabilities of your group.

2

3

4

5

Your first impression of the new group you’ll be managing is not too great. You tell your friend at dinner after your first day on the job: “Looks like I got a baby sitting job instead of a management job.”

You call a meeting of your work group and begin it by letting them know that a major procedure used by the work group for the past two years is being significantly revamped, and your department will have to phase in the change during the next six weeks. You proceed by explaining to them the reasoning your boss gave you for this change. You then say, “Let’s take the next 5 to 10 minutes to let you voice your reactions to this change.” After 10 minutes elapse with the majority of comments being critical of the change, you say: “I appreciate each of you sharing your reactions; and I, too, recognize that all change creates problems.

“The way I see it, however, is that we can spend the remaining 45 minutes of our meeting focusing on why we don’t want the change and why we don’t think it’s necessary, or we can work together to come up with viable solutions to solve the problems that implementing this change will most likely create.” After about five more minutes of comments being exchanged, the consensus of the group is that the remainder of the meeting needs to be focused on how to deal with the potential problems the group anticipates having to deal with as the new procedure is implemented.

You are preparing for the annual budget allocation meetings to be held in the plant manager’s office next week. You are determined to present a strong case to support your department getting money for some high-tech equipment that will help your employees do their jobs better. You will stand firm against any suggestions of budget cuts in your area.

Early in your career, you learned an important lesson about employee selection. One of the nurses on your floor unexpectedly quit. The other nurses were putting pressure on you to fill the position quickly because they were overworked even before the nurse left, and then things were really bad. After a hasty recruitment effort, you made a decision based on insufficient information. You ended up regretting your quick decision during the three months of problems that followed until you finally had to discharge the new hire. Since then, you have never let anybody pressure you into making a quick hiring decision.

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Suggested Answer Key Scenario 1 Planning (selecting a course of action to achieve organizational objectives) Organizing (structuring resources and activities to accomplish objectives in an efficient and effective manner) Directing (motivating and leading employees to achieve organizational objectives) Controlling (evaluating and correcting activities to keep the organization on course) Scenario 2 Planning (you will need this function to get your group headed in the right direction) Organizing (trying to get this group of employees to carry out the plans will be a challenge) Directing (motivating and leading employees to achieve objectives will be a high priority) Controlling (you will, no doubt, have to work closely with this group until you can develop them into a group of self-starters) Scenario 3 Planning (deciding how to accomplish the new goal of making the change) Organizing (you will need to determine what new relationships should be developed in order to successfully implement the change) Directing (you have already used your influence to get your group to move toward making the change and will undoubtedly need to do more throughout the change process) Controlling (you will need to monitor what’s happening to make sure things stay on track) Scenario 4 Directing (you will need to use your leading skills [influence] to get what your department needs) Controlling (the budgeting process is one tool used in controlling) Scenario 5 Organizing (you chose an employee and assigned them certain responsibilities) Controlling (your monitoring of the performance of the new employee-led you to make needed corrections—discipline and eventually discharge—and your new selection system helps to ensure that your work group will achieve its objectives) Solve the Dilemma: Making Infinity Computers Competitive Solve the Dilemma: Making Infinity Computers Competitive Infinity Computers Inc. produces notebook computers, which it sells through direct mail catalog companies under the Infinity name and in some retail computer stores under their private brand names. Infinity’s products are not significantly different from competitors’, nor do they have extra product-enhancing features, although they are very price competitive. The strength of the company has been its CEO and president, George Anderson, and a highly motivated, loyal workforce. The firm’s weakness is having too many employees and too great a reliance on one product. The firm switched to computers with the Intel Core i7 processors after it saw a decline in its netbook computer sales.

Recognizing that the strategies that initially made the firm successful are no longer working effectively, Anderson wants to reorganize the company to make it more responsive and competitive and to cut 07-160 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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costs. The threat of new technological developments and current competitive conditions could eliminate Infinity.

Summary Infinity Computers Inc. produces notebook computers, which sell through direct mail catalog companies under the Infinity name and in some retail computer stores under their private brand names.     

Products are not significantly different from competitors’ products.

Do not have extra product-enhancing features.

Very price competitive.

Strength from the company’s CEO/president George Anderson and the highly motivated, loyal staff.

Weakness from having too many employees and too great a reliance on one product.

The strategies that initially made the firm successful are no longer working. New technological developments and current competitive conditions could eliminate Infinity.

1. Evaluate Infinity’s current situation and analyze its strengths and weaknesses.

Infinity’s strengths include the competitive price of its products, the leadership abilities of its CEO, along with the loyalty and motivation of its employees. Its weaknesses are its tendency to follow its competitors instead of innovating, its overcapacity in terms of workforce, and its reliance on a single product.

2.

Evaluate the opportunities for Infinity, including using its current strategy, and propose alternative strategies.

Opportunities for Infinity may be emphasizing its price competitiveness or sticking with its current products while reducing the workforce. Other ideas are to create a differentiated product with special features at a lower price than its competitors or to increase product differentiation by incorporating “product-enhancing” features. Infinity could also rely on the loyalty and motivation of its employees to offer outstanding customer service.

3. Suggest a plan for Infinity to compete successfully over the next 10 years.

Responses will vary, but students should provide the kernel of a strategic plan including such sections as objectives, means to achieve the objectives, and measures of results.

CONNECT ACTIVITIES iSeeit! Video Case: SMART Goals Learning Objective: 6-2 Describe the major functions of management.

Activity Summary: This brief video describes the process of setting goals for an organization to achieve in the future. These goals should be specific, measurable, attainable, relevant, and time-bound. This activity is important because when these key components are sufficiently addressed, the worker 07-161 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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should have a good understanding of what will be required to meet the goal.

The goal of this activity is to demonstrate your understanding of the information required to set goals and lead employees toward accomplishing the goals of the business.

How to Use Activity: After assigning this activity to students, have them share their answers to the assignment questions with their classmates.

Class Discussion: Have students discuss the major differences in the types of goals and the factors required to successfully achieve those goals. iSeeIt! Video Case: Management and Leadership Learning Objective: 6-4 Specify the skills managers must have to be successful.

Activity Summary: This brief video describes the three major forms of leadership, applied to a relatable scenario of directing a movie. By exploring autocratic, democratic, and free-rein styles of leadership, students learn how these three different approaches can be brought to life while focusing on the same outcome.

How to Use Activity: After assigning this activity to students, tap into their personal work experiences.

Allow them to discuss aspects of their current or past jobs and highlight their knowledge of the concept while connecting to the chapter material.

Class Discussion: How would you describe the management style in your job? What type of leadership do you best respond to? What type of leader do you want to become? How would you describe your leadership style?

Growth and Crisis at Marriott International Learning Objective: 6-4 Specify the skills managers must have to be successful.

Activity Summary Demonstrate your understanding of the different functions and levels of management.

The leaders of Marriott International have a strong tradition of investing in the people within the organization, supporting them to provide high-quality service to customers. Through growth and acquisitions, Marriott International became the largest hotel chain in the world in 2016 and in 2019 announced plans for further growth. However, the coronavirus pandemic in 2020 challenged the growth of Marriott International.

This activity is important because, as a manager, students must be able to understand the role of management in the achievement of organizational objectives. In order to do this, they will need to understand the different functions that managers perform and the different levels of management within organizations. They must also understand that the importance of planning, organizing, leading, and controlling varies based on the manager’s level within the organization.

How to Use Activity: After assigning this activity to students, have them share their answers to the assignment questions with their classmates.

Class Discussion: Have students discuss how Marriott’s management has been successful, some of the challenges that they have faced, and how this case illustrates the interconnection of the management 07-162 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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functions.

BONUS TEACHING RESOURCES Additional Discussion Questions 1. How do vision and value statements impact planning?

When planning, most companies start with a vision statement and decide on the organization's values. A vision statement often explains why an organization exists and discusses long range goals or direction for the company. Values are guiding principles that direct an organization's decisions. The vision and values provide direction through an organization's planning process and help both managers and workers strive toward a purpose.

2. Briefly define a mission statement.

A mission statement describes an organization's fundamental purpose and basic philosophy.

3. Define and describe some of the characteristics of a strategic plan.

Strategic plans, establish the long-range objectives and overall strategy or course of action by which the firm fulfills its mission and vision statement while attempting to stay true to its values.

Strategic plans generally cover periods ranging from 2 to 10 years or even longer. They include plans to add products, purchase companies, sell unprofitable segments of the business, issue stock, and move into international markets 4. Define contingency or crisis planning and explain why it is important.

Crisis management, or contingency planning, is an element in planning that deals with potential disasters such as product tampering, oil spills, fire, earthquake, computer virus, or airplane crash. Businesses that have contingency and crisis management plans tend to respond more effectively when problems occur than do businesses that lack such planning.

5. Define leadership and explain how it helps a firm succeed.

Leadership is the ability to motivate employees to work toward organizational goals. Strong leaders establish a vision or a shared set of goals, and then create an organizational culture to achieve these goals.

6. What five things do effective leaders do well?

Successful leaders act the way they want their employees to act; inspire a shared vision; challenge conventional processes; enable employees to act, and encourage people to act kindly toward others.

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Controversial Issue Managers need good human relations, or people, skills. They must be able to communicate goals, and they have to understand their employees’ needs so that they can motivate them to perform.

Managers must also provide appropriate leadership.

Managers are not always very good at their jobs. Usually, poor management results from poor communication or interpersonal skills. Typical of some employees’ experience is this one, told by David Manning, a college student who worked as a radio announcer for a small station in a college town. The manager-owner of the radio station, Greg Smith, had often told the members of his staff: “I want you to know that my door is always open. Come in anytime if you have a suggestion to make our station the best on the air. Come see me.”

The young announcer took the manager at his word. David noticed that the music staff gave the announcer a list of numbers (such as 88745, 98432, 72341, etc.) of CDs to be pulled from the files and played on a classical music program. The announcer observed that it would take the music staff just a few more seconds to type after each number a notation, such as “Symphony #4 by Beethoven, Chicago Symphony Orchestra, Bruno Walter conducting.” Such notations would save David (and other announcers) a lot of time and would make the classical music program sound much better on the air.

David decided to make his suggestion to the manager. He went through the manager’s “open door” and presented his ideas. Greg Smith, the manager, replied: “I don’t want you kids coming in here complaining. If you can’t do the work, then quit. Your nitwit ideas are of no value to my radio station.”

The manager went on and on for several minutes. At the conclusion of his tirade, the manager said to David: “My door is always open; come back and see me with an idea anytime!”

Needless to say, David never returned to the manager’s office with any more suggestions.

Discussion Questions: 1.

Did the manager give mixed signals to his employees? Why? The manager definitely gave mixed signals to his employees. He probably wanted his leadership style to appear democratic, but he had no idea how to do it. He didn’t want to give up control, even though he wanted to appear to be a fair manager.

2. Can managers improve their management styles? How? Students’ answers may vary.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 07-164 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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1. The Team Concept in Management 2. Management Training Guest Speaker Suggestions 1. A manager from a local firm representing top-level management, middle management, or firstline management.

Teaching Suggestions 1. Use the “Lecture Outline and Notes” and PowerPoint slides to highlight the main points of the chapter.

2. Discuss the opening vignette and other boxed material. Use the “Boxed Text Discussion Questions” to review some of this boxed material. Ask students how the boxed material relates to the major functions of management, the three levels of management, and the skills managers need to be successful.

3.

Go over the “Check Your Progress” in the textbook.

4. Divide the class into six teams. (Large sections may require more than six teams.) Using the “Build Your Skills” exercise in the textbook, assign each team one managerial function. The team should decide on some examples of activities for which the managers might be involved. Have a team representative report or write the examples on the chalkboard.

Chapter 7: Organization, Teamwork, and Communication SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Musk Breaks the Chain of Command Going Green: Connection and Collaboration: How Timberland Works as a Team Entrepreneurship in Action: Bird Scooters Take Flight Technology and the Economy: Teamwork: Now Streaming at Netflix Responding to Business Challenges: Spacex: Out of This World Communication So You Want a Job in Managing Organizational Culture, Teamwork, and Communication END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Organization, Teamwork, and Communication See for Yourself Case: Coca-Cola Shakes Up Its Organization 07-165 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Team Exercise SUPPLEMENTAL TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Teamwork Solve the Dilemma: Quest Star in Transition CONNECT ACTIVITIES Brewing Up Fun in the Workplace Freshii’s Unique Structure Drives Its Success Netflix: Culture Attracts Talent BONUS TEACHING RESOURCES Additional Discussion Questions Controversial Issue Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY Because a business’s structure can so profoundly affect its success, this chapter will examine organizational structure in detail. First, we discuss how an organization’s culture affects its operations.

Then we consider the development of structure, including how tasks and responsibilities are organized through specialization and departmentalization. Next, we explore some of the forms organizational structure may take. Finally, we consider communications within business.

LEARNING OBJECTIVES LO 7-1

Explain the importance of organizational culture.

LO 7-2

Describe how organizational structures develop.

LO 7-3

Describe how specialization and departmentalization help an organization achieve its goals.

LO 7-4

Determine how organizations assign responsibility for tasks and delegate authority.

LO 7-5

Compare and contrast some common forms of organizational structure.

LO 7-6

Distinguish between groups and teams, and identify the types of each that exist in organizations.

LO 7-7

Describe how communication occurs in organizations.

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KEY TERMS AND DEFINITIONS accountability

The principle that employees who accept an assignment and the authority to carry it out are answerable to a superior for the outcome.

centralized organization

A structure in which authority is concentrated at the top, and very little decision-making authority is delegated to lower levels.

committee

A permanent, formal group that performs a specific task.

customer departmentalization

The arrangement of jobs around the needs of various types of customers.

decentralized organization

An organization in which decision-making authority is delegated as far down the chain of command as possible.

delegation of authority

Giving employees not only tasks but also the power to make commitments, use resources, and take whatever actions are necessary to carry out those tasks.

departmentalization

The grouping of jobs into working units usually called departments, units, groups, or divisions.

functional departmentalization

The grouping of jobs that perform similar functional activities, such as finance, manufacturing, marketing, and human resources.

geographical departmentalization

The grouping of jobs according to geographic location, such as state, region, country, or continent.

grapevine

An informal channel of communication, separate from management’s formal, official communication channels.

group

Two or more individuals who communicate with one another, share a common identity, and have a common goal.

line-and-staff structure

A structure having a traditional line relationship between superiors and subordinates and also specialized managers—called staff managers—who are available to assist line managers.

line structure

The simplest organizational structure, in which direct lines of authority extend from the top manager to the lowest level of the organization.

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matrix structure

A structure that sets up teams from different departments, thereby creating two or more intersecting lines of authority; also called a project management structure.

multi-divisional structure

A structure that organizes departments into larger groups called divisions.

organizational chart

A visual display of the organizational structure, lines of authority (chain of command), staff relationships, permanent committee arrangements, and lines of communication.

organizational culture

A firm’s shared values, beliefs, traditions, philosophies, rules, and role models for behavior (also called corporate culture).

organizational structure

The levels of management in an organization.

product departmentalization

The organization of jobs around the products of the firm.

product development teams

A specific type of project team formed to devise, design, and implement a new product.

project teams

Groups similar to task forces that normally run their operation and have total control over a specific work project.

quality assurance teams (or quality circles)

Small groups of workers brought together from throughout the organization to solve specific quality, productivity, or service problems.

responsibility

The obligation, placed on employees through delegation, to perform assigned tasks satisfactorily and be held accountable for the proper execution of work.

restructure

To change the basic structure of an organization.

self-directed work team (SDWT)

A group of employees responsible for an entire work process or segment that delivers a product to an internal or external customer.

span of management

The number of subordinates who report to a particular manager.

specialization

The division of labor into small, specific tasks and the assignment of employees to do a single task.

structure

The arrangement or relationship of positions within an organization.

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task force

A temporary group of employees responsible for bringing about a particular change.

team

A small group whose members have complementary skills; have a common purpose, goals, and approach; and hold themselves mutually accountable.

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CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, and KEY TERMS learners will need to take away from the course.

LO 7-1

LO 7-2

Explain the importance of organizational culture.

Key Terms:  Introduction  Organizational culture  Organizational Culture Lecture Outline and Notes: I. Organizational Culture Table 7.1 A. Organizational culture refers to a firm’s shared values, beliefs, traditions, philosophies, rules, and role models for behavior.

B. Also referred to as corporate culture, an organizational culture exists in every organization regardless of size, type, product, or profit objective.

C. In a sense, the organization’s culture provides a detailed map for employees and outsiders as to how the organization functions.

1. A firm’s culture may be expressed formally through its mission statement, codes of ethics, memos, manuals, and ceremonies.

2. A firm’s culture may be expressed informally through dress codes, work habits, extracurricular activities, and stories. A firm’s culture is more commonly expressed informally.

3. When values and philosophies are shared by all members of an organization, they will be expressed in its relationships with stakeholders.

D. Organizational culture helps ensure that all members of a company share values and suggests rules for how to behave and deal with problems within the firm.

E. Setting a positive organizational culture sets the tone for all other decisions.

F. Organizational culture helps ensure that all members of a company share values and suggests rules for how to behave and deal with problems within the organization.

Describe how organizational structures develop.

Key Terms:  Developing Organizational Structure  Structure  Organizational chart II. Developing Organizational Structure A. Structure is the arrangement or relationship of positions within an organization.

1. Develops when managers assign work tasks and activities to specific individuals or work groups and coordinate the diverse activities required to reach the firm’s objectives.

2. Structure determines the arrangement and relationship of positions within the organization in a way that facilitates the attainment of the firm’s mission, strategic plans, and objectives.

3. How well an organization makes decisions, responds to problems, and influences employees’ attitudes toward their work is largely determined by the organization’s structure.

4. Well-structured organizations are usually very effective, competitive, and sustained over the long term. a. For example, the organizational culture at the Four Seasons hotel chain is service-oriented. To encourage employees to be dedicated to service, the hotel offers unique perks such as the ability to request transfers among its 90

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properties around the world. This structure helps the firm achieve its mission statement and goals.

B. Organizational structure is depicted through organizational charts—visual displays of structure, lines of authority (chain of command), staff relationships, permanent committee arrangements, and lines of communication.

C. Growth requires organizing—the structuring of human, physical, and financial resources to achieve objectives in an effective and efficient manner; growth necessitates hiring people who have specialized skills.

D. The Evolution of a Clothing Store, Phases 1, 2, and 3 (Figure 7.1) Describe how specialization and departmentalization help an Key Terms: organization achieve its goals.  Specialization  Assigning Tasks  Departmentalization o Specialization  Functional o Departmentalization departmentalization  Product departmentalization  Geographical departmentalization  Customer departmentalization III. Assigning Tasks A. In any organization, activities must be coordinated, assigned to work groups, and controlled; this requires specialization and departmentalization.

B. Specialization 1. After identifying all activities that must be accomplished, managers then break these activities down into specific tasks that can be handled by individual employees.

2. Specialization is the division of labor into small, specialized tasks and the assignment of single tasks to employees. a. Job specialization is common in automobile manufacturing because dividing work into smaller, specialized tasks results in employees performing work more quickly and efficiently.

3. The rationale for specialization is efficiency. a. Specialization minimizes the time lost when workers shift from one job to another. b. Specialization may occur when activities to be performed are too numerous for one person to handle.

4. Overspecialization can have negative consequences: Employees may become bored and dissatisfied with their jobs, leading to poor work quality, injuries, and high employee turnover.

C. Departmentalization (Figure 7.2) 1. Departmentalization: the grouping of jobs into working units that are usually called departments, units, groups, or divisions. a. Most companies use more than one departmentalization plan to enhance productivity. b. Even cities use departmentalization to group jobs into working units.

2. Functional Departmentalization: the grouping of jobs that perform similar functional

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activities, such as finance, manufacturing, marketing, and human resources. a. Advantages include departmental supervision by experts, and workers doing similar jobs make them easier to manage. b. The biggest disadvantage is that decision making involving more than one department may be slow, and it requires greater coordination. c. This form of departmentalization is common in small organizations.

3. Product Departmentalization: the grouping of jobs around the firm’s products. a. Each division develops and implements its own product plans, monitors the results, and takes corrective action as necessary. b. For example, PepsiCo Inc. uses product departmentalization in North America but chooses to divide its segments into a type of geographical departmentalization. c. Some advantages are the coordination of all activities related to the product and the simplification of the decision-making process. d. The disadvantages include duplicating specialized functions and emphasizing one product rather than achievement of overall organizational objectives.

4. Geographical Departmentalization: the grouping of jobs by geographical location, such as state, region, country, or continent. a. An advantage is that organizations can respond to the unique requirements of a geographic area. b. Grouping by location can require a large administrative staff and control system to coordinate operations, and tasks are duplicated among the different regions.

5. Customer Departmentalization: the grouping of jobs around the needs of various customers. a. An advantage is it allows companies to address unique requirements of each group. b. Does not focus on the organization as a whole and requires a large administrative staff.

Determine how organizations assign responsibility for tasks and Key Terms: delegate authority.  Delegation of  Assigning Responsibility authority o Delegation of Authority  Responsibility o Degree of Centralization  Accountability o Span of Management  Centralized o Organizational Layers organization  Decentralized organization  Span of management  Organizational layers IV. Assigning Responsibility A. Delegation of Authority 1. Delegation of authority is not only giving tasks to employees but also empowering them to make commitments, use resources, and take whatever actions are necessary to carry out those tasks.

2. Delegation gives a responsibility, or obligation, to employees to carry out assigned tasks satisfactorily.

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3. The principle of accountability means that subordinates who accept an assignment and the authority to carry it out are answerable to a superior for the outcome.

4. The process of delegation establishes a pattern of relationships and accountability between superior and subordinates.

5. However, the act of delegating authority to a subordinate does not relieve the superior of accountability for the delegated job.

B. Degree of Centralization 1. The extent to which authority is delegated throughout an organization determines its degree of centralization.

2. In centralized organizations, authority is concentrated at the top level, and very little decision-making authority is delegated to lower levels. a. Organizations tend to be more centralized when the decisions to be made are risky and low-level managers are not highly skilled in decision making. b. Overcentralization can cause problems in part because it may take longer for the organization as a whole to implement decisions and to respond to changes and problems on a regional scale.

3. In decentralized organizations, authority is delegated as far down the chain of command as possible. a. Decentralization is characteristic of organizations that operate in complex, unpredictable environments. b. Lower level managers, interacting externally, often develop a good understanding of this environment, thus improving responsiveness and enhancing creativity. c. The delegation of authority to lower levels of managers may increase productivity. d. Decentralization requires that lower level managers have strong decisionmaking skills. e. In recent years, the trend has been toward more decentralized organizations.

C. Span of Management 1. There is no simple guideline as to how many subordinates managers should manage but experts suggest: a. Top managers should not directly supervise more than four to eight people. b. Lower level managers, supervising relatively routine tasks, can manage a larger number of subordinates.

2. Span of management refers to the number of subordinates who report to a particular manager (Figure 7.3). a. A wide span of management exists when a manager directly supervises a large number of employees. b. A narrow span of management exists when a manager directly supervises only a few subordinates.

3. A narrow span is appropriate when superiors and subordinates are not close together, the manager has many other responsibilities, frequent interaction is needed, and problems are common.

4. A wide span is appropriate when superiors and subordinates are close together, the manager has few other responsibilities, a low level of interaction is needed, few problems arise, subordinates are highly competent, and operating procedures are in place.

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in decentralized firms.

D. Organizational Layers 1. Organizational layers are the levels of management in an organization.

2. A company with many layers is considered tall; its span of management is narrow.

Administrative costs are usually higher and communications slower.

3. Organizations with few layers are considered flat and have wide spans of management. In this type of structure, managers perform more administrative duties and spend more time supervising and working with subordinates.

4. Companies that decentralize flatten their structures and widen their spans of management, often by eliminating layers of middle management.

Compare and contrast some common forms of organizational Key Terms: structure.  Line structure  Forms of Organizational Structure  Line-and-staff o Line Structure structure o Line-and-Staff Structure  Restructure o Multidivisional Structure  Multi-divisional o Matrix Structure structure  Matrix structure V. Forms of Organizational Structure A. Line Structure 1. Line structure is based on the direct lines of authority, extending from the top executive to the lowest level employee (Figure 7.4).

2. Line structures are the simplest form and most common in small businesses.

3. An advantage of the line structure is the clear chain of command that enables managers to make decisions quickly; a mid-level manager, for example, needs to consult only their immediate supervisor, not several people.

4. A disadvantage of the line structure is that it requires managers to be knowledgeable about the wide range of activities for which they are responsible.

B. Line-and-Staff Structure 1. A line-and-staff structure has a traditional line relationship between superiors and subordinates, and specialized managers—called staff managers—are available to assist line managers (Figure 7.5). a. Line managers are directly involved in the operation of the business, while staff managers provide advice and support on specialized matters. b. Staff managers do not have direct authority over line managers, but they do have authority over their own subordinates.

2. Line-and-staff organizations may experience overstaffing and ambiguous lines of communication. Employees may become frustrated because of their lack of authority to carry out decisions.

C. Multidivisional Structure 1. A multidivisional structure organizes departments into larger groups called divisions. a. Just as departments can be formed on the basis of geography, customer, product, or a combination of these, so too divisions can be formed based on any of these methods of organizing. b. Growing firms tend to restructure. c. Permits delegation of decision-making authority allowing division and

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department managers to specialize, so better decisions are made faster. They allow those closest to the action to make decisions that will affect them.

D. Matrix Structure 1. A matrix structure, also called a project management structure, sets up teams from different departments thereby creating two or more intersecting lines of authority. It is also called a project management structure (Figure 7.6). a. Employees are responsible to two managers. b. Matrix structures are usually temporary; team members go back to their functional or line departments after a project is finished.

2. An advantage of the matrix structure is that this form of organization provides flexibility, enhances cooperation and creativity, and enables organizations to respond quickly to changes.

3. The matrix structure is generally expensive and quite complex. Employees may be confused about who has authority—the project manager or the immediate supervisor.

Distinguish between groups and teams, and identify the types of Key Terms: each that exist in organizations.  Group  The Role of Groups and Teams in Organizations  Team  Types of groups that exist in organizations.  Committee o Committees  Task force o Task Forces  Project teams o Teams  Product development teams  Quality assurance teams (or quality circles)  Self-directed work team (SDWT) VI. The Role of Groups and Teams in Organizations A. Regardless of how they are organized, most of the essential work of business occurs in individual work groups and teams.

1. A group has been defined as two or more individuals who communicate with one another, share a common identity, and have a common goal.

2. A team is a small group whose members have complementary skills; a common purpose, goals, and approach; and hold themselves mutually accountable.

3. All teams are groups but not all groups are teams (Table 7.2).

4. Work groups emphasize individual work products, individual accountability, and even individual leadership; work teams share leadership roles, have both individual and mutual accountability, and create collective work products.

B. The type of groups an organization establishes depends on the tasks it needs to accomplish and the situation it faces.

C. Committees 1. A committee is usually a permanent, formal group that does some specific task, for example, an ethics committee.

D. Task Forces 1. A task force is a temporary group of employees responsible for bringing about a particular change.

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2. They typically come from all departments and levels of an organization.

E. Teams 1. Teams have the advantages of being able to pool members’ knowledge and skills, creating more solutions to problems than individuals working alone, and enhancing employee acceptance of and commitment to team goals.

2. Project teams are similar to task forces but normally run their own operation and have total control over a specific work project. They are almost always temporary, although a large project may last several years. a. Product development teams are a special type of project team formed to devise, design, and implement a new product.

3. Quality assurance teams (or quality circles) are fairly small groups of workers brought together from throughout the organization to solve specific quality, productivity, or service problems.

4. A self-directed work team (SDWT) is a group of employees responsible for an entire work process or segment that delivers a product to an internal or external customer. a. Self-directed work teams permit the flexibility to change rapidly to meet the competition or respond to customer needs. b. The defining characteristic of SDWTs is the extent to which it is empowered or given authority to make and implement work decisions.

Describe how communication occurs in organizations.

Key Terms:  Communicating in Organizations  Grapevine o Formal and Informal Communication o Monitoring Communications o Improving Communication Effectiveness VII. Communicating in Organizations A. Communication within an organization can flow in a variety of directions and from a number of sources, each using both oral and written forms of communication.

B. The success of communication systems within the organization has a tremendous effect on the firm’s overall success.

C. Alternatives to face-to-face communication, such as meetings, are increasing due to technological advances.

1. Many companies use internal networks called intranets to share information with employees. Employees in different locations rely on email, voice mail, and online newsletters. Another innovative approach is cloud computing technology that can access information over a network. Increased internet at work has also created problems involving employee abuse.

2. A survey of employees revealed that approximately 65% consider how their employers communicate with them to be a key factor in their job satisfaction.

D. Formal and Informal Communication (Table 7.3) 1. Formal channels of communication are intentionally defined and designed by the organization.

2. They represent communication flow within the formal organizational structure as shown on organizational charts (Figure 7.7). a. Upward communication flows from lower to higher levels of the organization and includes such information as progress reports, suggestions for improvement, inquiries, and grievances.

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b. Downward communication refers to the traditional flow of information from upper organizational levels to lower levels. This type of communication involves directions, assignment of tasks and responsibilities, performance feedback, and certain details about the organization’s strategies and goals. c. Horizontal communication involves the exchange of information among colleagues and peers on the same organizational level, such as across or within departments. Horizontal communication informs, supports, and coordinates activities both within the department and between other departments, for example, task forces and project teams. d. Diagonal communication occurs when individuals from different units and organizational levels communicate.

3. Besides formal channels of communication, firms also communicate informally. a. Friendships and other nonwork social relationships comprise the informal organization of a firm, and their impact can be great. b. The grapevine, an informal channel of communication, separate from management’s channels of formal, official communication.

1. The channel through which the most significant informal communication flows.

Grapevines exist in all organizations.

2. Information passed along the grapevine may relate to the job or organization, or it may be gossip and rumors unrelated to either.

3. Managers who understand how the grapevine works can utilize it by feeding it facts to squelch rumors and incorrect information. They can also obtain valuable information from the grapevine that could improve decision making.

E. Monitoring Communications 1. Technological advances and the increased use of electronic communication at work have made monitoring its use necessary for most companies.

2. Failing to monitor employees’ use of email, social media, and internet can be costly. a. Must balance respect for employee privacy but not abdicate employer responsibility.

F. Improving Communication Effectiveness 1. Without effective communication, the activities and overall productivity of projects, groups, teams, and individuals will be diminished.

2. One of the major issues of effective communication is in obtaining feedback. a. Listening is a skill that involves hearing, and most employees listen much more than they actively communicate to others. b. Managers should encourage employees to provide feedback, even if it’s negative.

3. Strong and effective communication channels are a requirement for companies to distribute information to different levels of the company.

4. The use of Zoom and Webex for videoconferencing, team collaboration, and even daily communication between employees is changing the work environment.

5. During the COVID-19 pandemic employees were forced to work from home and many have continued to do so on a permanent basis.

6. Employees need to be coached on best practices in using digital communication so that it’s not a distraction or disruptive to productivity.

7. Communication is necessary in helping every organizational member understand what is expected of them. Many business problems can be avoided if clear 08-179 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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communication exists within the company.

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Musk Breaks the Chain of Command Elon Musk, the founder, CEO, CTO, and chief designer at SpaceX and CEO of Tesla is a busy businessperson, so efficient communication is a top priority for him. Musk prefers free-flowing communication and feels that hierarchy shouldn’t get in the way of getting the job done.

He says if it becomes apparent to an employee that they are not adding value to a meeting, they should leave rather than waste their time. He also tells employees to avoid acronyms and nicknames for products and processes at the company to keep communication straightforward and easy-tounderstand.

1. What is the chain of command?

A chain of command is an organizational structure that documents how each member of a company reports to one another (who reports to whom).

2. Why does Musk suggest Tesla employees break the chain of command?

He believes it makes for more efficient and timely communication that helps get the job done.

3. Describe how Musk promotes free-flowing communication.

Musk tells the employees that “communication should travel via the shortest path necessary to get the job done.” He also encourages his employees to ditch large meetings. He also tells employees to avoid acronyms and nicknames for products and processes at the company to keep communication straightforward and easy-to-understand.

Going Green: Connection and Collaboration: How Timberland Works as a Team Timberland, founded in 1955 as the Abington Shoe Company, became Timberland Company in 1978.

The company originally manufactured footwear and later expanded into clothing and accessories.

Timberland is known for its eco-friendly products with one-third of its footwear made at least partially from recycled materials.

Timberland is committed to using teamwork to advance its goals of sustainable product offerings. Its commitment to teamwork extends not only to its employees, but to suppliers and even competitors to create solutions for positively affecting the environment.

1. How does Timberland use teamwork to advance its goals?

With the goal of positively affecting the sustainability movement, the company started a crossfunctional employee team to determine how it could contribute to sustainability. Timberland formed its Global Stewards Program. Those teams of passionate volunteer employees, using

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their own time, participate as civic leaders within their communities, empower employees, and lead social responsibility projects.

Timberland also teamed up with its leather suppliers to decrease energy and water usage at its leather tanneries to further advance its goal of sustainability.

2. Why would Timberland partner with the competition?

The company is so committed to the sustainability movement that it worked with Nike and many other firms to create the Higg Index, a green index for apparel. It also partnered with Adidas on a green footwear index. The goal of the partnerships is to create a major difference within Timberland’s industry.

3. How do you think Timberland’s use of teams empowers employees?

Timberland’s use of teams empowers employees to come together in a cross-functional team made up of members from different areas in the company to create solutions for positively impacting the environment. The employees are also encouraged to give back to their communities and fellow employees.

Entrepreneurship in Action: Bird Scooters Take Flight 1. . How is Bird financing the business?

Bird secured funding through a number of well-known private equity groups like Sequoia Capital, Index Ventures, and Greycroft.

2. Name some of Bird’s current assets. What liabilities does it have?

The liabilities would include accounts payable to the “chargers” who gather the scooters and return them to service, possible accounts payable to Segway for the scooters.

3. One challenge Bird has faced involves safety issues because the scooters do not come with helmets. How do you think this issue might affect future funding for Bird?

Answers will vary, but students need to support their answer.

Technology and the Economy: Teamwork: Now Streaming at Netflix 1. Describe how Netflix uses teams in its organization.

Employees at Netflix work in cross-functional teams, meaning that employees from different functional areas work together to create solutions. Another quality infused into the culture at Netflix is to always be recruiting. Everyone at Netflix has the responsibility of building a great team.

2. Do you think Netflix has more of a narrow span of management or a wide span of 08-182 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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management? Explain your reasoning.

Answers will vary but most students will state that Netflix uses a wide span of management since employees must have strong collaborative skills to work with cross-functional teams.

3. Based on how Netflix seems to delegate authority, what degree of centralization do you think Netflix uses in its organizational structure? Explain your reasoning.

Students should answer that Netflix is structured as a decentralized organization since it has an organizational structure that provides employees with more freedom to manage themselves.

Netflix also values independent decision making, teamwork, honest communication, effective people, and few rules, which shows a high degree of decentralization.

Responding to Business Challenges: Spacex: Out of This World Communication 1. What characteristics does Gwynne Shotwell have that makes her a good fit for SpaceX’s organizational culture?

Gwynne Shotwell recognizes the value of strong communication and teamwork. She is wellsuited to SpaceX’s self-driven organizational culture and is a risk-taker.

2. How does SpaceX display teamwork to overcome challenges?

The organizational culture inspired by Musk means that employees are always collaborating on how to make his seemingly impossible ideas into a reality. When the rocket exploded in 2016, SpaceX investigators teamed up with each other to investigate the cause of the explosion. They were able to determine that the issue was the fuel tank.

3. How do you think strong communication skills helped Gwynne Shotwell lead SpaceX through its explosion crisis?

Shotwell balances Musk as a less emotional and steadier leader. When the rockets exploded, she quickly realized that as the leader of the company, she needed to display confidence to the other employees. Thus she was able to communicate strong, confident leadership.

So You Want a Job in Managing Organizational Culture, Teamwork, and Communication?

How has technology created new job positions?

The area of corporate communications provides lots of opportunities for specific jobs that facilitate communication systems. Thanks to technology, there are job positions to help disseminate information through online newsletters, intranets, crowdsourcing, or internal computer networks to share information to increase collaboration. In addition to the many advances using electronic communications, there are technology concerns that create new job opportunities. Monitoring workplace communications such as the use of email and the internet has created new industries.

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There have to be internal controls in the organization to make sure that the organization does not engage in any copyright infringement. If this is an area of interest, there are specific jobs that provide an opportunity to use your technological skills to assist in maintaining appropriate standards in communicating and using technology.

END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Organization, Teamwork, and Communication You really need to encourage students to have a positive outlook about working with others on a team. At this point, students have been working on their group’s business plan for 6–8 weeks. Surprise the students by walking into class and having them evaluate how well their groups are doing. Have them complete a simple evaluation form regarding each member’s contribution-to-date on the business proposal. This is an ideal time for such an activity because they still have plenty of time to resolve any problems the group might be having and still end up with a strong group project.

See for Yourself Case: Coca-Cola Shakes Up Its Organization The Coca-Cola Company is a total beverage company with 86,200 employees worldwide and more than 500 brands in more than 200 countries and territories. Coca-Cola has felt the effects of declining soda sales as consumers become health conscious. This, paired with the sudden impact of the COVID19 pandemic, has hurt the soda giant.

The company’s gradual decline in soda sales was marked by a sharp decline in overall sales as a result of the global pandemic. A significant portion of Coca-Cola’s sales come from theaters, restaurants, and sporting events, which were closed or under reduced operations for the duration of the COVID-19 pandemic. In response to slow sales, which were accelerated by the pandemic, Coca-Cola eliminated several brands to slim down its portfolio, including Tab, Zico, and Odwalla.

Along with eliminating underperforming brands, Coca-Cola announced plans to restructure the company and focus its drink portfolio on larger and more popular brands. To help streamline the organization, nine new divisions will replace 17 business units and will focus on scaling new products faster while eliminating the duplication of resources. As a result of the structural changes, Coca-Cola reallocated people and resources, including voluntary and involuntary reductions in employees.

1. What factors have contributed to declining sales for Coca-Cola?

Consumers have become more health conscious. This, paired with the sudden impact of the COVID-19 pandemic, has hurt the soda giant.

2. How will a new organizational structure benefit Coca-Cola?

The changes in the operating model will shift marketing to drive more growth and put execution closer to customers and consumers while prioritizing a portfolio of strong brands

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and a disciplined innovation framework. This reduction in duplication of resources and focus on scaling new products faster should improve profitability.

3. How does the restructuring affect Coca-Cola employees?

As a result of the structural changes, Coca-Cola reallocated people and resources, including voluntary and involuntary reductions in employees.

Team Exercise Students will form groups; assign the responsibility of providing the organizational structure for a company in which one of your team members has worked. Was the organization centralized or decentralized in terms of decision making? Would you consider the span of control to be wide or narrow? Were any types of teams, committees, or task forces used in the organization? Report your findings to the class.

SUPPLEMENTAL TEACHING RESOURCES Check Your Progress 1. Identify four types of departmentalization and give an example of each type.

Departmentalization is grouping jobs into working units usually called departments, units, groups, or divisions. (1) Functional departmentalization is the grouping of jobs that perform similar functional activities, such as finance, manufacturing, marketing, and human resources.

(2) Product departmentalization is grouping jobs around the products of a firm. (3) Geographical departmentalization is grouping jobs by geographic location, such as country, region, or an even smaller area. (4) Customer departmentalization is grouping jobs around the needs of various types of customers, which allows an organization to respond to the needs of each group of customers. (Examples of these departmentalization types will vary according to the examples given by students.)

2. Explain the difference between groups and teams.

In a group, two or more individuals communicate with one another, share a common identity, and have a common goal. The purpose of the group is the same as the broader organizational mission, whereas the team has a specific purpose that is defined by the team itself. The leadership roles in the team are shared, and both the team members and the whole team are accountable for the results of their work. In a group, the leadership is clearly focused on one person; thus, each individual is accountable.

A team requires a collective effort and the participation of all team members, two characteristics that are not necessarily required in a group. All teams are groups, but not all groups are teams.

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3. What are self-managed work teams and what tasks might they perform that traditionally are performed by managers?

A self-managed work team is a group of employees responsible for an entire work process or segment that delivers a product to an internal or external customer. They might be given the authority to implement work decisions, especially when problems arise in the production process.

4. Explain how delegating authority, responsibility, and accountability are related.

All of these are related, but there is a difference in the meaning of each of these words.

Delegation of authority is the assigning of tasks to employees while giving them the power to make commitments, use resources, and take actions necessary to accomplish them.

Responsibility is the obligation to carry out assigned tasks satisfactorily. Accountability means that a subordinate is answerable to a superior for the outcome of an assigned task.

5. Distinguish between centralization and decentralization. Under what circumstances is each appropriate?

A centralized organization is one in which top-level managers delegate very little authority to lower level employees. A decentralized organization is one in which authority is delegated as far down the chain of command as possible. A centralized organization is appropriate when the decisions to be made are risky and when low-level managers are not highly skilled in decision making. Decentralization is appropriate when the organization operates in complex and unpredictable environments.

6. Define span of management. Why do some organizations have narrow spans and others wide spans?

Span of management is the number of subordinates who report to a particular manager. A wide span of management exists when a manager directly supervises a large number of employees. A narrow span of management exists when a manager directly supervises only a few subordinates.

The nature of spans of management in a company depends on the physical distance between managers and subordinates, on the managers’ responsibilities other than supervision, and on the degree of interaction required between managers and subordinates. Other factors include the frequency of problems, competency level of subordinates, and the existence of specific operating procedures.

7. Discuss the different forms of organizational structure. What are the primary advantages and disadvantages of each form?

The process of delegation establishes a pattern of authority and accountability, often called bureaucracy, within the organization. Various forms of bureaucracy include line structure, lineand-staff structure, and matrix structure, as well as committees.

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A line structure is based on direct lines of authority that extend from the top executive to employees at the lowest level of an organization. This structure provides a clear chain of command, but it also requires managers to possess a wide range of knowledge.

In the line-and-staff structure, there is a line relationship between superiors and subordinates, and line departments are directly involved in the operation of the organization. Specialized managers, called staff managers, are available to assist line managers.

The matrix structure involves setting up teams from different departments and creating two or more intersecting lines of authority. The matrix structure improves cross-pollination of ideas but is generally temporary.

8. Discuss the role of the grapevine within organizations. How can managers use it to further the goals of the firm?

The grapevine is an informal channel of communication separate from management’s formal, official communication channels. Astute managers try to identify informal leaders to gain their support for the organization’s objectives. Managers can use the grapevine to their advantage, feeding it facts to squelch rumors and incorrect information. They can also obtain valuable facts from the grapevine to improve decision making.

9. How have technological advances made electronic oversight a necessity in many companies?

Technological advances as alternatives to face-to-face communication have caused problems as employees face information overload. Electronic oversight is necessary in many companies to insure that employees use technology appropriately and efficiently.

10. Discuss how an organization’s culture might influence its ability to achieve its objectives. Do you think that managers can “manage” the organization’s culture?

When an organization’s culture consists of values shared by all members of the organization, results can be positive as all members work toward those shared objectives. Managers can “manage” an organization’s culture by establishing values and rules through authority, partly in organizational and policy manuals, and partly by example. The manager’s awareness of a company’s culture is management’s strongest tool in dealing with problems and weaknesses.

Get Involved 1. Explain, using a specific example (perhaps your own future business), how an organizational structure might evolve. How would you handle the issues of specialization, delegation of authority, and centralization? Which structure would you use? Explain your answers.

Students’ answers will vary.

2. Interview the department chairperson in charge of one of the academic departments in your college or university. Using Table 7.2 as a guideline, explore whether the professors function 08-187 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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more like a group or a team. Contrast what you learned here with what you see on your school’s basketball, football, or baseball team.

Students’ answers will vary.

Build Your Skills: Teamwork Background Think about all the different kinds of groups and teams you have been a member of or been involved with. Here’s a checklist to help you remember them— with “Other” spaces to fill in ones not listed.

Check all that apply.

School Groups/Teams

Community Groups/Teams

□ Sports teams □ Cheerleading squads □ Musical groups □ Hobby clubs □ Foreign language clubs □ Study groups □ Other _____

□ Fund-raising groups □ Religious groups □ Sports teams □ Political groups □ Boy/Girl Scout troops □ Volunteer organizations □ Other _____

Employment Groups/Teams □ Problem-solving teams □ Work committees □ Project teams □ Labor union groups □ Work crews □ Other _____

Task 1. Of those you checked, circle those that you would categorize as a “really great team.”

2.

Examine the following table and circle those characteristics from columns 2 and 3 that were represented in your “really great” team experiences.

Indicator Members arrive on time?

Members prepared?

Meeting organized?

Good Team Experience Members are prompt because they know others will be.

Members are prepared and know what to expect.

Members follow a planned agenda.

Members contribute equally?

Members give each other a chance to speak; quiet members are encouraged.

Discussions help members

Members learn from others’

Not-So-Good Team Experience Members drift in sporadically, and some leave early.

Members are unclear what the agenda is.

The agenda is tossed aside, and freewheeling discussion ensues.

Some members always dominate the discussion; some are reluctant to speak their minds.

Members reinforce their

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Instructor’s Manual––Chapter 8 make decisions?

Any disagreement?

More cooperation or more conflict?

points of view, new facts are discussed, creative ideas evolve, and alternatives emerge.

Members follow a conflictresolution process established as part of the team’s policies.

Cooperation is clearly an important ingredient.

Commitment to decisions?

Members reach consensus before leaving.

Member feelings after team decision?

Members are satisfied and are valued for their ideas.

Members support decision afterward?

Members are committed to implementation.

Ferrell et al: Business: A Changing World 8ce belief in their own points of view, or their decisions were made long before the meeting.

Conflict turns to argument, angry words, emotion, blaming.

Conflict flares openly, as well as simmering below the surface.

Compromise is the best outcome possible; some members don’t care about the result.

Members are glad it’s over, not sure of results or outcome.

Some members secondguess or undermine the team’s decision.

3. What can you take with you from your positive team experiences and apply to a work-related group or team situation in which you might be involved?

Suggested Answer Key 1. Typically, most people categorize very few of the teams they’ve been involved with as “really great.”

2. Obviously, most—if not all—of the circled items should come from column two of the table.

3. Some ideas that you might want to bring out in the discussion generated from this question are: 

Everybody pulls together.



Enthusiasm runs high.



Believe in what you’re doing.



Be passionate about achieving your team’s goals.



There was a clear challenge.



The teams must feel like they can make a difference.

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

Team members need to take individual responsibility for doing their best.



Team members need to look out for each other and care about each other as individuals.



Have a clearly defined and clearly communicated vision or goal for the team—one for which everybody on the team can take ownership.



Establish some guidelines among the team members that include adopting the characteristics of a “good team experience” from the table.

Solve the Dilemma: Quest Star in Transition Quest Star (QS), which manufactures quality stereo loudspeakers, wants to improve its ability to compete against Japanese Arms. Accordingly, the company has launched a comprehensive qualityimprovement program for its Iowa plant. The QS Intracommunication Leadership Initiative (ILI) has flattened the layers of management. The program uses teams and peer pressure to accomplish the plant’s goals instead of multiple management layers with their limited opportunities for communication. Under the initiative, employees make all decisions within the boundaries of their responsibilities, and they elect team representatives to coordinate with other teams. Teams are also assigned tasks ranging from establishing policies to evaluating on-the-job safety.

However, employees who are not self-motivated team players are having difficulty getting used to their peers’ authority within this system. Upper-level managers face stress and frustration because they must train workers to supervise themselves.

Summary A. Quest Star (QS), manufactures quality stereo loudspeakers and wants to improve its ability to compete against Japanese firms.

B.

QS Intracommunication Leadership Initiative (ILI) has flattened the layers of management. 

Uses teams and peer pressure to accomplish the plant’s goals instead of multiple management layers.



Employees make all decisions within the boundaries of their responsibilities.



They elect team representatives to coordinate with other teams.



Teams are assigned tasks ranging from establishing policies to evaluating on-the-job safety.



Employees who are not self-motivated team players are having difficulty getting used to their peers’ authority within the system.



Upper-level managers face stress and frustration because they must train workers to supervise themselves.

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1. What techniques or skills should an employee have to assume a leadership role within a work group?

To assume a leadership role within a work group, an employee should have very good technical knowledge of the tasks conducted by the team. This individual should also have some conceptual skills in order to relate to the various activities performed within the group. Finally, human relations skills are necessary for the leader to provide information to the rest of the group and for the members of the group to give feedback to their leader.

2. If each work group has a team representative, what problems will be faced in supervising these representatives?

Each team representative is likely to defend the interests of their own group and to neglect the actions that may favor the performance of the other groups. In other words, the degree of team collaboration is likely to be low.

3. What are the pros and cons of the system developed by QS? The program introduced by QS is likely to lead to greater employee involvement, innovation, improved collaboration among employees of each team, and employees’ enhanced sense of accomplishment. Overall, it is likely to increase the firm’s productivity and competitiveness. The cons, however, are that employees have to learn how to supervise themselves, something they were not used to doing under the old system. As a result, they are having difficulty getting used to their peers’ authority under the new system. Training programs are necessary to teach employees how to supervise themselves and work together in teams.

CONNECT ACTIVITIES Brewing Up Fun in the Workplace Learning Objective: 7-1 Explain the importance of organizational culture.

Activity Summary: This activity explores the importance of organizational culture through the lens of New Belgium Brewing. An organizational culture exists in every organization, regardless of size, organizational type, product, or profit objective.

How to Use Activity: Company culture takes many forms. Have students select companies to research and describe their cultures. Then have students explain if they feel they would be successful within that environment while describing why or why not.

Class Discussion: How would you describe company culture? If you’ve worked before, how would you describe the culture of your company? What types of company cultures do you feel you’d be most 08-191 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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successful in? Are there any company cultures you think it may be difficult to perform at your best?

Which is more important—a company’s strategy or its culture?

Freshii’s Unique Structure Drives Its Success Learning Objective: 7-5 Compare and contrast some common forms of organizational structure.

Activity Summary: Freshii is a fast-casual franchised restaurant chain, based in Toronto, Ontario, Canada. Founded in 2005, the company has grown to over 350 locations all over the world. One contributor to Freshii’s success is the structure of the organization. Students will learn how the structure is helping the company achieve its goals and growing rapidly.

How to Use Activity: Create an assignment were students interview a business professional. Through the informational interview, have students explore the individual’s role and responsibility, the operational structure of the company, and the company’s culture. Provide a template of example questions if necessary. Once students have completed their informational interview, debrief their experiences through class discussion. (Note to Professor: Optionally, have students complete a reflection where they extrapolate their learnings to their future career.)

Class Discussion: What were your takeaways from the informational interviews? Did anything that you learned surprise you? Can you see yourself being successful in either the role, responsibilities, structure, or company of the person you interviewed?

Netflix: Culture Attracts Talent Learning Objective: 7-1 Explain the importance of organizational culture.

Activity Summary: Managers in organizations help shape the behaviors, programs, and policies that enhance and support an organization’s culture. In this activity, students explore the culture of one of today’s most popular brands: Netflix.

How to Use Activity: After watching the video, abstract the concept of company culture to just culture in general. Ask students to define what culture they would like to have—whether in their lives, their careers, or even perhaps the culture of their very classroom. (Note to Professor: When students have a voice in shaping the culture of the classroom, they typically are more engaged with in-class participation and submission of class assignments. Consider facilitating this activity as a discussion or a discussion board; then, design a cultural manifesto for shared accountability of the new classroom culture.)

Class Discussion: What type of culture resonates best for you, either in the classroom or the workplace? What are the behaviors that support a successful culture? What do you need to be successful in this class? How can I as your professor best support your learning and growth?

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Additional Discussion Questions Which organizational structure would be best for the following situations? Draw an organizational chart that would be appropriate for each of the situations.

The owner of a real estate agency has opened an office with three real estate agents. The owner directs the agency.

The real estate agency above has grown in the last five years. The business has grown in two different directions: residential and commercial. The owner still directs the real estate agency. He now has five agents handling commercial real estate details and 15 agents handling residential real estate details.

He would like to appoint one of the agents to be manager of the commercial division and another agent to be manager of the residential real estate division.

Another five years have elapsed. The same real estate agency has grown. Most of the business is still centered in two divisions: residential and commercial. The owner has now added a vice president to oversee the residential and commercial divisions. Also, the agency has added advertising and office management departments; the purpose of these staff departments is to provide advice and support to the residential and commercial divisions.

The answers can vary. The purpose of this exercise is to get students to think of the differences in the forms of organizational structure. Situation a is probably best answered by the line structure with a direct authority from the owner (director) to the three real estate agents. Situation b could be answered with the multidivisional structure by dividing the organization into two areas with a separate supervisor managing the residential real estate division and another supervisor managing the commercial division. Situation c could illustrate the line-and-staff structure. The staff managers of the specialized departments (advertising and office management) are available to assist line managers.

Controversial Issue Why Isn’t Delegation Working Here?

One of the purposes for studying organizational structure is to determine what the authority relationships are, what the tasks are, and who is responsible for carrying out those tasks. The following story illustrates what happens when the delegation of responsibility is not given to the person in charge of a group of subordinates.

Billy Wagner was a born salesman. He had worked for several companies over the years as a successful salesman. Several times he had been named salesman of the year.

Billy foresaw that metal buildings were a new frontier, and he began to sell them—metal buildings for farms, small businesses, schools, and churches. Billy covered all of Iowa, and he was quite successful in selling the metal buildings. Business was booming so much in Billy’s territory that the metal-building manufacturer and the construction crews were having a problem keeping up with his sales.

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To add to the problem, the original manager of the firm (the woman who had hired Billy) resigned and took a job at an airport. Her replacement was full of vim, vigor, and vitality and was determined to get the company rolling again, even though there were some logistical problems that caused the firm to fall further and further behind schedule. After talking to many people (but not Billy) in the firm about the lag in schedule, the new manager finally arrived at a solution. He decided to talk to Billy.

“Billy,” the new manager said confidently, “I know how we can keep up with the schedules. We just need to place a little responsibility in some hands that are strong enough and mature enough to handle it. My investigations have led me to conclude that you can handle this assignment. Now, here’s the plan. Once you have sold a metal building and the construction contract is signed, you are responsible for seeing that the building is erected by the completion date specified in the contract.

Understand?”

Billy Wagner thought a moment. He realized this was the kind of challenge that he had always wanted—supreme authority over metal-building delivery. To make sure he understood the new manager, Billy wanted to check one minor item.

“I take it that this means that I’m in charge of the construction crews and can order extra workers and assign overtime as needed, right? And those crews and their straw bosses will know that my word is law, right?”

“Hold on,” the manager choked, “You can’t be in charge of the crews.”

Billy wasn’t through with this argument. “Boss, if I can’t be in charge of the crews and get them moving as I see best, then there’s no way you can hold me responsible for having those buildings up in time.”

These were not words that the new manager wanted to hear. “Now, Billy, you just have to learn how to get along with those crew chiefs, to work with them, and to be cooperative. You just don’t get the point.”

Actually, it was the manager who was not getting the point.

Discussion Questions: 1. What was the organizational problem in this story?

The organizational problem deals with the delegation of authority. Delegation of authority means not only giving tasks to employees but empowering them to make commitments, use resources, and take whatever actions necessary to carry out those tasks. Since Billy cannot efficiently make sure the buildings are done on time without having authority over the crew, the manager is not delegating authority properly.

2. Can someone be responsible for something over which that person does not have authority?

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Probably not, or at least not easily. The manager might hold Billy responsible despite Billy’s objections, but if the crews won’t listen to Billy because he does not have authority over them, then there is not much Billy can do to get the buildings done on time unless he offers some kind of incentive (which he might not have the authority to do either). If it’s not in his power to perform the tasks satisfactorily, then he cannot exhibit responsibility for something that he can’t wield control over.

3. How should the new manager have handled Billy’s request to be in charge, to be able to order extra workers, to assign overtime, and to know that his word was law?

Students may have differing opinions, but if the new manager wants to delegate the responsibility of getting the new buildings done on time, then he must give Billy the resources to do so. If he didn’t want to give up so much authority, perhaps he could’ve negotiated with Billy in some way to give Billy more control (and hence greater authority over the crews) and yet retain some authority over the situation himself.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 1. Specialization Techniques of Henry Ford 2. A Comparison of Policy Manuals (Employee Handbooks) in Selected Firms Guest Speaker Suggestions 1. A professor or teacher to talk about organizational structure.

2. A representative from a business firm to speak about changes in organizational structure for that firm.

Teaching Suggestions 21. Start the session with a “writing to learn” exercise. Select three or four of the questions in “Check Your Progress.” Have students choose one of the three or four selected questions and write their answers. Allot only a few minutes for this writing exercise. Call on volunteers or randomly call on students for answers.

22. Cover desired portions of chapter content using the “Lecture Outline and Notes.” If students have been assigned the chapter as a reading assignment, not every fact in the chapter needs to be given in a lecture.

23. Having students draw organizational charts will help reinforce the characteristics of each of the organizational forms. After the students have drawn their charts individually, have them compare their drawings in pairs (or possibly in groups).

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24. Students should have read the boxed material. Go over the discussion questions in class.

Spending time on the discussion questions, the case study, the boxed material, and so on, helps students analyze and think about what they have learned.

Chapter 8: Managing Operations and Supply Chains SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Walmart Invests in Tech to Tackle the Competition Responding to Business Challenges: Improving the Supply Chain with a Blockchain Entrepreneurship in Action: Attabotics Startup Sets Its Sights on Supply Chain Automation Going Green: Greening the Supply Chain Technology and the Economy: Sunny Skies Ahead for Weather Insights So You Want a Job in Operations Management END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Managing Service and Manufacturing Operations See for Yourself Case: Scentsy: The Smell of Success Team Exercise SUPPLEMENTAL TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Reduce Cycle Time Solve the Dilemma: Planning for Pizza CONNECT ACTIVITIES Yelp is Simplifying Restaurant Operations New Belgium Brewery: Operations Management Scaling Up an Up Scale Customer Furniture Business BONUS TEACHING RESOURCES Additional Discussion Questions Controversial Issue Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions 08-196 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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SUMMARY Here, we discuss the role of production or operations management in acquiring and managing the resources necessary to create goods and services. Production and operations management involves planning and designing the processes that will transform those resources into finished products, managing the movement of those resources through the transformation process, and ensuring that the products are of the quality expected by customers.

LEARNING OBJECTIVES LO 8-1

Define operations management and differentiate between operations and manufacturing.

LO 8-2

Explain how operations management differs in manufacturing and service firms.

LO 8-3

Describe the elements involved in planning and designing an operations system.

LO 8-4

Specify some techniques managers may use to manage the logistics of transforming inputs into finished products.

LO 8-5

Assess the importance of quality in operations management.

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KEY TERMS AND DEFINITIONS capacity

The maximum load that an organizational unit can carry or operate.

computer-assisted design (CAD)

The design of components, products, and processes on computers instead of on paper.

computer-assisted manufacturing (CAM)

Manufacturing that employs specialized computer systems to actually guide and control the transformation processes.

computer-integrated manufacturing (CIM)

A complete system that designs products, manages machines and materials, and controls the operations function.

continuous manufacturing organizations

Companies that use continuously running assembly lines, creating products with many similar characteristics.

customization

Making products to meet a particular customer’s needs or wants.

economic order quantity (EOQ) model

A model that identifies the optimum number of items to order to minimize the costs of managing (ordering, storing, and using) them.

fixed-position layout

A layout that brings all resources required to create a product to a central location.

flexible manufacturing

The direction of machinery by computers to adapt to different versions of similar operations.

inputs

The resources—such as labour, money, materials, and energy—that are converted into outputs.

intermittent organizations

Organizations that deal with products of a lesser magnitude than do project organizations; their products are not necessarily unique but possess a significant number of differences.

inventory

All raw materials, components, completed or partially completed products, and pieces of equipment a firm uses.

inventory control

The process of determining how many supplies and goods are needed and keeping track of quantities on hand, where each item is, and who is responsible for it.

ISO 9000

A series of quality assurance standards designed by the International Organization for Standardization (ISO) to ensure consistent product quality under many conditions.

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ISO 14000

A comprehensive set of environmental standards that encourages a cleaner and safer world by promoting a more uniform approach to environmental management and helping companies attain and measure improvements in their environmental performance.

ISO 19600

A comprehensive set of guidelines for compliance management that address risks, legal requirements, and stakeholder needs.

just-in-time (JIT) inventory management

A technique using smaller quantities of materials that arrive “just in time” for use in the transformation process and therefore require less storage space and other inventory management expense.

manufacturing

The activities and processes used in making tangible products; also called production.

material requirements planning (MRP)

A planning system that schedules the precise quantity of materials needed to make the product.

modular design

The creation of an item in self-contained units, or modules, that can be combined or interchanged to create different products.

operations

The activities and processes used in making both tangible and intangible products.

operations management (OM)

The development and administration of the activities involved in transforming resources into goods and services.

process layout

A layout that organizes the transformation process into departments that group-related processes.

product layout

A layout requiring that production be broken down into relatively simple tasks assigned to workers, who are usually positioned along an assembly line.

production

The activities and processes used in making tangible products; also called manufacturing.

project organization

A company using a fixed-position layout because it is typically involved in large, complex projects such as construction or exploration.

purchasing

The buying of all the materials needed by the organization; also called procurement.

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quality control

The processes an organization uses to maintain its established quality standards.

routing

The sequence of operations through which the product must pass.

scheduling

The assignment of required tasks to departments or even specific machines, workers, or teams.

standardization

The making of identical, interchangeable components or products.

statistical process control

A system in which management collects and analyzes information about the production process to pinpoint quality problems in the production system.

supply chain management

Connecting and integrating all parties or members of the distribution system in order to satisfy customers.

total quality management (TQM)

A philosophy that uniform commitment to quality in all areas of an organization will promote a culture that meets customers’ perceptions of quality.

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CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, and KEY TERMS learners will need to take away from the course.

LO 8-1

Define operations management and differentiate between operations and manufacturing.  Introduction  The Nature of Operations Management o The Transformation Process

Key Terms:  Operations management (OM)  Manufacturing  Production  Operations  Inputs  Products

Lecture Outline and Notes: I. The Nature of Operations Management A. Operations management (OM) refers to the development and administration of the activities involved in transforming resources into goods and services.

1. Operations managers oversee the transformation process and the planning and designing of operations systems, managing logistics, quality, and productivity.

2. Quality and productivity have become fundamental aspects of operations management because a company that cannot make products of the quality desired by consumers, using resources efficiently and effectively, will not be able to remain in business.

3. OM has historically been called production or manufacturing.

4. Also, the term “operations” represents an interest in viewing the operations function as a whole rather than simply inputs and outputs.

5. Production and manufacturing refer to the activities and processes used in making products (tangible goods and services). These two terms are often used interchangeably.

6. Operations describes the activities and processes—including production—involved in producing both tangible and intangible products.

B. The Transformation Process 1. The transformation process converts inputs into products (Figures 8.1, 8.2). a. Inputs are resources such as labour, money, materials, and energy.

2. The transformation process combines inputs in predetermined ways using different equipment, administrative procedures, and technology to create a product.

3. To ensure that the transformation process generates quality products efficiently, operations managers control the process by taking measurements (feedback) at various points in the transformation process, comparing measurements to established standards, and taking corrective action for any deviation.

4. Transformation may take place through one or more processes LO 8-2

Explain how operations management differs in manufacturing and service firms.  Operations Management in Service Businesses A. Operations Management in Service Businesses (Table 8.1) 1. Different types of transformation processes take place in organizations that provide

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Instructor’s Manual––Chapter 8

2.

3.

4.

5.

6.

7.

8.

9.

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services.

Unlike tangible goods, services are effectively actions or performances that must be directed toward the consumers who use them.

Regardless of the level of customer contact, service businesses strive to provide a standardized process.

Services Versus Tangible Products a. Manufacturers produce tangible products, while service providers produce intangible products. b. The very nature of the service provider’s product requires a higher degree of customer contact. c. The actual performance of the service typically occurs at the point of consumption. d. Service providers are often more limited than manufacturers in selecting work methods, assigning jobs, scheduling work, and exercising control over operations. e. The quality of the service experience is often controlled by a service contact employee.

Uniformity of Inputs a. Manufacturers typically have more control over the amount of variability of the resources they use than do service providers. b. Products of service organizations tend to be more “customized” than those of their manufacturing counterparts.

Uniformity of Products a. Because of the human element inherent in providing services, each service tends to be performed differently. b. Human and technological elements associated with a service can result in a different day-to-day or even hour-to-hour performance of that service.

Labour Required a. Service providers are generally more labour intensive because of the high level of customer contact, perishability of the output, and high degree of variation of inputs and outputs. b. A manufacturer is likely to be more capital intensive.

Measurement of Productivity a. For manufacturers, measuring productivity is fairly straightforward because of the tangibility of the output and its high degree of uniformity. b. For service providers, variation in service requirements from job to job and intangibility of the product make productivity measurement more difficult.

Most organizations are a combination of manufacturer and service provider, with both tangible and intangible qualities embodied in what they produce. a. Subway’s tangible inputs are bread, tomatoes, and lettuce, while their outputs are customized sandwiches.

Describe the elements involved in planning and designing an operations system.  Planning and Designing Operations Systems o Planning the Product o Designing the Operations Processes o Planning Capacity

Key Terms:  Standardization  Modular design  Customization  Capacity

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Instructor’s Manual––Chapter 8 o o

Planning Facilities Sustainability and Manufacturing

Ferrell et al: Business: A Changing World 8ce  Fixed-position layout  Project organization  Process layout  Intermittent organizations  Product layout  Continuous manufacturing organizations  Computerassisted design (CAD)  Computerassisted manufacturing (CAM)  Flexible manufacturing  Computerintegrated manufacturing (CIM)

II. Planning and Designing Operations Systems A. Before a company can make a product, it must decide what it will produce and for what group of customers, what processes it will use to make the products, and what facilities it needs to produce them.

B. Planning the Product 1. Before making a product, a company must determine what consumers want and then design a product to satisfy that want.

2. Most companies use marketing research to find out what consumers want.

3. Developing a product can be a lengthy, expensive process.

4. The engineering or research and development department is charged with turning a product idea into a workable design that can be produced economically, as well as can be produced efficiently.

5. Operations managers plan for the types and quantities of materials needed to produce the product, the skills and quantity of people needed to make the product, and the actual processes through which the inputs must pass.

C. Designing the Operations Processes 1. Before beginning production, a firm must determine the appropriate method of transforming resources into the desired product.

2. Often, customers’ specific needs and desires dictate the process.

3. Usually products are designed to be manufactured by one of three processes. a. Standardization i. Standardization is making identical, interchangeable components, or even complete products.

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ii. It speeds up production and quality control and reduces production costs; however, a customer might not get exactly what they want. b. Modular design i. Modular design is the creation of an item in self-contained units, or modules, which can be combined or interchanged to create different products. ii. It allows products to be repaired quickly, thus reducing the cost of labour, but the component itself is expensive, raising the cost of repair materials. c. Customization i. Customization is making products to meet a particular customer’s needs or wants. ii. Products produced in this way are generally unique. iii. Mass customization is making products to meet the needs and wants of a large number of individual customers. d. Blockchain i. Blockchain is a secure, public database (or ledger) that records all transactions and is spread across multiple computers. ii. The global blockchain is difficult to tamper with and growing rapidly.

D. Planning Capacity 1. Capacity refers to the maximum load that an organizational unit can carry or operate. a. The unit of measurement may be a worker or machine, a department, a branch, or even an entire plant. b. Maximum capacity can be stated in terms of the inputs or outputs provided.

2. Efficiently planning the organization’s capacity needs is an important process for the operations manager. a. Capacity levels that fall short can result in unmet demand (lost customers). b. When there is more capacity than needed, operating costs are driven up needlessly due to unused and often expensive resources. c. To avoid such situations, organizations must accurately forecast demand and then plan capacity based on these forecasts.

3. Once a capacity decision—such as factory size—has been implemented, it is very difficult to change the decision without incurring substantial costs.

E. Planning Facilities 1. Many products are produced in factories, but others are produced in stores, at home, or where the product ultimately will be used.

2. Companies must decide where to locate their operations facilities, what layout is best for producing their particular product, and even what technology to apply to the transformation process. a. Some companies are using both physical and virtual locations.

3. Facility Location a. Once a facility location decision has been made and implemented, the firm must live with it due to the high costs involved. b. When making the facility location decision, the firm must pay careful attention to factors such as proximity to market; availability of raw materials, transportation, power, and labour; climatic influences; community characteristics (quality of life); and taxes and inducements.

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c. The facility location is complex because it involves the evaluation of factors— many of which cannot be measured with precision.

F. Facility Layout a. Facility layout—the arrangement of the physical components of an organization—is a complex, highly technical task. b. There are three basic layouts used in industry. i. A fixed-position layout has a central location for the basic product, and all the resources required to create the product are brought to the location. A company using a fixed-position layout may be called a project organization because it is typically involved in large, complex projects such as construction or exploration. ii. The process layout organizes the transformation process into departments that group-related processes. Intermittent organizations, which create products to customers’ specifications and produce relatively few units of each product, use the process layout. iii. The product layout breaks down work into relatively simple tasks assigned to workers positioned along an assembly line. Companies that use this layout are known as continuous manufacturing organizations because once they are set up, they run continuously, creating products with many similar characteristics. c. Many companies use a combination of layout designs.

G. Technology 1. Every industry has a basic underlying technology that dictates the nature of its transformation process.

2. Additionally, computers and robots have strongly influenced the operations of many businesses. a. Computer-assisted design (CAD) is the design of components, products, or processes on computers instead of paper. b. Computer-assisted manufacturing (CAM) is the use of computers in manufacturing to guide and control the transformation process. c. Drones, Robotics, and AI. Drones refer to unmanned aerial vehicles and have long been used in military operations. Use of drones in business operations will vastly change the technology landscape. d. AI relates to machine (computer) learning that is able to perform activities and tasks that usually require human intelligence such as decisions, visual perception, and speech recognition. In short, it makes computers act like humans. e. Robots perform a variety of tasks too difficult, dangerous, or repetitive for humans and are becoming increasingly important in assembly line uses such as spot welding and painting. f. Flexible manufacturing is a system that uses computers to direct machinery to adapt to different versions of similar operations. g. Computer-integrated manufacturing (CIM) is a complete system that utilizes CAD/CAM, flexible manufacturing, and robotics to design products, manage machines and materials, and control the operations function.

H. Sustainability and Manufacturing 1. Manufacturing and operations systems are moving quickly to establish environmental sustainability and to reduce negative impacts on the natural 08-206 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

Instructor’s Manual––Chapter 8

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environment.

2. Sustainability deals with conducting activities in such a way as to provide for the long-term well-being of the natural environment, including all biological entities.

3. Issues include pollution of land, air, and water; climate change; waste management; deforestation; urban sprawl; protection of biodiversity; and genetically modified foods.

4. Sustainability is increasingly important to stakeholders and can lead to improved profits.

Specify some techniques managers may use to manage the logistics of Key Terms: transforming inputs into finished products.  Supply chain  Managing the Supply Chain management o Procurement  Purchasing o Managing Inventory  Inventory o Outsourcing  Inventory control o Routing and Scheduling  Economic order quantity (EOQ) model  Just-in-time (JIT) inventory management  Material requirements planning (MRP)  Routing  Scheduling III. Managing the Supply Chain A. A major function of operations is supply chain management, which refers to connecting and integrating all parties or members of the distribution system in order to satisfy customers.

1. Also called logistics, supply chain management includes all the activities involved in obtaining and managing raw materials and component parts, managing finished products, packaging them, and getting them to customers.

2. The supply chain integrates firms such as raw material suppliers, manufacturers, retailers, and ultimate consumers into a seamless flow of information and products.

3. Advances in technology continue to push supply chain to one of the most important functions in business.

4. AI is moving rapidly across supply chain functions. AI has the potential to make the world more efficient in predictable, physical work such as assembly lines, packaging, shipping, and other repetitive tasks.

5. Blockchain, mentioned previously, is an emerging information technology that will change supply chain relationships. It is a distributed ledger that can manage blocks of information without the control of intermediaries or third parties.

B. Procurement 1. Purchasing (or procurement) is the buying of all the materials needed by the organization.

2. The purchasing department aims to obtain items of the desired quality in the right quantities at the lowest possible cost.

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3. Not all organizations purchase materials; sometimes, a firm can make materials more economically than an outside supplier. Others lease rather than buy equipment.

C. Managing Inventory 1. Inventory is every raw material, component, completed or partially completed product, and piece of equipment a firm uses.

2. There are three basic types of inventory: a. Finished goods inventory includes those products that are ready for sale, such as a fully assembled automobile ready to ship to a dealer. b. Work-in-process inventory consists of those products that are partly completed or are in some stage of the transformation process. c. Raw materials inventory includes all the materials that have been purchased to be used as inputs for making other products.

3. Inventory control is the process of determining how many supplies and goods are needed and keeping track of quantities on hand, where each item is, and who is responsible for each item. a. OM must be closely coordinated with inventory control.

4. Inventory managers spend a great deal of time trying to determine the proper inventory level for each item. a. The economic order quantity (EOQ) model is an approach to inventory management that identifies the optimum number of items to order to minimize the costs of managing (ordering, storing, and using) them. b. Just-in-time (JIT) inventory management eliminates waste by using smaller quantities of materials that arrive “just in time” for use in the transformation process and therefore require less storage space and other inventory management expense. i. One downside to JIT inventory management might be shortages if unforeseen circumstances, such as natural disasters, occur. c. Material requirements planning (MRP) is a planning system that schedules the precise quantity of materials needed to make the product.

D. Outsourcing 1. Outsourcing has increasingly become a component of supply chain management in operations; it refers to the contracting of manufacturing or other tasks to independent companies, often overseas. (Top outsourcing providers are listed in Table 8.2.)

2. Many athletic shoe manufacturers, such as Nike, outsource production to China and Vietnam to take advantage of lower labour costs.

3. Companies that hire suppliers must make sure that their suppliers are following company standards of conduct, as failure to do so could lead to criticism of the parent company.

4. Outsourcing has increasingly been linked with the development of a competitive advantage through improved product quality, speeding up the time it takes products to get to the customer, and overall supply chain efficiencies. a. Outsourcing allows companies to free up time and resources to focus on what they do best and to create better opportunities to focus on customer satisfaction.

5. However, outsourcing may create conflict with labour and negative public opinion when it results in U.S. workers being replaced by lower cost workers in other 08-208 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

Instructor’s Manual––Chapter 8

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countries.

E. Routing and Scheduling 1. Routing is the sequence of operations through which the product must pass. a. The sequence depends on the product specifications developed by the engineering department of the company.

2. Scheduling is the process of assigning required tasks to departments or even specific machines, workers, or teams. a. A popular scheduling technique is the Program Evaluation and Review Technique (PERT), which identifies the major activities required to complete a project, arranges them in a sequence, determines the critical path, and estimates the time required for each event. b. The path that requires the longest time from start to finish is called the critical path because it determines the minimum amount of time in which the process can be completed. i. Producing a Big Mac involves several steps, including grilling the patties; assembling the ingredients; and placing the Big Mac in its package. If any of the activities on the critical path for production fall behind schedule, the sandwich will not be completed on time, causing customers to wait longer than they usually would (Figure 8.3).

Assess the importance of quality in operations management.

Key Terms:  Managing Quality  Quality control o International Organization for Standardization (ISO)  Total quality o Inspection management o Sampling (TQM) o Integrating Operations and Supply Chain Management  Statistical process control  ISO 9000  ISO 14000  ISO 19600 IV. Managing Quality A. Quality, like cost and efficiency, is a critical element of operations management because defective products can quickly ruin a firm.

1. Quality reflects the degree to which a product meets the demands and requirements of customers. a. For instance, customers often consider the quality of service of many airlines to be poor due to frequent flight delays, lost baggage, and so on. b. Independent sources such as the J.D. Power & Associates annual initial quality survey can be helpful for companies in measuring the quality of their products (Figure 8.3).

2. A company has to decide which quality characteristics it considers important and then define those characteristics in terms that can be measured.

3. The Malcolm Baldridge National Quality Award is given each year to companies that meet rigorous standards of quality.

4. Quality control refers to the processes an organization uses to maintain its established quality standards.

5. A method companies may use is statistical process control, where management collects and analyzes information about the production process to pinpoint quality

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problems. a. TQM involves coordinating efforts to improve customer satisfaction, increase employee participation and empowerment, strengthen supplier partnerships, and form and foster an organizational culture of continuous quality improvement. b. Continuous improvement of an organization’s products is built around the notion that quality is free; in contrast, not having high-quality products is expensive. c. A primary tool of continuous improvement is benchmarking, the measuring and evaluating of the quality of the firm’s goods, services, or processes as compared with the quality produced by the best performing companies in the industry. d. TQM should be incorporated throughout the transformation process, and quality control should be viewed as an element of the product itself, rather than as a function of the operations process.

B. International Organization for Standardization (ISO) 1. Regardless of whether a company has a TQM program, it must first determine what standard of quality it desires and then assess whether its products meet that standard. a. Product specifications and quality standards must be set so the company can create a product that will compete in the marketplace. b. Quality standards can be incorporated into service businesses as well. i. Quality standards for manufacturing might be the thickness of metal for amount of a certain material. ii. Service industry standards could be things such as how long a customer waits or how many fries are in an order. c. The next step is inspection.

2. ISO 9000 is a series of quality assurance standards designed by the International Organization for Standardization (ISO) to ensure consistent product quality under many conditions. a. The standards provide a framework for documenting how a certified business keeps records, trains employees, tests products, and fixes defects. b. Certification has become a virtual necessity for doing business in some hightechnology businesses.

3. ISO 14000 is a comprehensive set of environmental standards that encourages a cleaner, safer world. a. Helps create a uniform standard across nations with varying regulations.

4. ISO 19600 is a comprehensive set of guidelines that address risks, legal requirements, and stakeholder needs. a. These are guidelines rather than requirements; companies that comply with ISO 19600 cannot be certified.

C. Inspection 1. Inspection reveals whether products meet established quality standards.

2. Some inspection techniques are simple—such as weighing, measuring, or observing—while others are more elaborate.

3. Organizations normally inspect purchased items, work-in-process items, and finished items.

4. The inspection of purchased items and finished items takes place after the fact; the inspection of work-in-process is preventive.

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D. Sampling 1. When inspection procedures are expensive to perform, use elaborate testing equipment, destroy products, and/or require many hours to complete, it is usually desirable to test just a sample of the output.

2. If the sample passes inspection, the inspector may assume that all the items from the lot would also pass inspection.

3. Sampling will probably be used if tests are destructive to the product.

4. If human life or safety depends on the item, 100% of the output is inspected.

V. Integrating Operations and Supply Chain Management A. Managing supply chains requires vigilance and the ability to make quick tactical changes.

1. Managing partners in the supply chain and operations is important because many stakeholders hold the firm responsible for appropriate conduct related to quality.

B. Businesses can manage the risks of global supply chains through the following: 1. Adopt a Global Supplier Code of Conduct 2. Encourage compliance and procurement employees to work together to ensure ethical sourcing practices at reasonable prices.

3. Create a diverse supply chain to minimize risks.

4. Perform regular audits on suppliers to ensure compliance to standards.

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Walmart Invests in Tech to Tackle the Competition Omni-channel retailing, where retailers offer a seamless experience on mobile, desktop, or traditional retail spaces, is one of Walmart’s greatest strengths. Walmart uses four stores in the United States as test centers where they continuously rotate new technology, digital tools, and physical enhancements in and out of the stores—all with the intention of helping associates better and more easily serve customers.

The stores are focused on accelerating inventory movement from the back room to the sales floor, blending online and in-store inventory, speeding up in-store pick rates for online orders, and experimenting with new checkout technologies. Walmart is also exploring how to use a combination of in-store signage and handheld devices to help associates navigate to the right locations when picking items for online orders. So far, this change has reduced the time it takes associates to find items and has increased the percentage of times the associate finds the item on their first attempt.

Walmart plans to revamp 1,000 stores with a new format that encourages customers to use Walmart’s app while shopping and provides contactless checkout options. Walmart is using technology to compete with Amazon and other online retailers.

4. What is omni-channel retailing?

Omni-channel retailing is where retailers offer a seamless experience on mobile, desktop, or traditional retail spaces.

5. Why does Walmart’s large network of stores serve as an advantage over online competitors?

Answers will vary but most students will emphasize that with thousands of stores, Walmart has locations close to most of its customers. That means that customers can easily order online and pick up the merchandise in a nearby store. The stores operate as both physical shopping destinations and online fulfillment centers.

6. Describe how Walmart is attempting to improve its inventory management at the store level.

Walmart is focusing on accelerating inventory movement from the back room to the sales floor, blending online and in-store inventory, speeding up in-store pick rates for online orders, and experimenting with new checkout technologies.

Responding to Business Challenges: Improving the Supply Chain with Blockchain Blockchain is a secure database that records all transactions and is spread across multiple computers. Essentially, it is a ledger that, by its public nature, makes it difficult to tamper with—thus transfers (of any variety) can be made without worry of security breaches. Walmart uses blockchain to improve logistics and transparency.

Other companies are using blockchain technology to improve their supply chains. Maersk, Kroger, Nestlé, and Tyson Foods are all using the technology since it more accurately displays all transactions in the ledger as it updates in real time and allows participants to see valuable 08-212 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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information, including the location of the asset and who has it in their possession. The beauty of blockchain is it can be altered to fit different processes, participants, and types of networks.

1.

What are some ways that blockchain increases transparency in the supply chain?

Blockchain permits retailers to track items from beginning to end during the supply chain process. Since blockchain is a secure database that records all transactions and is spread across multiple computers, there is no concern of tampering. Additionally, a user can track an item at any time during the supply chain process. Walmart use blockchain to improve logistics and transparency. It uses blockchain for more than 1.1 million of its items, tracking their journey from suppliers to store shelves.

2.

How can blockchain be used as a tool to manage inventory?

Companies have used blockchain technology to track shipping containers around the world, thus improving cargo tracking throughout the supply chain. Blockchain more accurately displays all transactions in the ledger as it updates in real time allowing participants to see valuable information, including the location of the asset and who has it in their possession.

3.

What are some ways that you think different industries could use blockchain to improve the quality of their operations and products?

Answers will vary with students citing the examples mentioned in the text including online voting, banking transactions, mobile purchases, etc.

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Entrepreneurship in Action: Attabotics Startup Sets Its Sights on Supply Chain Automation 1. How does Attabotics affect facility layout?

Attabotics’ technology, which is used in areas such as retail, food and beverage, and medical supply facilities, condenses traditional warehouses with row-and-aisle configurations into vertical storage structures.

2. What is the benefit of vertical storage?

Vertical storage products requires upward of 85% less space. This allows companies to use smaller warehouses and operate fulfillment centers closer to high-density, urban areas. With smaller warehouses closer to customers, companies can reduce their carbon footprint.

3. In what other ways do you think robotics will affect supply chain management?

Answers will vary but students need to support their answers.

Consider Ethics and Social Responsibility: Target Aims for Bullseye With Supply Chain Improvements 4. Describe the many ways Target is trying to improve its supply chain in order to compete.

Target invested $5 billion toward improving its supply chain and technology infrastructure in a 2year period, including raising its delivery time standards for suppliers and investing in same-day delivery. Target tested a new distribution strategy in order to make its stores quicker at restocking and distributing to stores and customers.

Target also acquired Shipt, a same-day grocery delivery service that delivers directly to consumers’ doors. Shipt allows Target to compete directly against same-day delivery services offered by Amazon Fresh. Additionally, Target added fresh groceries and adult beverages to its drive up and pickup services.

5. Why might changes to its inventory management improve Target’s distribution?

Target’s distribution strategy reduces the replenish cycle down to hours. In Target’s smaller stores, located in more urban areas, the company reduced the amount of inventory it has.

Instead of large shipments of inventory, Target makes smaller deliveries to fulfill exactly what the stores need. This is more of a just-in-time approach to inventory management, which reduces waste and allows stores to get exactly what they need when they need it.

6. What are some of the risks of adopting a just-in-time approach? What are some ways that blockchain increases transparency in the supply chain?

Answers will vary but most students will focus on JIT issues such as running out of inventory and unhappy customers.

Blockchain permits retailers to track items from beginning to end during the supply chain process. Since blockchain is a secure database that records all transactions and is spread across multiple computers there is no concern of tampering. Additionally, a user can track an item at any time during the supply chain process.

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Going Green: Greening the Supply Chain 1. Use Internet resources to find Maple Leaf Foods value chain – farm to fork. What is the environmental footprint of their supply chain?

Answers should be consistent with the value chain depicted on the website.

2. Why are Scope 3 emissions so important for Maple Leaf Foods?

Scope 3 accounted for 82 percent of the company’s total emissions in 2020.

3. What are some of the challenges that the company faces to become the 'most sustainable protein company on earth'?

Answers will differ. However, challenges will arise with Scope 3 which involves all other emissions in the supply chain, and which the company does not directly control.

Technology and the Economy: Sunny Skies Ahead for Weather, and other retailers.

1. What are some ways that accurate weather predictions can be used to improve business operations?

Weather data could reduce annual legal, insurance, and risk mitigation costs, while 99% said that they could also reduce operational costs.

2. How do you think weather affects a company’s supply chain?

Weather could affect a company’s shipping and delivery, as well as the amount and type of products that need to be sourced.

3. How can NASCAR use the data from The Weather Company to improve operations and create better customer satisfaction?

Weather Company’s weather data and weather station at each race helped to improve race operations and fan engagement. This information helped NASCAR “minimize delays” and improved customer experiences.

So You Want a Job in Operations Management What role do supply chain managers play in the success of businesses?

Supply chain managers have a tremendous impact on the success of an organization. These managers are engaged in every facet of the business process, including planning, purchasing, production, transportation, storage and distribution, customer service, and more. Their performance helps organizations control expenses, boost sales, and maximize profits.

END OF CHAPTER TEACHING RESOURCES

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Build Your Business Plan: Managing Service and Manufacturing Operations You need to stress to the students the growth in the service industry and the effect this has had on all of them. Sometimes students are confused and view the service industry as replacing the manufacturing industry. There has been a shift in the manufacturing sector of outsourcing and importing that has hurt the labour force. However, students need to understand this is only indirectly related to the growth of the service sector. What students need to understand is that unemployed workers in the manufacturing industry need to consider making the transition to the service sector. Ask students what preparation would be necessary for the labour force to enter the service sector.

See for Yourself Case: Scentsy: The Smell of Success Scentsy, a direct selling company founded by the Thompsons, is a distributor of wickless candles, decorative warmers, diffusers, cleaning products, and other scented items. Founded in 2004, on a sheep farm in Ohio, Scentsy has grown into a company with more than 250,000 independent contractors in more than 14 countries with distribution centers in the United States, Australia, Mexico, the Netherlands, and the United Kingdom.

When the COVID-19 pandemic struck the United States in 2020, Scentsy had to act fast. Stay-athome orders were issued throughout the country, and the business was engulfed in uncertainty.

From the beginning, Scentsy was classified by local and state government as an essential business in the states it distributes products. When its Lexington, Kentucky, warehouse operations were shut down by local authorities, Scentsy’s legal team worked with state officials to demonstrate that the company met their definition of an essential business. Extensive safety measures were put in place for the company’s essential workers who could not do their jobs from home.

Scentsy’s inventory management philosophy is grounded by the fact that the cost of having too little inventory to support the potential growth of its independent consultants is much greater than the cost of having excess inventory. The Thompsons made the critical early decision to lean into growth and invest heavily in additional inventory (raw materials and finished goods) and employees to be able to service growth while operating under challenging conditions such as social distancing, extra cleaning cycles, and personal protective equipment needs. They implemented hazard pay for essential workers, which led to a significant philosophical shift and the implementation of living wage standards.

Overseas factory shutdowns created concern around sustainable growth. Supply chain managers worked with suppliers to facilitate large purchase orders. The company also engaged in supply chain mapping, identifying and selecting alternative overseas and domestic suppliers. The company’s ability to supply cleaning items while stock outs happened in the retail space validated the company’s decision to move production in-house. Being more vertically integrated over time has allowed Scentsy to become less reliant on others in the supply chain, making the company nimbler and more flexible.

Scentsy’s independent salesforce thrives on social events. However, due to the pandemic, the company canceled its in-person events for the year, including the Scentsy World Tour, a traveling event with onsite training and a sneak peek of new products. Scentsy successfully shifted from inperson to virtual events.

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Scentsy stands out because it successfully meets the needs of key stakeholder groups. The company has been recognized by the Direct Selling Association for its customer-centric sales and marketing.

Additionally, Scentsy’s efforts to bolster its supply chain amid a global pandemic and its ability to effectively communicate with its consultants were a recipe for success.

1.

Describe Scentsy’s inventory management philosophy.

Scentsy’s inventory management philosophy is grounded by the fact that the cost of having too little inventory to support the potential growth of its independent consultants is much greater than the cost of having excess inventory.

2. What temporary measures did Scentsy put in place to support manufacturing and shipping operations?

To meet the needs of consultants and consumers, each department analyzed its workforce and re-deployed employees to operations based on willingness, ability, and previous experience to enhance the company’s ability to produce products and fulfill orders. A process was put in place for high-level management and other white-collar workers to volunteer after-hours and on weekends to support manufacturing and shipping operations until the company could hire and train more than 800 new employees, effectively doubling its operations and consultant support teams.

3.

Why do you think Scentsy sales spiked amid the pandemic?

Quarantine, working from home, and the availability of stimulus funds created a perfect storm that led to the massive demand for Scentsy home fragrance and cleaning products.

Team Exercise Students will form groups and assign the responsibility of finding companies that outsource their production to other countries. Questions to ask include: What are the key advantages of this outsourcing decision? Do you see any drawbacks or weaknesses in this approach? Why would a company not outsource when such a tactic can be undertaken to cut manufacturing costs? Students will then report their findings to the class.

SUPPLEMENTAL TEACHING RESOURCES Check Your Progress 1. What is operations management?

Operations management is the development and administration of the activities involved in transforming resources into goods and services.

2. Differentiate among the terms operations, production, and manufacturing.

Production and manufacturing are used interchangeably to represent the activities and processes used in making tangible products. Operations is a broader term, describing those processes used in the making of both tangible and intangible products.

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3. Compare and contrast a manufacturer versus a service provider in terms of operations management.

Manufacturers and service providers both must schedule and control operations as well as allocate necessary resources. However, though manufacturers and service providers often perform similar activities, they differ in the following five basic ways: (1) nature and consumption of outputs, (2) uniformity of inputs, (3) uniformity of outputs, (4) labour requirements, and (5) measurement of productivity.

4. Who is involved in planning products?

The functions involved in planning products include research, engineering, and operations management. In larger corporations, these functions may be separate departments; however, in smaller companies, one or two individuals may be responsible for all planning functions. It is important to have every part of a firm involved in planning products to ensure that they not only satisfy customers but also allow a firm to achieve its objectives.

5. In what industry would the fixed-position layout be most efficient? The process layout? The product layout? Use real examples.

A fixed-position layout uses a central location for the basic product, and all resources required to create the product are moved to that location. Students’ examples will vary, but a bridge under construction would be one example of fixed-position layout.

The process or functional layout organizes the transformation process into departments according to the type of work to be done. Known as intermittent organizations, they deal with products of lesser magnitude than product organizations. They are able to create a product to a customer’s specifications and produce relatively few units of each product. Students’ examples will vary, but a factory that engages in printing activities would be one example of process layout.

A product or line layout requires that the work of creating a product be broken down into activities or tasks requiring relatively short periods of time and be assigned to workers positioned along the line. The product moves from one worker to another, and each one in turn performs the required tasks or activities. Organizations using this layout are known as continuous manufacturing organizations because once they are set up they run continuously, creating products with many similar characteristics. Students’ examples will vary, but a company that makes plastic components would be one example of product layout.

6. What criteria do businesses use when deciding where to locate a plant?

The following factors are considered for plant location: a. Proximity to market b. Availability of raw materials c. Availability of transportation d. Availability of power 10-218 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Instructor’s Manual—Chapter 10 e. Climatic influences f.

Availability of labour

g. Community characteristics h. Taxes and inducements 7. What is flexible manufacturing? How can it help firms improve quality?

In flexible manufacturing, computers direct machinery to adapt to different versions of similar operations. This can help the firm improve quality because one machine can be programed to carry out its function for several different versions of an engine. This eliminates the need to shut down the production line to refit the machine.

8. Define supply chain management and summarize the activities it involves.

Supply chain management refers to connecting and integrating all parties or members of the distribution system in order to satisfy customers. It includes all the activities involved in obtaining and managing raw materials and component parts, managing finished products, packaging them, and getting them to customers. Its primary activities include purchasing, managing inventory, and scheduling.

9. Describe some of the methods a firm may use to control inventory.

A firm may use a variety of methods to control inventory including economic order quantity (identifies the optimum number of items to order to minimize the costs of managing them), just-in-time inventory management (eliminates waste by using smaller quantities of materials that arrive “just-in-time” for use), and material requirements planning (a planning system that schedules the precise quantity of materials needed to make the product).

10. When might a firm decide to inspect a sample of its products rather than test every product for quality?

Whether to inspect 100% of the output or only part of it is related to the cost of the inspection process, destructiveness of the inspection process, and the importance of the item to the safety of consumers or others. The greater the cost and the more destructive the inspection process, the more likely the firm is to use sampling techniques. However, the more important an item is to the safety of consumers or others, the more likely the firm is to examine all items.

Get Involved 1. Compare and contrast OM at McDonald’s with that of Honda of America. Compare and contrast OM at McDonald’s with that of a bank in your neighborhood.

Sample answer (not exhaustive):

Inputs

McDonald’s

Honda of America

Local bank

Human labour, money, management, energy, cooking oil, meat,

Human labour at factory, salespeople, money, management, energy,

Human labour, money, management, information and

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Instructor’s Manual—Chapter 10 condiments, pickles, ketchup, mustard, bread, soft drinks, milk, coffee, juice concentrate, water, potatoes, plastic toys, menus, ice cream cones, wrappers

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engines, braking systems, steel, glass, door panels, windows, rubber, tires, dashboard needles, transmission gears, steering wheel, seats, airconditioner vents, radios, mirrors, paint Metal forming equipment, machining equipment, car lifts, robotics, conveyor systems, lubrication equipment, wheel spoke spinning machine, assembly line, welding machines, hydraulic press machines, stamping parts, rotational equipment Assembly line

customer data, paper, calculators, knowledge

Equipment

Drive-thru equipment (loudspeaker, signs), cash registers, ovens, cutlery, playground equipment, fryer, ice cream machine, coffee maker, soda dispensers, ice makers, shelves, food preparation tables (assembly line)

Method of manufacturing Output

Assembly line A quality food product and an enjoyable environment

Finished automobiles

Financial services that can be customized to the needs of customers

Physical Good

Yes

Yes

Possibly (money)

Contact with customer (services)

Extensive

None except at dealerships

Control over uniformity of outputs

Strong control over consistency of food products; less control over service Some customization as consumers can request varying adjustments to their food products

Large amount of control

Extensive, including online and in-person (high touch and high tech) Financial services must comply with regulatory requirements, although service may vary Mass customization provides opportunities to adjust financial products to needs of specific customers

Level of standardization

Very standardized although car models might differ

Teller machines, drivethru equipment, computers, filing systems, ATM machines, counters, drawers

_________________

2. Find a real company that uses JIT, either in your local community or in a business journal. Why did the company decide to use JIT? What have been the advantages and disadvantages of using JIT for that particular company? What has been the overall effect on the quality of the company’s goods or services? What has been the overall effect on the company’s bottom line?

Students’ answers will vary based on the company they choose.

3. Interview someone from your local Chamber of Commerce and ask them what incentives the community offers to encourage organizations to locate there. (See if these incentives relate to 10-220 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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the criteria firms use to make location decisions.)

Students’ answers will vary.

Build Your Skills: Reduce Cycle Time Background An important goal of production and operations management is reducing cycle time—the time it takes to complete a task or process. The goal in cycle time reduction is to reduce costs and/ or increase customer service. Many experts believe that the rate of change in our society is so fast that a firm must master speed and connectivity. Connectivity refers to a seamless integration of customers, suppliers, employees, and organizational, production, and operations management. The use of the Internet and other telecommunications systems helps many organizations connect and reduce cycle time.

Task Break up into pairs throughout the class. Select two businesses (local restaurants, retail stores, etc.) that both of you frequent, are employed by, and/or are fairly well acquainted with. For the first business, one of you will role-play the “manager” and the other will role-play the “customer.”

Reverse roles for the second business you have selected. As managers at your respective businesses, you are to prepare a list of five questions you will ask the customer during the role-play. The questions you prepare should be designed to get the customer’s viewpoint on how good the cycle time is at your business. If one of the responses leads to a problem area, you may need to ask a follow-up question to determine the nature of the dissatisfaction. Prepare one main question and a follow-up, if necessary, for each of the five dimensions of cycle time: 1. Speed—the delivery of goods and services in the minimum time; efficient communications; the elimination of wasted time.

2. Connectivity—all operations and systems in the business appear connected with the customer.

3. Interactive relationships—a continual dialog exists among operations units, service providers, and customers that permits the exchange of feedback on concerns or needs.

4. Customization—each product is tailored to the needs of the customer.

5. Responsiveness—the willingness to make adjustments and be flexible to help customers and to provide prompt service when a problem develops.

Begin the two role-plays. When it is your turn to be the manager, listen carefully when your partner answers your prepared questions. You need to elicit information on how to improve the cycle time at your business. You will achieve this by identifying the problem areas (weaknesses) that need attention.

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After completing both role-play situations, fill out the accompanying form for the role-play when you were the manager. You may not have gathered enough information to fill in all the boxes. For example, for some categories, the customer may have had only good things to say; for others, the comments may all be negative. Be prepared to share the information you gain with the rest of the class. I role-played the manager at (business). After listening carefully to the customer’s responses to my five questions, I determined the following strengths and weaknesses as they relate to the cycle time at my business: Dimension Speed Connectivity Interactive relationships Customization Responsiveness

Strength

Weakness

The goal of this exercise is to help students understand the concept of cycle time and the five dimensions of cycle time: speed, connectivity, interactive relationships, customization, and responsiveness. During the role-play, students should be able to define the business activities that are related to the dimensions. The main concern is that students gather enough information to complete all boxes. In some cases, it may be hard for them to determine both strengths and The goal of this exercise is to help students understand the concept of cycle time and the five dimensions of cycle time: speed, connectivity, interactive relationships, customization, and responsiveness. During the role-play, students should be able to define the business activities that are related to the dimensions.

Solve the Dilemma: Planning for Pizza McKing Corporation operates fast-food restaurants in 3 provinces, selling hamburgers, roast beef and chicken sandwiches, french fries, and salads. The company wants to diversify into the growing pizza business. Six months of tests revealed that the ideal pizza to sell was a 16-inch pie in three varieties: cheese, pepperoni, and deluxe (multiple toppings). Research found the size and toppings acceptable to families as well as to individuals (single buyers could freeze the leftovers), and the price was acceptable for a fast-food restaurant ($7.99 for cheese, $8.49 for pepperoni, and $9.99 for deluxe).

Marketing and human resources personnel prepared training manuals for employees, advertising materials, and the rationale to present to the restaurant managers (many stores are franchised). Store managers, franchisees, and employees are excited about the new plan. There is just one problem.

The drive-through windows in current restaurants are too small for a 16-inch pizza to pass through.

The largest size the present windows can accommodate is a 12-inch pie. The managers and franchisees are concerned that if this aspect of operations has been overlooked, perhaps the product is not ready to be launched. Maybe there are other problems yet to be uncovered.

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A. McKing Corporation operates fast-food restaurants in 50 states, selling hamburgers, roast beef and chicken sandwiches, french fries, and salads.

B. Wants to diversify into the growing pizza business.

1. Ideal pizza to sell was a 16-inch pie in three varieties: cheese, pepperoni, and deluxe (multiple toppings) C. Marketing and human resources personnel prepared: 1. Training manuals for employees 2. Advertising materials 3. Rationale to present to the restaurant managers (many stores are franchised) D. Issues: 1. The drive-through windows in current restaurants are too small for a 16-inch pizza to pass through.

2. Concerns that if this aspect of operations has been overlooked perhaps the product is not ready to be launched.

1. What mistake did McKing make in approaching the introduction of pizza?

McKing failed to consider operations issues when designing the product. Specifically, it did not ensure that product delivery (the drive-through service) was feasible for the new pizza product.

2. How could this product introduction have been coordinated to avoid the problems that were encountered?

Introduction of this product could have been coordinated better by teaming operations management personnel with the research and design personnel. Operations managers would know how to evaluate the product from an operational issue, thus taking into consideration how the product will be produced and delivered to the customer.

3. If you were an executive at McKing, how would you proceed with the introduction of pizza into the restaurants?

Students’ answers will vary, but each should demonstrate an understanding of the problem being corrected.

CONNECT ACTIVITIES Yelp is Simplifying Restaurant Operations Learning Objective: 8-3 Explain how operations management differs in manufacturing and service firms.

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automatic and structured response. In the service industry, it is challenging because the output is generally intangible and can rarely be saved, stored, or resold. Therefore, it is difficult to accurately estimate demand in order to match supply. Students will demonstrate understanding of how operations management works in a service-oriented business in this activity.

New Belgium Brewery: Operations Management Learning Objective: 8-1 Define operations management.

Activity Summary: New Belgium Brewery is a small but constantly growing business that has won many awards and achieved a strong reputation for quality products and environmental responsibility.

Students will learn the operational practices New Belgium puts into place to ensure a quality product to support a successful service and manufacturing operation.

How to Use Activity: Have class off location! Work with a local business to get a tour of a manufacturing plant. Student will see concepts like line inputs, outputs, and transformation processes brought to life.

Class Discussion: A supply chain encompasses the end-to-end development process of a particular good or service from concept to completion. What considerations might a business leader need to think of when planning a good’s production? At its core, a supply chain is a process that is followed.

How would you describe the supply chain of a typical restaurant like McDonalds? Suppose you ordered a Big Mac. What needs to happen from a supply chain perspective at the farming, corporate, and restaurant levels to ensure the proper making of the sandwich?

Scaling Up an Up Scale Customer Furniture Business Learning Objective: 8-4 Describe the elements involved in planning and designing an operations system.

Activity Summary: Students will explore the challenges faced by a local furniture manufacturer on their journey to meet their growing customer base. At the conclusion of the case, students will have a grasp on operations management and planning operations systems to effectively meet its supply chain.

How to Use Activity: This exercise places students in the hot seat to make key business decisions.

Consider exploring these supply chain concepts further by focusing on a logistics company, such as UPS or FedEx. Have students research all that needs to get their package delivered—everything from sticking the label on the package to it being delivered at the recipient’s door. (Note to Professor: This activity can be strengthened even more by having students research the process and effects of specifically overnight shipping.)

Class Discussion: What are the steps needed for a package to go from one place to another? What considerations might these companies make when designing operations processes? Consider FedEx’s headquarters in Memphis and UPS’ in Louisville. The headquarters for both companies are situated within 500 miles of each other. Is this a coincidence? Why or why not? (Note to Professor: FedEx and UPS’ headquarters are situated within the geographic mean of the entire U.S. population, allowing them to be in the center of almost everyone within the country. As a result, packages can emerge from their hubs in a solid position to travel to the recipient. Connect back to the chapter’s section on Planning Facilities.)

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BONUS TEACHING RESOURCES Additional Discussion Questions 1. What is the purpose of inventory control?

Inventory refers to all the materials a firm holds to manufacture products, or it can refer to goods held for sale to final customers. Production depends on inventory managers to know what materials are available for assembly or manufacture. In addition, inventory is important to managers trying to determine the proper amount of inventory to be maintained. Inventory control is especially important with JIT systems.

2. PERT charts can show a sequence of activities in days rather than seconds. Draw a PERT chart for the chairperson of a banquet committee showing the most efficient path for these projected events: January 5 January 6 January 19 January 20 January 27 January 27 January 27 January 30

Confirm banquet room reservation.

Publicize banquet.

Count number of banquet reservations; phone in total to hotel.

Phone chairpersons of banquet decorating committee and hospitality committee to review preparations for banquet.

(2-4 p.m.) Decorating committee places decorations on tables.

(2-4 p.m.) Hospitality committee prepares registration table and banquet booklets.

Banquet (6 p.m.)

Send thank-you notes to all committee persons and hotel staff.

This will be a fairly simple chart, with a straight path except at 2-4 p.m. on January 27, when the two committees will be working simultaneously. Explain to students that most PERT charts for production purposes will be much more complex than this example.

Controversial Issue How Much Robotics Is Too Much?

This is an age of automation and computerization. Marvels are possible in our time, but sometimes certain citizens become frustrated with these modern innovations.

For example, there are people who are annoyed by solicitations via the telephone. Such solicitations are often timed for the dinner hour so that family members will be at home, which doubles the bother. Add to this the automated telephone solicitor. You answer your phone, and a recording begins to speak. Some react by thinking: “If your firm does not think enough of me as a prospective client to have a human call me, then I absolutely refuse to listen to your message.”

More and more robots are being used in industry, and more and more of the products we consume are partially manufactured by the concept we call robotics.

Certainly, the fact that robots save wages for a firm is considerable motivation to employ them. Also, robots do an excellent job of precise, repetitive jobs. But the question arises of whether robots do as good a job as humans. The experts would say that it depends on the task involved and the quality level 10-225 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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of the humans replaced in the process.

Discussion Questions: 1. Suppose you are traveling down the highway in a new car. Would you gain more comfort and security from the knowledge that your car was carefully assembled by ultra-conscientious and highly-skilled artisans or some experimental robots being broken in at the factory?

Student answers will vary.

2. Would you react favorably to a doctor being assisted by a robot? How would you like the idea of a robot being involved in an operation on you?

Student answers will vary.

3. Would the use of a robot save the patient money? If so, would insurance firms opt for robotics operations all the time to cut costs?

It may save money if it makes the doctor’s job easier and more efficient. Insurance firms may like these cost-cutting measures, but they would likely experience much resistance on the part of stakeholders. Consumers will likely not trust robots as much as human doctors. It could take a long time for such trust to develop, and only if robots prove to be safer and more efficient than human doctors. So it is not likely that consumers would tolerate insurance firms which insist that something like health be completely robotic operated.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 1.

2.

3.

4.

The Influence of W. Edwards Deming on Modern Quality Control A Study of Just-in-Time Inventory Concepts in American Manufacturing Advantages and Disadvantages of Robots in Manufacturing Utilization of Quality Circles in Organizations

Guest Speaker Suggestions 1. A professor of production and operations management to talk about different production and operations processes.

2. A representative of a manufacturing firm to talk about production and operations management processes.

3. A quality-control manager from a local firm to talk about quality control techniques, statistical sampling, quality circles, or other quality programs employed at that firm.

4. A software representative to demonstrate CAD or CAM applications. Many of these software representatives will have videos or other visual presentations designed to inform potential users about their products. Some of these demonstration packages would be informative for class use.

5. A representative of a firm that markets industrial robots. As in the case of CAD and CAM 10-226 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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software, industrial robot representatives may have videos and visual presentations to provide information about the use of industrial robots.

Teaching Suggestions 25. This chapter offers the instructor an opportunity to relate experiences of a visit to a manufacturing plant. Or, the instructor may ask students to relate their knowledge of the production processes and facility layout of local manufacturing plants. Using local examples will add interest to the discussion. Use this discussion before proceeding to the chapter lecture.

26. Use the PowerPoint slides to enhance the lecture.

27. Emphasize the boxed material and cases in the textbook. Use “Boxed Text Discussion Questions” and answers, which are provided in this Instructor’s Manual. Comments on the case are also given in this Instructor’s Manual.

28. Review the objectives given at the beginning of the chapter (also given at the beginning of each chapter in this Instructor’s Manual). Have students answer without referring to the “Review Your Understanding” at the end of the chapter.

29. A student tour of a manufacturing facility would be ideal, but time and travel considerations often preclude such plans. An alternative is for the instructor to tour a local manufacturing facility and report back to students the different production and operations processes and layout facilities. The instructor might videotape some of the production and operations processes, giving students a view of a local manufacturing facility.

Chapter 9: Motivating the Workforce SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Hilton Motivates Its Employees With a Touch of Hospitality Consider Ethics and Social Responsibility: A Perfect Fit: Patagonia’s Passionate Employees Responding to Business Challenges: Bad Moods Contribute to Decreased Productivity Entrepreneurship in Action: Klue’s Award-winning Corporate Culture Business Disruption: Lockheed Martin Flexes Its Work Schedule So You Think You May Be Good at Motivating a Workforce END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Motivating the Workforce See for Yourself Case: Inside Google’s High-Performance Culture Team Exercise 10-227 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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SUPPLEMENTAL TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Motivating Solve the Dilemma: Motivating to Win CONNECT ACTIVITIES Employees Love SAS iSeeIt! Video Case: Maslow's Hierarchy of Needs Video case: Appletree Answers BONUS TEACHING RESOURCES Additional Discussion Questions Controversial Issue Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions SUMMARY Because employees do the actual work of the business and influence whether the firm achieves its objectives, most top managers agree that employees are an organization’s most valuable resource. To achieve organizational objectives, employees must have the motivation, ability (appropriate knowledge and skills), and tools (proper training and equipment) to perform their jobs. We examine employees’ needs and motivation, managers’ views of workers, and several strategies for motivating employees.

Managers who understand the needs of their employees can help them reach higher levels of productivity and thus contribute to the achievement of organizational goals.

LEARNING OBJECTIVES LO 9-1

Explain why the study of human relations is important.

LO 9-2

Summarize early studies that laid the groundwork for understanding employee motivation.

LO 9-3

Compare and contrast the human relations theories of Abraham Maslow and Frederick Herzberg.

LO 9-4

Investigate various theories of motivation, including Theories X, Y, and Z; equity theory; expectancy theory; and goal-setting theory.

LO 9-5

Describe some of the strategies that managers use to motivate employees.

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KEY TERMS AND DEFINITIONS behaviour modification

Changing behaviour and encouraging appropriate actions by relating the consequences of behaviour to the behaviour itself.

classical theory of motivation

Theory suggesting that money is the sole motivator for workers.

compressed workweek

A 4-day (or shorter) period in which an employee works 40 hr.

equity theory

An assumption that how much people are willing to contribute to an organization depends on their assessment of the fairness, or equity, of the rewards they will receive in exchange.

esteem needs

The need for respect—both self-respect and respect from others.

expectancy theory

The assumption that motivation depends not only on how much a person wants something but also on how likely they are to get it.

extrinsic rewards

Benefits and/or recognition received from someone else.

flextime

A program that allows employees to choose their starting and ending times, provided that they are at work during a specified core period.

goal-setting theory

Refers to the impact that setting goals has on performance.

human relations

The study of the behaviour of individuals and groups in organizational settings.

hygiene factors

Aspects of Herzberg’s theory of motivation that focus on the work setting and not the content of the work; these aspects include adequate wages, comfortable and safe working conditions, fair company policies, and job security.

intrinsic rewards

The personal satisfaction and enjoyment felt after attaining a goal.

job enlargement

The addition of more tasks to a job instead of treating each task as separate.

job enrichment

The incorporation of motivational factors such as opportunity for achievement, recognition, responsibility, and advancement, into a job.

job rotation

Movement of employees from one job to another in an effort to relieve the boredom often associated with job specialization.

job sharing

Performance of one full-time job by two people on part-time hours.

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Maslow’s hierarchy

A theory that arranges the five basic needs of people—physiological, security, social, esteem, and self-actualization—into the order in which people strive to satisfy them.

morale

An employee’s attitude toward their job, employer, and colleagues.

motivation

An inner drive that directs a person’s behaviour toward goals.

motivational factors

Aspects of Herzberg’s theory of motivation that focus on the content of the work itself; these aspects include achievement, recognition, involvement, responsibility, and advancement.

physiological needs

The most basic human needs to be satisfied—water, food, shelter, and clothing.

reinforcement theory

The theory that behaviour can be strengthened or weakened through the use of rewards and punishments.

security needs

The need to protect oneself from physical and economic harm.

self-actualization needs

The need to be the best one can be; at the top of Maslow’s hierarchy.

social needs

The need for love, companionship, and friendship—the desire for acceptance by others.

Theory X

McGregor’s traditional view of management whereby it is assumed that workers generally dislike work and must be forced to do their jobs.

Theory Y

McGregor’s humanistic view of management whereby it is assumed that workers like to work and that under proper conditions employees will seek out responsibility in an attempt to satisfy their social, esteem, and selfactualization needs.

Theory Z

A management philosophy that stresses employee participation in all aspects of company decision making.

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CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, and KEY TERMS learners will need to take away from the course.

LO 9-1

Explain why the study of human relations is important.  Introduction  Nature of Human Relations

Key Terms:  Human relations  Motivation  Morale  Intrinsic rewards  Extrinsic rewards

Lecture Outline and Notes: I. Nature of Human Relations A. Human relations is the study of individual and group behaviour in organizational settings; it is concerned with what motivates employees to perform their jobs.

In business, human relations involves motivating employees to achieve organizational objectives efficiently and effectively. e. A central question for the human resources manager is: “What motivates employees to perform?” f. Successful companies provide important lessons about how to treat employees. Most top managers agree that employees are a company’s most important resource.

B. Motivation is an inner drive that directs behaviour toward goals (Figure 9.1).

1. A goal is the satisfaction of a need, while a need is the difference between a desired state and an actual state.

2. Motivation explains why people behave as they do; a lack of motivation explains why people avoid doing what they should do.

3. Human relations is concerned with the needs of employees, their goals and how they try to achieve them, and the impact of those needs and goals on job performance.

4. Motivating employees to stay engaged is a key responsibility of management. a. Engagement involves emotional involvement and commitment by the employee. b. Being engaged results in carrying out the expectations and obligations of employment by the employee.

5. A person who recognizes or feels a need is motivated to take action to satisfy the need and achieve a goal. a. For example, a salesperson whose performance is far below other salespeople’s performance will likely try to change their tactics to improve their skills.

C. Morale is an employee’s attitude toward their job, employer, and colleagues.

1. High morale contributes to high levels of productivity, high returns to stakeholders, and employee loyalty. a. When employees have high morale, motivation is high, and goals are achieved.

2. Low morale may cause high absenteeism and turnover.

3. Many companies offer diverse benefits to boost morale and satisfaction, including involving employees in decision making, showing appreciation for their efforts, and creating a pleasant work environment.

4. Human resources managers can also use benefits as well as daily motivational incentives to increase morale.

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LO 9-2

LO 9-3

Ferrell et al: Business: A Changing World 8ce

1. An intrinsic reward is the personal satisfaction and enjoyment you feel from attaining a goal.

2. An extrinsic reward is the benefit or recognition you receive from someone else.

3. Intrinsic and extrinsic rewards both increase employee motivation.

4. Respect, involvement, appreciation, adequate compensation, promotions, a pleasant work environment, and a positive organizational culture are all morale boosters, all of which can help companies retain good employees (Table 9.1).

Summarize early studies that laid the groundwork for understanding Key Terms: employee motivation.  Classical theory of  Historical Perspectives on Employee Motivation motivation o Classical Theory of Motivation o The Hawthorne Studies II. Historical Perspectives on Employee Motivation A. From early studies, researchers have attempted to find ways to motivate workers.

B. Classical Theory of Motivation 1. According to the classical theory of motivation, money is the sole motivator for workers and can lead to increased productivity.

2. Frederick Taylor and Frank and Lillian Gilbreth conducted time and motion studies in an effort to improve employees’ productivity, which led to the application of scientific principles to management. a. Taylor believed managers should break down each job into component tasks, determine how best to perform each task, and specify the output for each worker in order to improve productivity. b. Taylor suggested that managers link a worker’s pay directly to output. i. He developed the piece-rate system, under which employees were paid a certain amount for each unit they produced. c. Taylor and most early 20th-century managers generally felt that money and job security were the primary motivators of employees.

3. Managers are increasingly striving to relate pay to performance in order to motivate employees and boost productivity. However, there are other considerations as well.

A. The Hawthorne Studies 1. Elton Mayo and Harvard researchers continued Taylor’s work in studies at the Hawthorne Works Plant of the Western Electric Company that sought to identify what physical working conditions in the workplace stimulated employees to be most productive.

2. The studies found that employee productivity increased regardless of the physical conditions; they were responding to the attention they received, a phenomenon known as “the Hawthorne effect.”

3. The researchers concluded that social and psychological factors could significantly affect productivity and morale.

4. They revealed that human factors influence employee behaviour.

Compare and contrast the human relations theories of Abraham Key Terms: Maslow and Frederick Herzberg.  Maslow’s hierarchy  Theories of Employee Motivation  Physiological needs o Maslow’s Hierarchy of Needs  Security needs o Herzberg’s Two-Factor Theory  Social needs  Esteem needs

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Ferrell et al: Business: A Changing World 8ce  Self-actualization needs  Hygiene factors  Motivational factors

III. Theories of Employee Motivation

LO 9-4

A. Maslow’s Hierarchy of Needs (Figure 9.2) 1. According to Maslow, an employee is motivated by where they are at any given time relative to their needs.

2. Managers should understand their employees’ needs in order to discover what the most appropriate motivators would be at any given time.

3. Psychologist Abraham Maslow arranged humans’ five basic needs into Maslow’s hierarchy in the order in which people strive to satisfy them. a. Physiological needs are the first to be satisfied and include the needs for the essentials of life—water, food, shelter, and clothing. b. Security needs relate to protecting oneself from physical and economic harm. c. Social needs are the needs for love, companionship, and friendship—the desire for acceptance from others. d. Esteem needs relate to the desire for respect—both self-respect and respect from others. Competition is a form of esteem that motivates people to be more productive. e. Self-actualization is the desire to be the best one can be.

4. Maslow’s theory maintains that needs at the bottom of the hierarchy must be satisfied before higher level needs can be met.

5. Maslow’s theory also suggests that if lower level needs are reactivated, the individual will try to satisfy that need rather than higher level needs.

6. Managers can learn from Maslow’s hierarchy that employees will be motivated to contribute to organizational goals only if they first satisfy their physiological, security, and social needs through their work.

B. Herzberg’s Two-Factor Theory (Table 9.2) 1. Frederick Herzberg studied various factors relating to the job and their relation to employee motivation and concluded that job factors can be classified into two categories. a. Hygiene factors relate to the work setting rather than the content of the work and include adequate wages, comfortable and safe working conditions, fair company policies, and job security. These factors do not necessarily motivate employees, but their absence may be a source of dissatisfaction. b. Motivational factors relate to the content of the work itself and include achievement, recognition, involvement, responsibility, and advancement. They promote higher levels of performance. Their absence may not lead to dissatisfaction, but their presence is likely to motivate people to excel.

2. Herzberg’s motivational factors and Maslow’s esteem and self-actualization needs are similar.

3. The higher level needs in Maslow’s hierarchy and the motivational factors identified by Herzberg are important in improving productivity.

Investigate various theories of motivation, including Theories X, Y, and Key Terms: Z; equity theory; expectancy theory; and goal-setting theory.  Theory X  McGregor’s Theory X and Theory Y  Theory Y  Theory Z  Theory Z

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 Equity Theory  Equity theory  Expectancy Theory  Expectancy theory  Goal-Setting Theory  Goal-setting theory A. McGregor’s Theory X and Theory Y 1. Douglas McGregor contrasted two views of management, the traditional view called Theory X and a humanistic view, which he called Theory Y. 2. Theory X managers assume that workers generally dislike work and must be forced to do their jobs. a. The average person naturally dislikes work and will avoid it when possible. i. Theory X assumes that the average worker prefers to be directed, avoids responsibility, has relatively little ambition, and wants security. ii. Most workers must be coerced, controlled, directed, or threatened with punishment to get them to work toward achieving organizational objectives. iii. Theory X focuses on physiological and security needs and virtually ignores the higher needs discussed by Maslow.

3. Theory Y assumes that workers like to work and will normally seek out responsibility to satisfy their social, esteem, and self-actualization needs. a. Theory Y managers maintain less control and supervision, do not use fear as a motivator, and are more democratic in decision making. b. Theory Y assumes people will exercise self-direction and self-control to achieve objectives to which they are committed. c. Theory Y makes the following assumptions about how employees see work: i. The expenditure of physical and mental effort in work is as natural as play or rest. ii. People will exercise self-direction and self-control to achieve objectives to which they are committed. iii. People will commit to objectives when they realize that the achievement of those goals will bring them personal reward. iv. The average person will accept and seek responsibility. v. Imagination, ingenuity, and creativity can help solve organizational problems, but most organizations do not make adequate use of these characteristics in their employees. vi. Organizations today do not make full use of workers’ intellectual potential. d. Theory Y managers address the high-level needs in Maslow’s hierarchy as well as physiological and security needs. e. Theory Y has gained widespread support and has displaced Theory X. B. Theory Z 1. Theory Z is a management philosophy that stresses employee participation in all aspects of company decision making.

2. Theory Z was developed by William Ouchi, and it incorporates and adapts many elements of the Japanese approach to management. a. Managers and workers share responsibilities; the management style is participative, and employment is long term. b. Some have begun to question Theory Z. c. Theory Z results in employees feeling organizational ownership, and research has found that these feelings of ownership may produce positive attitudinal and behaviour effects for employees.

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3. Theory Y and Theory Z are complementary.

4. Comparisons of Theories X, Y, and Z (Table 9.3) C. Equity Theory 1. According to equity theory, how much people are willing to contribute to an organization depends on their assessment of the fairness, or equity, of the rewards they will receive in exchange.

2. In theory, the rewards an individual receives are proportional to the contribution made to the organization.

3. Each worker regularly develops a personal input–output ratio by taking stock of their contribution (inputs) to the organization in time, effort, skills, and experience and assessing the rewards (outputs) offered by the organization in pay, benefits, recognition, and promotions.

4. The worker compares their input–output ratio to other employees. If the ratios are close, the worker will feel that they are being treated equitably.

5. An employee who feels that their rewards don’t match their contributions (in equity) will probably try to get a raise or leave the organization.

6. Almost all issues involved in equity theory are subjective and can cause problems for managers.

7. Managers should try to avoid equity problems by ensuring that rewards are distributed on the basis of performance and that all employees clearly understand the basis for their pay and benefits.

D. Expectancy Theory 1. Psychologist Victor Vroom’s expectancy theory assumes that motivation depends not only on how much a person wants something but on the person’s perception of how likely they are to get it.

2. A person who wants something and has reason to be optimistic will be strongly motivated.

E. Goal-Setting Theory 1. Goal-setting theory refers to the impact that setting goals has on performance.

2. Goals act as motivators to focus employee efforts.

3. In 1954, Peter Drucker introduced the term management by objectives (MBO) that refers to the need to develop goals that both managers and employees can understand and agree upon.

4. Linking personal and organizational objectives can give employees a greater sense of commitment toward achieving organizational goals.

LO 9-5

Describe some of the strategies that managers use to motivate employees.  Strategies for Motivating Employees  Behaviour Modification  Job Design  Importance of Motivational Strategies

Key Terms:  Behaviour modification  Reinforcement theory  Job rotation  Job enlargement  Job enrichment  Flextime  Compressed workweek  Job sharing

IV. Strategies for Motivating Employees A. Based on the theories of motivation discussed earlier, businesses have developed a number 10-236 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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of strategies for motivating employees to achieve organizational objectives and for boosting morale and productivity.

B. Behaviour Modification 1. Behaviour modification involves changing behaviour and encouraging appropriate actions by relating the consequences to the behaviour itself.

2. The concept of behaviour modification was developed by psychologist B. F. Skinner, who showed that reward and punishment can modify behaviour.

3. If behaviour is positively reinforced, or rewarded, that behaviour will tend to be repeated, while behaviour that is punished will tend to be eliminated.

4. In the long run, rewarding appropriate behaviour will generally be a more effective way to modify behaviour.

C. Job Design 1. Managers have several strategies they can use to design jobs to help improve employee motivation.

2. Job rotation allows employees to move from one job to another to relieve the boredom associated with specialization (Table 9.4). a. Job rotation allows workers to undertake a variety of tasks and to learn new skills. b. One drawback of job rotation is that employees may eventually become bored with all the jobs in the cycle. c. Job rotation is extremely useful when a person is being trained for a position that requires an understanding of the various units in an organization. d. Job rotation is also used to cross-train today’s self-directed work teams.

3. Job enlargement involves adding tasks to a job instead of treating each task as a separate job. a. Job enlargement, like job rotation, was developed to overcome the boredom associated with specialization. b. Jobs are more satisfying as the number of tasks performed by an individual increases.

4. Job enrichment involves incorporating motivational factors such as opportunity for achievement, recognition, responsibility, and advancement into a job. a. Job enrichment gives workers not only more tasks within the job but more control and authority over the job. b. Job enrichment enhances a worker’s feeling of responsibility and provides opportunities for growth and advancement when the worker is able to take on more challenging tasks.

5. Many managers have turned to flexible scheduling strategies such as flextime, compressed workweeks, job sharing, part-time work, and telecommuting. a. Managers are using flexible scheduling strategies to meet problems of poor motivation and high absenteeism. b. Flextime is a program that allows employees to choose their starting and ending times as long as they are at work during a specified core period. (Figure 9.3) c. A compressed workweek is a 4-day (or shorter) period in which an employee works 40 hr. d. Job sharing occurs when two people do one job. The company benefits by gaining the skills of two people for one job, often at a lower total salary. Job sharing gives both people an opportunity to work as well as time for other obligations such as parenting. e. Other flexible scheduling strategies are being used.

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i. One strategy allows full-time workers to work part time for a certain period. ii. Another allows employees to split their time between the office and home.

Some firms allow employees to work at home a few days of the week (sometimes called telecommuting). f. Usually companies offer flexible work schedules to give more options to employees who are trying to juggle work and family responsibilities. g. Preliminary findings indicate such plans increase job satisfaction, which, in turn, increase productivity. i. More flexible schedules are associated with healthier lifestyle choices such as increased physical activity and healthier sleep habits. ii. However, there may be some downsides. Some have found that working from home limits their career advancement opportunities. Also, telecommuting may blur the boundaries between office and home.

D. Importance of Motivational Strategies 1. Motivation is a process that affects all the relationships within an organization and influences many areas such as pay, promotion, job design, training opportunities, and reporting relationships.

2. Motivating employees to increase satisfaction and productivity is an important concern for organizations seeking to remain competitive in the global marketplace.

3. The economic environment can change an employee’s motivation. a. In a slow growth or recession economy, sales can flatten or decrease and morale can drop because of the need to cut jobs. b. In the most recent recession, many workers feared losing their jobs and increased the amount they were saving. c. In good economic times, employees may be more demanding and be on the lookout for better opportunities. d. New rewards or incentives may help motivate workers in such economies.

4. Table 9.5 shows Companies with Excellent Motivational Strategies, along with the types of strategies they use to motivate employees.

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Hilton Motivates Its Employees With a Touch of Hospitality Hilton is widely recognized as being an employee-centric company due, in large part, to its innovative workplace practices. Hilton has improved its resources for veterans and working parents, expanded its parental leave policy, and created dozens of new professional development and advancement courses. Hilton prioritizes a culture of respect, inclusion, and hospitality.

1. Describe the motivational strategies Hilton uses.

Hilton implemented various motivational strategies designed to enhance employee engagement including: the Hilton Senior Leadership Business Immersion program where senior leaders and board members spend 3 days doing the work of frontline employees such as checking in guests, carrying luggage to rooms, handling guest issues, and cleaning rooms. The company also promotes lifelong learning with its leadership development framework, Lead@Hilton. Hilton also understands that recognition matters as demonstrated by its employee recognition program.

2. How does Hilton’s immersion program benefit employees?

This 3-day immersion program provides management with authentic insights into challenges the staff face and what improvements are needed.

3. Do you believe that satisfied employees will lead to satisfied hotel guests?

Answers will vary but most students will agree that the Hilton approach of trying to prevent burnout and staff turnover plays a critical role in improving customer experiences.

Consider Ethics and Social Responsibility: A Perfect Fit: Patagonia’s Passionate Employees 1. How does Patagonia use training and a fun, informal work environment to encourage employees to support Patagonia’s mission?

Patagonia ensures employees understand and support its mission statement using a mix of inperson training, video training, and online instruction to help employees learn about company expectations. Patagonia also creates excitement for the company’s mission with a fun, informal work environment for employees. For example, it instituted a flextime policy that allows employees to go surfing during the day.

2. Why do you think Yvon Chouinard decided to make his company so focused on employee satisfaction?

New employees are hired based in large part on their passion for the firm’s goals. Yvon Chouinard wanted the firm’s main goal to be improving the planet not pursuing profits. At Patagonia, employees are viewed as important partners toward advancing environmental preservation.

3.

Do you think that an informal work environment that provides employees freedom to take off during the day will be harmful or helpful in the long run? Why? Answers will vary with some students maintaining that an informal work environment fosters collaboration and dedication that will continue to generate long-term success. Others will

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contend that in the long run an informal environment does not provide enough structure and accountability and will be harmful.

Responding to Business Challenges: Bad Moods Contribute to Decreased Productivity A study found that employees who start the day in a bad mood can see their productivity levels reduced by more than 10 percent. Additionally, bad moods tend to be contagious, affecting other employees and customers and reducing the bottom line. The Gallup-Healthways Well-Being Index reveals that employees are becoming unhappier with their jobs. Much of this can be attributed to economic uncertainty.

1. Why might an uncertain economic climate contribute to decreased productivity?

With businesses cutting back, employees are often expected to take on greater roles with fewer benefits. As a result, employees experience more dissatisfaction with their jobs and a less positive relationship with their employers.

2. Why do employee bad moods have such a negative effect on an organization?

Employees who start the day in a bad mood can see their productivity levels reduced by more than 10 percent. Additionally, bad moods tend to be contagious, affecting other employees and customers and reducing the bottom line.

3. What can employers do to improve the moods of their employees?

By providing incentives such as time to pursue their own projects, socialization among employees, which can improve moods and build cohesiveness etc.

Responding to Business Challenges: Bad Moods Contribute to Decreased Productivity 1. Is health care a hygiene factor or a motivational factor?

Health care is a hygiene factor since it is a benefit and falls under salary.

2. Klue offers development programs to help employees advance. Which need does this meet on Maslow’s hierarchy of needs?

This falls under self-actualization since it helps employees be the “best they can be.”

3. Do Klue’s managers seem to adopt a Theory X approach or a Theory Y approach to managing employees? Explain your reasoning.

Most students will say that Klue’s managers seem to adopt a Theory Y approach to managing employees since they promote a culture where employees advance. It empowers employees by paying competitively within the industry, and it places high precedence on employee input and feedback.

Business Disruption: Lockheed Martin Flexes Its Work Schedule 1. What are the advantages of a compressed workweek?

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A compressed workweek results in 3-day weekends so the employees have more flexibility to engage in personal activities. Many think this helps promote work–life balance. It also reduces computing time and costs.

2. What are the disadvantages of a compressed workweek?

Longer days can cause worker fatigue and can negatively impact work–life balance for employees who have scheduling conflicts or family obligations.

3. Why do you think employers such as Lockheed Martin offer compressed work schedules?

Answers will vary depending on students’ personal perspective and lifestyle.

So You Think You Might Be Good at Motivating a Workforce Why are human relations programs important in the workforce?

They are necessary to teach employees about sensitivity to other cultures, religions, and beliefs, as well as for teaching the workforce about the organization so that they understand how they fit into the larger picture. Employees need to appreciate the benefits of working together to make the firm run smoothly, and they also need to understand how their contributions help the firm. In order to stay motivated, most employees need to feel like what they do each day contributes something of value to the firm. Disclosing information and including employees in decision-making processes will also help employees feel valuable and wanted within the firm.

END-OF-CHAPTER TEACHING RESOURCES Build Your Business Plan: Motivating the Workforce Consider having an open discussion with the students about what their previous employers have used to motivate them. Did it cost the employer much to implement this program? Perhaps it wasn’t money, but time, which is an opportunity cost. Following a discussion of what students think works and what doesn’t as motivators to employees, challenge the students to be creative when selecting motivating techniques that would work for their business.

See for Yourself Case: Inside Google’s High-Performance Culture Google is the number one search engine, retaining an impressive 90% of the global market share of mobile, web, and in-app searches Google has a wide variety of products such as web analytics, advertising, and digital book publishing. As one of the largest tech companies in the world, Google must motivate its employees to continuously innovate.

To create a high-performance culture, Google invests in its employees. When Sergey Brin and Larry Page founded the company, they recognized employees had to put in long hours to make the company not only successful but also flexible enough to adapt to the changing environment. The company strives to make its corporate culture fun and innovative.

In addition to satisfying the needs of its current employees, Google works to ensure it recruits top talent. Google recruiters take a creative approach to reviewing resumes to ensure the company hires the most creative, talented individuals. The recruiters focus on the bottom part of the resume where candidates focus showcase their innovation and creative talents.

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1. How does Google invest in its employees?

The Googleplex campus contains amenities such as onsite gyms, swimming pools, a bowling alley, an outdoor volleyball court, and even high-tech “nap pods” for optimized downtime. Google employees are provided with perks to make the campus seem like a second home. They built a sense of community with breakout zones and microkitchens around the campus in addition to its peer-to-peer coaching program, Googler-to-Googler. Google also invested in its employees while they were working remotely: giving each employee a $1,000 home office allowance, fitness coaches, and virtual cooking classes.

2.

Describe Google’s approach to building effective teams.

It ensures that employees feel safe psychologically; that is, employees should feel free to contribute to meetings and conversations without fear of rejection, embarrassment, or punishment. The company also looks for a specific set of qualities for its leaders to make sure teams are productive. Google also conducted a study that found the best leaders empowered their teams instead of micromanaging.

3. In what ways does Google empower its employees?

Google’s decentralized structure means decision-making authority is delegated as far down the chain of command as possible. This can improve responsiveness, enhance creativity, and empower employees to make decisions. Employees can use 20% of their time for personal side projects which has resulted in many new products. The company also has the Google.org Fellowship that allows its employees to work full time for nonprofit partners for up to 6 months.

Team Exercise Students will form groups and outline a compensation package that they would consider ideal in motivating an employee, recognizing performance, and assisting the company in attaining its costto-performance objectives. They should think about the impact of intrinsic and extrinsic motivation and recognition. They should ask themselves the question: How can flexible scheduling strategies be used effectively to motivate employees? Students will then report their compensation packages to the class.

SUPPLEMENTAL TEACHING RESOURCES Check Your Progress 1. Why do managers need to understand the needs of their employees?

Managers need to understand the needs of their employees because in an organizational setting, individuals and groups need to be satisfied in order to achieve organizational goals.

Human relations is concerned with the needs of employees, their goals, and the impact of these needs and goals on job performance. Social and psychological factors significantly affect productivity and morale. Managers who understand employees’ needs, beliefs, and expectations are most successful in motivating them.

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2. Describe the motivation process.

Motivational factors that relate to the content of the work itself include achievement, recognition, involvement, responsibility, and advancement. These factors promote higher levels of performance.

3. What was the goal of the Hawthorne studies? What was the outcome of those studies?

In the Hawthorne studies, Elton Mayo and a team of researchers tried to determine what physical conditions in the workplace, such as light and noise levels, stimulate employees to be most productive. Their studies revealed that social and psychological factors significantly affect productivity and morale. Productivity increased regardless of the physical conditions. Employees were responding to the attention they received, not the changing physical work conditions. This phenomenon is known as the Hawthorne effect.

4. Explain Maslow’s hierarchy of needs. What does it tell us about employee motivation?

Abraham Maslow theorized that human beings have five basic needs: physiological, security, social, esteem, and self-actualization. Maslow’s hierarchy arranged these needs in the order in which people strive to satisfy them. Maslow’s theory suggests that employees will be motivated to contribute to organizational goals only if they are first able to satisfy their physiological, security, and social needs through their work.

5. What are Herzberg’s hygiene and motivational factors? How can managers use them to motivate workers?

Hygiene factors relate to the work setting—not work content—and include adequate wages, comfortable working conditions, fair company policies, and job security. Motivational factors relate to the content of the work and include achievement, recognition, the work itself, involvement, responsibility, and advancement. Managers must make certain that hygiene factors are present or workers will become dissatisfied and possibly leave. They can motivate workers by providing motivational factors.

6. Contrast the assumptions of Theory X and Theory Y. Why has Theory Y replaced Theory X in management today?

Theory X assumes that (1) workers do not like work and will avoid it when possible; (2) workers must be coerced, controlled, directed, or threatened with punishment to get them to work toward achievement of organizational goals; and (3) workers prefer to be directed, prefer to avoid responsibility, want security, and have little ambition.

By contrast, Theory Y assumes (1) the expenditure of physical and mental effort and work is natural, (2) workers will exercise self-direction and self-control in the service of objectives to which they are committed, (3) workers will commit to objectives when they realize that achievement to those objectives will bring them personal reward, and (4) workers will accept and seek out responsibilities.

Probably the main reason Theory Y has supplanted Theory X is that managers had determined that Theory X management styles did not lead to improved productivity. Also, many organizations have studied the success of Japanese worker productivity. The Japanese had long ago dropped the Theory X management style.

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7. What is Theory Z? How can businesses apply Theory Z to the workplace?

Theory Z stresses employee participation in all aspects of organizational decision making. This theory includes many elements of the Japanese approach to management. Theory Z is less formal and more personal, work relationships are long term, there is less specialization, there is more group decision making, less control, and managers focus on the worker’s whole life.

Businesses wishing to apply Theory Z have to change to a more participative, employeeinvolved, or work-team oriented program. This means dropping old traditional manager– employee management styles. For Theory Z to work, management must be committed to employee involvement.

8. Identify and describe four job design strategies.

There are several strategies managers may use to structure jobs to promote employee motivation. a. Job rotation allows employees to move from one job to another in an effort to relieve boredom associated with specialization. b. Job enlargement involves adding tasks to a job instead of treating each task as a separate job. c. Job enrichment involves achievement, recognition, responsibility, and advancement into the job situation. d. Flexible scheduling strategies involve deviations from the traditional 40-hr workweek consisting of five 8-hr days with fixed starting and ending times.

9. Name and describe some flexible scheduling strategies. How can flexible schedules help motivate workers?

Flexible scheduling strategies include: a. Flextime—allows employees to choose their starting and ending times as long as they are at work during a specified core period. b. The compressed workweek—a 4-day (or shorter) period in which an employee works 40 hr. c. Job sharing—when two people do one job.

A business may use flexible scheduling strategies to accommodate the needs of employees (e.g., students or parents) as well as to motivate them. Alternative schedules may be needed to survive tough economic times.

10. Why are motivational strategies important to both employees and employers?

Motivation can foster employee loyalty and boost productivity. It affects all relationships within an organization and influences many areas such as pay, promotion, job design, training opportunities, and reporting relationships. Motivating employees is important for organizations seeking to remain competitive in the global marketplace.

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Get Involved 1. Consider a person who is without housing: How would a person be motivated and what actions would that person take? Use the motivation process to explain. Which of the needs in Maslow’s hierarchy are likely to be most important? Least important?

Motivation involves trying to meet both needs and goals. A person who is without housing would be motivated to find a way to meet their physiological needs such as food and shelter.

They might be motivated to join a program that offers job training or the chance to work such as Goodwill. They might also try to get involved with a housing program. In this case, physiological needs would be most important, followed by security needs. Because the person is more concerned with surviving, social, esteem, and self-actualization needs are likely to be the least important.

2. View the video Cheaper by the Dozen (1950) and report on how the Gilbreths tried to incorporate their passion for efficiency into their family life.

Student answers will vary.

3. What events and trends in society, technology, and economics do you think will shape management theory in the future?

Student answers will vary.

Build Your Skills: Motivating Background Do you think that, if employers could make work more like play, employees would be as enthusiastic about their jobs as they are about what they do in their leisure time? Let’s see where this idea might take us.

Task After reading the “Characteristics of PLAY,” place a √ in column one for those characteristics you have experienced in your leisure time activities. Likewise, check column one on the next page for those “Characteristics of WORK” you have experienced in any of the jobs you’ve held.

All That Apply

Characteristics of PLAY 1. New games can be played on different days.

2. Flexible duration of play.

3. Flexible time of when to play.

4. Opportunity to express oneself.

5. Opportunity to use one’s talents.

6. Skillful play brings applause, praise, and recognition from spectators.

7. Healthy competition, rivalry, and challenge exist.

8. Opportunity for social interaction.

9. Mechanisms for scoring one’s performance are available (feedback).

10. Rules ensure basic fairness and justice.

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Characteristics of WORK 1. Job enrichment, job enlargement, or job rotation.

2. Job sharing.

3. Flextime, telecommuting.

4. Encourage and implement employee suggestions.

5. Assignment of challenging projects.

6. Employee-of-the-month awards, press releases, employee newsletter announcements.

7. Production goals with competition to see which team does best.

8. Employee softball or bowling teams.

9. Profit sharing; peer performance appraisals.

10. Use tactful and consistent discipline.

Suggestions for Use Before assigning the exercise, you might ask some or all of the following questions to lay the groundwork for the exercise. 

What is your favorite recreational activity to pursue during your leisure time? Maybe you have a passion for playing tennis, rollerblading, hiking in the mountains, water skiing, snowboarding, golfing, or bicycling.



What is it about you that is different when you’re “at play,” doing whatever activity it is you enjoy doing, than when you’re “on the job” performing a task?

(Because I have chosen when to play, what to play, and where to play, there are no pressures, deadlines, or requirements imposed on me by others. The freedom that comes from play often does not exist when I’m “on the job,” so my approach to both tend to be totally different.)



What characteristics does “play” possess that “work” often does not that can make play more appealing than work?

(See column two of the exercise chart in the textbook on the Build Your Skills: Motivating page for some ideas here.)

Critical Thinking Questions: 1. What prevents managers from making work more like play?

Many managers believe that people can’t enjoy themselves and get work done at the same time. Work to them is serious business. Therefore, they tend not to encourage many of the practices outlined in column four of the chart. Many of these options also cause some managers to feel as though they have lost control over employees’ behaviour because the environment is too loose or because employees have so much say about how, where, and when the work gets done.

2. Are these forces real or imagined?

For the most part, these forces are imagined because research supports that there is increased productivity in environments that allow creativity, humor, and other less restrictive behaviours 10-246 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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to take place. Obviously, it is possible for everybody to be focused on having fun to the point of not getting the job done. As with everything in life, balance is necessary.

3. What would be the likely (positive and negative) results of making work more like play?

Likely positive results are increased synergy, more creative approaches to solving problems, increased feelings of ownership for what’s going on, greater job satisfaction, and increased productivity. Likely negative results are that controlling bosses will not be able to adapt very well to this environment; without the right kind of leadership, these systems can be misdirected; and not all employees are suited to many of these approaches.

4. Could others in the organization accept such creative behaviours?

It depends on how they perceive the behaviours. Most likely, however, if others in the organization see tangible results coming out of work groups characterized by such creative behaviours, they will be more inclined to accept the behaviours.

Solve the Dilemma: Motivating to Win Eagle Pharmaceutical has long been recognized for its innovative techniques for motivating its salesforce. It features the salesperson who has been the most successful during the previous quarter in the company newsletter, “Touchdown.” The salesperson also receives a football jersey, a plaque, and $1,000 worth of Eagle stock. Eagle’s “Superbowl Club” is for employees who reach or exceed their sales goal, and a “Heisman Award,” which includes a trip to the Caribbean, is given annually to the top 20 salespeople in terms of goal achievement.

Eagle employs a video conference hookup between the honored salesperson and four regional sales managers to capture some of the successful tactics and strategies the winning salesperson uses to succeed. The managers summarize these ideas and pass them along to the salespeople they manage. Sales managers feel strongly that programs such as this are important and that, by sharing strategies and tactics with one another, they can be a successful team.

Summary 1. Eagle Pharmaceutical has long been recognized for its innovative techniques for motivating its salesforce.

2. Features the salesperson who has been most successful in previous quarter in company newsletter “Touchdown.” a. Receive football jersey b. Plaque c. $1,000 worth of Eagle stock 3. “Superbowl Club” for employees who reach/exceed their sales goals 4. “Heisman Award” trip to Caribbean to top 20 salespeople 5. Video conference hookup 10-247 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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a. Between honored salesperson and four regional sales managers to share some tactics and strategies winning salesperson uses. b. Managers summarize these ideas and pass them along to their salespeople.

1. Which motivational theories are in use at Eagle?

Eagle uses expectancy theory in combination with the self-esteem needs of Maslow and the motivational factors of Herzberg to motivate its employees. Each of the awards, and in particular being featured in the company newsletter, receiving a jersey, and being awarded a plaque, enhance employee self-esteem (Maslow) and are considered motivational factors (Herzberg). The winning salesperson also gets their “successful tactics and strategies” recognized; they are summarized and passed on to other salespeople (another way of encouraging salespeople to work toward a common goal rather than compete against one another). The criteria for award selection are clear and understood by each employee. The drives to excel and accomplish the objectives necessary for the rewards are consistent with the expectancy theory of motivation.

2. What is the value of getting employees to compete against a goal instead of against one another?

Competition against a goal instead of against one another is important because of its impact on teamwork. Employees are less likely to help each other out when competing against one another than when competing against a goal. Further, competition against a goal offers each employee the opportunity to succeed, regardless of the performance of other employees.

3. Put yourself in the shoes of one of the four regional sales managers and argue against potential cutbacks to the motivational program.

Students’ answers will vary but should present logical arguments that demonstrate relevant understanding of the chapter material. One possible answer is that cutbacks will force salespeople to modify their expectations and may discourage them from working as hard.

CONNECT ACTIVITIES Employees Love SAS Learning Objective 9-1: Explain why the study of human relations is important.

Activity Summary: SAS, a software company established in 1976, has consistently been praised as one of the best places to work. Year after year, the company receives high rankings and awards from magazines such as Fortune and Working Mother. Students will grasp what SAS is doing to motivate its workforce.

How to Use Activity: After completing this case, ask students to write down how they like to be motivated. What needs, goals, and rewards do they have in order to be spurred to work productively for the benefit of a specific employer?

Class Discussion: We’re all driven to work for a variety of reasons—what motivates you? Responses from students may include money, type of work, colleagues, benefits, and so on. What is the most effective way for you to be motivated? As one progresses through their career, how might their 10-248 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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motivation change?

iSeeIt! Video Case: Maslow's Hierarchy of Needs Learning Objective 9-3: Compare and contrast the human relations theories of Abraham Maslow and Frederick Herzberg.

Activity Summary: This activity describes how regardless of individual, humans as a collective have very similar needs in work and life, according to Maslow’s research.

How to Use Activity: Using Maslow’s Hierarchy of Needs have students list examples that align with each level.

Class Discussion: What examples can you share that align with each level on Maslow’s hierarchy? Do you agree with Maslow’s hierarchy? Do you think anything doesn’t belong or is missing?

Video case: Appletree Answers Learning Objective 9-4: Investigate various theories of motivation, including Theories X, Y, and Z; equity theory; expectancy theory; and goal-setting theory.

Activity Summary: Appletree Answers provides call centers and receptionist services for companies all across the world. Leadership at the company knows the importance of having a motivated workforce; it’s good for business, employees, and customers. After completing the exercise, students will understand the basics of select motivation theories.

How to Use Activity: Invite students to extend their knowledge by hosting a World Café across select motivation theories presented in either the case or the text.

Class Discussion: Which theory of motivation resonates most with you? Suppose you were starting a company. How would you motivate employees?

BONUS TEACHING RESOURCES Additional Discussion Questions 1. What is meant by the equity theory? How can the equity theory guide managers in dealing with subordinates?

The equity theory assumes that how much people are willing to contribute to an organization depends on their assessment of the fairness, or the equity, of the rewards they will receive.

Managers should attempt to distribute rewards on the basis of performance and be certain that all employees clearly understand the basis for their pay and benefits.

2. In what areas are the typical North American management style and the typical Japanese style different?

The areas in which they are different are duration of employment, rate of promotion, amount of specialization, decision making, control, and concern for workers. (See Table 9.2 for some specific ways in which the management styles differ.)

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3. What is the main purpose of organizations offering flexible scheduling strategies for employees?

Flexible scheduling strategies enhance motivation and attendance of employees and meet the changing needs of a diverse work force. Many employees prefer flexible scheduling strategies to allow them more time to spend with their families.

What was the importance of the studies of Frederick W. Taylor and Elton Mayo to human relations?

Frederick W. Taylor is considered the father of scientific management. He studied the way employees performed specific work tasks and set up incentives through a piece-rate system.

Although he believed that money and job security were the primary motivators of employees, his work was important in that he began to study employee motivation, leading to the application of scientific principles of management.

Elton Mayo and his researchers studied the physical conditions in the workplace. They found that productivity increased regardless of the physical conditions. They concluded that social and psychological factors significantly affected productivity and morale. The Hawthorne studies were the beginning of a concern for human relations in the workplace.

Controversial Issue A Second Look at Sinclair’s The Jungle Early in the 20th century, Upton Sinclair spent several weeks in “Packingtown,” the part of Chicago in which meat-processing plants were located. His assignment was to write a novel about the plight of processing-plant workers. His writing first appeared as a serial in a periodical called Appeal to Reason, and was later printed in book form as The Jungle. The Jungle had an immediate impact, but it was not the impact that the author and his sponsors had expected. Passages concerning the filth in which meat was made captured the nation’s attention and led to some corrective federal legislation. The plight of the workers was lost in the shuffle. Let’s look at these workers in greater detail.

Sinclair’s novel and the resulting legislation attacked the owners/operators of the meat-processing plants for the filthy conditions they allowed to exist. For example, the most graphic passages explained in great detail that the processed meat could contain one or more of the following items: rat poison, rat dung, rats, human tuberculosis germs, bread set out (and poisoned) to catch rats, two-year-old sausages that had been rejected at foreign ports of entry, and human urine. Such conditions were deplorable, and the owners/operators received all the blame.

However, if you reread the graphic passages with an open mind, free from anti-management preconceptions, you may pause to carefully consider the actions of workers who carelessly threw dead rats into vats in which sausage was being prepared and scooped up rat dung and poisoned bread and knowingly threw both into the vats.

Individually, the processing-plant workers were unhappy, dissatisfied, uncomfortable, and depressed—the very essence of low morale. As a group, their actions proved that they did not care about the welfare of the employer or the health of the buying public. These workers were not identifying with the organization and 10-250 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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its goals. Rather, it was apparent that the workers hated their employer and gained some fleeting glee from doing things to subvert the employer’s goals.

It was many years after The Jungle was published that working conditions improved to any appreciable degree. Federal law quickly improved cleanliness and product standards, however. The lesson to be learned from this information is that enlightened employers should be aware that worker attitudes can still degenerate—as they did in Packingtown—unless management is ever alert to the welfare of workers.

Discussion Questions: 1. Who should be responsible for products that do not meet minimum health standards? The owners/operators? Or the workers?

Likely the blame can be laid on all parties: the workers, operators, and owners. The workers should still bear some responsibility for their actions, as they are not just hurting their employer and the business, but also could be causing harm to the public at large. Also, the operators/owners should be held responsible for the deplorable working conditions that were causing such high employee dissatisfaction. Additionally, one could also argue that operators/owners lacked the proper controls to ensure that the meat was fit to eat; their quest for profits not only led to the deplorable work conditions and an indifference to employee suffering, but also represented a complete disregard for public safety.

2. Was there something in the employer’s actions and attitude that drove the workers to such behavior?

Absolutely. The employers exhibited indifference to their employees’ plight. They allowed the employees to work in horrible work conditions and subjugated them to long work hours because they knew they could get away with it and make more money. If one employee quit or was injured, he or she could easily be replaced. These conditions led to extreme dissatisfaction and depression on the employees’ part, and a lack of concern by management for the sanitation of the meat prompted employees to contaminate the meat whenever possible in an attempt at revenge.

3. What had happened to morale and a sense of group spirit?

Morale and esprit de corps were nonexistent. The horrible work conditions and the indifference and downright selfishness of employers made employees feel useless. Knowing that they could be easily replaced, they had no way to make their concerns heard. Additionally, cohesiveness was severely lacking. In fact, friendships and shared goals among employees were likely discouraged due to the competitive atmosphere. Employees knew they could be easily replaced by those who needed work, so they likely felt little motivation to work with other employees at a job that they hated but nevertheless needed.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 10-251 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

Instructor’s Manual—Chapter 10 1.

2.

3.

4.

5.

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Advantages and Disadvantages of Flexible Scheduling Japanese Management Frederick Taylor: Father of Scientific Management B. F. Skinner and Behaviour Modification Motivational Factors of Frederick Herzberg

Guest Speaker Suggestions 1. A human relations professor to speak about the study of human relations, motivation, or job design.

2. A representative of a business firm to talk about management styles, team concepts, job design, or flexible scheduling. (If the representative cannot come to class, the instructor may wish to go to the firm and videotape segments of the firm to illustrate the different management styles or team concepts.)

3. A management information systems professor to talk about the potential for “telecommuting.”

Teaching Suggestions 30. Begin the class session with a brief writing assignment. Have students write for a few minutes on the following: Why is the study of human relations important? Call on different students to give their written answers. Use these answers and/or your discussion as a lead-in to the lecture.

31. Use the “Lecture Outline and Notes” and slides to emphasize the main points of the chapter.

32. Discuss the “Check Your Progress” questions in the textbook.

33. Examine the boxed materials. Questions and answers are provided in this Instructor’s Manual.

34. Have students discuss the relative advantages and disadvantages of Theory X, Theory Y, and Theory Z.

Chapter 10: Managing Human Resources SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Shopify Supports Employees in an Autonomous Environment Responding to Business Challenges: Guerrilla Recruitment Technology and the Economy: Artificial Intelligence is Changing the Way Employees Learn Consider Ethics and Social Responsibility: WestJet and Unionization Responding to Business Challenges: Estée Lauder Embraces Diversity Responding to Business Challenges: Has COVID Forever Altered The Way We Work?

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So You Want to Work in Human Resources END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Managing Human Resources See for Yourself Case: Diversity Inspires Innovation at Apple Team Exercise SUPPLEMENTAL TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Appreciating and Valuing Diversity Solve the Dilemma: Morale Among the Survivors CONNECT ACTIVITIES Working With Unions at Freeman Lululemon Selects for Culture Fit iSeeIt! Video Case: Human Resource Planning BONUS TEACHING RESOURCES Additional Discussion Questions Controversial Issue Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY This chapter focuses on the quantity and quality of human resources. First, we look at how human resource managers plan for, recruit, and select qualified employees. Next, we look at training, appraising, and compensating employees—aspects of human resource management designed to retain valued employees. Along the way, we’ll also consider the challenges of managing unionized employees and workplace diversity.

LEARNING OBJECTIVES LO 10-1

Define human resources management and explain its significance.

LO 10-2

Summarize the processes of recruiting and selecting human resources for a company.

LO 10-3

Discuss how workers are trained and their performance appraised.

LO 10-4

Identify the types of turnover companies may experience, and explain why turnover is an important issue.

LO 10-5

Specify the various ways a worker may be compensated.

LO 10-6

Discuss some of the issues associated with unionized employees, including collective bargaining and dispute resolution.

LO 10-7

Discuss the importance of diversity in the workforce.

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KEY TERMS AND DEFINITIONS arbitration

Settlement of a labour/management dispute by a third party whose solution is legally binding and enforceable.

benefits

Nonfinancial forms of compensation provided to employees such as pension plans, health insurance, paid vacation and holidays, and the like.

bonuses

Monetary rewards offered by companies for exceptional performance as incentives to further increase productivity.

boycott

An attempt to keep people from purchasing the products of a company.

collective bargaining

The negotiation process through which management and unions reach an agreement about compensation, working hours, and working conditions for the bargaining unit.

commission

An incentive system that pays a fixed amount or a percentage of the employee’s sales.

conciliation

A method of outside resolution of labour and management differences in which a third party is brought in to keep the two sides talking.

development

Training that augments the skills and knowledge of managers and professionals.

diversity

The participation of different ages, genders, races, ethnicities, nationalities, and abilities in the workplace.

human resource management (HRM)

All the activities involved in determining an organization’s human resource needs, as well as acquiring, training, and compensating people to fill those needs.

job analysis

The determination, through observation and study, of pertinent information about a job—including specific tasks and necessary abilities, knowledge, and skills.

job description

A formal, written explanation of a specific job, usually including job title, tasks, relationship with other jobs, physical and mental skills required, duties, responsibilities, and working conditions.

job promotion

Advancement to a higher-level position with increased authority, responsibility, and pay.

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job specification

A description of the qualifications necessary for a specific job, in terms of education, experience, and personal and physical characteristics.

labour contract

The formal, written document that spells out the relationship between the union and management for a specified period of time—usually 2 or 3 years.

labour unions

Employee organizations formed to deal with employers for achieving better pay, hours, and working conditions.

lockout

Management’s version of a strike, wherein a work site is closed so that employees cannot go to work.

mediation

A method of outside resolution of labour and management differences in which the third party’s role is to suggest or propose a solution to the problem.

orientation

Familiarizing newly hired employees with fellow workers, company procedures, and the physical properties of the company.

picketing

A public protest against management practices that involves union members marching and carrying anti-management signs at the employer’s plant or work site.

profit sharing

A form of compensation whereby a percentage of company profits is distributed to the employees whose work helped to generate them.

recruiting

Forming a pool of qualified applicants from which management can select employees.

salary

A financial reward calculated on a weekly, monthly, or annual basis.

selection

The process of collecting information about applicants and using that information to make hiring decisions.

separations

Employment changes involving resignation, retirement, termination, or layoff.

strikebreakers

People hired by management to replace striking employees; called “scabs” by striking union members.

strikes

Employee walkouts; one of the most effective weapons labour has.

training

Teaching employees to do specific job tasks through either classroom development or on-the-job experience.

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transfer

A move to another job within a company at essentially the same level and wage.

turnover

Occurs when employees quit or are fired and must be replaced by new employees.

wage/salary survey

A study that tells a company how much compensation comparable firms are paying for specific jobs that the firms have in common.

wages

Financial rewards based on the number of hours the employee works or the level of output achieved.

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CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, and KEY TERMS learners will need to take away from the course.

LO 10-1

LO 10-2

Define human resources management and explain its significance.  Introduction  The Nature of Human Resource Management  Planning for Human Resource Needs

Key Terms:  Human resource management (HRM)  Job analysis  Job description  Job specification

Lecture Outline and Notes: I. The Nature of Human Resource Management A. Human resource management refers to all the activities involved in determining an organization’s human resource needs as well as acquiring, training, and compensating people to fill those needs.

1. Managers try maximizing employee satisfaction while motivating them to meet organizational objectives productively.

2. Human resource management has increased in importance over the last few decades. a. Today’s workforce includes significantly more women, minorities, as well as disabled and older workers. b. Effective human resource managers are aware of changing employee conditions and use them to increase efficiency and productivity. c. Every manager in an organization practices some of the functions of human resource management at all times.

II. Planning for Human Resource Needs A. After determining how many employees and what skills are needed to achieve organizational objectives, a firm must ascertain how many employees it currently has and project how many may be retiring or leaving.

B. Current and forecasted employee requirements then enable the manager to determine hiring and qualification requirements.

C. Next, a strategy for satisfying human resource needs is developed, which may include outsourcing, automation, or the use of temporary workers.

D. Job analysis determines, through observation and study, the specific tasks that comprise a job—the skills, knowledge, and abilities needed to perform it; and the job environment. Managers use job analysis in two ways.

1. To develop a job description—a formal, written description of a specific job, including job title, tasks to be performed, relationship with other jobs, physical and mental skills required, duties, responsibilities, and working conditions.

2. To develop a job specification—a description of the qualifications necessary for a specific job in terms of education, experience, personal characteristics, and physical characteristics.

3. Both job descriptions and job specifications are used to develop recruiting materials.

Summarize the processes of recruiting and selecting human resources Key Terms:

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for a company  Recruiting  Recruiting and Selecting New Employees  Selection o Recruiting o Selection  Legal Issues in Recruiting and Selecting III. Recruiting and Selecting New Employees A. Recruiting 1. Recruiting means forming a pool of qualified applicants from which management will select employees.

2. There are two sources for applicants. a. Internal sources of applicants are the organization’s current employees. This approach is relatively inexpensive. b. External sources are outside the firm. i. External sources consist of newspaper and journal ads, employment agencies, recommendations from current employees, unsolicited applications, online websites, and social networking sites such as LinkedIn. ii. Internships are also a good way to solicit for employees. iii. Recruiting for entry-level managerial and professional positions is often carried out on university campuses. iv. For managerial and professional positions above the entry level, employment agencies or executive search firms (headhunters) are often used.

B. Selection 1. Selection is the process of collecting information about applicants and using that information to decide which ones to hire.

2. The application is the first stage of the process. a. The applicant usually fills out an application with information on current salary, reason for seeking a new job, years of experience, availability, and level of interest. A brief interview is sometimes included. b. The goal at this stage is to get acquainted with the applicants and eliminate those obviously not qualified for the job. c. The process can be lengthy and expensive but necessary in order to find applicants who can do the work and fit into the firm’s structure and culture. d. Careful hiring saves the company money it would spend later in recruiting, selecting, and training replacement employees. e. Many companies now accept online applications and some contain a questionnaire. f. Applications supply basic information such as name and work history but they also reveal clues about the applicants. Imaginative responses may reveal creativity and hastily written responses could mean a person who does not pay attention to details.

3. The interview is the second phase of the selection process. The interview provides in-depth information both to the company and to the prospective employee. (Table 10.1). a. An interviewee’s questions may be as revealing as their answers b. “Tell me about yourself” is the most common question, but all of the questions help managers obtain that detailed picture of the applicant they 01-260 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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are looking for (Table 10.2). c. Mistakes made by interviewees (Table 10.3).

4. Testing is the third stage of the selection process. a. Ability, performance, aptitude, IQ, or personality tests may be given to determine whether an applicant has the necessary skills for a certain kind of work and his or her ability to fit into the firm’s culture. i. Myers–Brigg is used to assess an applicant’s potential for a certain kind of job. ii. Polygraph (lie detector) tests, once a common tool for evaluating applicants’ honesty, were restricted in 1988 to specific government jobs and jobs involving security or access to drugs. b. Applicants may also undergo physical examinations to determine their suitability for some jobs. c. Many companies require applicants to be screened for illegal drug use.

5. Reference checking, the final step, involves verifying educational background and previous work experience. a. Background checking is important because applicants sometimes misrepresent themselves on their applications or résumés (Table 10.4). i. An internet search is often done to determine social media or other public activities. b. Many organizations will confirm employment but will not release details about the quality of a previous employee’s work.

IV. Legal Issues in Recruiting and Selecting A. Legal constraints and regulations are present in almost every phase of the recruitment and selection process, and violations can result in lawsuits and fines.

1. The Charter of Rights and Freedoms guarantees that all people are treated the same way under the law, and the Canadian Human Rights Act ensures that all people have equal opportunities for employment.

2. The Canadian Human Rights Act ensures that all people have equal opportunities for employment.

3. The Employment Equity Act ensures that federally regulated employers with more than 100 employees do not disadvantage women, visible minorities, people with disabilities, or Aboriginal Peoples.

Discuss how workers are trained and their performance appraised.

Key Terms:  Developing the Workforce  Orientation o Training and Development  On-boarding o Assessing Performance  Training  Development V. Developing the Workforce A. Orientation (on-boarding) familiarizes the newly hired employees with fellow workers, company procedures, and the physical properties of the company.

1. It generally includes a tour of the facility, introductions, and the distribution of manuals describing the organization’s various policies.

2. It also involves socializing the new employee into the ethics and culture of the company.

B. Training and Development 1. Training is teaching employees how to do their specific job tasks.

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a. On-the-job training allows workers to learn by actually performing the tasks of the job. b. Classroom training teaches employees with lectures, conferences, videotapes, case studies, and web-based training. i. One example is McDonald’s Hamburger University. McDonald’s has expanded its famous Hamburger University into China to train Chinese students in such areas as restaurant management, leadership development, and other skills. c. Some companies ask experienced workers to mentor new employees.

Mentoring involves supporting, training, and guiding an employee in their professional development.

2. Development is training that augments the skills and knowledge of managers and professionals.

3. Training and development are also used to improve the skills of employees in their present positions and to prepare them for increased responsibility and job promotions.

C. Assessing Performance 1. A performance appraisal identifies an employee’s strengths and weaknesses on the job.

2. It has three main objectives: a. It provides employees with feedback on how they are doing and what they need to do to improve their performance. b. It provides a basis for determining how to compensate and reward. c. It provides the organization with information about the quality of its selection, training, and development activities.

3. Performance appraisals may be objective or subjective. a. Objective assessments are quantifiable. b. Subjective assessments are used when jobs do not lend themselves to objective appraisals. A ranking system is used to assess various performance factors. i. Productivity and quality are two important performance measurements, but many appraisals also include teamwork as well as financial management (Table 10.5).

4. Another performance appraisal method used is the 360-degree feedback system, which provides feedback from a panel that typically includes superiors, peers, and subordinates.

5. HR managers are more likely to view performance reviews as more effective than employees are.

Identify the types of turnover companies may experience, and explain Key Terms: why turnover is an important issue.  Turnover  Turnover  Job promotion  Transfer  Separations A. Turnover 1. Turnover, which occurs when employees quit or are fired and must be replaced by new employees, results in lost productivity, fees to recruit new employees, management time devoted to interviewing, and socialization costs for new

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employees.

2. Part of the reason for turnover may be overworked employees as a result of downsizing and a lack of training and advancement opportunities.

3. Turnover is not always an unhappy occasion when it occurs in the form of promotions or transfers. a. A job promotion is an advancement to a higher level position within an organization that has increased authority, responsibility, and salary. In some companies and most labour unions, seniority determines who should be promoted. b. A transfer is a move from one job to another within a company at essentially the same wage and job level. c. A separation is the departure of the employee from the organization because of resignation, retirement, layoff, or termination (Figure 10.1). i. Employees may be terminated, or fired, for poor performance, violation of work rules, absenteeism, and so on (Table 10.6). ii. Recent legislation and court decisions require companies to fire employees for just cause only. Managers should exercise care to warn employees when their performance is unacceptable and may lead to dismissal, as well as documenting warnings in employee work records. iii. Usually a function of economic trouble, layoffs are sometimes temporary; employees may be brought back when business conditions improve. iv. When layoffs are permanent, sometimes companies will help employees find other jobs or extend benefits while the employees search for new employment. d. Because of the expense of recruiting and training new employees, wellorganized human resource departments try to minimize losses caused by separations and transfers.

Specify the various ways a worker may be compensated.

Key Terms:  Compensating the Workforce  Wage/salary o Financial Compensation survey o Benefits  Wages  Commission  Salary  Bonuses  Profit sharing  Benefits VI. Compensating the Workforce A. Designing fair financial compensation plans for employees is important because wages and salaries are a substantial portion of an organization’s expenses.

1. Wages that are too high may result in high-priced products, while wages that are too low may harm morale and result in costly turnover.

2. Designing a fair financial compensation plan is a difficult task.

3. A wage/salary survey tells a company how much compensation comparable firms are paying for specific jobs that the firms have in common.

B. Financial Compensation 1. Wages are financial rewards based on the number of hours the employee works

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or the level of output produced. a. Time wages are based on the number of hours worked. They are easy to compute but provide no incentive to increase productivity. b. Minimum wage is a federally mandated minimum amount per hour (Table 10.7). c. Piece wages are based on the level of output. A major advantage of piece wages is that employees are encouraged to supervise their own activities and to increase output.

2. Commissions are payments to an employee for a fixed amount or a percentage of the employee’s sales. This method motivates employees to sell as much as they can.

3. A salary is a financial reward calculated on a weekly, monthly, or annual basis.

This method is associated with white-collar workers and professionals.

4. Other forms of financial compensation: a. Bonuses are an addition to regular compensation and are given as rewards for exceptional performance. b. Profit sharing is a distribution of a percentage of company profits to the employees whose work helped generate those profits. i. Employee stock ownership plans (ESOPs) have gained in popularity in recent years. ii. Profit sharing can motivate employees to work hard, because increased productivity and sales mean that the profits or stock dividends will increase.

C. Benefits 1. Benefits are nonfinancial forms of compensation provided to employees such as pension plans; health, disability, and life insurance; sick leave, holidays, credit union membership, health programs, childcare, eldercare, and more (table 10.8). a. According to Statistics Canada, the total cost of employee benefits has risen faster than wages with costs to employers increasing two to three times the rate of inflation. b. Legally required benefits—Canada Pension Plan, workers’ compensation, and Employment Insurance—account for some of the increase in costs, but increases in non-mandatory benefits such as health and dental plans account for the majority of the increase.

2. Such benefits increase employee security, and to a certain extent, morale, and motivation.

3. A benefit increasingly offered is the employee assistance program (EAP). a. Most EAPs offer counseling for and assistance with employees’ personal problems that might hurt job performance if not addressed (e.g., drug and alcohol abuse, fitness programs). b. EAPs help reduce costs associated with poor productivity, absenteeism, and other workplace issues by helping employees deal with personal problems that contribute to these issues.

4. Companies try to provide the benefits they believe their employees want, but diverse people may want different things. Some companies use fringe benefit programs to allow employees to choose the benefits they would like, up to a specified amount. a. Traditional fringe benefits include sick leave, pension plans, health plans, and 01-264 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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bonuses. b. Soft benefits (to help achieve a work–life balance) include on-site childcare, spas, food service, and even hair salons. c. Cafeteria benefit plans allow employees to select the benefits most important to them Discuss some of the issues associated with unionized employees, Key Terms: including collective bargaining and dispute resolution.  Labour union  Managing Unionized Employees  Collective  Collective Bargaining bargaining  Resolving Disputes  Labour contract  Picketing  Strikes  Boycott  Lockout  Strikebreakers  Conciliation  Mediation  Arbitration VII. Managing Unionized Employees A. A labour union is an employee organization formed to deal with employers for achieving better pay, hours, and working conditions.

1. Union workers make, on average ($200 per week), more than nonunion employees.

2. Significant aspects of HRM, particularly compensation, are dictated by union contracts at many companies.

B. Although unions provide employees with considerable negotiation power, union growth has slowed in recent years, and prospects for growth do not look good.

1. Most blue-collar workers have already been organized.

2. Canada has shifted from manufacturing to a service economy, further reducing the demand for blue-collar workers.

3. An increased focus on productivity and efficiency has led to more participative management, blurring the line between management and workers.

4. Nonetheless, labour unions have been successful in organizing blue-collar manufacturing, government, and health care workers, as well as smaller percentages of employees in other industries.

C. Collective Bargaining (Figure 10.2) 1. Collective bargaining is the negotiation process through which management and unions reach an agreement about compensation, working hours, and working conditions for the bargaining unit.

2. The objective of negotiation is to reach agreement about a labour contract—the formal, written document that spells out the relationship between the union and management for a specified period of time. a. In collective bargaining, each side tries to negotiate an agreement that meets its demands; compromise is frequently necessary. b. Management negotiates to gain or retain control over employment issues (hiring, firing, standards, schedules, etc.). c. Unions focus on contract issues such as magnitude of wages, better pay,

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holidays, better scheduling, and benefits. d. Unions focus on magnitude of wages. Many labour contracts contain a costof-living escalator clause (COLA). e. Givebacks are wage or benefit concessions accepted by employees during tough economic times.

D. Resolving Disputes 1. At times, labour and management cannot agree on a labour contract.

2. When collective bargaining breaks down, either side may resort to more drastic measures to achieve its objectives.

3. Labour Tactics a. Picketing is a public protest against management practices with workers marching (often waving anti-management signs and placards) at the employer’s plant. b. Strikes—employee walkouts—are one of labour’s most effective weapons against management; however, they are a weapon of last resort. c. A boycott is an attempt to keep people from purchasing a company’s products.

4. Management Tactics a. A lockout, management’s version of a strike; actually closes a work site so that employees cannot go to work. b. Strikebreakers, called “scabs” by striking union members, are people hired by management to replace striking employees. It is often a measure of last resort for management.

5. Outside Resolution a. Outside resolution may be necessary if other means of dispute resolution fail. b. In such cases, the parties have three choices: i. Conciliation involves the use of a neutral third party, a conciliator, to keep labour and management bargaining. The conciliator’s goal is to get both parties to focus on the issues and prevent negotiations from breaking down. ii. Mediation involves using a neutral third party, a mediator, to suggest a solution to the problem. This third party has no formal power over labour or management. iii. Arbitration involves bringing in a neutral third party, an arbitrator, to settle the dispute. An arbitrator’s solution is legally binding and enforceable. iv. Generally, arbitration occurs on a voluntary basis; management and labour must agree to it. Sometimes, management and labour submit to compulsory arbitration, in which an outside party (usually the federal government) requests arbitration to head off a prolonged strike LO 10-7

Discuss the importance of diversity in the workforce.  The Importance of Workforce Diversity  The Characteristics of Diversity  Why Is Diversity Important?  The Benefits of Workforce Diversity

Key Terms:  Diversity

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 Employment Equity  Trends in Management of the Workforce VIII. The Importance of Workforce Diversity A. The Characteristics of Diversity (Figure 10.3) 1. Diversity refers to the participation of different ages, genders, races, ethnicities, nationalities, and abilities in the workplace.

2. Differences can be separated into primary and secondary characteristics of diversity. a. Primary characteristics of diversity are inborn and cannot be changed and include age, gender, race, ethnicity, abilities, and sexual orientation. b. Secondary characteristics of diversity can be changed and include work background, income, marital status, military experience, religious beliefs, geographic location, parental status, and education. c. Although defining characteristics as primary or secondary can help enhance our understanding, we must remember that each person is defined by the interrelation of all characteristics.

B. Why Is Diversity Important?

1. The Canadian workforce is becoming more diverse. a. Corporate Canada is also aware of the upcoming labour shortage and is becoming increasingly aware that eliminating barriers to potential employees could eliminate part of this problem. In fact, a recent study completed by RBC found that eliminating age, gender, and cultural barriers could bring an additional 1.6 million Canadians to the workforce. b. Companies that are championing diversity are also becoming aware of the impact a diverse workforce can have on their financial performance. For example, it has been found that companies with a more diverse leadership teams were 33 percent more likely to see better than average profits.

2. More and more companies are trying to improve HRM programs to recruit, develop, and retain more diverse employees to better serve their diverse customers.

3. Effectively managing diversity in the workforce involves cultivating and valuing its benefits and minimizing its problems.

C. The Benefits of Workforce Diversity 1. There are a number of benefits to fostering and valuing workforce diversity. a. More productive use of a company’s human resources. b. Reduced conflict among employees of different ethnicities, races, religions, and sexual orientations as they learn to respect each other’s differences. c. More productive working relationships among diverse employees as they learn more about and accept each other. d. Increased commitment to and sharing of organizational goals among diverse employees at all organizational levels. e. Increased innovation and creativity as diverse employees bring new, unique perspectives to decision-making and problem-solving tasks. f. Increased ability to serve the needs of an increasingly diverse customer base.

2. As workforce diversity becomes a valued organizational asset, companies spend less time managing conflict and more time accomplishing tasks and satisfying customers.

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1. The Employment Equity Act is designed to ensure that women, Aboriginal Peoples, people with disabilities, and visible minorities receive the same employment opportunities as all Canadians.

IX. Trends in Management of the Workforce A. The last recession and financial crisis along with advances in information technology have had a major impact on employment.

B. New technology is blurring the lines between work time and leisure time.

C. It is important for managers to be aware of legal issues regarding workers’ rights.

BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Shopify Supports Employment in an Autonomous Environment Shopify’s growth over the past five years has been substantial. The company which was started by Tobias Lütke in his garage has seen its market cap soar to almost $30 billion with almost 3000 employees. With Canada’s unemployment rate at its lowest level in almost four decades, many employers are struggling to attract talent. Shopify is not one of the employers, in fact, Shopify routinely attracts many applicants who go through a rather rigorous hiring process in which many prospective candidates are unsuccessful.

1. What are some of the advantages and disadvantages of Shopify’s hiring practices?

Student answers may vary. Students should note that some advantages include a rigorous hiring process which focuses on being thorough and eliminating bias. Students may also say that new hires are given responsibility and autonomy as soon as they are hired which helps lead projects and be creative. Students may cite several disadvantages including shunning traditional interview questions and assigning too much responsibility to people too soon.

2. Based on the information in the case, create a definition for the term Trust Battery. Do you like the concept? Do you think it accurately represents work relationships? Why or why not?

Student answers will vary.

3. Are you surprised Shopify provides employees with such a high level of autonomy? What are the advantages and disadvantages of this type of work environment?

Student answers will vary. Students may note several different advantages such as allowing people to be creative, wok independently, solve problems and so forth. Disadvantages include the lack of structure, lack of ability to ask people for help and so forth.

Responding to Business Challenges: Guerrilla Recruitment 1. Using this case, the Chapter and online resources what are some of the advantages and disadvantages of traditional recruitment methods? Using the same sources what are some of the advantages and disadvantages of guerrilla recruitment?

Student answers will vary. Some advantages may include: 1. Less expensive than traditional methods; 2. Reach younger audiences; 3. Enables recruiters to establish a social relationship with people. Some disadvantages include: 1. Not everyone is using social media; 2. People may not take social media job inquiries seriously.

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2. In groups or individually think about the school that you are attending. Come up with a list of non-traditional recruitment ideas to recruit someone to work in the IT Department, Public Relations/Affairs and finally a CPA to work in the Finance Department. Narrow your list down to your favorite one or two per job. Create a small plan noting the actual targeted demographic of the method, appeal of the campaign to targeted audience and likelihood of success.

Student answers will vary.

Technology and the Economy: Artificial Intelligence is Changing the Way Employees Learn 1. What are the advantages and disadvantages of AI-powered learning?

Advantages include: information that could be adaptable to the learner and their preferred style; considering prior knowledge; quick and ongoing feedback to employees; personalized learning experiences; recommendations for additional learning opportunities; tracking retention; and mapping out individual learning programs.

Disadvantages include financial investment in the product and an investment of time.

2. Personalized AI-powered content can be a sizeable investment for companies. Do you think most companies will be willing to make the investment this year? Why or why not?

Student answers will vary. Good answers will discuss current economic and other conditions.

3. Universities and colleges do not personalize a lot of their education. Do you think universities should allow for a greater personalization in education and testing? Why or why not?

Student answers will vary as personalized education and testing has advantages and disadvantages. Simulations, games, or other methods are already used in some courses to demonstrate student learning.

Consider Ethics and Social Responsibility: WestJet and Unionization WestJet’s senior management actively discouraged unionization for years. When people hear this fact, they are often surprised. After all, this is WestJet, the small(ish) regional Canadian airline that offers direct economy service to various points throughout the country. WestJet employees are funny and approachable, and actual owners in the business, as they are rewarded with generous employee share purchase plans and profit sharing. Airline business analysts would point out that Canadians who think this way may be recalling a WestJet from the past. Many union organizers and WestJet employees would say that their image as happy, well-treated owners in the company is more the result of a successful marketing campaign by management than actual reality. Union activists state that WestJet has a long history of anti-union activity directly aimed at maintaining low wages and limiting employee rights. WestJet employees also pointed out a number of unfriendly labour practices at the airline.

1. What are some of the advantages and disadvantages of unions for management and employees?

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Advantages for employees: 1. Strength in numbers, 2. Unions often result in higher wages, 3.

Unions normally increase benefits, 3. Unions will help with scheduling and recognition of seniority Disadvantages for employees: 1. Union dues, 2. Potential loss of relationship with management, 3. Stricter rules and terms of employment because of a collective agreement.

Advantages for employer: 1. Clear terms and conditions of labour, 2. Negotiate with all employees at once Disadvantages for employer: 1. Higher costs, 2. Increase in benefits, 3. Reduction in flexibility 2. Do you think the formation of unions at WestJet was inevitable given the company’s growth?

Student answers will vary.

3. Do you think WestJet’s business practices are ethical? Why or why not?

Student answers will vary.

Responding to Business Challenges: Estée Lauder Embraces Diversity 1. Why is workforce diversity important?

Answers will vary but students should include (1) Increased commitment to and sharing of organizational goals among diverse employees at all organizational levels. (2) Increased innovation and creativity as diverse employees bring new, unique perspectives to decisionmaking and problem-solving tasks. (3) Increased ability to serve the needs of an increasingly diverse customer base.

2. How is Estée Lauder improving its diversity and inclusion efforts?

To foster a more diverse and inclusive environment, Estée Lauder vowed to hire more Black employees, double diverse recruiting, ensure equal access to leadership training, require more diverse sets of candidates for executive and director-level positions, and purchase more products from Black-owned companies. Estée Lauder set forth plans to increase diverse recruiting and guarantee equal access to leadership training so that a more diverse set of candidates can be proposed for executive positions.

Estee Lauder is reviewing its products to insure that its products are culturally sensitive. Estee Lauder has also launched New Equity and Engagement Center of Excellence to oversee and manage the success of its commitments to diversity and inclusion.

3. How does expanding the shade ranges of its products support diversity?

Expanding shade ranges for a variety of products to accommodate more skin tones will make its products more appealing to a wide range of customers and promotes inclusivity.

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Responding to Business Challenges: Has COVID Forever Altered The Way We Work?

1. After reading the case, think about what we have learned about Human Resource Management in this Chapter and the text. Do you think the three changes discussed in the case above will be permanent? Why? Changes include remote work, investment in AI technology, and a people-focused culture. The permanency of the changes depends on the internal and external environment of the company.

2. What do you think are some of the advantages and disadvantages of remote work, investment in AI and changes to corporate culture? Good answers will go beyond the case and include individual/reflective thought.

Student answers will vary and should take into account advantages and disadvantages of each change. Good answers will go beyond the case and include individual/reflective thought.

3. What are some other trends in work that you have witnessed or read about? Where any of them more compelling than those discussed in the case? List the trends and briefly describe them.

Student answers will vary.

So You Want to Work in Human Resources What is the value of having a diverse workforce, and why does it present challenges to human resource managers?

Diversity is an asset and can help a company keep from having blind spots or harmony in thought, background, and perspective, which stifles good team decisions. However, a diverse workforce can present some management challenges. Human resource management is often responsible for managing diversity training and compliance to make sure employees do not violate the ethical culture of the organization or break the law. Different people have different goals, motivations, and ways of thinking about issues that are informed by their culture, religion, and the people closest to them.

END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Managing Human Resources Have students identify how they have learned about jobs they have applied for in the past. What sources work best in your community? Assuming that the majority of employees (if not all) they will be hiring will be part time, ask them in class to go through the steps they need to take in order to determine the size of their workforce. This will force them to start thinking about how to organize their business.

See for Yourself Case: Diversity Inspires Innovation at Apple Apple has invested heavily in diversity, equity, and inclusion. The company considers the diversity of its employees to be one of its greatest strengths and believes that to create products that serve everyone, it must foster an inclusive work environment. Apple has focused on hiring more women and underrepresented individuals, including those who identify as Black, Hispanic, Native American, 01-271 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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or Native Hawaiian & Other Pacific Islander. Additionally, Apple has achieved gender pay equity in every country where it operates, meaning women earn the same as their male counterparts.

1. Why are diversity, equity, and inclusion important?

Answers will vary but students should include (1) Increased commitment to and sharing of organizational goals among diverse employees at all organizational levels. (2) Increased innovation and creativity as diverse employees bring new, unique perspectives to decisionmaking and problem-solving tasks. (3) Increased ability to serve the needs of an increasingly diverse customer base.

2. Describe how Apple is creating a pipeline for diverse talent.

Apple’s $100 million Racial Equity and Justice Initiative (REJI) helps the company provide opportunities for women and historically underrepresented groups. Apple also supports a global innovation and learning hub for historically black colleges and universities. In addition to REJI, Apple is committed to doing more. It continues to build upon its contributions to community organizations such as community colleges, nonprofits, and other local organizations that empower the next generation.

3. How do Apple’s Diversity Network Associations create an inclusive work environment?

Apple’s Diversity Network Associations, employee-led groups brings more than 25,000 employees together through education, leadership programs, and networking. Groups include Accessibility@Apple, Amigos@Apple, Black@Apple, Pride@ Apple, Women@Apple, and more.

The network helps employees feel welcome and offers resources and support to the employees.

Team Exercise Students will form groups and go to monster.com and look up job descriptions for positions in business (account executive in advertising, marketing manager, human resource director, production supervisor, financial analyst, etc.). They should ask themselves: What are the key requirements for the position that I have been assigned (education, work experience, language/computer skills, etc.)? Does the position announcement provide a thorough understanding of the job? Was any key information that I would have expected omitted? Students will then report their findings to the class.

SUPPLEMENTAL TEACHING RESOURCES Check Your Progress 1. Distinguish among job analysis, job descriptions, and job specifications. How do they relate to planning in human resource management?

Job analysis is observing the specific tasks that make up a job; the skills, knowledge, and abilities needed to perform it; and the job environment. A job description is a formal, written description of a specific job. A job specification is a description of the qualifications necessary for a specific job. Employment analysis establishes the general personnel requirements of the business. Next, managers analyze the jobs within the organization to match the human resources to the available jobs.

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2. What activities are involved in acquiring and maintaining the appropriate level of qualified human resources? Name the stages of the selection process.

Human resource managers are concerned with maximizing employees’ satisfaction and improving their efficiency to meet organizational objectives. Human resource managers are involved with planning and forecasting, recruitment and selection, training and development, and determining compensation. The selection process includes completing an application, interviewing, testing, and checking references.

3. What are the two types of training programs? Relate training to kinds of jobs.

Training is teaching employees to do specific job tasks through either classroom development or on-the-job experience. On-the-job training allows workers to learn by actually performing the task on the job under the guidance of an experienced employee. Classroom training uses lectures, conferences, films, case studies, and web-based training to teach employees about a job and its requirements.

4. What is the significance of a performance appraisal? How do managers appraise employees?

The performance appraisal seeks to identify an employee’s strengths and weaknesses on the job. It is one of the most difficult tasks for managers. It provides employees with feedback on how they are doing and what they need to do to improve their performance. It provides a basis for determining how to distribute rewards. It provides the organization with information about the quality of its selection, training, and development activities.

Appraisals can be objective or subjective. Whether objective or subjective, the manager discusses the appraisal results with the employee.

5. Why does turnover occur? List the types of turnover. Why do businesses want to reduce turnover due to separations?

Turnovers can occur because they are initiated by the employer or by the employee. Sometimes the turnovers, especially layoffs, are initiated because of economic downturns. The types of turnover include promotions, transfers, and separations. Promotion is advancement to a higher level job with increased authority, responsibility, and pay. A transfer is a move to another job within the company at essentially the same level and wages. Separations include resignation, discharge, layoff, and retirement. Businesses want to reduce turnover due to separation because selection and training of new employees is an expensive and time-consuming process.

6. Relate wages, salaries, bonuses, and benefits to Herzberg’s distinction between hygiene and motivation factors. How does the form of compensation relate to the type of job?

Frederick Herzberg’s theory of motivation focused on job factors, as discussed in Chapter 9.

Hygiene factors relate to the work setting and include adequate wages, comfortable working conditions, fair company policies, and job security. Motivational factors relate to the content of the work and include achievement, recognition, the work itself, involvement, responsibility, and advancement. It should be obvious to students that adequate wages, salaries, and benefits are necessary hygiene factors for employees.

In general, salaries are associated with white-collar workers such as office personnel, executives, and professionals. Time-based wages are associated with blue-collar workers, clerks, 01-273 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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maintenance personnel, and so forth. Finally, piece-based wages are associated with skilled craftworkers, while commissions are associated with certain types of sales positions.

7. What is the role of benefits? Name some examples of benefits.

The role of benefits is to attract and help retain employees, increase employee security, and to a certain extent, increase morale and motivation. In addition, utilization of the benefits may keep employees healthy and productive, thereby reducing absenteeism, waste, and turnover. Some examples of benefits include pension plans, holidays, health programs, employee assistance programs, health insurance, and so on.

8. Describe the negotiation process through which management and unions reach an agreement on a contract.

Collective bargaining is the negotiation process through which management and unions reach an agreement about issues such as compensation, working hours, and working conditions. The union prepares a list of concessions it wants from management; management then defines what it is willing to concede to the union and still maintain a reasonable level of profitability.

Management tries to maintain control over work schedules, the hiring and firing of workers, production standards, and other work policies. Unions tend to focus on issues such as magnitude of wages, better pay rates for holidays, overtime, undesirable shifts, scheduling of pay increases, and benefits. After union representatives and management negotiate issues and reach agreement on the terms of a contract, union members vote on the contract. If they ratify the contract, it becomes the legally binding agreement between the union and management for a specified period.

9. Besides collective bargaining and grievance procedures, what other alternatives are available to labour and management to handle labour disputes?

Both labour and management can use pressure tactics to resolve disputes. Although most labour disputes are handled through collective bargaining or grievance procedures, sometimes management or labour may resort to more drastic measures to achieve their objectives. Labour might use picketing or boycotts. Picketing is a public protest against management practices and involves union members marching—often waving anti-management signs and placards—at the employer’s plant or work site. Boycotts are an attempt to keep people from purchasing the company’s products. The most effective weapon wielded by unions against management is the strike. A strike makes carrying out the normal operations of a business difficult or impossible. A lockout is management’s version of a strike; management actually closes down the workplace so the employees cannot work. Strikebreakers are people hired by management to replace striking employees; they’re sometimes called scabs by the union workers. Another tactic is to bring in a third party to aid in conciliation, mediation, or arbitration.

10. What are the benefits associated with a diverse workforce?

Some of the benefits of workforce diversity include more productive use of a firm’s human resources, reduced conflict among employees, increased attention to organizational goals, increased innovation and creativity in decision making and problem-solving, and greater ability to serve a diverse customer base.

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Get Involved 1. Although many companies screen applicants and test employees for illegal drug use, such testing is somewhat controversial. Find some companies in your community that test applicants and/or employees for drugs. Why do they have such a policy? How do the employees feel about it? Using this information, debate the pros and cons of drug testing in the workplace.

Student answers will vary depending upon the company they choose.

2. If collective bargaining and the grievance procedures have not been able to settle a current labour dispute, what tactics would you and other employees adopt? Which tactics would be best for which situations? Give examples.

Most likely, students will choose to strike, picket, or boycott. Boycotts may be good for situations where employees are strong enough to band together to make a difference. If the situation is severe enough, employees might even be able to get consumers to join in their cause. Human rights violations might be a good example of a situation where boycotts can be effective. Picketing would be good in situations in which employees need to arouse sympathy for their cause. Situations might include cuts in benefits. Students should realize that strikes are the most risky and should be used as a last resort. The strikes in Chicago over teacher pay provide a good example of a situation where striking might be used.

3. Find some examples of companies that value their diverse workforces, perhaps some of the companies mentioned in the chapter. In what ways have these firms derived benefits from promoting cultural diversity? How have they dealt with the problems associated with cultural diversity?

Student answers will vary.

Build Your Skills: Appreciating and Valuing Diversity Background Here’s a quick self-assessment to get you to think about diversity issues and evaluate the behaviours you exhibit that reflect your level of appreciation of other cultures: Do you . . .

Regularly

Sometimes

Never

1. Make a conscious effort not to think stereotypically?

2. Listen with interest to the ideas of people who don’t think like you do?

3. Respect other people’s opinions, even when you disagree?

4. Spend time with friends who are not your age, race, gender, or the same economic status and education?

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5. Believe your way is not the only way?

6. Adapt well to change and new situations?

7. Enjoy traveling, seeing new places, eating different foods, and experiencing other cultures?

8. Try not to offend or hurt others?

9. Allow extra time to communicate with someone whose first language is not yours?

10. Consider the effect of cultural differences on the messages you send and adjust them accordingly?

Scoring Number of Regularly checks

_____ multiplied by 5 = _____

Number of Sometimes checks

_____ multiplied by 3 = _____

Number of Never checks

_____ multiplied by 0 = _____ TOTAL _____

Task In a small group or class discussion, share the results of your assessment. After reading the following list of ways you can increase your knowledge and understanding of other cultures, select one of the items that you have done and share how it helped you learn more about another culture. Finish your discussion by generating your own ideas on other ways you can learn about and understand other cultures and fill in those ideas on the blank lines at the end. 

 

 

Be alert to and take advantage of opportunities to talk to and get to know people from other races and ethnic groups. You can find them in your neighborhood, in your classes, at your fitness center, at a concert or sporting event—just about anywhere you go. Take the initiative to strike up a conversation and show a genuine interest in getting to know the other person.

Select a culture you’re interested in and immerse yourself in that culture. Read novels, look at art, take courses, see plays.

College students often have unique opportunities to travel inexpensively to other countries—for example, as a member of a performing arts group, with a humanitarian mission group, or as part of a college course studying abroad. Actively seek out travel opportunities that will expose you to as many cultures as possible during your college education.

Study a different language.

Expand your taste buds. The next time you’re going to go to a restaurant, instead of choosing that old familiar favorite, find a restaurant that serves ethnic food you’ve never tried before.

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Many large metropolitan cities sponsor ethnic festivals, particularly in the summertime, where you can go and take in the sights and sounds of other cultures. Take advantage of these opportunities to have a fun time learning about cultures that are different from yours.

Suggestions for Use After students have completed the self-assessment, ask them to discuss the results either in small groups or as a class. Encourage the students to share their experiences learning about other cultures using the suggested methods provided in the text and to generate some ideas of their own.

Solve the Dilemma: Morale Among the Survivors Medallion Corporation manufactures quality carpeting and linoleum for homes throughout the United States. A recession and subsequent downturn in home sales has sharply cut the company’s sales. Medallion found itself in the unenviable position of having to lay off hundreds of employees in the home office (the manufacturing facilities) as well as many salespeople. Employees were called in on Friday afternoon and told about their status in individual meetings with their supervisors. The laidoff employees were given one additional month of work and a month of severance pay, along with the opportunity to sign up for classes to help with the transition, including job search tactics and résumé writing.

Several months after the cutbacks, morale was at an all-time low for the company, although productivity had improved. Medallion brought in consultants, who suggested that the leaner, flatter organizational structure would be suitable for more team activities. Medallion, therefore, set up task forces and teams to deal with employee concerns, but the diversity of the workforce led to conflict and misunderstandings among team members. Medallion is evaluating how to proceed with this new team approach.

1. What did Medallion’s HRM department do right in dealing with the employees who were laid off?

Medallion’s HRM department implemented an employee assistance program for laid-off employees. This employee assistance program included free classes on job search tactics and résumé writing. These classes helped to smooth the transition and to reduce any animosity the laid-off employees might have felt toward the organization.

2. What are some of the potential problems that must be dealt with after an organization experiences a major trauma such as massive layoffs?

After a major layoff, employee morale is likely to be very low. It is not uncommon for the remaining employees to (1) feel a sense of loss (they miss the people who were laid off), (2) feel guilty for being kept, (3) feel uncertain about their own professional future, and (4) experience role ambiguity related to the new and leaner structure.

3. What can Medallion do to make the team approach work more smoothly? What role do you think diversity training should play?

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Medallion can smooth the transition to the team approach by ensuring that employees are clear as to their roles and responsibilities. Toward that end, Medallion should provide its employees with new job descriptions that include explanations of how the team is to function and implement a diversity training program. Finally, Medallion should ensure that its task force handling employee concerns maintains employee confidentiality, so employees do not fear retribution for voicing concerns. Diversity training should play a key role in the transition because it will help to reduce conflict (and improve productivity) among employees of different ethnicities, races, religions, and sexual orientations.

CONNECT ACTIVITIES Working With Unions at Freeman Learning Objective 10-7: Discuss some of the issues associated with unionized employees, including collective bargaining and dispute resolution.

Activity Summary: The United States has shifted from a manufacturing to a service economy, further reducing the demand for blue-collar workers. Nonetheless, labour unions have been successful in organizing blue-collar manufacturing, government, and health care workers, as well as workers in some other industries like carpenters, electronics, and entertainment industry employees. This exercise is important because significant aspects of HRM are dictated to a large degree by union contracts at many companies, and you are likely to work with unionized employees throughout your career. You may even be a member of a labour union at some point in your career.

The goal of this exercise is to demonstrate your understanding of the HRM process and union labour.

How to Use Activity: After assigning the video, ask students to put themselves in the shoes of a union organizer and the human resource manager. Have the students also think about the pros and cons of union membership for an employee. What are the disadvantages to the company of having a union?

Class Discussion: What are the advantages that Freeman experiences as a result of working with labour unions? What HR activities are impacted by having a union?

Lululemon Selects for Culture Fit Learning Objective 10-2: Summarize the processes of recruiting and selecting human resources for a company.

Activity Summary: This activity is important because human resource management is more than focusing on the employees already working for a company. It involves processes including recruitment, selection, training, development, appraisal, and separation. It is important to understand how these processes influence and are influenced by company culture. The goal of this exercise is to demonstrate students understanding of how Lululemon selects new employees based on cultural fit.

How to Use Activity: After assigning the video, ask students to put themselves in the shoes of a hiring manager. What are the recruiting, selection, and testing steps they would utilize to ensure they’re hiring the most qualified candidates?

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Class Discussion: If you were a part of HR, what recruiting, selection, and testing actions would you perform to ensure you’re hiring the most qualified candidates? What methods would you use to recruit a pool of candidates? What questions would you ask in the interviewing process? Would you test applicants in a specific way (e.g., IQ, personality, drug)? How would you ensure your company is diverse? iSeeIt! Video Case: Human Resource Planning Learning Objective 10-1: Explain the significance of human resource management.

Activity Summary: This brief video describes a job analysis, including how it is created and what it is used for in the human resource management process.

How to Use Activity: Now that students understand how a job is analyzed and created, have them create their own hiring plan for a fictitious position including the job description, hiring criteria, and financial criteria.

Class Discussion: How might you determine the appropriate pay range for the position you’re hiring for? In the same way that you are planning to ask a candidate questions, they will likely have questions for you. What questions should you be prepared to answer as the hiring manager representing the company?

BONUS TEACHING RESOURCES Additional Discussion Questions 1. Where do most firms recruit qualified applicants?

Most firms get their applicants from two sources, internally or externally. Internal sources of applicants are from their own employees. An internal announcement may be on the bulletin board or in a company announcement or newsletter. External sources include newspaper advertisements, professional journals, employment agencies, colleges or vocational schools, recommendations from current employees, and unsolicited applications.

2. Why has the use of physical examinations in the selection process become controversial for businesses?

The issue of worker privacy and possible inaccuracy of current test procedures has led to questioning of drug tests. Another issue is whether companies can reject applicants testing positive for HIV or AIDS. The tests can be valid if the position in question requires a particular physical ability, such as for firefighters.

3. Employee Assistance Programs (EAPs) add to company costs. Why should a firm bother with Employee Assistance Programs?

Treating the problems addressed in EAPs (drug and alcohol abuse, personal and family problems, health and exercise) helps to improve productivity and reduce absenteeism.

Employees who are happy will be more productive. Healthy employees will reduce health insurance costs. Lastly, companies showing a concern for workers tend to have improved employee morale.

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4. Bring a copy of a local newspaper “Help Wanted” section to class. What qualifications (job specifications) do the ads request of applicants?

The answers will vary, but most should mention education, experience, personal characteristics (outgoing, self-starters, innovative persons, etc).

5. Bring a copy of a performance appraisal form to class. Copies may be secured from companies or examples may be presented in textbooks. Is the performance appraisal based on objective or subjective information? Is the performance appraisal based on pre-set objectives for the individual employee?

The answers will vary. Many of the appraisal forms will depend on subjective assessments, especially on the use of rating scales.

Controversial Issue How Easy Is It to Be an Arbitrator?

Unlike mediation and conciliation, arbitration leads to a binding decision that in most cases will settle the issue permanently. As you can see, an arbitrator must take his or her role very seriously because his or her decision will have a significant impact on people’s lives. An arbitrator does not necessarily pick a middle ground that will satisfy both sides. He or she will carefully consider the facts in the case and then make a ruling; often, such a ruling will grant to one side everything it could have hoped for.

Note to Instructors: Help your students step into the kind of controversy that an arbitrator must deal with. Two sides of a dispute have been sketched below. Bring both sides to the attention of your students and have them decide which kind of directive would settle the impasse in the most fair and equitable manner. The situation could be transformed into a role play by having some students represent each of the sides in the issue and then leaving a student or group of students with the task of arriving at a fair settlement.

Here are the sides to the dispute turned over to an arbitrator.

Management Dillon Haskill reported to work 30 minutes late on April 4. This is not the first time Haskill has been late, and on previous occasions he has been warned that a repeat of this tardiness without a good excuse could mean suspension or dismissal. When he was tardy on April 4, Dillon Haskill was given yet another warning by his supervisor. After hearing this warning, Haskill became angry and began cursing his supervisor. Haskill had to be restrained by some fellow workers. Because of his habitual tardiness and his attack on his supervisor, Dillon Haskill was dismissed and given three weeks of pay at the end of the April 4 work day.

Labour Dillon Haskill has never been given a written warning that tardiness will not be tolerated. His personnel record in the human resources office will verify this. When Dillon reported for work on April 4, he was met at the door by his supervisor, who began throwing curses at Dillon. When Dillon tried to respond quietly to these taunts, several management personnel (other supervisors) brutally grabbed Dillon from behind. Further, on April 4, there were seven other employees who were later than Dillon, and they received no reprimand, formal or otherwise. It is our contention that Dillon’s supervisor does 01-280 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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not like Dillon and is just making serious trouble for him.

It is possible for your students to make a decision using the above information. However, if an arbitrator felt that the above evidence or testimony was incomplete, then he or she would request more data or call in more witnesses to the incident. Although the two versions of the story differ, it is possible that the versions are merely highly subjective interpretations of what took place. In an effort to make a fair ruling, an arbitrator must often read between the lines in reconstructing just what happened.

Discussion Questions: 1. What should the arbitrator’s decision be? Can there be a compromise in the dispute?

Students’ answers can vary, as long as they adequately support their responses.

2. Could management avoid some of the problems brought out in this controversy by published policies and rules?

Management could probably have avoided some of these problems by publishing policies and rules. Then Dillon could not have used the excuse that he didn’t know the policies on tardiness.

As Dillon claims that other employees were tardier than he was and did not receive reprimands, these policies would also supply written guidelines that all the managers at the company could use to reprimand other employees who were tardy. This would maintain fairness and apply appropriate disciplinary measures to other employees who exhibited similar behavior.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 1. The Advantages and Disadvantages of Piece-Rate Compensation Plans 2. The Benefits of Providing Childcare or Day Care for Employees 3. Employee Stock Ownership Plans (ESOPs) Guest Speaker Suggestions 1. A human resource management representative from a business firm to speak about different aspects of the selection process, compensation plans, and benefits plans.

2. A representative from the EEOC to speak about how it helps to ban discrimination in employment and how it seeks to increase job opportunities for women and minorities.

3. A representative from a college or university office for students with disabilities to speak about providing opportunities for the handicapped in the workplace.

Teaching Suggestions 35. Review the “Boxed Text Discussion Questions” provided in this Instructor’s Manual. Have students gone over these questions before class? Call on various students for answers.

36. Have students select and complete an exercise from “Get Involved.” Then, at the next session, have them give a brief presentation of their work to the class.

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37. Discuss the “Check Your Progress” questions in the textbook.

Chapter 11: Customer-Driven Marketing SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Cheeckbone Beauty, a Successful Canadian Indigenous Company With Global Aspirations Technology and the Economy: Virtual Reality Conceals the World, Augmented Reality Improves It Responding to Business Challenges: Leonard Asper Is Targeting Men in His Return to Media Responding to Business Challenges: RBC’s Gen Z Marketing Strategy Business Disruption: Even Wedding Shopping Is Moving Online Business Disruption: Will Crowdfunding Replace Market Research?

So You Want a Job in Marketing END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Customer-Driven Marketing See for Yourself Case: Dollar General Cashes In on Niche Business Strategy Team Exercise SUPPLEMENTAL TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: The Marketing Mix Solve the Dilemma: Will It Go? CONNECT ACTIVITIES LEGO: Inspire the Builders of Tomorrow…Girls Included!

McDonald’s Market Challenge BONUS TEACHING RESOURCES Additional Discussion Questions Controversial Issue Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions 01-282 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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SUMMARY In this chapter, we focus on the basic principles of marketing. First we define and examine the nature of marketing. Then we look at how marketers develop marketing strategies to satisfy the needs and wants of their customers. Next, we discuss buying behaviour and how marketers use research to determine what consumers want to buy and why. Finally, we explore the impact of the environment on marketing activities.

LEARNING OBJECTIVES LO 11-1

Define marketing and describe the exchange process.

LO 11-2

Specify the functions of marketing.

LO 11-3

Explain the marketing concept and its implications for developing marketing strategies.

LO 11-4

Examine the development of a marketing strategy, including market segmentation and marketing mix.

LO 11-5

Investigate how marketers conduct marketing research and study buying behaviour.

LO 11-6

Summarize the environmental forces that influence marketing decisions.

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KEY TERMS AND DEFINITIONS attitude

Knowledge and positive or negative feelings about something.

buying behaviour

The decision processes and actions of people who purchase and use products.

concentration approach

A market segmentation approach whereby a company develops one marketing strategy for a single market segment.

culture

The integrated, accepted pattern of human behaviour, including thought, speech, beliefs, actions, and artifacts.

exchange

The act of giving up one thing (money, credit, labor, goods) in return for something else (goods, services, or ideas).

learning

Changes in a person’s behaviour based on information and experience.

market

A group of people who have a need, purchasing power, and the desire and authority to spend money on goods, services, and ideas.

market segment

A collection of individuals, groups, or organizations who share one or more characteristics and thus have relatively similar product needs and desires.

market segmentation

A strategy whereby a firm divides the total market into groups of people who have relatively similar product needs.

marketing

A group of activities designed to expedite transactions by creating, distributing, pricing, and promoting goods, services, and ideas.

marketing concept

The idea that an organization should try to satisfy customers’ needs through coordinated activities that also allow it to achieve its own goals.

marketing mix

The four marketing activities—product, price, promotion, and distribution—that the firm can control to achieve specific goals within a dynamic marketing environment.

marketing orientation

An approach that requires organizations to gather information about customer needs, share that information throughout the entire firm, and use that information to build long-term relationships with customers.

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marketing research

A systematic, objective process of getting information about potential customers to guide marketing decisions.

marketing strategy

A plan of action for developing, pricing, distributing, and promoting products that meet the needs of specific customers.

multi-segment approach

A market segmentation approach whereby the marketer aims its efforts at two or more segments, developing a marketing strategy for each.

perception

The process by which a person selects, organizes, and interprets information received from their senses.

personality

The organization of an individual’s distinguishing character traits, attitudes, or habits.

place/distribution

Making products available to customers in the locations and quantities desired.

price

A value placed on an object exchanged between a buyer and a seller.

primary data

Marketing information that is observed, recorded, or collected directly from respondents.

promotion

A persuasive form of communication that attempts to expedite a marketing exchange by influencing individuals, groups, and organizations to accept goods, services, and ideas.

reference groups

Groups with whom buyers identify and whose values or attitudes they adopt.

secondary data

Information that is compiled inside or outside an organization for some purpose other than changing the current situation.

social classes

A ranking of people into higher or lower positions of respect.

social roles

A set of expectations for individuals based on some position they occupy.

target market

A specific group of consumers on whose needs and wants a company focuses its marketing efforts.

total-market approach

An approach whereby a firm tries to appeal to everyone and assumes that all buyers have similar needs.

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CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, and KEY TERMS learners will need to take away from the course.

LO 11-1

LO 11-2

Define marketing and describe the exchange process.  Key Terms:  Introduction  Marketing  Nature of Marketing  Exchange o The Exchange Relationship Lecture Outline and Notes: I. Nature of Marketing A. Marketing, a vital part of any business undertaking, is a group of activities designed to expedite transactions by creating, distributing, pricing, and promoting goods, services, and ideas.

1. Creates value by allowing individuals and organizations to obtain what they need and want.

2. Other functional areas of the business must be coordinated with marketing decisions.

3. May be the hardest concept for organizations to master as motives are often unclear; few principles can be applied consistently; and markets tend to fragment, each desiring customized products, new value, or better service.

4. What marketing is NOT: a. It is not manipulating consumers to get them to buy products they do not want. b. It is more than selling and advertising; it is a systematic approach to satisfying consumers.

B. The Exchange Relationship 1. An exchange is the act of giving up one thing in return for something else.

2. Businesses exchange their goods, services, or ideas for money or credit supplied by customers in a voluntary exchange relationship.

3. For an exchange to occur, certain conditions are required.

4. Buyers and sellers must be able to communicate about the “something of value” available to each. a. Each participant must be willing to give up its respective “something of value” to receive the “something” held by the other (Figure 11.1). b. The tangible product itself is often not as important as the image or benefits associated with the product. c. This intangible “something of value” may be capability gained from using a product or the image evoked by it, or even the brand name.

Specify the functions of marketing.  Functions of Marketing A. Functions of Marketing 1. Buying a. A marketer must understand buyers’ needs and desires to determine what products to make available.

2. Selling a. Selling expedites the exchange process, and marketers view selling as a

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persuasive activity that is accomplished through promotion.

3. Transporting a. Transporting is the process of moving products from the seller to the buyer.

4. Storing a. Storing includes warehousing activities.

5. Grading a. Grading refers to standardizing products and displaying and labeling them so that consumers clearly understand their nature and quality.

6. Financing a. Financing involves arranging credit, which makes the purchase of products possible.

7. Marketing Research a. Through marketing research, marketers ascertain the need for new goods and services.

8. Risk Taking a. Risk taking is associated with the chance of loss from marketing decisions that involve the use of resources. b. Developing a new product creates a chance of loss if consumers do not like it enough to buy it.

Explain the marketing concept and its implications for developing Key Terms: marketing strategies.  Marketing  The Marketing Concept concept o Evolution of the Marketing Concept  Marketing orientation A. The Marketing Concept 1. The marketing concept is the idea that an organization should try to satisfy customers’ needs through coordinated activities that allow it to achieve its own goals. a. The marketing concept guides all marketing activities. b. According to the marketing concept, a business must find out what consumers need and want and then develop the product that fulfills that need or want. c. The business must then get the product to the customer. d. A business must also continually alter, adapt, and develop products that keep pace with changing consumer needs and wants.

2. Determining the true needs of buyers is increasingly difficult because buying motivation is not understood by either the buyer or the organization.

3. Although customer satisfaction is the goal of the marketing concept, a business must also achieve its own objectives; if it does not, it will not survive.

4. To implement the marketing concept, a firm must have good information about what consumers want, adopt a consumer orientation, and coordinate its efforts throughout the entire organization. a. A breakdown at any point in the organization can result in lost sales, lost revenues, and dissatisfied customers.

5. Employees who know how to understand and satisfy customers’ needs and wants are those who focus on ideas, benefits, and other aspects of the

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product or service. These employees do not focus on selling the goods or services, but rather on providing value to the customer. a. For instance, Mattel has realized dolls should come in different sizes.

B. Evolution of the Marketing Concept 1. The Production Orientation a. During the Industrial Revolution, new technologies and management ideas made it possible to manufacture products with greater efficiency; demand for manufactured goods was very strong. Companies, therefore, adopted a production orientation.

2. The Sales Orientation a. By the first part of the 20th century, supply caught up with demand, and businesspeople came to believe that personal selling and advertising were the most important activities to increase profits. Companies, therefore, adopted a sales orientation.

3. The Marketing Orientation a. By the 1950s, some businesspeople began to recognize that success required determining what customers want and making products that satisfy those wants rather than making products and then persuading consumers to buy them. b. A marketing orientation requires organizations to gather information about customer needs, share that information throughout the entire firm, and use that information to help build long-term relationships with customers. c. Trying to assess what consumers want is difficult and further complicated by the rate at which trends, fashions, and tastes can change. i. For example, the Tesla meets the needs of consumers who care about the environment and wish to improve their environmental footprint by driving an electric vehicle. ii. It is more efficient and less expensive for the company to retain existing customers and even increase the amount of business each customer provides the organization than to find new customers. d. Most companies are turning to technologies associated with customerrelationship management to help build relationships and boost business with existing customers. e. Communication remains a major element of any strategy to develop and manage long-term customer relationships. i. Regardless of the medium through which communication occurs, customers should ultimately be the drivers of marketing strategy because they understand what they want.

Examine the development of a marketing strategy, including market Key Terms: segmentation and marketing mix.  Marketing  Developing a Marketing Strategy strategy o Selecting a Target Market  Market o Developing a Marketing Mix  Target market  Total-market approach  Market

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Ferrell et al: Business: A Changing World, 8ce segmentation  Market segment  Concentration approach  Multi-segment approach  Marketing Mix  Price  Place/distribution  Promotion

II. Developing a Marketing Strategy A. A marketing strategy is a plan of action for developing, pricing, distributing, and promoting products that meet the needs of specific customers.

1. A marketing strategy consists of two major components: selecting the target market and developing an appropriate marketing mix to satisfy that target market.

B. Selecting a Target Market 1. A market is a group of people who have a need, purchasing power, and the desire and authority to spend money on goods, services, and ideas.

2. A target market is a more specific group of consumers on whose needs and wants a company focuses its marketing efforts.

3. A target market can either be small or encompass the total market (Figure 11.2). a. Some firms use a total-market approach, in which they try to appeal to the entire market and assume that all buyers have similar needs and wants. b. Most firms use market segmentation and divide the total market into groups of people who have relatively similar product needs. c. A market segment is a collection of individuals, groups, or organizations that share at least one characteristic and have relatively similar product needs and desires.

4. Market Segmentation Approaches a. The concentration approach is a market segmentation approach in which a marketer directs one marketing strategy toward a single market segment. (Porsche, for example, uses a concentration approach.) b. The multi-segment approach is a market segmentation approach in which the marketer aims its marketing efforts at two or more segments, developing a marketing strategy for each. (Raleigh Bicycles uses a multisegment approach.) i. Niche marketing is a narrow market segment focus when efforts are on one small, well-defined segment that has a unique, specific set of needs. (Airline marketers have used this strategy.) c. For a firm to successfully use the concentration or multi-segment approach to market segmentation, several requirements must be met such as heterogeneous consumer needs, identifiable and divisible segments, designated comparable segments, profit potential for at least one segment, and the ability to reach the chosen market segment with a 01-289 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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particular market strategy. Or a firm to successfully use the concentration or multi-segment approach to market segmentation, several requirements must be met such as heterogeneous consumer needs, identifiable and divisible segments, designated comparable segments, profit potential for at least one segment, and the ability to reach the chosen market segment with a particular market strategy.

5. Bases for Segmenting Markets—businesses segment markets on the basis of several variables: a. Demographic—age, sex, race, ethnicity, income, education, occupation, family size, family life cycle, religion, and social class. These characteristics are often closely related to customers’ product needs and purchasing behaviours. b. Geographic factors—climate, terrain, natural resources, population density, and subcultural values. These influence consumer needs and product usage. c. Psychographic—personality characteristics, motives, and lifestyles. d. Behaviouristic—how consumers’ behaviour toward the product affects its use.

C. Developing a Marketing Mix 1. The marketing mix refers to four marketing activities that the firm can control to achieve specific goals within a dynamic marketing environment (Figure 11.3). a. The buyer or target market is the central focus of all four marketing activities: product, price, promotion, and distribution.

2. Product a. A product is a complex mix of tangible and intangible attributes and includes everything the buyer receives from an exchange. i. A good is a physical entity you can touch. ii. A service is the application of human and mechanical efforts to people or objects to provide intangible benefits to customers. iii. An idea is a concept, philosophy, image, or issue. b. A product has emotional and psychological, as well as physical characteristics. c. Almost every purchase or exchange involves consumers trying to maximize benefits and satisfaction and minimize unfavorable attributes. d. The product is an important variable—often the central focus—of the marketing mix; the other variables (price, promotion, and distribution) must be coordinated with product decisions.

3. Price a. Price represents the value placed on what is exchanged between a buyer and a seller. b. Price quantifies value and is the basis of most market exchanges. c. Price is the key element of the marketing mix because it directly relates to revenue and profits. d. Price can be changed quickly to stimulate demand or respond to competitors’ actions.

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quantities. It involves transporting, warehousing, materials handling, and inventory control. b. Distribution is sometimes referred to as “place” because it helps to remember the marketing mix as the “4 Ps.” c. Intermediaries, usually wholesalers and retailers, perform many of the activities required to move products efficiently. d. Eliminating wholesalers and other intermediaries would not do away with the need for the services they provide.

5. Promotion a. Promotion is a persuasive form of communication that attempts to expedite a marketing exchange by influencing individuals, groups, and organizations to accept goods, services, and ideas. b. Promotion includes advertising, personal selling, publicity, and sales promotion. c. The aim of promotion is to communicate directly or indirectly with individuals, groups, and organizations to facilitate exchanges. d. Digital advertising on websites and social media sites is growing.

Investigate how marketers conduct marketing research and study Key Terms: buying behaviour.  Marketing  Marketing Research and Information Systems research  Buying Behaviour  Primary data o Psychological Variables of Buying Behaviour  Secondary data o Social Variables of Buying Behaviour  Buying behaviour o Understanding Buying Behaviour  Perception  Learning  Attitude  Personality  Reference groups  Social classes  Culture III. Marketing Research and Information Systems A. Marketing research is a systematic, objective process of getting information about potential customers to guide marketing decisions.

1. Such information might include data about the age, income, ethnicity, gender, and educational level of people in the target market, their preferences for product features, their attitudes toward competitors’ products, and the frequency with which they use the product.

2. Marketing research is vital because the marketing concept cannot be implemented without information about customers. This research helps to guide marketing decisions.

B. A marketing information system is a framework for accessing information about customers from both inside and outside sources.

C. Two types of data are usually available to decision makers.

1. Primary data are observed, recorded, or collected directly from respondents.

Primary data must be gathered by researchers. a. Primary data must be gathered by researchers who develop a method to observe phenomena or research respondents.

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b. Many companies use “mystery shoppers” to visit their retail establishments. c. Companies use surveys and focus groups to gauge customer opinion (Table 11.2). d. Some methods for marketing research use passive observation of consumer behaviour and open-ended questioning techniques.

2. Secondary data are compiled inside or outside the organization for some purpose other than changing the current situation. This type of data is already available in private or public reports.

D. Online Marketing Research 1. New information technologies are changing the way businesses learn about customers and market products.

2. Virtual testing is a kind of interactive multimedia research that combines sight, sound, and animation to facilitate the testing of concepts, packaging, and design features.

3. Social networking sites are a great way for marketers to obtain information on consumers who are willing to share their opinions on products and companies, to reach new markets, and to gain varied perspectives.

4. Online surveys are becoming an important part of marketing research.

5. Marketing analytics uses data that has been collected to measure, interpret, and evaluate marketing decisions.

IV. Buying Behaviour A. Buying behaviour refers to the decision processes and actions of people who purchase and use products.

1. Marketers analyze buying behaviour because a firm’s marketing strategy should be guided by an understanding of buyers.

2. For instance, men’s shopping habits are changing. As a result, retailers such as Saks and Barney’s have begun expanding the men’s areas in their stores.

B. Psychological Variables of Buying Behaviour 1. Perception is the process by which a person selects, organizes, and interprets information received from their senses.

2. Motivation is an inner drive that directs a person’s behaviour toward achieving a goal.

3. Learning brings about changes in a person’s behaviour based on information and experience.

4. Attitude is knowledge and positive or negative feelings about something.

5. Personality is the organization of an individual’s distinguishing character traits, attitudes, or habits.

C. Social Variables of Buying Behaviour 1. Social factors include social roles, which are a set of expectations for individuals based on some position they occupy.

2. Other social factors include roles, reference groups, social classes, and culture. a. Reference groups are groups that individuals identify with and whose values or attitudes they adopt. b. Social classes are determined by ranking people into higher or lower positions of respect. c. Culture is the integrated, accepted pattern of human behaviour, including 01-292 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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thought, speech, beliefs, actions, and artifacts. i. Culture determines what people wear and eat and where they live and travel. Many Hispanic Texans and New Mexicans, for example, buy masa trigo, the dough used to prepare flour tortillas, which are basic to Southwestern and Mexican cuisine.

D. Understanding Buying Behaviour 1. Although marketers try to understand buying behaviour, it is difficult to explain exactly why a buyer purchases a particular product.

2. Tools and techniques for analyzing are not exact.

3. Trying to understand consumer wants and needs is the best way to satisfy them.

Summarize the environmental forces that influence marketing decisions.  The Marketing Environment V. The Marketing Environment (Figure 11.4) A. A number of external forces directly or indirectly influence the development of marketing strategies.

1. Political, legal, and regulatory forces—laws and regulators’ interpretation of laws; law enforcement and regulatory activities; regulatory bodies, legislators and legislation; and political actions of interest groups.

2. Social forces—the public’s opinions and attitudes toward issues such as living standards, ethics, the environment, lifestyles, and quality of life.

3. Competitive and economic forces—competitive relationships, unemployment, purchasing power, and general economic conditions.

4. Technological forces—computers and advances in communications and transportation that improve distribution, promotion, and new product development.

B. Marketing environment forces can change quickly and radically, and changes in one may cause changes in others.

C. Marketing requires creativity and consumer focus because environmental forces can change quickly and dramatically.

D. Although the forces in the marketing environment are sometimes called uncontrollables, to some degree, a marketing manager can influence some environmental variables.

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Cheeckbone Beauty, a Successful Canadian Indigenous Company With Global Aspirations Harper started CheeckBone Inc. with only $500 in cash and a plan to weave the names of inspirational Indigenous women into her products. She also established social goals, including being a role model for Indigenous girls, giving 10% of her profits to FNCFS (First Nations Child and Family Caring Society of Canada), and using her eventual success to engage others in conversations about residential schools.

Harper says the future for Cheekbone is limitless, and wants her company to grow into global brand.

She has taken the firm in that direction by signing a retail partnership with Sephora, one of the global leaders in the beauty industry. Cheekbone also continues to invest heavily in new sustainable product development, and Harper hopes to expand her product line further.

1. What do you think are the advantages and disadvantages of Jenn Harper's business?

Advantages: Uses bootstrapping to enter the market; avoids capital-intensive practice of manufacturing and uses Canadian co-packers; sells digitally direct to consumers; uses low-cost social media marketing; focuses on research and development and creating brands that resonate with consumers.

Disadvantages: Cosmetics world is highly competitive; limited target market; and lack of funding for global expansion.

2. Harper is clearly hoping to become a global brand. What do you see as some of the challenges to her goal?

Challenges may include the need for additional capital and giving up some control to new investors/partners; facing more competition; expanding the market to non-indigenous customers.

3. Do you think Harper should expand to more traditional marketing? Why or why not?

The low-cost social media marketing has been successful. Traditional marketing may be necessary as the company develops into a global brand.

4. Imagine you are Jenn Harper's hired consultant. What recommendations would you make to her based on your work in the course to date?

Answers will vary.

5. Given the discussions in the Chapter, do you think Harper would qualify as a social entrepreneur? Why or why not?

Harper’s social goals include being a role model for Indigenous girls, giving 10% of her profits to FNCFS (First Nations Child and Family Caring Society of Canada), and using her eventual success to engage others in conversations about residential schools. She is also creating new environmentally sustainable products.

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Technology and the Economy: Virtual Reality Conceals the World, Augmented Reality Improves It 1. How are AR makers trying to overcome obstacles to embrace the marketing concept?

They recognize that to satisfy customer needs, they will need to develop headsets and devices that customers will want to wear. They will have to address the bulkiness, GPS accuracy, and privacy concerns.

2. What type of variables do you think AR marketers are most likely to use to segment the market?

Answers will vary but should include Demographic, Geographic, Psychographic, and Behaviouristic bases.

3. If you were a marketer of new AR headsets, what type of market segmentation approach would you adopt to reach consumer segments? Explain your reasoning.

Answers will vary, but students must be able to defend their answers.

Responding to Business Challenges: Leonard Asper Is Targeting Men in His Return to Media A decade ago, Leonard Asper was the CEO of CanWest Global Communications, a media giant that controlled such assets as television stations Global Television, Showcase, Slice, and HGTV Canada, as well as other valuable media assets, such as the National Post. CanWest was relying on an aggressive acquisition strategy, and when the financial crisis hit, advertising revenue dried up and CanWest’s balance sheet, already strapped with a heavy debt load, became unsustainable and the company filed for creditor protection. As a result, Asper stepped down as CEO. After leaving CanWest, Asper was unsure what direction he would go in professionally, but eventually decided to return to what he knew best—media—and bought a controlling interest in Anthem Media Group Inc., which at the time owned the Fight Network.** Asper was now intent on creating a new media empire, one with a lot more focus on a particular audience. At the time, advertisers were telling Asper, and whoever would listen, that reaching men between the ages of 18 and 65—both on television and online—was increasingly difficult as there were very few stations or shows that targeted this important group.  Asper’s approach for Anthem would be to fill this niche, and create and acquire media aimed primarily at male audiences.

1. What are the pros and cons of creating an entire media group aimed specifically at men? Will Aspers’ company succeed? Why or why not?

Answers may vary. Students should note for pros that it allows a company to specialize and offer specific content. Additionally, reaching men is difficult as there is little content aimed at the market. The cons include not including women which make up roughly 50% of the population and that men may be difficult to target as a group for a variety of reasons.

2. Asper appears to be creating a media group with a very traditional if not stereotypical view of male audiences with a focus on combat sports, hunting, fishing, race cars and fantasy sports. Do you think enough males are still interested in these pursuits to support independent 24 hour channels? Why or why not?

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Answers will vary, but students must be able to defend their answers.

3. Women are also playing fantasy sports and watching and participating in extreme sports, auto racing, combat sports and hunting and fishing. Based on this information should Asper consider changing his message to advertisers that his media company is targeted primarily at men? Why or why not? What would be the advantages and disadvantages of changing his message to advertisers?

Answers may vary. Students may note that the majority of viewers will still likely be men and women may not make up a large enough percentage of the population to justify a change. The advantages of changing the message may include a broadening of the market but a disadvantage maybe that advertisers who are looking specifically for males may not invest in advertising with a change in direction.

4. Assume that you are a corporate marketing expert, and Asper has asked you to change his message to advertisers to make it more inclusive. Develop a new message, which Asper can use, to convince businesses to advertise on his speciality channels.

Answers may vary.

5. Some critics point out that Asper’s focus on males is almost borderline unethical as it treats both man and women in a very stereotypical fashion. Do you think Asper’s approach is ethical or unethical? Why? Answers will vary, but students must be able to defend their answers.

6. Many media companies, especially those with a television and radio focus have failed in recent years due the high costs of creating content and the increased time people are spending online.

Do you think Asper’s company will be successful? Why or why not?

Answers will vary, but students must be able to defend their answers.

Responding to Business Challenges: RBC’s Gen Z Marketing Strategy RBC, Canada’s largest bank, obviously has many different target markets, which results in the bank managing different marketing mixes. One key target market for the bank is university students and recent graduates. This group is particularly important as they are just starting to form relationships with companies and the bank realizes that if it captures a young customer’s business now it may be able to retain the customer for a lifetime. To achieve this result, RBC tries to differentiate itself from the other banks by creating a superior student-focused marketing mix.

1. What markets is RBC targeting with social media?

RBC is targeting young people especially university students and recent graduates.

2. Are there other things RBC could be doing with its marketing mix to appeal to the youth market?

Answers will vary, but students may mention sponsoring youth events, promoting charities and so forth.

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3. Do you think RBC's investment in the Olympics and the Torch Relay was a good idea? Will it improve their market share?

Answers will vary, but students may mention that the torch relay stopped in cities and towns and featured youth-focused entertainment 4. Will being a leader in social media translate into more young clients for the bank?

Answers will vary, but students may mention that it will provide the bank and opportunity to build a relationship with consumers that could last a lifetime.

Business Disruption: Even Wedding Shopping Is Moving Online Originally, retailers thought items such as books and computers were products deemed perfect for online sales as they were mostly straightforward purchases involving little emotion.

Traditional retailers noted that while non-emotional items could be sold online, specialty goods such as wedding gowns and engagement rings had too much emotional involvement to be sold over the Internet. Traditionalists have been proven wrong. Women are flocking to online discount wedding dress and jewellery.

1. Are you surprised that people will purchase wedding dresses and engagement rings from discount or online companies? Would you do this? Why or why not?

Answers will vary. Students may discuss that people are buying everything online so why not wedding rings and supplies. Other students may note that highly emotional purchases might be tougher to make online.

2. Wedding dresses and engagement rings were thought to be emotional purchases. Is this still true as discount, department and online stores have become so successful in selling these products?

Answers will vary, some students may say you can still have an emotional experience buying a product online. Others may disagree.

3. What are some of the reasons that David's Bridal and BlueNile has been so successful?

Answers will vary, students should state they offer products at a low cost, they are efficient operators who keep their own costs down and they have been building a strong customer image.

4. Online retailers such as BlueNile are often blamed for putting small local stores out of business.

Do you think this could be true? Why or why not?

Answers will vary, while some students may say yes and reference the low cost of BlueNile diamonds others may disagree and reference larger bricks and mortar jewelry stores or other online sites such as Amazon.

5. Visit BlueNile site and try out some of the custom apps. After visiting the site and browsing its merchandise do you feel you are more or less likely to purchase a ring online?

Answers will vary.

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Business Disruption: Will Crowdfunding Replace Market Research?

Traditionally, when an entrepreneur where asked if a market exists they would respond that they have market research or often would be in some stage of the process. To many in the business world, this would be an acceptable way to determine market potential for a new product. But with the advent of the Internet, social media, and crowdfunding, this may no longer be the case. Many in the business community are urging entrepreneurs and businesses to bring their product to market using crowdfunding.

1. How can traditional market research offer entrepreneurs an advantage over just opting to use crowdfunding to find out if a market exists?

Student answers will vary. Students will likely mention market research is systematic, ensures a proper response rate and so forth. Whereas crowdfunding may depend more on the campaign behind it rather than the product or service.

2. Do you think companies should skip traditional market research and use crowdfunding to determine if a market exists for a product? Why or why not?

Student answers will vary. Students should incorporate some of Answer #1 in their response and add in that the value of crowdfunding is instant feedback supported by money.

3. What are some of the potential advantages and disadvantages of pre-selling a product that is not fully developed on a crowdfunding site?

Advantages: Company can use money to fully develop the product, company can attract investors knowing a market exists, crowdfunding allows for feedback from purchasers and potential purchasers alike.

Disadvantages: Company may not be able to produce the product in a timely or cost-efficient fashion, the result could significantly damage the entrepreneur and business, due to an ineffective campaign an entrepreneur may draw incorrect conclusions about the viability of the product.

4.

Do you think people will purchase individual musical instruments for their plants to play at $89.99 each? Why or why not?

Student answers will vary.

5. Develop a marketing strategy for Limestone, including a brief description of the product, price, place and promotion.

Student answers will vary.

6. Would you invest in the Limestone Technologies Plant Choir? Why or why not?

Student answers will vary.

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What are some of the job opportunities in marketing and the salaries associated with the positions?

Marketing research is a vital aspect in marketing decision making and presents many job opportunities. A market analyst may make between $36,000 and $76,000, while a market research director earns a median salary of more than $107,000.

Other areas include direct marketing: buyers, catalog managers, research/mail-list managers, or order fulfillment managers. Most positions in direct marketing involve planning and market analysis. Emarketing also offers many career opportunities, including customer relationship management (CRM).

A CRM manager earns a median salary of approximately $67,000, and experienced individuals may earn as much as $116,000.

END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Customer-Driven Marketing Focusing on your community and posing the questions asked at the end of this chapter in the “Build Your Own Business Plan” section (i.e., Who will be the target market you will specifically try to reach?”), have the students respond to the questions using a new Thai restaurant that you (hypothetically) are considering opening in your community. This can be an excellent way to have a lively discussion on what the “ability and willingness of the consumers to purchase” really means.

See for Yourself Case: Dollar General Cashes in on Niche Business Strategy Dollar General found its niche focusing on selling small-ticket items to a target market of low-income consumers on tight budgets. Dollar General spends $250,000 on a new store making good use of shelving space, fitting a variety of different products within a space one tenth the size of a Walmart store. The store avoids selling items in bulk like many competitors in the industry since its customers shop paycheck-to-paycheck.

Dollar General would add around 1,000 new stores as part of its $22 billion proposed expansion plan.

The plan is to focus on small towns consisting of low-income households and individuals that rely on government assistance. This fits the company’s strategy of catering to “Anytown, USA.” 1. Describe how Dollar General has found success in catering to a unique market niche ignored by many of its rivals?

Most retailers’ stores are too big and the cost to build too expensive. The Dollar General’s target market, with a high poverty rate and a medium household income under $35,000, has insufficient purchasing power to support stores like Walmart.

2. How does Dollar General keep costs low enough to maintain its low prices?

Its stores cost $250,000 focusing on an inventory stocking system that fits a variety of different products within a space one-tenth the size of a Walmart store.

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3. How do stores like Dollar General differ from other stores in a fluctuating economy?

General Dollar has recognized the large income gap in the United States leaves a significant market of locations untouched by rival stores. A fluctuating economy has less impact on Dollar General because these locations are not looking to thrive economically but primarily to survive in a growing economy.

Team Exercise Students will form groups and be assigned the responsibility of finding examples of companies that excel in one dimension of the marketing mix (price, product, promotion, and distribution). They will provide several company and product examples and defend why this would be an exemplary case.

They will then present their research to the class.

SUPPLEMENTAL TEACHING RESOURCES Check Your Progress 1. What is marketing? How does it facilitate exchanges?

Marketing is a group of activities designed to expedite transactions by creating, distributing, promoting, and pricing goods, services, and ideas. Businesses exchange their goods, services, or ideas for money or credit supplied by buyers in a voluntary exchange relationship. Marketing focuses on the many activities—planning, pricing, promoting, and distributing products—that foster exchanges.

2. Name the functions of marketing. How does an organization use marketing activities to achieve its objectives?

The functions of marketing include buying, selling, transporting, storing, grading, financing, marketing research, and risk-taking. Each of these functions helps accomplish marketing objectives.

3. What is the marketing concept? Why is it so important?

The marketing concept states that an organization should try to satisfy customers’ needs through coordinated activities that also allow it to achieve its own goals. Adoption of the marketing concept is important because it provides the organization with a philosophy of meeting customers’ needs without sacrificing the long-run needs of the organization.

4. What is a marketing strategy?

A marketing strategy is the plan of action for developing, pricing, distributing, and promoting products that meet the needs of specific customers.

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5. What is market segmentation? Describe three target market strategies.

Market segmentation is the process of dividing the total market into groups of people with relatively similar product needs. The three strategies are the total-market approach, concentration approach, and multi-segment approach.

6. List the variables in the marketing mix. How is each used in a marketing strategy?

The marketing mix involves four variables: product, promotion, price, and distribution. The product is a complex mix of tangible and intangible attributes that provide satisfaction and benefits. Price represents the value placed on an object in an exchange; it quantifies value and is the basis of most market exchanges. Distribution makes products available in the quantities desired to as many customers as possible while holding total inventory, transportation, and storage costs as low as possible. Promotion is a persuasive form of communication that attempts to facilitate a marketing exchange by influencing individuals, groups, or organizations to accept an organization’s products.

7. Why are marketing research and information systems important to an organization’s planning and development of strategy?

Marketing research is a systematic and objective effort to obtain information about potential customers in order to guide marketing decisions. A marketing information system establishes a framework for accessing information about customers from sources both inside and outside of the organization. Marketing research and information systems are important to an organization’s planning and developing strategy. They make possible a systematic approach to decision making in marketing.

8. Briefly describe the factors that influence buying behaviour. How does understanding buying behaviour help marketers?

Psychological and social variables play a part in buyer behaviour. The psychological variables include these factors: (1) perception—the process by which a person selects, organizes, and interprets information received from their senses in order to understand it; (2) motivation—an internal force that directs an individual’s behaviour to achieve a goal; (3) learning—a change in a person’s behaviour caused by information and experience; (4) attitude—knowledge and positive or negative feelings about something; and (5) personality—the organization of an individual’s distinguishing character traits, attitudes, and habits.

Social variables of buyer behaviour include the following four factors: (1) social roles—the set of expectations for individuals based on some position they occupy; (2) reference groups—groups with whom individuals identify and whose values or attitudes the individuals adopt; (3) social classes—determined by ranking people into higher or lower positions of respect; and (4) culture—the integrated, accepted pattern of human behaviour that includes thought, speech, beliefs, actions, and artifacts.

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Marketers analyze buying behaviour because a firm’s marketing strategy should be guided by an understanding of what, where, when, and how consumers buy.

9. Discuss the impact of technological forces and political and legal forces on the market.

Technological, political, and legal forces form part of the marketing environment. This environment influences and structures the development of marketing strategy. These forces shape the marketing environment in which the firm operates. Although these forces in the marketing environment are sometimes called uncontrollables, marketing has an opportunity to influence environmental variables.

Get Involved 1. With some or all of your classmates, watch several hours of television, paying close attention to the commercials. Pick three commercials for products with which you are somewhat familiar.

Based on the commercials, determine who the target market is. Can you surmise the marketing strategy for each of the three?

Students’ answers will vary depending upon the commercials they choose.

2. Discuss the decision process and influences involved in purchasing a personal computer.

Buying behaviour refers to the decision processes and actions of people who purchase and use products. When purchasing a personal computer, both psychological and social variables are important. Psychological variables include perception, motivation, learning, attitude, and personality. For example, suppose a person is looking for a high-quality computer, they might perceive a lower priced computer to be of lower quality. Perhaps a buyer might be motivated to purchase a tablet computer due to ease of use and storage. The person might have learned from past experiences that a specific brand of computer, such as a Dell, is a high-quality brand. The person’s attitude toward Dell products might be positive (possibly as a result of past experiences, advice from friends, or even commercials), which could prompt them to purchase a Dell. Perhaps the person feels like the shape or color of a particular computer matches their personality best.

In terms of social factors, a person might be influenced by reference groups, social classes, and culture. A person might use their reference group, such as friends or family, to seek recommendations on which computer to buy. A person might also choose to buy a computer that fits with their social class; for instance, a person in the upper class might choose to purchase a more expensive brand. Culture might not be as important to this decision process.

However, because Apple products are so popular in American culture, a person might choose to purchase a Mac or an iPad. The marketing mix is also important in the decision-making process. A person might have specific criteria that the computer must have in order to purchase it. On the other hand, if the person cannot find the computer in the right color at the store, they might choose to purchase another color or type of computer. Those looking for less expensive computers will look for 01-302 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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those with a lower price. Finally, the person might also be influenced by promotional materials such as TV commercials or magazine advertisements.

Build Your Skills: The Marketing Mix You’ve learned the four variables—product, promotion, price, and distribution—that the marketer can select to achieve specific goals within a dynamic marketing environment. This exercise will give you an opportunity to analyze the marketing strategies of some well-known companies to determine which of the variables received the most emphasis to help the company achieve its goals.

Task In groups of three to five students, discuss the examples below and decide which variable received the most emphasis.

A. B. C. D.

Product Distribution Promotion Price 1. Starbucks Coffee began selling bagged premium specialty coffee through an agreement with Kraft Foods to gain access to more than 30,000 supermarkets.

2. Zoom is a videoconferencing tool that allows people to host and join meetings.

3. Oculus released the Oculus Quest 2 all-in-one virtual reality headset for playing video games.

4. After decades on the market, WD-40 is in about 80 percent of households—more than any other branded product. Although WD-40 is promoted as a product that can stop squeaks, protect metal, loosen rusted parts, and free sticky mechanisms, the WD-40 Company has received letters from customers who have sprayed the product on bait to attract fish, on pets to cure mange, and even on people to cure arthritis. Despite more than 200 proposals to expand the WD-40 product line and ideas to change the packaging and labeling, the company stands firmly behind its one highly successful and respected original product.

5. WestJet makes flying fun. Flight attendants try to entertain passengers, and the airline has an impeccable customer service record. Employees play a key role and take classes that emphasize that having fun translates into great customer service.

6. Hewlett-Packard offered a $100 rebate on a $799 HP LaserJet printer when purchased with an HP LaserJet toner cartridge. To receive the rebate, the buyer had to submit their receipt online to certify the purchase. A Facebook ad with a coupon was used stating, “We’re taking $100 off the top.”

The correct answer is based on the emphasis of the major activity described in each example.

Answer Key: 1. Distribution (B) 2. Price (D) 3. Product (A) 01-303 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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4. Product (A) 5. Product (A) 6. Promotion (C) Solve the Dilemma: Will It Go? Ventura Motors makes midsized and luxury automobiles. Best-selling models include its basic fourdoor sedans (priced from $20,000 to $25,000) and two-door and four-door luxury automobiles (priced from $40,000 to $55,000). The success of two-seat sports cars like the Mazda RX-8 started the company evaluating the market for a two-seat sports car priced midway between the moderate and luxury markets. Research found that there was indeed significant demand and that Ventura needed to act quickly to take advantage of this market opportunity.

Ventura took the platform of the car from a popular model in its moderate line, borrowing the internal design from its luxury line. The car was designed, engineered, and produced in just over two years, but the coordination needed to bring the design together resulted in higher-than-anticipated costs. The price for this two-seat car, the Olympus, was set at $32,000. Dealers were anxious to take delivery on the car, and salespeople were well trained on techniques to sell this new model.

However, initial sales have been slow, and company executives are surprised and concerned. The Olympus was introduced relatively quickly, made available at all Ventura dealers, priced midway between luxury and moderate models, and advertised heavily since its introduction.

1. What do you think were the main concerns with the Olympus two-door sports coupe? Is there a market for a two-seat, $32,000 sports car when the RX-8 sells for significantly less?

The main concern with the Olympus two-door sports coupe is that it may be overpriced. The market research (assuming it is correct) revealed that “significant demand” exists for a midrange, two-seat sports coupe—the market currently being served by Mazda. Although Ventura delivered a car designed to compete in the two-seat sports car market, it priced the car based on additional expenses resulting from rapid development and introduction (2 years from concept to production). However, there may be a market for the Olympus if Ventura can differentiate the car in a way that is significant to the consumer. If Ventura does not successfully differentiate its Olympus from other vehicles, it is unlikely that the market will be kind to Ventura.

2. What is the role of the marketing mix in the Olympus introduction?

The marketing mix is going to be very important to the Olympus introduction. Distribution (place) is already established and will be difficult to change. While the Olympus is already in production, Ventura can manipulate price and promotion to position (or perhaps reposition) the car and control market penetration.

3. What are some of the marketing strategies auto manufacturers use to stimulate sales of certain makes of automobiles?

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Students’ answers will vary, but should include discussion of things such as instant rebates, low financing, free add-ons (air conditioning, stereo, etc.), dealer incentives, heavy advertising, and so forth.

CONNECT ACTIVITIES McDonald’s Market Challenge Learning Objective 11-5: Examine the development of a marketing strategy, including market segmentation and marketing mix.

Activity Summary: Students will read a short case discussing decreasing sales for the global fast food chain, McDonald’s.

Two potential causes of the decrease in sales are discussed.

Companies must understand and respond to changing markets in order to remain competitive. This includes effectively engaging in the functions of marketing, identifying the market segment to which the company wants to appeal, and creating a marketing mix that appeals to that market.

How to Use Activity: Have the students focus on the environmental factors that have impacted McDonald’s Business and McDonald’s response.

Class Discussion: How are Millennials different from the other demographic groups? What have McDonald’s competitors done to be more successful in the changing fast food market? What is McDonald’s doing to obtain marketing research information about its customers?

LEGO: Inspire the Builders of Tomorrow…Girls Included!

Learning Objective 11-5: Examine the development of a marketing strategy, including market segmentation and marketing mix.

Activity Summary: This activity is important because in business, it is important to understand Marketing. Marketing includes a group of activities designed to expedite transactions by creating, distributing, pricing, and promoting goods, services, and ideas.

The goal of this exercise is to apply marketing concepts to LEGO’s expanded product line aimed at making their products attractive to young girls.

How to Use Activity: Have the students focus on the different marketing strategies that LEGO could use. Have the students discuss the concept of “target” marketing and the issues a company faces when using this approach?

Class Discussion: What marketing segments did LEGO use to increase sales? What problems did the company encounter when it began focusing on LEGO products for girls? What environmental factors forced LEGO to change its strategy?

BONUS TEACHING RESOURCES Additional Discussion Questions 1. Is it difficult or easy to manage marketing efforts?

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Unfortunately, it is difficult to understand and predict what consumers want. Businesses have found that by using market research, a study of consumers’ needs and wants, that they can improve their ability to predict consumers’ ever-changing desires.

2. What is the Social Media era?

Social media is redefining marketing as it allows for building of online communities which encourages online participation and communication among members. Consumers can communicate in real time with companies, share information with their associates and friends and search for unbiased product opinions online. The results have been significant as FaceBook, Twitter, LinkedIn, YouTube, blogs, wikis, and podcasts have become both communication and business tools.

3. How common is social media monitoring and why do firms engage in the practice?

Social media monitoring is becoming increasingly commonplace and in 2013 42% of companies consider social media monitoring one of their top three priorities as they see this as essential to understanding their customers and identifying opportunities.

4. Define primary and secondary data.

Researchers will normally start their search for information from pre-existing sources known as secondary sources or secondary data. If there is not enough secondary information available then marketers will often turn to primary research, or the collection of new data that is specific to the problem at hand. Primary data as discussed above is new data or new information.

5. Define a marketing information system and discuss why it is important.

A marketing information system or MIS is a framework for accessing information about customers from sources both inside and outside the organization. Inside the organization, there is a continuous flow of information about prices, sales, and expenses. Outside the organization, data are readily available through private or public reports and census statistics, as well as from many other sources. Computer networking technology provides a framework for companies to connect to useful databases and customers with instantaneous information about product acceptance, sales performance, and buying behaviour. This information is important to planning and marketing strategy development.

Controversial Issue How Do You Feel about Telephone Solicitations?

Students in college dormitories may not be as vulnerable to telephone solicitations as families living in their own homes, but students probably have experienced telephone solicitations.

Telephone solicitations, including technological advances such as computerized telephone dialing, have increased. To determine how you react to telemarketing, listen to this list and see which of these 01-306 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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aspects you dislike. Number a sheet of paper from one to ten. Place a checkmark beside each number of the statement for which you have a dislike. If the activity mentioned does not bother you, leave a blank after the number.

1.

2.

3.

4.

5.

Calls come at the busiest time in a family’s life—mealtime.

Sales personnel are often crude and pushy and do not take “no” for an answer.

Sales personnel ask personal questions.

Sales personnel call you by your first name as if they have known you for years.

Some callers enlist your participation in a “very short survey,” and the survey turns out to last 20 minutes.

6. The so-called scientific survey by a national rating service turns out to be a local and amateurish survey for Joe’s Bar and Grill.

7. Some callers are very clearly reading a canned pitch.

8. The caller is a machine.

9. The salesperson definitely insults your intelligence with a stupid question like: “Which hand is the Statue of Liberty holding up?”

10. The salesperson wastes your time with chat about the weather as a way to lead into the sales message.

Take an informal poll to find approximately how many of the statements about telephone solicitations were disliked by students. Most likely, many of the students resent telephone solicitations. Because so many firms are using telemarketing, there must be profit in its use.

Discussion Questions: 1. Why do organizations use telemarketing? Or why do consumers buy the products or services promoted by telephone solicitations?

Many organizations use telemarketing because it is profitable (or else they wouldn’t employ something that annoys so many consumers). Telemarketing is a more inexpensive means for taking surveys, and telemarketers can use the telephone to reach people all across the country.

People may buy products promoted by telephone solicitation because they like the product, like the salesperson, or just have a hard time saying no.

2. Could organizations use some other form of promotion more successfully?

Possibly, but it depends on the type of product/service being advertised and the target market.

Different media may be successfully used for all kinds of different products. Other forms of promotion may be more expensive, however.

3. If telephone solicitation is to be used, how might that solicitation process be made more pleasant for the potential customer and made more effective for the firm using telemarketing?

Students’ answers will vary.

Term Paper or Project Topics 01-307 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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These topics may be assigned as individual or collaborative projects: 1.

2.

3.

4.

Honda’s Way of Selling Automobiles The Team Concept in Marketing Technology in Marketing Functions How Quality Improvement Has Changed Marketing

Guest Speaker Suggestions 1. A professor of marketing to speak about various facets of marketing.

2. A marketing executive from a local firm to speak about marketing as a career or what is involved in marketing.

3. A representative of a local nonprofit organization to speak about marketing efforts for that organization.

4. A professor to speak about distribution.

5. A professor to speak about promotion.

Teaching Suggestions 1. Review the objectives at the front of the chapter.

2. Use the “Lecture Outline and Notes” with the slides indicated in the margins.

3. Review “Check Your Progress” and “Additional Discussion Questions and Exercises” that are provided in this Instructor’s Manual.

Chapter 12: Dimensions of Marketing Strategy SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Ali Asaria Believes Traditional Retailers Can Still Thrive Entrepreneurship in Action: Indigenous Entrepreneur Patrice Mousseau Solves a Common Skin Problem Consider Ethics and Social Responsibility: Should Companies follow Lush's Lead and Leave Instagram, TikTok, Snapchat and Facebook behind?

Consider Ethics and Social Responsibility: TikTok Is Tracking You and Helping Companies Make Money – Is it Ethical?

Business Disruption: Retail and COVID-19, The worst of times and the best of times Consider Ethics and Social Responsibility: Is Facebook acting ethically by making billions from products which harm consumers and selling your personal information?

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So You Want to Be a Marketing Manager END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Dimensions of Marketing Strategy See for Yourself Case: Facebook and Instagram Get Social with E-Commerce Team Exercise SUPPLEMENTAL TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Planning a Digital Marketing and Social Networking Site Solve the Dilemma: Developing Successful Freeware CONNECT ACTIVITIES iSeeIt! Video Case: The Product Life Cycle NASCAR Turns to Social Media Developing New Products at Domino’s BONUS TEACHING RESOURCES Additional Discussion Questions Controversial Issue Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions SUMMARY The key to developing a marketing strategy is selecting a target market and maintaining a marketing mix that creates long-term relationships with customers. Getting just the right mix of product, price, promotion, and distribution is critical if a business is to satisfy its target customers and achieve its own objectives (implement the marketing concept). The focus of these marketing mix elements is a marketing strategy that builds customer relationships and satisfaction.

The internet and information technology have dramatically changed the environment for business.

Marketers’ new ability to convert all types of communications into digital media has created efficient, inexpensive ways of connecting businesses and consumers and has improved the flow and the usefulness of information. In this chapter, we’ll take a closer look at the four dimensions of the marketing mix—product, price, distribution, and promotion—used to develop the marketing strategy, and provide some key definitions related to digital marketing and social networking.

LEARNING OBJECTIVES LO 12-1

Describe the role of product in the marketing mix, including how products are

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developed, classified, and identified.

LO 12-2

Define price and discuss its importance in the marketing mix, including various pricing strategies a firm might employ.

LO 12-3

Identify factors affecting distribution decisions, such as marketing channels and intensity of market coverage.

LO 12-4

Specify the activities involved in promotion, as well as promotional strategies and promotional positioning.

LO 12-5

Define digital media and digital marketing, and recognize their increasing value in strategic planning.

LO 12-6

Understand the characteristics of digital media and how these methods are different from traditional marketing activities.

LO 12-7

Demonstrate the role of digital marketing and social networking in today’s business environment.

LO 12-8

Show how digital media affect the marketing mix.

LO 12-9

Define social networking and illustrate how businesses can use different types of social networking media.

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KEY TERMS AND DEFINITIONS advertising

A paid form of nonpersonal communication transmitted through a mass medium, such as television commercials or magazine advertisements.

advertising campaign

Designing a series of advertisements and placing them in various media to reach a particular target market.

branding

The process of naming and identifying products.

business products

Products that are used directly or indirectly in the operation or manufacturing processes of businesses.

commercialization

The full introduction of a complete marketing strategy and the launch of a product for commercial success.

consumer products

Products intended for household or family use.

discounts

Temporary price reductions are often employed to boost sales.

exclusive distribution

The awarding by a manufacturer to an intermediary of the sole right to sell a product in a defined geographic territory.

generic products

Products with no brand name that often come in plain, simple packages and carry only their generic name.

influence marketing

The use of influencers to sell a product or service or to build a brand.

integrated marketing communications

The process of coordinating the promotion mix elements and synchronizing promotion as a unified effort.

intensive distribution

A form of market coverage whereby a product is made available in as many outlets as possible.

labelling

The presentation of important information on the package.

manufacturer brands

Brands initiated and owned by the manufacturer to identify products from the point of production to the point of purchase.

marketing channel

A group of organizations that moves products from their producer to customers; also called a channel of distribution.

materials handling

The physical handling and movement of products in warehousing

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and transportation. mobile marketing

Using a mobile device to communicate marketing messages.

packaging

The external container that holds and describes the product.

penetration price

A low price designed to help a product enter the market and gain market share rapidly.

personal selling

Direct, two-way communication with buyers and potential buyers.

physical distribution

All the activities necessary to move products from producers to customers—inventory control, transportation, warehousing, and materials handling.

price skimming

Charging the highest possible price that buyers who want the product will pay.

private distributor brands

Brands, which may cost less than manufacturer brands that are owned and controlled by a wholesaler or retailer.

product line

A group of closely related products that are treated as a unit because of similar marketing strategy, production, or end-use considerations.

product mix

All the products offered by an organization.

promotional positioning

The use of promotion to create and maintain an image of a product in buyers’ minds.

psychological pricing

Encouraging purchases based on emotional rather than rational responses to the price.

publicity

Nonpersonal communication transmitted through the mass media but not paid for directly by the firm.

pull strategy

The use of promotion to create consumer demand for a product so that consumers exert pressure on marketing channel members to make it available.

push strategy

An attempt to motivate intermediaries to push the product down to their customers.

quality

The degree to which a good, service, or idea meets the demands and requirements of customers.

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retailers

Intermediaries that buy products from manufacturers (or other intermediaries) and sell them to consumers for home and household use rather than for resale or for use in producing other products.

sales promotion

Direct inducements offering added value or some other incentive for buyers to enter into an exchange.

selective distribution

A form of market coverage whereby only a small number of all available outlets are used to expose products.

test marketing

A trial minilaunch of a product in limited areas that represent the potential market.

trademark

A brand that is registered with the U.S. Patent and Trademark Office and is thus legally protected from use by any other firm.

transportation

The shipment of products to buyers.

warehousing

The design and operation of facilities to receive, store, and ship products.

wholesalers

Intermediaries who buy from producers or from other wholesalers and sell to retailers.

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CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, and KEY TERMS learners will need to take away from the course.

LO 12-1

Describe the role of product in the marketing mix, including how products are developed, classified, and identified.  Introduction  The Marketing Mix  Product Strategy o Developing New Products o Classifying Products o Product Line and Product Mix o Product Life Cycle o Identifying Products

Key Terms:  Test marketing  Commercialization  Consumer products  Business products  Product line  Product mix  Branding  Trademark  Manufacturer brands  Private distributor brands  Generic products  Packaging  Labelling  Quality

Lecture Outline and Notes: I. The Marketing Mix A. The key to developing a marketing strategy is maintaining the right marketing mix that satisfies the target market and creates long-term relationships with customers.

B. The marketing mix involves product, price, promotion, and distribution.

C. The marketing mix is the part of the marketing strategy that involves decisions regarding controllable variables.

D. Successful companies offer at least one dimension of value that surpasses all competitors in the marketplace in meeting customer expectations.

E. Successful companies must also maintain acceptable, and if possible, distinguishable differences in the other dimensions as well.

II. Product Strategy A. A product is a good, service, or idea containing tangible and intangible attributes that provide satisfaction and benefits.

1. Remember that thousands of products are introduced each year but very few succeed.

2. A firm can take considerable time to get a product ready for the market; it took more than 20 years for the first photocopier, for example.

3. Sometimes a product or idea is shelved, only to be returned to later.

B. Developing New Products 1. Before introducing new products, a business must follow a multistep process.

2. Idea Development a. New ideas can come from marketing research, engineers, and outside sources. b. New ideas can also come from customers, brainstorming, and intracompany incentives.

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i.

New ideas can even create a company. When Jeff Bezos came up with the idea to sell books over the internet in 1992, he had no idea it would evolve into a billion-dollar firm. After failing to convince his boss of the idea, Bezos left to start Amazon.com.

3. New Idea Screening a. In this phase, a marketing manager should look at the organization’s resources and objectives and assess the firm’s ability to produce and market the product. b. Important considerations are consumer desires; competition; technological changes; social trends; and political, economic, and environmental considerations. c. Most new product ideas are rejected during the screening stage because they seem inappropriate or impractical for the organization.

4. Business Analysis a. Business analysis is a basic assessment of a product’s compatibility in the marketplace and its potential profitability. b. The most important question relates to market demand—how the product will affect the firm’s sales, costs, and profits.

5. Product Development a. In this stage, the firm develops a prototype that should reveal the intangible attributes as perceived by the consumer. b. Product development is often expensive, and few product ideas make it to this stage.

6. Test Marketing a. Test marketing is a trial mini launch of a product in limited areas that represent the potential market. b. It allows a complete test of the marketing strategy in a natural environment, giving the organization the opportunity to discover weaknesses and eliminate them before the product is fully launched. c. Because test marketing requires significant resources and expertise, market research companies like ACNielsen can assist firms in test marketing their products.

7. Commercialization a. Commercialization is the full introduction of a complete marketing strategy and the launch of a product for commercial success. b. During this stage, the firm gears up for full-scale production, distribution, and promotion.

C. Classifying Products 1. How a product is used and why it is purchased determines how a product is classified.

2. Consumer products are purchased for household or family use; they are not intended for any purpose other than daily living. a. Convenience products are bought frequently, without a lengthy search, and often for immediate consumption. Consumers spend little time in planning where to buy the product and usually take any available brand. b. Shopping products are purchased after the consumer has compared competitive products. Price, features, quality, style, service, and image all influence buyers’ decisions. c. Specialty products are products that the consumer makes a special effort to 01-315 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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obtain. They are purchased less often and consumers are unwilling to accept a substitute.

3. Business products are used directly or indirectly in the operation or manufacturing processes of businesses. a. Raw materials are natural products taken from the earth, oceans, and recycled solid waste. b. Major equipment covers large, expensive items used in production. c. Accessory equipment is used for production, office, or management purposes, which usually does not become part of the final product. d. Component parts are finished items, ready to be assembled into the final product. e. Processed materials are things that are used directly in production or management operations but are not readily identifiable as component parts. f. Supplies are materials that make production, management, and other operations possible. g. Industrial services include financial, legal, marketing research, security, janitorial, and exterminating services.

D. Product Line and Product Mix (Figure 12.1) 1. A product line is a group of closely related products that are treated as a unit because of similar marketing strategies and production or end-use considerations.

2. A product mix is all the products offered by the organization.

E. Product Life Cycle (Figure 12.2) 1. Like people, products are born, grow, mature, and eventually die.

2. Some products have very long lives, and others are comparatively short lived.

3. In the introductory stage, consumer awareness and acceptance are limited; sales start at zero, and profits are negative (Smartwatches).

4. During the growth stage, sales increase at a rapid rate, and profits peak and then start to decline (Drones). a. Competing firms become aware that the product has achieved some success, which may result in their entry into the market. b. The firm tries to strengthen its position in the market.

5. In the maturity stage, industry sales continue to increase, peak, and then decline.

Severe competition and heavy marketing expenses characterize this stage (CocaCola, PepsiCo).

6. During the decline stage, sales fall rapidly and profits decline (landline phones, VCRs). a. Certain models may be eliminated, and marketing expenditures may be cut. b. Plans must be made to phase out the declining product and introduce the new ones to take its place.

7. It should be noted that products do not always go one way in the life cycle; some products can rebound back into the growth stage.

F. Identifying Products 1. Branding, packaging, and labelling can be used to identify or distinguish one product from other products.

2. Branding (Table 12.1 and Table 12.2) a. Branding is the process of naming and identifying products. i. A brand is a name, term, symbol, design, or combination that identifies and distinguishes a product.

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ii. The brand name is the part of the brand that can be spoken and consists of letters, words, or numbers. iii. A brand mark is the part of the brand that is a distinctive design. iv. A trademark is a brand that is registered with the U.S. Patent and Trademark Office and is legally protected from use by any other firm.

Protecting a brand name is important in maintaining a brand identity.

(Xerox and Kleenex are now synonymous with the product.) b. There are two main categories of brands. i. Manufacturer brands are brands initiated and owned by the manufacturer to identify products from the point of production to the point of purchase. ii. Private distributor brands are middleman or store brands owned and controlled by a wholesaler or retailer. iii. In addition, there are generic products, which have no brand name at all. c. Companies use two basic approaches to branding multiple products. i. Each product within a company’s product mix is given its own brand name (Unilever sells many well-known consumer products—Dove, Axe, Knorr, Hellman’s, Dermalogica—each individually branded). ii. In family branding, each of a firm’s products is branded with the same name or at least part of the name (Gillette, Sara Lee, IBM). d. Companies may react differently to domestic versus foreign brands.

3. Packaging a. Packaging is the external container that holds and describes the product. b. The packaging influences consumers’ attitudes and their buying decisions. c. A package can perform several functions, including protection, economy, convenience, and promotion.

4. Labelling a. Labelling is the presentation of important information on the package. b. Content, nutritional information, safety precautions, and instructions are the kinds of information contained on labels. i. For instance, as concern for the environment grows, many companies are developing products with more eco-friendly ingredients, from recycled paper to biodegradable chemicals. Labels transfer that information to the consumer.

5. Product Quality a. Quality reflects the degree to which a good, service, or idea meets the demands and requirements of customers. b. The level of quality is the amount of quality that a product possesses, and the consistency of quality depends on the product maintaining the same level of quality over time. c. Quality of service is difficult to gauge because it depends on customers’ perceptions of how well the service meets or exceeds their expectations. d. Quality is judged by consumers, not service providers Define price and discuss its importance in the marketing mix, Key Terms: including various pricing strategies a firm might employ.  Price skimming  Pricing Strategy  Penetration price o Pricing Objectives  Psychological pricing o Specific Pricing Strategies  Shrinkflation

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III. Pricing Strategy A. Price is the value placed on the object involved in an exchange between a buyer and seller.

1. Buyers’ interest in price stems from their expectations about the usefulness of a product or the satisfaction they may derive from it.

2. Price is a key element in the marketing mix because it relates directly to the generation of revenue and profits.

3. For most products, the quantity demanded goes up as the price goes down, and vice versa.

4. Consumers vary in their response to price: some focus solely on the lowest price, while others consider quality or the prestige associated with a product and its price.

5. The product’s perceived value in the marketplace added to the production costs help determine price.

6. Price is probably the most flexible variable in the marketing mix.

B. Pricing Objectives 1. Four common pricing objectives are: a. Maximizing profits and sales b. Boosting market share c. Maintaining the status quo d. Survival C. Specific Pricing Strategies 1. Pricing strategies provide guidelines for achieving the company’s pricing objectives and overall marketing strategy.

2. Pricing New Products a. Setting the correct price is critical: the right price leads to profitability, but the wrong price may kill the product. b. There are two basic approaches to setting the base price for a new product. i. Price skimming is charging the highest possible price that buyers who want the product will pay. ii. Penetration pricing is a low price designed to let a product enter the market and gain market share rapidly. iii. Penetration pricing is less flexible; it is more difficult to raise a penetration price than to lower a skimming price. iv. When Netflix entered the market, it offered its rentals at prices much lower than the average rental stores and did not charge late fees.

3. Psychological Pricing a. Psychological pricing is designed to encourage purchases based on emotional rather than rational responses to the price. b. Even/odd pricing ($9.99 rather than $10) is an example of psychological pricing. c. Symbolic/prestige pricing creates an image of high quality to buyers. d. Shrinkflation is when companies reduce their product size rather than raise prices.

4. Price Discounting a. Price Discounting—temporary price reductions, or discounts, are often employed to boost sales.

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LO 12-3

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b. Quantity discounts reflect the economies of purchasing in large volumes. c. Seasonal discounts are used to stimulate purchases of products out of season. d. Promotional discounts attempt to improve sales by advertising price reductions on selected products to increase customer interest.

Identify factors affecting distribution decisions, such as marketing Key Terms: channels and intensity of market coverage.  Marketing channel  Distribution Strategy  Retailers o Marketing Channels  ,Showrooming o Intensity of Marketing Coverage  Omnichannel retail o Physical Distribution  Wholesalers o Importance of Distribution in a Marketing Strategy  Intensive distribution  Selective distribution  Exclusive distribution  Physical distribution  Transportation  Warehousing  Materials handling IV. Distribution Strategy A. Marketing Channels 1. A marketing channel, or channel of distribution, is a group of marketing organizations that directs the flow of products from producers to consumers.

2. Middlemen, or intermediaries, are organizations that bridge the gap between the producer of the product and the ultimate user of the product. a. Retailers buy products to sell to consumers rather than for resale or use in producing other products. i. By bringing together an assortment of products from competing producers, retailers create place utility (a convenient shopping location), time utility (convenient operating hours), and ownership utility (risk of ownership). ii. Today, there are too many stores competing for too few customers so competition is intense. (Table 12.3 profiles general merchandise retailers.) iii. Showrooming is where consumers visit a traditional merchant location to see and touch a product and then purchase it for less money online. iv. Omnichannel retail is the integration of all retail channels including inperson, online, and is often supported by social media. b. Wholesalers generally buy from producers or other wholesalers and sell to retailers. i. Wholesalers are extremely important because of the functions they perform (Table 12.4). ii. Although it is true that wholesalers can be eliminated, their functions must be passed on to some other intermediary or even the consumer. iii. Wholesalers help consumers and retailers by buying in large quantities, then selling to retailers in smaller quantities. By stocking an assortment of goods, wholesalers match products to demand.

1. Supply Chain Management a. Creates alliances between channel members to improve distribution channel relationships among manufacturers and intermediaries.

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b. Includes all organizations involved in moving products from the producer to the ultimate consumer. c. Goes beyond traditional members to include all organizations involved in moving products. d. Focus shifts from selling to the next level to one of selling products through the channel.

2. Channels for Consumer Products a. Channels can vary from being very simple (straight from the producer to consumer) to highly complex (producer, agents, wholesalers, retailers, then consumers). (Figure 12.3). b. Services are usually distributed through the most direct marketing channel because they are produced and consumed simultaneously.

3. Channels for Business Products a. Unlike consumer goods, over half of business products are sold through direct marketing channels. b. Business customers buying expensive or complex products like to communicate directly with producers to gain the technical assistance and personal assurances only the producer can offer. c. Other business products may be distributed through channels employing wholesaling intermediaries such as industrial distributors and/or manufacturer’s.

4. Intensity of Market Coverage a. Intensity of market coverage relates to the number and variety of product outlets; it depends on the behavior of customers and the nature of the target market and competition. b. Intensive distribution makes a product available in as many outlets as possible. This type of distribution is usually used for convenience goods. c. Selective distribution uses only a small portion of all available outlets. It is used most often for products for which consumers compare price, quality, and style. d. Exclusive distribution exists when a manufacturer gives a middleman the sole right to sell a product in a defined geographic territory. This method is used when products are purchased and consumed over a long period of time and requires service or information to develop a satisfactory sales relationship.

B. Physical Distribution 1. Physical distribution includes all the activities necessary to move products from producers to customers.

2. Transportation a. Transportation is the shipment of products to buyers, is an essential part of distribution. b. Factors affecting the selection of a mode of transportation include cost, capability, reliability, and availability.

3. Warehousing a. Warehousing involves designing and operating facilities to receive, store, and ship products. b. Companies can use their own private warehouses or lease space in public warehouses.

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c. Warehousing is important because it makes products available for shipment to match demand at different geographic locations.

4. Materials Handling a. Materials handling is the physical handling and movement of products in warehouse operations and transportation.

C. Importance of Distribution in a Marketing Strategy 1. Distribution is the least flexible element of the marketing mix.

2. Resource commitments and contractual obligations are difficult to change quickly.

3. Expanding into new markets could mean a complete change in distribution.

4. If a company does not manage its channel efficiently, a competitor may evolve to create a more effective distribution system.

Specify the activities involved in promotion, as well as promotional Key Terms: strategies and promotional positioning.  Integrated  Promotion Strategy marketing o The Promotion Mix communications o Promotion Strategies: To Push or to Pull  Advertising o Objectives of Promotion  Advertising o Promotional Positioning campaign  Mobile marketing  Influence marketing  Personal selling  Publicity  Sales promotion  Push strategy  Pull strategy  Promotional positioning V. Promotion Strategy A. The role of promotion is to communicate with individuals, groups, and organizations to facilitate an exchange directly or indirectly.

1. It encourages marketing exchanges by attempting to persuade individuals, groups, and organizations to accept goods, services, and ideas.

2. It is used not only to sell products but also to influence opinions and attitudes toward an organization, person, or cause.

B. The Promotion Mix 1. Advertising, personal selling, publicity, and sales promotion are called the promotion mix because a good promotion program results from carefully selecting and blending these elements.

2. The process of coordinating the promotion mix elements and synchronizing promotion as a unified effort is called integrated marketing communications.

3. Advertising a. Advertising is a paid form of nonpersonal communication transmitted through a mass medium. b. An advertising campaign involves designing a series of advertisements and placing them in various media to reach a particular target audience. i. A product’s features, uses, and benefits affect the content of the campaign message and individual ads.

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ii. Characteristics of the people in the target audience also influence both content and form, as do an advertising campaign’s objectives and platform. c. Advertising media, both print and electronic, are the vehicles or forms of communication used to reach a desired audience. d. Infomercials—large blocks of radio or television air time featuring a celebrity or upbeat host talking about and demonstrating a product—have evolved as an advertising method.

Mobile Marketing a. Mobile marketing is the use of a mobile device to communicate marketing messages. b. Common examples include apps, text messages, proximity ads Influencer Marketing is the use of influencers to sell a product or service or to build a brand. Influencers are trusted people within a community who have loyal online followers and can use their influence to influence others. Influencers create online content, often to express opinions, and companies can use them to promote their products or services. Given the importance followers place on an influencers’ opinions, they can be highly effective marketers for a company.

Personal Selling a. Personal selling is direct, two-way communication with buyers and potential buyers. b. Personal selling is the most flexible of the promotional methods. c. There are three distinct categories of salespersons: order takers, creative salespersons, and support salespersons d. In general, personal selling is a six-step process: i. Prospecting—identifying potential buyers. ii. Approaching—using a referral or calling on a customer without prior notice to determine interest in a product. iii. Presenting—getting the prospect’s attention with a product demonstration. iv. Handling objections—countering reasons for not buying the product. v. Closing—asking the prospect to buy the product. vi. Following up—checking customer satisfaction with the purchased product.

Content Marketing a. One of the emerging trends in marketing is the creation of valuable content by companies to attract consumers to their products and further build a company’s brand.

Guerrilla marketing a. Guerrilla marketing is pursuing traditional marketing through unconventional means. Essentially, guerrilla marketing consists of attracting consumer attention to a company using unique and/or creative methods.

Publicity a. Publicity is nonpersonal communication transmitted through the mass media, but the firm does not directly pay for this communication. b. Publicity is mainly informative (which differs from advertising, which is informative, persuasive, or both). c. Most companies have a public relations department trying to gain favourable publicity and minimize negative publicity. d. Publicity describes what a firm is doing, what products it is launching, or other

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newsworthy information, but seldom calls for action, which differs from advertising. e. The mass media willingly carry publicity because they believe it has a general public interest, but most publicity appears once in the mass media and is not repeated (unlike advertising). f. While advertising costs the firm money, publicity is free. g. Publicity is extremely important when communication focuses on a company’s activities and products and is directed at interest groups, current and potential investors, regulatory agencies, and society in general. h. A variation of traditional advertising is buzz marketing, in which marketers attempt to create a trend or acceptance of a product through publicity. i. Companies seek out trendsetters in a community and get them to “talk up” their product, which is viewed as more credible than paid communication. ii. A related concept is viral marketing, which describes the concept of getting internet users to pass on ads and promotions to others.

10. Sales promotion involves direct inducements offering added value or some other incentive for buyers to enter into an exchange. a. The major tools of sales promotion are store displays, premiums, samples and demonstrations, coupons, contests and sweepstakes, refunds, and trade shows. b. Sales promotion stimulates customer purchasing and increases dealer effectiveness in selling products. c. It is used to enhance and supplement other forms of promotion.

C. Promotion Strategies: To Push or Pull (Figure 12.4) 1. In developing a promotion mix, marketers must decide whether to fashion a mix that pushes or pulls the product.

2. A push strategy is used to motivate intermediaries to push the product down to their customers.

3. With a pull strategy, promotion creates consumer demand for the product so that consumers will exert pressure on marketing channel members to make the product available.

4. Exclusive use of advertising denotes a pull strategy, while personal selling to marketing channel members indicates a push strategy. A company can also use a combination of the two.

D. Objectives of Promotion 1. The marketing mix will vary depending on a company’s objectives 2. Promotion is only one element and must be tied to organizational objectives a. Typical objectives are stimulating demand, stabilizing sales, and informing, reminding, and reinforcing consumers.

E. Promotional positioning uses promotion to create and maintain an image of a product in buyers’ minds that persuades them to buy. It is a natural result of market segmentation.

Define digital media and digital marketing, and recognize their Key Terms: increasing value in strategic planning.  E-business  What Is Digital Marketing?  Digital media  Digital marketing VI. What Is Digital Marketing?

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A. An e-business involves carrying out the goals of business through the use of the internet B. Digital media are electronic media that function using digital codes via computers, cellular phones, smartphones, and other digital devices that have been released in recent years.

C. Digital marketing uses digital media to develop communications and exchanges with customers Understand the characteristics of digital media and how these Key Terms: methods are different from traditional marketing activities  Addressability  Growth and Benefits of Digital Communication  Interactivity  Accessibility  Connectivity  Control VII. Growth and Benefits of Digital Communication A. The Internet has created opportunities for businesses to create relationships with consumers, to target markets more precisely, and to reach previously inaccessible markets worldwide.

B. Digital marketing has 5 key characteristics: 1. Addressability is the ability for a business to identify consumers before they make a purchase 2. Interactivity allows customers to express their needs and wants directly to the firm in response to its communications 3. Accessibility allows consumers to find information about competing products, prices, and reviews and become more informed about a firm and the relative value of its products 4. Connectivity keeps customers and businesses connected with each other 5. Control refers to consumers’ ability to regulate the information they receive via the Internet Demonstrate the role of digital marketing and social networking in today’s business environment.  Using Digital Media in Business VIII. Using Digital Media in Business A. Digital media have created new ways of doing business and shopping.

1. Fast communication 2. Real-time exchanges 3. More interactive 4. Build closer relationships.

5. Learn more accurately about consumer and supplier needs.

B. Digital communication is fast and inexpensive.

1. Easier for businesses to fulfill their business goals by selling goods and services online.

2. A cost-effective means to conduct marketing research and judge consumer demand for potential new products.

C. Digital markets are more similar to traditional markets than they are different.

1. Digital technology has had more impact on industries where the cost of business and customer transactions has been very high, for example, investment trading is less expensive online.

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D. Digital media can also improve communication within and between businesses.

1. With more firms conducting business over the internet, there is a need to control access to their digital communication systems to ensure worker productivity.

Show how digital media affect the marketing mix.  Product Considerations  Distribution Considerations  Promotion Considerations  Pricing Considerations  Social Media Marketing IX. Digital Media and the Marketing Mix A. There are some key differences between digital media and traditional media as pertains to the marketing mix: 1. Communications are faster and interactive.

2. Companies can reach target markets more easily, affordably, and quickly.

3. They help marketers utilize new resources in seeking out and communicating with customers.

B. Digital media let marketers and customers easily share information through email, mobile phones, social networking, wikis, video sharing, podcasts, blogs, videoconferencing, and other technologies.

C. Consumers now spend more time on social networking sites than they do on e-mail, and social network use continues to grow.

D. Achieving the right marketing mix remains essential.

1. Product Considerations a. Connectivity of digital media creates opportunities for businesses to add services and to enhance product benefits. b. Some products are only available via digital media. c. The internet can make it easier to anticipate consumer needs—but competition makes quality products and service offerings more important than ever.

2. Distribution Considerations a. The internet is a new distribution channel. b. Processing orders electronically reduces inefficiencies, costs, and redundancies while increasing speed. c. Shipping times and costs are an important element in attracting customers. d. Walmart and other retailers use online catalogs and company websites and blogs to supplement their retail stores.

3. Promotion Considerations a. Promotion is one of the best applications for digital media i. It increases brand awareness. ii. It takes advantage of social networks or virtual worlds to form relationships and generate positive publicity about products iii. Thanks to online promotion, consumers can be more informed now than ever, including reading consumer-generated content before making purchasing decisions b. Consumer consumption patterns are changing and marketers must adapt their promotional efforts to meet them i. For instance, Facebook has its “Facebook Exchange” and “Facebook

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Canvas” to help businesses target their promotions to the right audiences.

4. Pricing Considerations a. Price is the most flexible element of the marketing mix. b. Digital marketing can enhance products’ value by providing extra benefits like service, information, and convenience. c. Discounts and promotions can be quickly communicated using digital media. d. Deal websites allow consumers to compare prices of products.

E. Social Media Marketing 1. Social media marketing enables firms to promote a message and create online conversations through multiple platforms.

2. Large markets can be targeted and reached through paid media, owned media, and earned media.

3. In addition to placing ads, marketers can own their own media outlets and create messages on social networks.

4. Markets can have earned media when consumers are communicating on social media sites.

5. Although digital word-of-mouth posts can promote a product or firm, they are not controllable like advertising, but if the communication is positive, it increases sales.

6. Marketing should focus on relationship building and social media can influence consumer behavior and deliver value to the firm.

Define social networking and illustrate how businesses can use Key Terms: different types of social networking media.  Social Networks  Types of Consumer-Generated Marketing and Digital  Blog Media  Wiki o Social Networks  Viral marketing o Media Sharing  Podcast o Photo Sharing o Blogs and Wikis o Podcasting o Social Media Dashboards o Online Monitoring and Analytics  Using Digital Media to Reach Consumers  Using Digital Media to Learn about Consumers X. Types of Consumer-Generated Marketing and Digital Media A. Digital media are more consumer-driven than traditional media. Two factors have sparked the increase in consumer-generated information.

1. Increased tendency for consumers to publish their thoughts, opinions, and reviews of products via blogs and other digital media.

2. Consumers tend to trust other consumers over corporations.

B. Social Networks 1. A social network is a web-based meeting place for friends, family, co-workers and peers that lets users create a profile and connect with other users for a variety of purposes.

2. Are valuable to marketers as a means of building relationships with customers, providing product information, and learning about consumer needs. a. Blogs and Wikis C. Media Sharing

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1. Video sharing allows anyone who wishes to upload videos to the Internet to do so. a. YouTube is the most popular, but hundreds of other video sharing sites exist.

2. Viral marketing is a marketing tool that utilizes the Internet, especially video sharing and social networking sites, to spread a message and create brand awareness. Campaigns that successfully go viral are transmitted rapidly around the Internet with no help from the marketer.

3. Marketers increasingly use consumer-generated content for ad campaigns, rather than hiring ad executives.

D. Photo Sharing 1. Photo sharing sites are similar to video sharing websites, but they allow users to upload, edit, and share photos. a. Businesses can use photo sharing sites to display images of products. b. Helps to add a “personal touch” to businesses E. Blogs (web-logs) are web-based journals through which authors can editorialize and interact with other Internet users.

1. Two-thirds of Internet users read blogs, and over half of bloggers say that they will blog about products they strongly like or dislike.

2. Blogs give consumers power over companies because companies cannot control what bloggers write.

F. Wikis are websites where users can add or edit content of posted articles.

1. Wikipedia is the most famous wiki 2. Monitoring wikis can give corporations a better idea of how consumers feel about their company or products.

3. Some organizations use wikis as an internal tool for complex projects.

G. Podcasting 1. Podcasts are audio or video files that can be downloaded from the Internet via a subscription that delivers content to listening devices or personal computers.

H. Social media dashboards 1. Social media dashboards enable companies to submit information to a central location, and software posts the information to various social media sites.

XI. Online Monitoring and Analytics A. Without digital media monitoring and evaluation, it is not possible to maximize resources and minimize costs in social media marketing.

B. Marketing analytics uses tools and methods to measure and interpret the effectiveness of marketing activities.

C. The Google Analytics dashboard is broken into five sections: real time, audience, acquisition, behavior, and conversions.

D. Google Analytics is arguably the most robust web analytics tool available, and it is free to anyone with a Google account.

XII. Using Digital Media to Reach Consumers A. Digital media take away some of the marketer’s control over how information is dispensed.

B. Marketers can adapt and use digital media to their advantage—it takes work to constantly adapt to new technologies and changing consumption patterns.

C. Social Technographics (Table 12.5).

XIII. Using Digital Media to Learn about Consumers A. Digital media can be great resources for conducting market research, gathering information about consumers, and asking customers about their preferences.

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B. Crowdsourcing involves using communities of interested consumers to gather input and feedback for marketing purposes.

C. Digital media help to level the playing field between large and small companies, as both have access to the same sites and the same information.

D. Online forums can be a good place to gather consumer feedback 1. In the case of negative feedback, digital media allow companies to directly ask consumers what can be done to improve.

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Ali Asaria Believes Traditional Retailers Can Still Thrive While many people think traditional retail is an unattractive market, Toronto entrepreneur Ali Asaria sees opportunity. With this thought in mind, Asaria left Well.ca to start Tulip, a cloud-based app business focused on helping retailers succeed in the face of online competition. Tulip’s business model is based on enhancing the retail experience by enabling sales associates to provide vastly superior customer service to in-store customers. Tulip allows sales associates to use their smartphones to quickly learn about customers’ past purchases, offer recommendations that can be presented to the client, page other associates to bring products to customers while they continue assisting them, and even collect payments from anywhere in the store.

1. What are some of the advantages retailers gain by using Tulip? Students may use Internet resources to see latest upgrades to the Tulip app.

Advantages: Tulip’s business model is based on enhancing the retail experience by enabling sales associates to provide vastly superior customer service to in-store customers.

Tulip allows sales associates to use their smartphones to quickly learn about customers’ past purchases, offer recommendations that can be presented to the client, page other associates to bring products to customers while they continue assisting them, and even collect payments from anywhere in the store.

Tulip has further enhanced the app to provide retailers with even more data and analytical tools.

Tulip has launched Tulip Prism, which allows retailers to create specific customer lists based on buying behaviour and reach out to customers.

2. Do you think Tulip will be successful? Why or why not?

Student answers will vary. Some students may conclude no given the decline in retail. Other students may point out to the company’s growing customer list, the impact on store sales and the money they have raised and conclude yes.

3. Tulip's business model is based on retailers having motivated and engaged sales associates.

What are some challenges with this concept? What are some potential solutions?

Student answers will vary. Students will likely note that sales associates are often not well paid and sometimes lack training. Solutions could include enhancements in training, better pay, incentive pay and opportunities for promotion.

4. Do you think Tulip will be able to expand their business to mass merchants such as Walmart and Canadian Tire? Why or why not?

Student answers will vary.

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Entrepreneurship in Action: Indigenous Entrepreneur Patrice Mousseau Solves a Common Skin Problem Patrice Mousseau, an Ojibway from the Fort William First Nation community in Ontario, says her entrepreneurship journey started with a need to solve a problem. Shortly after the birth of her daughter, her new baby developed red welts on her body and was subsequently diagnosed with eczema. The most common treatment for eczema is steroid cream and Mousseau was concerned about the long-term impact of using steroids on her young child.

Mousseau says she essentially took everything she could learn from academic journals and medical research, combined this with her knowledge about Indigenous medicine in her crock-pot, and cooked up a treatment. Mousseau says she tested the chemical- and fragrance-free cream and all her daughter's eczema cleared up in two days.

1. Explain what new product development steps Mousseau went through as she developed her company and cream, Satya.

Student answers may vary. Students will likely note that she engaged in idea development when she created the product. Students may assess that she participated in idea screening and business analysis based on their interpretation of the facts in the case. Students should find that she did engage in prototype development/product development, test marketing (farmer’s markets) and finally commercialization (stores & distributor).

2. Given Mousseau's business and her actions, do you think she qualifies as a social entrepreneur?

Why or why not? Students may wish to use Internet resources to revisit the term.

Students answers will vary. Some students will argue that she is profit driven and cannot qualify. Others may argue she is based on the product itself, her support of working mothers and future plans.

3. How would you classify Mousseau's cream using the categories directly discussed below. Why? Students will likely assess the cream as a ‘shopping product.’ Some may use the category of ‘speciality product.’

Consider Ethics and Social Responsibility: Should Companies follow Lush's Lead and Leave Instagram, TikTok, Snapchat and Facebook behind?

1. Do you think its a good business decision for Lush to leave Instagram, TikTok and Facebook?

Why or why not?

Lush’s senior management says they are being socially responsible as they are concerned about social media’s negative impact on women, especially young girls. Although Lush’s revenue will decline, the social benefits outweigh the costs.

2. Lush has tried to leave social media before. They eventually came back. Do you think this move will be permanent? Why or why not?

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The company is still on YouTube and Twitter.

3. Do you think other companies will follow Lush's lead? Why or why not?

Lost revenue is a consideration.

4. Given what we know about the negative impact of social media on young people especially females, do you think its ethical for companies to advertise using this form? Why or why not?

Answers will vary.

Consider Ethics and Social Responsibility: TikTok Is Tracking You and Helping Companies Make Money – Is it Ethical?

1. Were you aware that TikTok was tracking your online use more than other social media apps?

Answers will vary.

2. Is TikTok an ethical company based on what you have read in the case?

Consider that TikTok has 14 different companies tracking data. Of the 14 trackers, 13 are private third-party companies, and nobody seems to know what they are doing with the information.

The third-party companies also continue to monitor online activity after closing the app. TikTok has also found a workaround for privacy settings on Google and Apple so companies can access data even if you are trying to stop them.

3. Should companies use TikTok for marketing? Why or why not?

Companies have found success on TikTok, so it is likely that they will use the app for marketing.

Business Disruption: Retail and COVID-19, The worst of times and the best of times 1. Do you think brick-and-mortar retailers will be able to convince shoppers to return to stores?

Why or why not?

Brick- and-mortar retailers will have to innovate to be able to convince shoppers to return to stores.

2. What suggestions would you make to brick-and-mortar focused retailers to improve in-store sales?

An example would be by increasing their use of social media to stay in touch with customers and offer incentives or information on promotions.

3. Omnichannel involves a great of customer tracking up to and including a customers physical location and in some cases their social media use. Do you think there are any privacy concerns associated with retailers tracking customers? Why or why not?

Answers will vary.

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4. What are some of the advantages and disadvantages of Sephora's strategy to increase sales?

Sephora uses its Beauty Bag app as a mobile hub to optimize the consumer experience. The app can identify when customers enter the store, offers them promotions, and points out items they may be interested in based on past purchases and their Internet use, including new products.

When the customer is elsewhere, the app can be used to communicate with customers, enables them to try on products electronically using augmented reality, and makes use of an AI-driven chatbot. The app can also encourage consumers to visit social media channels. Disadvantages would include privacy concerns.

5. Complete some research using Internet technology. What are some advantages and disadvantages of omnichannel not discussed in the case?

Answers will vary.

6. Many smaller and/or private retailers will not be able to invest heavily in technology. Develop some recommendations how these companies can continue to attract customers and stay viable.

Answers will vary.

7. What are some of the advantages and disadvantages of the store within a store concept?

Students should go beyond what they have read in the case and in the text book and think thoroughly about the issue. Students should be able to cite four to five examples of the concept that they have personally seen or learned about using Internet technology.

A store within a store concept allows retailers to either charge rent or earn a percentage of sales from partners in physical stores and sometimes online. The retailer may also benefit from an increase in foot traffic or website visits as shoppers must visit their physical location or website to make a purchase. The partner benefits include obtaining retail space without having to build real estate and accessing established sites 8. Why do you think Toys 'R' Us would be an attractive purchase for WHP Global. Students should use Internet technology to read more about the acquisition and discuss WHP's progress in turning the company around.

WHP Global, which acquired Toys r Us is benefitting as they can quickly open 400 locations within a popular Department store. Macy’s is hoping the famous brand will bring in increased foot and web traffic as toy sales have increased in recent years especially to Millennial shoppers.

9. Do you think Macy's partnership with Toys 'R' Us will be successful? Why or why not?

Answers will vary.

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Consider Ethics and Social Responsibility: Is Facebook acting ethically by making billions from products which harm consumers and selling your personal information?

1. Do you think people are aware of the amount of personal information being collected by Facebook? Will awareness hurt the company’s business model? Why or why not?

Facebook is making billions from personal information, and often people do not know that this is the case or the extent of personal information Facebook is selling.

2. Do you think it’s ethical for Facebook to collect and sell the personal information of its billions of users? Why or why not?

Selling personal information may be a minor offense compared to the mental health challenges Instagram and other social media sites have on young people.

3. Do you think users will be happy if governments succeed in removing feedback from social media apps? Why or why not?

There is such concern over social media feedback and the impact on teen mental health that some advocates are lobbying the government to disable such features as likes, shares, and comments.

4. Use Internet resources to read up on Meta and the metaverse. Report back to your peers about the progress Meta is making in extending the physical world into a virtual one. Do you think this is a good business strategy? Why or why not?

Answers will vary.

So You Want to Be a Marketing Manager What factors have made the job of marketing manager more challenging in recent years?

While a career in marketing can be very rewarding, marketers today agree that the job is getting tougher. Many advertising and marketing executives say the job has gotten much more demanding in the past 10 years, viewing their number one challenge as balancing work and personal obligations.

Other challenges include staying current on industry trends or technologies, keeping motivated/inspired on the job, and measuring success.

END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Digital Marketing and Social Networking Encourage students to consider developing a short survey instrument to ascertain demand for their business, especially if the business will primarily serve the needs of college students. The questionnaire could help them determine how much college students are willing to spend on a particular product category, and how far they are willing to travel to obtain or experience the good/service.

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priced. What you want to do is uncover the real reason students have this perception. This will help the students realize how important perception and the image of the establishment are to the customer.

Using the example suggested in the Instructor’s Manual for Chapter 11, have the students suggest ideas for special opening events for your new Thai Restaurant that will not drain them financially.

How will they spread the word of this new establishment?

See for Yourself Case: Facebook and Instagram Get Social With e-Commerce This case discusses how Facebook has progressed from connecting friends and family to also focusing on connecting individuals to products and businesses. Facebook has been the dominant social media platform for businesses and advertisers for years.

With the Shops tool, Facebook wanted to create a simple and seamless shopping experience across Facebook’s family of apps and make it easier for small businesses to operate and grow. Rather than charging businesses to use Shops, Facebook decided to offer the service for free, believing it would lead to more ad spending over time.

1. Why has Facebook been so successful at attracting businesses and advertisers?

One reason it has been so successful is that Facebook observes how its 2.8 billion monthly active users use the platform and leverage this data to improve its services.

2. How do businesses benefit from Facebook Shops?

The Facebook Shop feature increases the searchability and reach of small businesses and allows business owners to drive sales through conversation. Users can message business owners over Messenger, Instagram direct messaging, or WhatsApp to ask questions and get support.

Facebook can also utilize what it knows about its users’ shopping habits and preferences to deliver relevant product suggestions. Finally, the convenience of Facebook Shops is derived from the merchant’s ability to upload its catalogs once to make them accessible across all of Facebook’s associated apps.

3. How does Facebook make money from Facebook Shops?

If retailers make Facebook an integral part of their e-commerce strategies, it will boost user engagement on the platform and increase Facebook and Instagram’s advertising revenues in the long-run.

Team Exercise Students will develop a digital marketing promotion for a local sports team, using Twitter, Facebook, and other social networking media to promote ticket sales for next season’s schedule. In their plan, they should provide specific details and ideas for the content they would use on the sites. Also, they will need to describe how they would encourage fans and potential fans to go to their site. They will 01-334 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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need to consider how they would use digital media to motivate sports fans to purchase tickets and merchandise and attend games.

SUPPLEMENTAL TEACHING RESOURCES Check Your Progress 1. What steps do companies generally take to develop and introduce a new product?

Introducing a new product involves a six-step process: (1) idea development, (2) screening new ideas, (3) business analysis, (4) product development, (5) test marketing, and (6) commercialization.

2. What is the product life cycle? How does a product’s life cycle stage affect its marketing strategy?

Product life cycle refers to the life of a product in the marketplace. Like people, products are born and grow, mature, and eventually die—that is, they are pulled from the market. The four stages of the product life cycle are introduction, growth, maturity, and decline.

A marketer must perform different tasks for each life cycle stage of a product. In the introductory stage, consumer awareness and acceptance are limited. Thus, buyers must be made aware of the fact that the product exists and offers benefits. In the growth stage, competing firms become aware that the product has achieved some success and may make decisions to enter the market. During the growth stage, the firm tries to strengthen its position in the market by emphasizing benefits in identifying market segments that want these benefits.

The maturity stage is characterized by severe competition and heavy expenditures for marketing expenses. New competitors emphasize improvements and differentiation of the product. A company may have to introduce new brand extensions. This is done to maintain a large market share. During the decline stage, sales continue to fall rapidly. As profits drop, firms may eliminate certain models or items. Plans must be made for phasing out the product and introducing new products to take its place.

3. Which marketing mix variable is probably the most flexible? Why? Price is the most flexible variable in the marketing mix. Although it may take years to develop a product, establish channels of distribution, and design and implement promotion, a product’s price may be set and changed in a few minutes.

4. Distinguish between the two ways to set the base price for a new product.

Price skimming is setting the highest possible price that buyers will pay. This method allows a company to generate revenue to offset research and development costs and guards against setting a price that does not cover expenses. It is easier to lower prices on a successful product than it is to raise them. However, the high price and quick profits may attract competitors into the market, thus lowering profits.

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By contrast, a penetration price is a low price designed to let a product enter the market and gain market share rapidly. This policy is less flexible than price skimming because it is more difficult to raise a penetration price than it is to lower a skimming price. Penetration pricing is used most often when it is suspected that competitors will enter a market soon after a product has been introduced. Penetration pricing allows the marketer to gain a large market share and discourage competitors from entering the market. It is most appropriate when demand is highly elastic.

5. What is probably the least flexible marketing mix variable? Why? Distribution is probably the least flexible marketing mix variable because marketing mix decisions involve committing resources and establishing contractual relationships; these decisions are difficult or impossible to change.

6. Describe the typical marketing channels for consumer products.

There are four basic marketing channels for consumer products:    

Channel A moves the product from the producer directly to the consumer.

In Channel B, the product moves from the producer, to a retailer, to the consumer.

In Channel C, the product goes from the producer, to a wholesaler, to a retailer, to the consumer.

Channel D moves the product from the producer to an agent, to a wholesaler, to a retailer, to the consumer.

7. What activities are involved in physical distribution? What functions does a warehouse perform?

Physical distribution includes all the activities necessary to move products from producers to customers—inventory control, transportation, warehousing, and materials handling.

Warehousing involves the design and operation of facilities to receive, store, and ship goods.

Warehousing also makes products available for shipment to match demand at different geographic locations.

8. How do publicity and advertising differ? How are they related?

Advertising is paid for by an identified sponsor and is usually directed to a mass market. The seller has complete control over this form of promotion. Publicity is often viewed as being part of a public relations program, a broad set of communication activities designed to maintain favorable relations between an organization and the public. Advertising messages tend to be informative, persuasive, or both; publicity is mainly informative. Advertising is often designed to have an immediate impact or to give specific information to persuade a person to act. Publicity usually describes what a firm is doing and the type of products that are being launched, or it offers other newsworthy information that is not a call for action. When using advertising, the organization must pay for media time. A company may spend money to release information to the press or to call a news conference, but this is not paying for media time. Therefore, people outside the organization shape the message—either positively or negatively. Advertising can be directed and repeated a number of times; most publicity appears in the mass media only once.

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9. List the circumstances in which the push and pull promotional strategies are used.

In developing a promotion mix, marketers must decide whether to fashion a mix that pushes or pulls the product. When using the push strategy, the marketer attempts to motivate these middlemen to push the product down to their customers. In contrast, a pull strategy uses promotion to create consumer demand for a product so that the consumers exert pressure on marketing channel members to make the product available. Consumers create a pull for the product by requesting it from their retail outlet. A company can use either strategy, or it can use a variation or combination of the two. The allocation of promotional resources to various marketing mix elements probably determines which strategy will be used.

10. What is digital marketing?

Digital marketing uses all digital media, including the internet and mobile and interactive channels, to develop communication and exchanges with customers.

11. How can marketers utilize digital media to improve business?

Marketers can use new digital media to improve marketing research, to communicate with consumers and stakeholders, to reach new target markets, and to receive feedback about new products. Digital media are more interactive than traditional media, allowing marketers to improve their efforts and to reach new target markets.

12. Define accessibility, addressability, connectivity, interactivity, and control. What do these terms have to do with digital marketing?

Accessibility, addressability, connectivity, control, and interactivity are the five characteristics of digital media that differentiate them from traditional marketing media. Accessibility allows consumers to find information about competing products, prices, and reviews and become more informed about a firm and the relative value of its products. Addressability is the ability of a business to identify customers before they make purchases. Connectivity is the use of digital networks to provide links between information providers and users. Interactivity allows customers to express their needs and wants directly to the firm in response to its communications. Finally, control involves consumers’ ability to regulate the information they receive via the internet and the rate and sequence of their exposure to that information.

13. How is the internet changing the practice of marketing?

There are many correct responses to this question, as it is very open-ended. The internet has increased the speed of communication, has made marketing a more interactive practice between marketers and consumers, and has given consumers a voice and therefore more power to either criticize or praise products. The internet has taken away some power from established marketing firms, even allowing fans in some instances to create popular advertising campaigns and ads. However, it has also allowed marketers to improve their market research efforts and to broaden their reach into new target markets. In some ways, the internet has leveled the playing field and has provided small businesses with opportunities they did not have before.

14. What impact do digital media have on the marketing mix?

Digital media change how marketers should approach the marketing mix somewhat, but the marketing mix remains as essential as ever. There are a few key differences when using digital 01-337 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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media in the marketing mix. First, digital media make customer communications richer, faster, and interactive. Second, digital media help companies reach new target markets more easily, affordably, and quickly than ever before. Finally, digital media help marketers utilize new resources in seeking out and communicating with customers. One of the most important benefits of digital marketing is the ability of marketers and customers to share information easily.

15. How can businesses utilize new digital and social networking channels in their marketing campaigns?

Consumers spend more time on social networking sites than they do on email, and more than three fourths of internet users read blogs. These numbers point to the pervasiveness of online social media and the importance for marketers in harvesting this potentially powerful tool.

Students’ answers may vary as to how marketers can use new digital media in their marketing campaigns. They must explain their answers.

Get Involved Students’ answers will vary for all of the questions in this exercise. In order for students to learn from one another, assign this as homework and then have students share and discuss their responses during the next class period.

1. Amazon.com is one of the most recognized e-businesses. Visit the site (www.amazon.com) and identify the types of products the company sells. Explain its privacy policy.

Amazon.com sells videos, books, music, games, toys, clothing, jewelry, appliances, pet supplies, electronics, and even food. The Amazon Security and Privacy policy discusses customer rights and supplier responsibilities. The Conditions of Use are for users who want to buy products through Amazon.com and covers IP items such as trademarks, patents, and copyrights. The Amazon.com Privacy Notice discusses the rights of users, such as safe shopping, user privacy regarding information that is shared, Amazon.com updates, ways to unsubscribe, and information concerning personal notification services. It provides answers that detail some of the issues consumers might be most concerned about, such as cookies, third-party advertisers, and the type of personal information that Amazon.com collects. The Supplier Code describes ethical standards for those who supply products to Amazon.com.

2. Visit some of the social networking sites identified in this chapter. How do they differ in design, audience, and features? Why do you think some social networking sites like Facebook are more popular than others?

Student answers will vary depending upon which sites they view.

3. It has been stated that digital technology and the internet are to business today what manufacturing was to business during the Industrial Revolution. The technology revolution requires a strategic understanding greater than learning the latest software and programs or determining which computer is the fastest. Leaders in business can no longer delegate digital media to specialists and must be the connectors and the strategists of how digital media will be used in the company. Outline a plan for how you will prepare yourself to function in a business world where digital marketing knowledge will be important to your success.

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This question would work well as a group activity. Divide the class into groups of no more than six people and have them develop the plan together.

Build Your Skills: Planning a Digital Marketing and Social Networking Site Many companies today utilize digital media in a way that reflects their images and goals. They can also help to improve customer service, loyalty, and satisfaction while reaching out to new target markets.

Companies use these sites in a variety of ways, sometimes setting up Facebook pages or Twitter accounts to gather customer feedback, to promote new products, or even to hold competitions.

The economy has experienced many ups and downs in recent decades, but e-commerce has been an area that has continued to grow throughout economic ups and downs. Many dot-com companies and social networking sites have risen and collapsed. Others such as Amazon, eBay, Facebook, and Twitter have not only survived, but thrived. Many that succeed are “niche players”; that is, they cater to a very specific market that a brick-and-mortar business (existing only in a physical marketplace) would find hard to reach. Others are able to compete with brick-and-mortar stores because they offer a wider variety of products, lower prices, or better customer service. Many new digital media outlets help companies compete on these fronts.

As a manager of Biodegradable Packaging Products Inc., a small business that produces packaging foam from recycled agricultural waste (mostly corn), you want to expand into e-business by using digital media to help market your product. Your major customers are other businesses and could include environmentally friendly companies like Tom’s of Maine (natural toothpaste) and Celestial Seasonings (herbal tea). Your first need is to develop a social networking site or blog that will help you reach your potential customers. You must decide who your target market is and which medium will attract it the best.

Task Students will assume the role of a manager at Biodegradable Packaging Products Inc., a small business that produces packaging foam from recycled agricultural waste (mostly corn). The company wants to expand into e-business by using digital media to help market its product. Major customers are other businesses and could include environmentally friendly companies like Tom’s of Maine (natural toothpaste) and Celestial Seasonings (herbal tea). Students will first need to develop a social networking site or blog that will help them reach their potential customers. They must decide who their target market is and which medium will attract them the best.

The task will involve planning a digital media marketing campaign using online social networking sites, blogs, or another digital media outlet based on the template provided.

Social networking/blog/other site: ______ Overall image and design of your site: ______ Strategy for attracting followers to your site: ______ 01-339 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Solve the Dilemma: Developing Successful Freeware Paul Easterwood, a recent graduate of Colorado State University with a degree in computer science, entered the job market during a slow point in the economy. Tech sector positions were hard to come by, and Paul felt he wouldn’t be making anywhere near what he was worth. The only offer he received was from an entrepreneurial firm, Pentaverate Inc., that produced freeware. Freeware, or public domain software, is offered to consumers free of charge in exchange for revenues generated later.

Makers of freeware (such as Adobe and Netscape) can earn high profits through advertisements their sites carry, from purchases made on the freeware site, or, for more specialized software, through feebased tutorials and workshops offered to help end users. Paul did some research and found an article in Worth magazine documenting the enormous success of freeware.

Pentaverate Inc. offered compensation mainly in the form of stock options, which had the potential to be highly profitable if the company did well. Paul’s job would be to develop freeware that people could download from the internet and that would generate significant income for Pentaverate. With this in mind, he decided to accept the position, but he quickly realized he knew very little about business. With no real experience in marketing, Paul was at a loss to know what software he should produce that would make the company money. His first project, IOWatch, was designed to take users on virtual tours of outer space, especially the moons of Jupiter (Paul’s favorite subject), by continually searching the internet for images and video clips associated with the cosmos and downloading them directly to a PC. The images would then appear as soon as the person logged on. Advertisements would accompany each download, generating income for Pentaverate.

However, IOWatch experienced low end-user interest and drew little advertising income as a result.

Historically at Pentaverate, employees were fired after two failed projects. Desperate to save his job, Paul decided to hire a consultant. He needed to figure out what customers might want so he could design some useful freeware for his second project. He also needed to know what went wrong with IOWatch because he loved the software and couldn’t figure out why it had failed to find an audience.

The job market has not improved, so Paul realizes how important it is for his second project to succeed.

1. As a consultant, what would you do to help Paul figure out what went wrong with IOWatch?

Students’ answers will vary.

2. What ideas for new freeware can you give Paul? What potential uses will the new software have?

Students’ answers will vary, but they should explain each of their ideas in full.

3. How will it make money?

Students’ answers will vary depending on the ideas that they listed in their answer to Question 2.

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iSeeIt! Video Case: The Product Life Cycle Learning Objective: 12-1 Describe the role of product in the marketing mix, including how products are developed, classified, and identified.

Activity Summary: This short video describes how products progress through four stages while on the market, more commonly referred to as the product life cycle. It’s a process every product goes through. Stages include introduction, growth, maturity, and decline.

How to Use Activity: After showing the video, ask students to construct a timeline of a product as it is has or is going through its life cycle. (Note to Professor: You may prescribe products or allow students to think of their own. Further, you can facilitate a cross-curricular connection by having students create the timeline as a craft or use desktop publishing software.)

Class Discussion: What are the stages of a product life cycle? What’s the longest product you can think of that has remained popular, free from hitting its decline stage? What’s the shortest product you can think of, one that declined in popularity quite quickly? Some products are designed with the intent of a long life cycle, while others are designed for a short life cycle. What examples can you think of? (Note to Professor: Fad products are often intended for a short life cycle, with a high production run in a limited time horizon.)

NASCAR Turns to Social Media Learning Objective: 12-5: Define digital media and digital marketing, and recognize their increasing value in strategic planning.

Activity Summary: As social networks evolve, both marketers and the owners of social networking sites are realizing the opportunities such networks offer—an influx of advertising dollars for site owners and a large reach for the advertiser. As a result, marketers are experimenting with promotion on social networks. Some of the most prominent sites are Facebook, LinkedIn, and Twitter. Students will learn the business application of a social network.

How to Use Activity: With social media continuing to grow in both the personal and professional landscapes, have students create two-column list on the “good” of having your business on social media, as well as the potential “bad” that can be caused by having a business on social media.

Class Discussion: What are the benefits to being on social media from a business perspective? What are the potential drawbacks? What are some brands that have a successful social media presence?

What tactics have they used to stand out?

Developing New Products at Domino’s Learning Objective: 12-7: Demonstrate the role of digital marketing and social networking in today's business environment.

Activity Summary: Domino’s Pizza was founded over 60 years ago and has grown into the second largest pizza franchise in the world. Even given its size and longevity, Domino’s continues to create new platforms to use in its branding and promotions. This exercise is important because the internet and information technology have dramatically changed the environment for business and understanding how companies like Domino’s have embraced those changes will help you prepare for your career. The goal of this activity is to demonstrate understanding of how digital marketing and 01-341 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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social media can be used in marketing.

How to Use Activity: Have the students evaluate Domino’s social media tools and how well they meet the top 10 guidelines for effective social media use.

Class Discussion: Domino’s uses social media platforms like Facebook to connect consumers with marketers and other consumers. Have students discuss what social media trends should be incorporated into their marketing plan.

BONUS TEACHING RESOURCE Additional Discussion Questions 1. What is the key to developing a marketing strategy?

The key to developing a marketing strategy is maintaining the right marketing mix that satisfies the target market and creates long-term relationships with customers 2. How are products classified?

Products are usually classified as either consumer or industrial products. Consumer products can be further classified as convenience, shopping, or specialty products. The industrial product classifications are raw materials, major equipment, accessory equipment, component parts, processed materials, supplies and industrial services.

3. What is the difference between a product line and a product mix?

A product line is a group of closely related products that are treated as a unit because of similar marketing strategy. At Colgate-Palmolive, for example, the oral-care product line includes Colgate toothpaste, toothbrushes, and dental floss. A product mix is all the products offered by an organization.

4. What are some methods of identifying products?

Branding, packaging, and labelling can be used to identify or distinguish one product from others.

As a result, they are key marketing activities that help position a product appropriately for its target market.

5. Define integrated marketing communications.

The process of coordinating the promotion mix elements and synchronizing promotion as a unified effort is called integrated marketing communications. When planning promotional activities, an integrated marketing communications approach results in the desired message for customers. Different elements of the promotion mix are coordinated to play their appropriate roles in delivery of the message on a consistent basis 6. How can digital media improve communication within and between businesses?

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Digital media can also improve communication within and between businesses. In the future, most significant gains will come from productivity improvements within businesses.

Communication is a key business function, and improving the speed and clarity of communication can help businesses save time and improve employee problem-solving abilities. Digital media can be a communications backbone that helps to store knowledge, information, and records in management information systems so co-workers can access it when faced with a problem to solve. A well-designed management information system that utilizes digital technology can, therefore, help reduce confusion, improve organization and efficiency, and facilitate clear communications. Given the crucial role of communication and information in business, the longterm impact of digital media on economic growth is substantial, and it will inevitably grow over time.

7.

Define crowdsourcing and explain its use.

Crowdsourcing describes how marketers use digital media to find out the opinions or needs of the crowd (or potential markets). Communities of interested consumers join sites like threadless.com, which designs t-shirts, or crowdspring.com, which creates logos and print and Web designs. These companies give interested consumers opportunities to contribute and give feedback on product ideas. Crowdsourcing lets companies gather and utilize consumers’ ideas in an interactive way when creating new products. There are even sites that crowdsource entire advertising campaigns, like victorandspoils.com.

Controversial Issue Privacy Concerns in a Digital Age Privacy in a digital era is a concern for all people and all organizations. With technology constantly advancing, it is difficult for regulators to keep up with the changes. This leaves holes in the regulatory framework and creates opportunities for cybercriminals to take advantage of unwitting victims.

Compounding the problem is the slow eroding of the lines between public and private spheres. Online social networking sites help people to stay connected, but it also has made users (especially younger users) feel increasingly comfortable with the idea of posting private information on the Internet. Many people have blogs now, post their every move on Twitter, and keep detailed profiles on Facebook and other social networking sites. Many users do not realize the risks involved in posting private information. From receiving unsolicited sales calls to identity theft, privacy issues on the Internet are serious and growing.

While many young people may think nothing of divulging personal information while online, security experts and others are worried about this new Facebook feature and others like it. Not only does it represent a security threat on the Internet, but it is letting users know where you are via online social networking sites, Twitter or another venue lets the world know when you are not home. Paris Hilton and other celebrities were robbed repeatedly in late 2009. Once apprehended, the thieves admitted that they were able to track when the celebrities were out of their homes through tweets. When 01-343 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Hilton tweeted that she was out at a party or out on vacation, the thieves knew that they had a window of opportunity during which they could break into her home.

These information-sharing technologies are not all bad, however. They have allowed marketers to better target important markets, as well as opened up new avenues of communication between businesses and consumers. Digital technologies have helped businesses and individuals connect and stay in touch in ways that were unthinkable even 15 years ago. In many ways, they have changed how people interact, the kinds of products people want to consume, and how businesses conduct research and marketing activities. In this way, Facebook and other companies like it have created new and positive opportunities for businesses to succeed in an increasingly fast-paced and competitive business environment.

Discussion Questions: 1. Why does the Internet create so many privacy issues?

The Internet and other digital technologies have grown so rapidly that adequate regulations and protections are nearly impossible. By the time laws and regulations are passed, technology has changed again and people are no longer fully protected. Cybercriminals have developed sophisticated technologies and methods for obtaining private information, from addresses to social security numbers to bank accounts.

2. What do you think companies can do to help ensure that their customers and stakeholders are protected from cybercriminals who might seek to obtain private information?

Students’ answers will vary.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 1.

2.

3.

4.

5.

6.

7.

The Importance of Generic Products in the Marketplace The Success or Failure of New Products A Comparison of Research and Development for Japan and Canada.

How to measure the effectiveness of Facebook or Twitter as a marketing tool.

Are digital media really more effective at reaching target markets than traditional media?

How the marketing mix changes when using digital media versus traditional media.

How have companies altered their approaches to advertising in the age of digital marketing.

Guest Speaker Suggestions 1. A representative from a local firm to speak on any of the following topics:    

Research and Development Product Line and Product Mix Branding, Packaging, and Labeling Test Marketing

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2. A representative of a distribution center to speak about the distribution process.

3. A representative of a wholesaler or other marketing intermediary to talk about the way their organization performs marketing functions 4. An executive or representative from a local business that has experienced success using digital marketing.

5. A marketing professor who can discuss in greater detail the changing business climate and increase in the use of digital media.

6. A young entrepreneur who has utilized digital media and the internet while seeking to get their business off the ground.

7. A local blogger who has managed to turn their blog into a profitable business.

Teaching Suggestions 38. Instructors may want to grab the class’s attention by starting with some viral ads from the internet (easily found on YouTube or many corporate websites).

39. Have students spend part of class researching digital marketing campaigns for a company of their choice.

40. Have students break into small groups to discuss how they would approach creating a digital marketing campaign. Make sure to reinforce the importance of the marketing mix.

Chapter 13: Financial Accounting and Financial Management SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Big Four Under Big Pressure Technology and the Economy: Artificial Intelligence Transforms Accounting Intelligence Entrepreneurship in Action: A Buzzing Success Going Green: Stranded Assets Pose a Financial and Environmental Risk So You Want to Be an Accountant END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Accounting and Financial Statements See for Yourself Case: How Regulation Credits Are Saving Tesla’s Earnings Team Exercise SUPPLEMENTAL TEACHING RESOURCES 01-345 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Check Your Progress Get Involved Build Your Skills: Financial Analysis Solve the Dilemma: Exploring the Secrets of Accounting CONNECT ACTIVITIES Financing the Shirt on Your Back: Threadless iSeeIt! Video Case: The Accounting Cycle Catching Up on Financials for Board Oversight BONUS TEACHING RESOURCES Additional Discussion Questions Controversial Issue Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY This chapter explores the role of accounting in business and both short- and long-term financial management. First, we discuss the accounting process and briefly look at some simple financial statements and accounting tools that are useful in analyzing organizations worldwide. Then we discuss the management of short-term assets, which companies use to generate sales and conduct ordinary day-to-day business operations. Next, we turn our attention to the management of short-term liabilities, the sources of short-term funds used to finance the business. Finally, we discuss the management of long-term assets such as plants, equipment, and the use of common stock (equity) and bonds (long-term liability) to finance these long-term corporate assets.

LEARNING OBJECTIVES LO 13-1

Describe the different uses of accounting information.

LO 13-2

Demonstrate the accounting process.

LO 13-3

Examine financial statements to evaluate a firm’s "bottom line" and financial position.

LO 13-4

Analyze financial statements, using ratio analysis, to evaluate a company’s performance.

LO 13-5

Describe some common methods of managing current assets and current liabilities.

LO 13-6

Summarize the importance of long-term assets and capital budgeting.

LO 13-7

Specify how companies finance their operations.

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KEY TERMS AND DEFINITIONS accountants

Professionals employed by large corporations, government agencies, and other organizations to prepare and analyze their financial statements.

accounting

The recording, measurement, and interpretation of financial information.

accounting cycle

The four-step procedure of an accounting system: examining source documents, recording transactions in an accounting journal, posting recorded transactions, and preparing financial statements.

accounting equation

Assets equal liabilities plus owners’ equity.

accounts payable

The amount a company owes to suppliers for goods and services purchased with credit.

accounts receivable

Money owed a company by its clients or customers who have promised to pay for the products at a later date.

accrued expenses

All unpaid financial obligations incurred by an organization.

annual report

Summary of a firm’s financial information, products, and growth plans for owners and potential investors.

asset utilization ratios

Ratios that measure how well a firm uses its assets to generate each $1 of sales.

assets

A firm’s economic resources or items of value that it owns, such as cash, inventory, land, equipment, buildings, and other tangible and intangible things.

balance sheet

A “snapshot” of an organization’s financial position at a given moment.

bonds

Debt instruments that larger companies sell to raise long-term funds.

budget

An internal financial plan that forecasts expenses and income over a set period of time.

capital budgeting

The process of analyzing the needs of the business and selecting the assets that will maximize its value.

cash flow

The movement of money through an organization over a daily, weekly, monthly, or yearly basis.

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commercial paper

A written promise from one company to another to pay a specific amount of money.

commercial certificates of deposit (CDs)

Certificates of deposit issued by commercial banks and brokerage companies, available in minimum amounts of $100,000, which may be traded prior to maturity.

cost of goods sold

The amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies.

current assets

Assets that are used or converted into cash within the course of a calendar year; also called short-term assets.

current liabilities

A firm’s financial obligations to short-term creditors, which must be repaid within 1 year.

current ratio

Current assets divided by current liabilities.

debt to total assets ratio

A ratio indicating how much of the firm is financed by debt and how much by owners’ equity.

debt utilization ratios

Ratios that measure how much debt an organization is using relative to other sources of capital, such as owners’ equity.

depreciation

The process of spreading the costs of long-lived assets such as buildings and equipment over the total number of accounting periods in which they are expected to be used.

dividend yield

The dividend per share divided by the stock price.

dividends per share

The actual cash received for each share owned.

double-entry bookkeeping

A system of recording and classifying business transactions that maintains the balance of the accounting equation.

earnings per share

Net income or profit divided by the number of stock shares outstanding.

eurodollar market

A market for trading U.S. dollars in foreign countries.

expenses

The costs incurred in the day-to-day operations of an organization.

factor

A finance company to which businesses sell their accounts receivable—usually for a percentage of the total face value.

floating-rate bonds

Bonds with interest rates that change with current interest rates

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otherwise available in the economy. gross income (or profit)

Revenues minus the cost of goods sold required to generate the revenues.

income statement

A financial report that shows an organization’s profitability over a period of time—month, quarter, or year.

inventory turnover

Sales divided by total inventory.

journal

A time-ordered list of account transactions.

ledger

A book or computer file with separate sections for each account.

liabilities

Debts that a firm owes to others.

line of credit

An arrangement by which a bank agrees to lend a specified amount of money to the organization upon request.

liquidity ratios

Ratios that measure the speed with which a company can turn its assets into cash to meet short-term debt.

long-term (fixed) assets

Production facilities (plants), offices, and equipment—all of which are expected to last for many years.

long-term liabilities

Debts that will be repaid over a number of years, such as long-term loans and bond issues.

managerial accounting

The internal use of accounting statements by managers in planning and directing the organization’s activities.

marketable securities

Temporary investment of “extra” cash by organizations for up to one year in Treasury bills, certificates of deposit, commercial paper, or eurodollar loans.

net income

The total profit (or loss) after all expenses, including taxes, have been deducted from revenue; also called net earnings.

owners’ equity

Equals assets minus liabilities and reflects historical value.

per share data

Data used by investors to compare the performance of one company with another on an equal, per share, basis.

prime rate

The interest rate that commercial banks charge their best customers (usually large corporations) for short-term loans.

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private accountants

Accountants employed by large corporations, government agencies, and other organizations to prepare and analyze their financial statements.

profit

The difference between what it costs to make and sell a product and what a customer pays for it.

profit margin

Net income divided by sales.

profitability ratios

Ratios that measure the amount of operating income or net income an organization is able to generate relative to its assets, owners’ equity, and sales.

quick ratio (acid test)

A stringent measure of liquidity that eliminates inventory.

ratio analysis

Calculations that measure an organization’s financial health.

receivables turnover

Sales divided by accounts receivable.

retained earnings

Earnings after expenses and taxes that are reinvested in the assets of the firm and belong to the owners in the form of equity.

return on assets

Net income divided by assets.

return on equity

Net income divided by owners’ equity; also called return on investment (ROI).

revenue

The total amount of money received from the sale of goods or services, as well as from related business activities.

secured bonds

Bonds that are backed by specific collateral that must be forfeited in the event that the issuing firm defaults.

secured loans

Loans backed by collateral that the bank can claim if the borrowers do not repay them.

serial bonds

A sequence of small bond issues of progressively longer maturity.

statement of cash flows

Explains how the company’s cash changed from the beginning of the accounting period to the end.

total asset turnover

Sales divided by total assets.

trade credit

Credit extended by suppliers for the purchase of their goods and services.

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transaction balances

Cash kept on hand by a firm to pay normal daily expenses, such as employee wages and bills for supplies and utilities.

Treasury bills (T-bills)

Short-term debt obligations the Canadian government sells to raise money.

unsecured bonds

Debentures or bonds that are not backed by specific collateral.

working capital management

The managing of short-term assets and liabilities.

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CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, and KEY TERMS learners will need to take away from the course.

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Describe the different uses of accounting information.  Introduction  The Nature of Accounting o Accountants o Accounting or Bookkeeping? o The Uses of Accounting Information o Integrity in Accounting

Key Terms:  Accounting  Accountant)  Managerial accounting  Cash flow  Budget  Annual report

Lecture Outline and Notes: I. The Nature of Accounting A. Accounting is the recording, measurement, and interpretation of financial information.

1. Large numbers of people, both within and outside businesses, use accounting tools to evaluate organizational operations.

2. The Accounting Standards Board sets the principles and standards of financial accounting and reporting in the private sector.

3. Scandals happen when accounting firms fail to follow generally accepted accounting principles, or GAAP. B. Accountants 1. Accountants are the people who prepare accounting information.

2. Public Accountants a. Certified public accountants (CPAs) are individuals who have been certified by the province in which they practice to provide accounting services ranging from the preparation of financial records and the filing of tax returns to complex audits of corporate financial records. b. Certification gives a public accountant the right to express, officially, an unbiased opinion regarding the accuracy of a client’s financial statements. c. Most are either self-employed or members of large public accounting firms, although some work for smaller second-tier firms. (Table 13.1). d. Ethical accountants are more important than ever after a series of financial scandals in the early 2000s. e. A growing area for public accounts is forensic accounting, which involves analyzing financial documents in search of fraudulent entries or financial misconduct. These individuals are sometimes called fraud examiners. i. Forensic accountants have been used since the 1930s but are now being rapidly added by many auditing firms. ii. The Association of Certified Fraud Examiners, which certifies certified fraud examiners (CFEs), has grown to more than 90,000 members.

C. Accounting or Bookkeeping?

1. Although the terms accounting and bookkeeping are often used interchangeably, they should not be confused.

2. Bookkeeping is much narrower and far more mechanical than accounting and 01-353 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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is typically limited to the routine, day-to-day recording of business transactions.

3. Bookkeepers require less training than accountants.

4. Accountants, on the other hand, usually complete coursework beyond their four- and five-year accounting degrees so they not only record financial information, but understand, interpret, and develop sophisticated accounting systems necessary to classify and analyze complex financial information.

D. The Uses of Accounting Information (Figure 13.1) 1. Many business failures can be linked to ignorance of the information contained in financial statements. a. Likewise, most business successes can be traced to informed managers who understand the consequences of their decisions.

2. Managers and owners use financial statements for internal and external purposes.

3. Internal Uses a. Managerial accounting refers to the internal use of accounting statements by managers in planning and directing the organization’s activities. b. Cash flow is the movement of money through a business on a daily, weekly, monthly, or yearly basis. i. It is not uncommon for even successful companies to struggle making payments because of inadequate cash flow. One common reason for a cash crush is poor managerial planning. c. A budget is an internal financial plan that forecasts expenses and income over a set period of time. i. While most companies prepare master budgets for the entire firm, many also prepare budgets for smaller divisions, departments, product lines, or even projects. ii. “Top-down” master budgets begin at upper management and filter down, while “bottom-up” budgets start at the department or project level and are combined at the CEO’s office. iii. The major value of a budget lies in its breakdown of cash inflows and outflows.

4. External Uses a. Managers also use accounting statements to report the financial performance of a business to outside organizations. i. Such statements are used for filing income taxes, obtaining credit from lenders, and reporting results to the firm’s stockholders. b. These financial statements become the basis for the information provided in a corporation’s official annual report, a summary of the firm’s financial information, products, and growth plans for stockholders and potential investors.

1. The single most important component of an annual report is the signature of a certified public accountant attesting that the required financial statements are an accurate reflection of the underlying financial conditions of the firm; those that meet these conditions are called audited.

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2. The primary users of audited financial information are government agencies; stockholders and potential investors; and lenders, suppliers, and employees. d. A corporation’s stockholders use financial statements to evaluate the return on their investment and the overall quality of the firm’s management team. i. Poor performance often results in changes in top management. e. Banks and other lenders look at financial statements to determine a company’s ability to meet current and future debt obligations if a loan or credit is granted.

II. Importance of Integrity in Accounting A. Strong compliance to accounting principles creates trust among stakeholders.

B. It is important to remember that integrity in accounting processes requires ethical principles and compliance with both the spirit of the law and professional standards in the accounting profession.

Demonstrate the accounting process.

Key Terms:  The Accounting Process  Assets o The Accounting Equation  Liabilities o Double-Entry Bookkeeping  Owners’ equity o The Accounting Cycle  Accounting equation o Financial Statements  Double-entry bookkeeping  Accounting cycle  Journal  Ledger III. The Accounting Process A. The Accounting Equation 1. Assets are a firm’s economic resources or items of value that it owns.

2. Liabilities are debts the firm owes to others.

3. Owners’ equity equals assets minus liabilities and includes all of the funds that have ever been contributed to the company that never have to be paid back. a. In the case of Anna’s Flowers, if Anna were to liquidate, her business, any money left over after selling all the shop’s assets and paying off its liabilities would comprise her owners’ equity.

4. Accounting equation: Assets = Liabilities + Owners’ equity.

B. Double-Entry Bookkeeping 1. Double-entry bookkeeping is the system of recording and classifying business transactions in separate accounts that maintain the balance of the accounting equation. (Figure 13.2) 2. To keep the accounting equation in balance, each business transaction must be recorded in two separate accounts.

3. Most organizations not only classify transactions as assets, liabilities, or owners’ equity, but further break them down to provide more specific information.

C. The Accounting Cycle 1. The accounting cycle is the four-step process of examining source documents,

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recording transactions, posting transactions, and preparing financial statements. (See Figure 13.3.) a. Step One: Examine Source Documents. This includes all source documents, such as checks, credit card receipts, and sales slips that provide evidence of transactions. b. Step Two: Record Transactions. Each financial transaction is recorded in a journal, a time-ordered list of account transactions. c. Step Three: Post Transactions i. Transactions are then posted to a general ledger, a book or computer program with separate files for each account; this process is known as posting. ii. At the end of the accounting period (usually yearly, but sometimes quarterly or monthly), a summary of the balances of all the accounts in the general ledger, called a trial balance, must be prepared. d. Step Four: Prepare Financial Statements. The information from the trial balance is used to prepare financial statements, such as the balance sheet, income statement, and other documents. i. In the case of public corporations and certain other organizations, a CPA must attest, or certify, that the organization followed generally accepted accounting principles in preparing the financial statements. ii. When the statements are complete, the books are “closed,” and the accounting cycle begins anew for the next accounting period.

D. Financial Statements A. The physical results of the accounting process are financial statements—the income statement, the balance sheet, and the statement of cash flows.

1. Manufacturing firms, service providers, and nonprofit organizations each use a different set of accounting principles or rules upon which the accounting profession has agreed; these are sometimes referred to as generally accepted accounting principles (GAAP).

2. Many accounting concepts go by more than one name. Each country has a different set of rules the businesses within that country must follow; most use International Financial Reporting Standards.

3. Moreover, certain concepts have more than one name. For example, sales and revenues are used interchangeably, as are profits, income, and earnings. (Table 13.2) 4. Not all financial statements follow precisely the same format; one size does not fill all.

Examine financial statements to evaluate a firm’s "bottom line" Key Terms: and financial position.  Income statement  Financial Statements  Revenue o The Income Statement  Cost of goods sold o The Balance Sheet  Gross income (profit) o The Statement of Cash Flows  Expenses  Depreciation  Net income  Balance sheet  Current assets

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Ferrell et al: Business: A Changing World, 8ce  Accounts receivable  Current liabilities  Accounts payable  Accrued expenses  Statement of cash flows

IV. Financial Statements A. The Income Statement 1. The income statement is a financial statement showing the profitability of a firm over a period of time (Table 13.3). a. Other names for the income statement include profit and loss (P&L) statement or an operating statement. b. The income statement indicates the firm’s profitability or income, which is derived by subtracting the firm’s expenses from its revenues.

2. Revenue is the total amount of money received (or promised) from the sale of goods or services, as well as from other business activities such as the rental of property and investments. a. Cost of goods sold (CGS) is the amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies. (CGS = Beginning inventory + Interim purchases – Ending inventory.) b. Gross income or profit is equal to revenues minus the cost of goods sold. c. Profit is the difference between what it costs to make and sell a product and what a customer pays for it.

3. Expenses are the costs incurred in the daily operation of a business. a. There are three common expense accounts shown on income statements. i. Selling, general, and administrative expenses include advertising and sales salaries, salaries of executives and staff, and the costs of owning and maintaining the general office. Included in this category is a special type of expense known as depreciation, the process of spreading the costs of long-lived assets over the total number of accounting periods in which they are expected to be used. ii. Research, development, and engineering expenses include scientific, engineering, and marketing personnel and the equipment and information used to design and build prototypes and samples. iii. Interest expenses include the direct costs of borrowing money.

4. Net income is the profit (or loss) after all expenses, including taxes, have been deducted from revenue. a. Most companies present the current year’s results along with the previous two years’ income statements to permit comparison of performance from one period to another.

5. Temporary Nature of Income Statement Accounts a. Companies record their operational activities in the revenue and expense accounts during an accounting period b. Gross profit, earnings before interest and taxes, and net income result from information in the revenue and expense accounts. c. At the end of each accounting period, the dollar amounts in all the 01-357 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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revenue and expense accounts are moved into a “Retained Earnings” account, one of the owners’ equity accounts. d. This shifting of dollar values from the revenue and expense accounts allows the firm to begin the next accounting period with zero balances in those accounts. e. When a corporation elects to pay dividends, it decreases the cash account (an asset category) as well as a capital account (an owners’ equity category).

B. The Balance Sheet 1. The balance sheet presents a “snapshot” of a company’s financial position at a given moment. (Table 13.4) 2. The balance sheet takes its name from its reliance on the accounting equation: Assets must equal liabilities plus owners’ equity.

3. The balance sheet presents an accumulation of all the company’s financial transactions since its founding.

4. Assets a. Asset accounts are listed in descending order of liquidity—how quickly they could be converted into cash. b. Current assets, also called short-term assets, are those that are used or converted into cash within a year; they include cash, temporary investments, accounts receivable (money owed the company by its customers who have promised to pay at a later date), and inventory. i. Accounts receivable usually includes an allowance for bad debts that management does not expect to collect. c. Long-term (fixed) assets represent a commitment of organizational funds for at least one year, and include long-term investments, plants and equipment, and intangible assets such as “goodwill,” reputation, as well as patents and trademarks.

5. Liabilities a. Current liabilities include a firm’s financial obligations to short-term creditors, which must be repaid within a year; long-term liabilities have longer repayment terms. b. Accounts payable are amounts owed to a company’s suppliers for goods and services purchased with credit. c. Other liabilities include wages earned by employees but not yet paid and taxes owed to the government. d. These accounts may be consolidated into an accrued expense account representing all unpaid financial obligations incurred by the firm.

6. Owners’ Equity a. Owners’ equity includes the owners’ contributions to their business along with income retained to finance continued growth and product development. b. Owners’ equity accounts vary according to type and class of stock issued. c. Each type of stock is represented by a separate owners’ equity account, called contributed capital.

C. The Statement of Cash Flows 1. The statement of cash flows explains how the company’s cash changed from the beginning of the accounting period to the end.

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2. Many investors and other users of financial statements want more information about a firm’s cash flow to better understand its financial health.

3. The change in cash is explained through details in three categories. a. Cash from operating activities is calculated by combining the changes in the revenue accounts, expense accounts, current assets accounts, and current liability accounts. b. Cash from investing activities is calculated from changes in the long-term or fixed asset accounts.

4. Cash from financing activities is calculated from changes in the long-term liability accounts and the contributed capital accounts in owners’ equity.

Analyze financial statements, using ratio analysis, to evaluate a Key Terms: company’s performance.  Ratio analysis  Ratio Analysis: Analyzing Financial Statements  Profitability ratios o Profitability Ratios  Profit margin o Asset Utilization Ratios  return on assets o Liquidity Ratios  Return on equity o Debt Utilization Ratios  Asset utilization o Per Share Data ratios  Receivables turnover  Inventory turnover  Total asset turnover  Liquidity ratios  Current ratio  Quick ratio (acid test)  Debt utilization ratios  Debt to total assets ratio  Times interest earned ratio  Per share data  Earnings per share  Dividends per share V. Ratio Analysis: Analyzing Financial Statements A. Ratio analysis refers to calculations that measure an organization’s financial health, bringing the information from the income statement and balance sheet into sharper focus.

1. A ratio is one number divided by another with the result showing the relationship between the two numbers.

2. Financial ratios are used to weigh and evaluate a firm’s performance.

3. The results of the ratio computation should be compared to other companies in the same industry and to the company’s own past record.

4. The income statement and the balance sheet answer two questions: 1) How much did the firm gain or lose? and 2) How much is the firm currently worth on historical values found on the balance sheet?

B. Profitability Ratios

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1. Profitability ratios measure how much operating income or net income a firm is able to generate relative to its assets, owners’ equity, and sales.

2. Profit margin = Net income/Sales; it shows the overall percentage profits earned by the company.

3. Return on assets = Net income/Assets; it shows how much income the firm produces for every dollar invested in assets.

4. Return on equity = Net income/Owners’ Equity; it shows how much income is generated by each $1 the owners have invested in the firm. a. Stockholders are always concerned with how much money they will make on their investment, and they frequently use the return on equity ratio as one of their key performance yardsticks.

C. Asset Utilization Ratios 1. Asset utilization ratios measure how efficiently a firm uses its assets to generate one dollar in sales. Managers can use asset utilization ratios to pinpoint areas of inefficiently in their operation.

2. Receivables turnover = Sales/Accounts receivable; it indicates how many times a firm collects its accounts receivable in one year. a. It also demonstrates how quickly a firm is able to collect payments on its credit sales, and no payments mean no profit.

3. Inventory turnover = Sales/Total Inventory; it indicates how many times a firm sells and replaces its inventory over the course of a year. a. A high inventory turnover ratio may indicate great efficiency but may also suggest the possibility of lost sales due to insufficient stock levels.

4. Total asset turnover = Sales/Total assets; it measures how well an organization uses all of its assets in creating sales. It indicates whether a company is using its assets productively.

D. Liquidity Ratios 1. Liquidity ratios measure the speed with which a company can turn its assets into cash to pay off short-term debt.

2. High liquidity ratios may satisfy a creditor’s need for safety, but ratios that are too high may indicate that the organization is not using its current assets efficiently.

3. Current ratio = Current assets/Current liabilities.

4. Quick ratio (acid test) = Current assets – Inventory/Current liabilities. a. By eliminating inventory, the least liquid current asset, the quick ratio test measures how well an organization can meet its current obligations without resorting to the sale of its inventory.

E. Debt Utilization Ratios 1. Debt utilization ratios indicate how much debt the company is using relative to other sources of capital.

2. Debt financing is riskier than equity as it demands a monthly payment regardless of profitability. In addition, recessions affect heavily indebted firms far more than those financed through equity. a. Most companies tend to keep debt-to-asset levels below 50 percent.

3. Debt to total assets ratio = Total debt/Total assets; it indicates how much of the firm is financed by debt and how much by owners’ equity.

4. Times interest earned ratio = Operating income/Interest expense; it is a measure of the safety margin a company has with respect to the interest 01-360 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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payments it must make to its creditors. a. A low times interest earned ratio indicates that even a small decrease in earnings may lead the company into financial straits.

F. Per Share Data 1. Per share data is used by investors to compare the performance of one company with another on an equal basis.

2. Earnings per share = Net income/Number of shares outstanding. a. Diluted earnings per share equals net income divided by the number of shares outstanding but diluted. Diluted shares include potential shares that could be issued due to the exercise of stock options or the conversion of certain types of debt into common stock.

3. Dividends per share = Dividends paid/Number of shares outstanding.

Dividends result in double taxation.

G. Industry Analysis 1. Trends in the ratios over an appropriate time period should be considered.

2. Industry ratios are commonly used as a comparative measure.

3. Ratios of other firms in a specific industry provide data for comparative purposes so that performance can be evaluated.

Describe some common methods of managing current assets Key Terms: and current liabilities.  Working capital  Managing Assets and Liabilities management o Managing Current Assets  Transaction balances o Managing Current Liabilities  Marketable securities  Treasury bills (T-bills)  Commercial certificates of deposit (CDs)  Commercial paper  Eurodollar market  Trade credit  Line of credit  Secured loans  Unsecured loans  Prime rate  Factor VI. Managing Current Assets A. Current assets are short-term resources such as cash, investments, accounts receivable, and inventory.

B. Terms current and short-term assets are often used interchangeably.

C. Short-term financial management is sometimes called working capital management because current assets and liabilities continually flow (“work”) through the organization.

1. The goal of financial managers who focus on current assets and liabilities is to maximize the return to the business.

2. Managing Cash a. Effective cash flow—the movement of money through an organization—is

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a crucial element facing any financial manager. b. Transaction balances are cash kept on hand by a business to pay normal daily business expenses. c. Companies generally want to collect cash quickly but pay it out slowly.

3. Investing Idle Cash. a. When cash comes in faster than it is needed to pay bills, companies may invest the “extra” cash for short periods. b. Marketable securities are temporary investments of extra cash for up to one year in Treasury bills, certificates of deposit, commercial paper, or eurodollar loans. c. Treasury bills (T-bills) are short-term debt obligations of the federal government. d. Commercial certificates of deposit (CDs) are issued by commercial banks and brokerage firms, are available in minimum amounts of $100,000, and may be traded prior to maturity. e. Commercial paper is a written promise from one company to another to pay a specific amount of money. f. The eurodollar market is a market for trading U.S. dollars in foreign countries.

VII. Managing Current Liabilities A. Current liabilities are short-term debts such as accounts payable, accrued wages and taxes, and short-term bank loans.

1. Managing Accounts Receivable a. Each credit sale represents an account receivable—a payment owed to a business from credit customers. b. Many firms offer discounts on purchases if they pay the invoice early. c. Discounts make cash flow through the firm faster, but they also reduce profitability. d. Profitability of accounts receivable is affected by the type of customer to which a business extends credit. e. Information on company credit ratings is provided by credit bureaus, credit-rating agencies such as Dun & Bradstreet and industry trade groups.

2. Optimizing Inventory a. The object is to minimize the firm’s investment in inventory without experiencing production cutbacks as a result of critical materials shortfalls or lost sales due to insufficient finished goods inventories. b. Optimal inventory levels are determined in part by the method of production. c. Radio frequency identification (RFID) tags are becoming a popular way for companies to manage their inventory. d. Because customers may switch to a competitor when their needs are not met, inventory shortages can be as much of a drag on potential profits as too much inventory.

3. Non-bank Liabilities a. Businesses can sell their accounts receivable to a finance company known as a factor. b. This gives the selling organizations cash and assumes responsibility for 01-362 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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collecting the accounts Summarize the importance of long-term assets and capital Key Terms: budgeting.  Long-term (fixed)  Managing Fixed Assets assets  Capital Budgeting and Project Selection  Capital budgeting  Assessing Risk  Pricing Long-Term Money VIII. Managing Fixed Assets A. Long-term (fixed) assets are those assets expected to last for many years, such as plants and equipment.

1. Leasing is one approach for companies who do not have the funds to purchase expensive buildings or equipment. a. A capital lease is a long-term contract and shows up on the balance sheet as an asset and a liability. b. An operating lease is a short-term cancelable lease and does not show up on the balance sheet.

B. Capital Budgeting and Project Selection 1. Capital budgeting is the process of analyzing the needs of business and selecting the assets that will maximize its value.

2. The capital budget is the amount of money budgeted for investment in such long-term assets.

3. It does not end with the selection, purchase, and use of an asset; all assets and projects must be continually reevaluated to ensure they remain compatible with the firm’s needs.

4. Budgeting is not an exact process and managers must be flexible when new information is available.

C. Assessing Risk (Figure 13.4) 1. Every investment carries some risk with international investments carrying more risk a. Must consider economic and political climate. b. Risk assessments must include the stability and competitive nature of the marketplace.

2. Long duration projects or assets are riskier. a. The longer a project or asset is expected to last, the greater its potential risk because it is difficult to predict how long equipment will last before it wears out or becomes obsolete. b. Predicting cash flows over a long project is a gamble.

D. Pricing Long-Term Money 1. There is a limited supply of funds available for investment. a. The returns on any project must cover not only the costs of operating the project but also the interest expenses for the debt used to finance its operation. b. The most efficient and profitable companies can attract the lowest-cost funds because they have a reputation for less risk. c. Newer and less prosperous firms must pay higher costs to attract suppliers of funds.

2. New companies have a strong motivator to use financial resources wisely

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because they will, over time, reduce the costs of their funds and increase overall profitability. a. New firms tend to enter industries with the greatest rewards for success.

3. Competition intensifies and drives down profit potential Specify how companies finance their operations.

Key Terms:  Financing the Firm  Long-term liabilities o Financing with Debt  Bonds o Financing with Equity  Unsecured bonds  Secured bonds  Serial bonds  Floating-rate bonds  Junk bonds  Retained earnings  Dividend yield IX. Financing with Debt A. Two ways of financing to acquire fixed assets include equity financing and debt financing.

B. Long-term liabilities are debts that will be repaid over a number of years, such as long-term loans and bond issues.

1. Financing with long-term liabilities is a type of debt financing.

2. Many firms acquire debt by borrowing money from pension funds, mutual funds, or life insurance funds.

3. Companies that rely too heavily on debt can get into difficulty should the economy falter.

C. Bonds: Corporate IOUs 1. A bond is a debt instrument that a company sells to raise long-term funds.

2. Bonds are issued by corporations; public utilities; nonprofit corporations; and federal, provincial, and municipal governments.

3. Most bonds can be transferred from one owner to another in a bond market.

4. The bond contract, or indenture, sets forth all the terms between the bondholders and issuing organizations, including: a. The face value—the initial sales price of the bond (Table 13.5). b. The maturity date—bond owner receives the face value of the bond along with the final interest payment. c. The coupon rate—the guaranteed percentage of face value the company will pay to the bond owner every year (interest rate). d. Other important areas such as repayment methods, interest payment dates, procedures to be followed in case of failure to make payments, conditions for early repayment, and any collateral conditions.

D. Types of Bonds 1. Unsecured bonds are debentures or bonds not backed up by collateral.

2. Secured bonds are backed by specific collateral that must be forfeited if the issuing firm defaults.

3. Serial bonds, different from secured bonds, are a sequence of small bond issues of progressively longer maturity.

4. Floating-rate bonds do not have fixed interest payments; the interest rate change with current interest rates.

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5. A junk bond offers higher rates of return than other bonds but at higher risk.

X. Financing with Equity A. Owners’ equity is the owners’ investment in an organization.

B. Common stock, the single most important source of capital for most new companies, represents ownership in a corporation and gives the stock owners voting rights.

1. The par value is the dollar value of a stock printed on the stock certificate.

2. Market value—price at which the common stock is currently trading.

3. The difference between a stock’s par value and its offering price is called capital in excess of par. (See Table 13.6: A Basic Stock Quote.)

C. Preferred stock gives owners preference in distribution of the company’s profits, but not voting privileges. The primary advantage of owning preferred stock is that it is a safer investment than common stock.

D. When a company has profits left over after paying expenses and taxes, it can retain some or all of the earnings to invest in corporate expansion or pay out some of the earnings to stockholders in the form of dividends.

1. Retained earnings are retained and reinvested in the assets of the firm; they belong to the owners in the form of equity.

2. When the board of directors distributes some of a company’s profits to the owners, it issues them cash payments called dividends.

3. The dividend yield is the dividend per share divided by the stock price.

4. Not all companies pay dividends.

5. Estimated Common Stock Price–Earnings Ratio, Dividend Yield, and Beta (Table 13.7)

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Big Four Under Pressure 1. Why is the Big Four’s dominance being scrutinized?

Following the collapse of several high-profile companies, many believe there is a conflict of interest between the audit and nonaudit services these accounting firms provide. The Big Four have more than 75% of the global accounting market share, with an even tighter hold on the world’s largest public companies.

2. Why do critics suggest there is a conflict of interest of the Big Four accounting firms?

Critics suggest accounting firms do not properly evaluate their clients’ accounts because it would interfere with their consultancy work, creating a conflict of interest. Since nonaudit services produce the majority of the Big Four’s income, critics argue this creates a conflict of interest.

3. In your opinion, are current accounting regulations sufficient?

Answers will vary, but students need to support their answers. Some students might argue that their auditing activities might be compromised and need further regulations. Others may argue that since there are different teams providing the work, there is sufficient oversight.

Technology and the Economy: Artificial Intelligence Transforms Accounting Intelligence 1. Describe some of the advantages of AI to the accounting industry.

AI will increase time savings, reduce errors, and aid compliance. In turn, this will allow accountants to spend time on more meaningful tasks, while AI can cover tasks like data entry.

2. GL.ai, the AI system adopted by PricewaterhouseCoopers, helps identify anomalies in its clients’ general ledger systems. Why do you think this is important?

Answers will vary, but students need to support their answer and discuss that AI should increase a company’s productivity.

3. If AI can take over basic accounting tasks such as data entry, do you think this will improve the services accountants offer to their customers? Why or why not?

Again, answers will vary but students need to support their answer.

Entrepreneurship in Action: A Buzzing Success Miels d’Anicet founded in 2000 by Anne-Virginie Schmidt and Anicet Desrochers, has grown into a company with annual sales now at more than $2 million. The couple devised an organic honey brand that would appeal to foodies, and grew that brand by getting their honey into the kitchens of fashionable restaurants. The owner, Monique Deschaine, from the beginning handled the accounting responsibilities and diversified their revenue.

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1. Why does Anne-Virginie Schmidt need to possess good accounting skills in her management of Miels d’Anicet?

Anne-Virginie Schmidt needed to possess good accounting skills because she had assumed all responsibility for accounting including: monitoring and responding to growth by keeping the company’s financial statements up-to-date according to generally accepted accounting principles (GAAP).

2. Why is it important for Monique Deschaine to use her skills developed as a CPA? It was important to use her skills to ensure the company’s financials are viewed as accurate and reliable. Other skills used were risk-management expertise, establishing margins and calculating the true costs of products.

3. As companies grow, do you think it is a good idea for the founders to continue assuming their firms’ accounting responsibilities? Why or why not?

Answers will vary but many students will probably answer that it would become increasingly difficult to assume all of the responsibilities but it certainly is in the founder’s “best interest” to take a significant role in the financials to ensure continued financial success.

Going Green: Stranded Assets Pose a Financial and Environmental Risk The term stranded assets is becoming more popular in financial reporting, especially for the oil and gas industry. These assets, including some oil and gas fields, come with a high environmental price and have the potential to be left unused if tougher environmental regulations are passed. Stranded assets create significant risk for companies and their shareholders. According to the CDP—a group that gathers environmental data for shareholders—deforestation alone could result in $1 trillion of stranded assets for public companies, particularly those in the oil, lumber, and cattle industries.

Attracting (or appeasing) investors is one of the largest drivers of this trend.

1. Should companies include environmental costs, or “stranded assets,” into its accounting statements?

Students’ answers will vary, but their reasoning should support their answers. It would increase transparency with stakeholders and provide a better idea of the “true” costs of operations— including the environmental cost. It may also encourage firms to take steps to try to reduce their environmental costs for future accounting statements.

2. How might climate change and other environmental risks negatively impact a firm’s assets or bottom line?

Per the case information, deforestation alone could result in $1 trillion of stranded assets for public companies, particularly those in the oil, lumber, and cattle industries. When you factor in all of the other environmental risks, the impact to a firm’s bottom line could be significant.

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3. What might be some advantages to reporting and monitoring environmental costs?

Reporting and monitoring environmental costs may create additional trust with stakeholders. It also allows the organization to keep track of its progress and work toward reducing environmental costs in the future.

So You Want to Be an Accountant Do you like numbers and finances? Are you detail oriented, a perfectionist, and highly accountable for your decisions?

If so, accounting may be a good field for you. If you are interested in accounting, there are always job opportunities available no matter the state of the economy. Accounting is one of the most secure job options in business. Of course, becoming an accountant is not easy. You will need at least a bachelor’s degree in accounting to get a job, and many positions require additional training. Many states demand coursework beyond the 120–150 credit hours collegiate programs require for an accounting degree. If you are really serious about getting into the accounting field, you will probably want to consider getting your master’s in accounting and taking the CPA exam.

END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Accounting and Financial Statements For this chapter, perhaps by using the Thai Restaurant example, ask the students what the expenses will be to start this new business. As they provide answers, write them on the board so students can visualize the scope of expenditures. A key discussion should revolve around whether they should buy or lease the building and equipment. Assuming they make the latter choice, they need to consider what type of lease (flat rate, straight percentage, combination) would be best for their new business.

Given the industry the students are developing plans for, have them identify some of the reasons businesses fail in this industry. What are they going to do to try and prevent their business from being just another statistic?

See for Yourself Case: How Regulation Credits Are Saving Tesla’s Earnings Tesla, an all-electric vehicle and energy generation products company, is widely admired for its industry-altering innovation built around its core vision of moving the world toward sustainable energy. Tesla did not invent the EV, but it was the first to create a viable EV for consumers and has set the standard of what an electric car should be.

Tesla had its first profitable year a decade after it was publicly listed. Critics have been quick to point out a potential flaw in the company’s financial structure, which comes in the form of regulatory credits. Critics have been quick to point out a potential flaw in the company’s financial structure, which comes in the form of regulatory credits. In 1 year alone, Tesla made $1.6 billion by selling its excess regulatory credits to other car manufacturers.

Tesla sells its credits to manufacturers who are slow to go green and need to achieve compliance.

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This permits the companies from having to pay heavy fines for noncompliance. Although Tesla is currently receiving substantial income from selling the credits, those revenues are expected to decline substantially (or disappear completely) as those companies begin meeting compliance requirements.

If regulatory credits disappear, many profitable quarters would have been negative for Tesla.

Essentially, Tesla seems to be losing money selling cars and making money selling credits.

4. How does Tesla profit from regulatory credits?

Companies that exceed the zero-emission automobile standards, such as Tesla, are given credits. Credits per vehicle vary depending on the car’s drivetrain and the electric range. These credits can be sold to manufacturers who are slow to go green and need to achieve compliance.

This has generated $1.6 billion in income for Tesla.

5. Why is Tesla’s income from the sale of credits is expected to decline?

Tesla’s income from the sale of credits is expected to decline as other companies make the move to zero emission vehicles. Trends in the jurisdictions indicate that some requirements will become less stringent and may impact the demand for the credits.

6. What will happen to Tesla if regulatory credits disappear?

If regulatory credits disappear, many profitable quarters would have been negative for Tesla.

Essentially, Tesla seems to be losing money selling cars and making money selling credits.

Team Exercise Students can look at websites such as Yahoo! Finance (finance.yahoo.com), under the company’s “key statistics” link, to find many of its financial ratios, such as return on assets and return on equity.

Have each member of the students’ teams look up a different company. They should explain why they think there are differences in the ratio analysis for these two ratios among the selected companies.

SUPPLEMENTAL TEACHING RESOURCES Check Your Progress 1. Why are accountants so important to a corporation? What function do they perform?

Accountants are important because they analyze and interpret financial information to determine if the organization is using its funds efficiently and to make plans for increasing profits. Accountants develop systems that summarize all transactions into comprehensive financial statements.

2. Discuss the internal uses of accounting statements.

Financial statements may be used internally for planning and directing the course of the organization. Monitoring cash flow is one important area. Financial statements are also 01-369 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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important in the preparation of budgets for the firm.

3. What is a budget?

A budget is an internal financial statement that projects revenues and expenditures for a given period of time. They may be applicable to an individual segment of the firm or the firm as a whole. Their major value is the analysis of inflows and outflows.

4. Discuss the external uses of financial statements.

The main external use is to report the financial performance of the business to outside organizations. This may include filing taxes, obtaining credit, and reporting results to shareholders and analysts.

5. Describe the accounting process and cycle.

The accounting process involves the accounting equation and double-entry bookkeeping. The accounting equation is Assets = Liabilities + Owners’ equity. Double-entry bookkeeping is a system of recording and classifying business transactions in accounts that maintain the balance of the accounting equation.

6. The income statements of all corporations are in the same format. True or false? Discuss.

False. Different types of firms (service, manufacturing, financial, etc.) use their own accounting principles, to which the profession has agreed. These are called generally accepted accounting principles (GAAP). One way in which the format differs is in the slightly different terminology used in the financial statements.

7. Which accounts appear under “current liabilities”?

The accounts that appear under “current liabilities” are those that reflect financial obligations that must be repaid within 1 year. Those accounts include accounts payable and accrued expenses.

8. Together, the income statement and balance sheet answer two basic questions. What are they?

The income statement answers the question of the firm’s profitability, and the balance sheet answers the question of how much the firm is currently worth.

9. What are the five basic ratio classifications? What ratios are found in each category?

The five basic ratio classifications and the ratios they contain are: i. Profitability ratios—profit margin, return on assets, return on equity. ii. Asset utilization ratios—receivables turnover, inventory turnover, total asset turnover. iii. Liquidity ratios—current ratio, quick ratio. iv. Debt utilization ratio—debt to total assets, times interest earned. v. Per share data—earnings and dividends per share.

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10. Why are debt ratios important in assessing the risk of the firm?

Debt utilization ratios are critical to assessing the risk of the firm because a high debt level and interest obligations can threaten the existence of the firm. The more assets are financed by debt, the higher the risk level of the firm.

11. Define working capital management.

Working capital management is the management of current assets and current liabilities. The term is used because the current accounts continually flow through the firm and are said to be working.

12. Describe the various types of marketable securities. a.

b.

c. d.

Treasury bills are short-term debt obligations of the federal government. They are issued weekly, may have a maturity of up to one year, and are perhaps the safest investment.

Commercial certificates of deposit are issued by commercial banks and brokerage companies, are available in minimum amounts of $100,000, and may be traded prior to maturity.

Commercial paper is a written promise from one company to another to pay a specific amount of money.

Some companies invest extra cash in international markets such as the eurodollar market, a market for trading U.S. dollars in foreign countries.

13. What are fixed assets? Why is assessing risk important in capital budgeting?

Fixed, or long-term, assets that are expected to last for many years. Examples include production facilities (plants), offices, and equipment. Assessing risk is important in capital budgeting because it allows for more informed project investment decision making. That is, decision makers can use estimated returns on investments and the likelihood that the returns will be realized when deciding between competing capital expenditures. For example, a high return project may have such high risk that realizing a return is unlikely, making the investment undesirable. Without risk assessment, the project’s high return makes the project appear desirable.

14. How can a company finance fixed assets?

Two common choices of financing fixed assets exist for organizations wishing to make capital expenditures. The organization can attract new owners (equity financing), and/or it can take on long-term liabilities (debt financing). Debt financing includes long-term bank loans and corporate bond issues.

15. What are bonds and what do companies do with them?

A bond is a debt security that a company sells to raise long-term funds. The bond is a certificate, much like an IOU, that represents the company’s debt to the bondholder. Organizations issue bonds to finance long-term capital investment projects.

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16. How can companies use equity to finance their operations and long-term growth?

Companies may sell partial ownership (equity) of the organization in the form of stocks to individuals wishing to invest. Each share represents a portion of the organization’s total equity.

By expanding its equity base through stock issues, an organization is able to raise funds for longterm capital expenditures.

Get Involved 1. Look up the annual report of a company with which you are familiar. Read through the financial statements, then write up an analysis of the firm’s performance using ratio analysis.

Look at data over several years and analyze whether the firm’s performance is changing through time.

Sample student answer (not exhaustive):

Return on Assets Return on Equity Quick Ratio Current Ratio Total Asset Turnover Receivables Turnover Inventory Turnover Times Interest Earned

20X4 13.79 73.43 0.98 1.21 0.93 3.7 22.51 73.77

Acme Company 20X3 13.33 64.94 0.98 1.19 0.9 3.63 21.79 65.76

20X2 12.29 74.37 1.13 1.36 0.88 3.52 20.01 55.23

20X1 10.7 58.66 0.95 1.15 0.9 3.67 21.61 48.3

We can see that Acme’s return on assets, return on equity, and times interest earned generally increased in the past 4 years. The other ratios seemed to fluctuate a bit more during certain years, but all the ratios are higher in 2011 than in 2008. This means that Acme is earning a higher return on assets and equity and is experiencing a higher turnaround on receivables. It also seems to be replacing its inventory a bit more than in 2008 and seems to be doing better in using its total assets to generate sales. It is also doing a better job with its abilities to turn assets into cash as seen by its current ratio and quick ratio. However, note that the quick ratio is less than one; this might indicate that Acme may experience a little bit of trouble meeting obligations without selling its inventory. This is lower than its quick ratio in 2009 (but higher than the quick ratio in 2008).

While students might want to say that Acme is doing well because its ratios have improved, they must also realize that these ratios—although showing some improvement—mean little without comparing them to similar companies in the industry. If the ratios of all the other companies are higher, then they might reveal that Acme is underperforming, despite its improvement in the past 4 years. Then again, the exact opposite could be true. It is also hard to determine whether, for instance, a quick ratio less than one is bad for the industry. Industries differ in terms of liquidity, inventory, and so on. While lower values in one industry might be problematic, they could be perfectly acceptable in another industry. (For example, industries with lots of inventory would have higher inventory turnover and possibly a lower quick ratio depending upon its assets and liabilities.) Finally, it is interesting that in 2008 the nation was still in the midst of the recession. Hence, it seems likely that Acme’s (and other companies’) financial ratios would 01-372 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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improve. Students might want to go back even further to get a good snapshot of the company’s health over time.

2. Using a national newspaper, find the current rates of interest on the following marketable securities. If you were a financial manager for a large corporation, which would you invest extra cash in? Which would you invest in if you worked for a small business? a. b. c. d. e. f.

Three-month T-bills Six-month T-bills Commercial certificates of deposit Commercial paper Eurodollar deposits Money market deposits

Students’ answers will depend upon when they conduct this research.

3. Select five public companies. Look up their earnings, dividends, and prices for the past five years. What kind of picture is presented by this information? Which stocks would you like to have owned over this past period? Do you think the next five years will present a similar picture?

Students’ answers will vary depending upon the companies they choose. More than likely, because these companies experienced a recession in the past five years, causing many companies’ stock prices and earnings to decrease, the next five years will likely not be similar.

Build Your Skills: Financial Analysis Background The income statement for Western Grain Company, a producer of agricultural products for industrial as well as consumer markets, is shown here. Western Grain’s total assets are $4,237.1 million, and its equity is $1,713.4 million.

Consolidated Earnings and Retained Earnings Year Ended December 31, 20X1 (Millions) Net sales Cost of goods sold Selling and administrative expense Operating profit Interest expense Other income (expense), net Earnings before income taxes Income taxes Net earnings

20X1 $6,295.4 2,989.0 2,237.5 1,068.9 33.3 (1.5) 1,034.1 353.4

(Net earnings per share) Retained earnings, beginning of year Dividends paid

$2.94

680.7

3,033.9 (305.2)

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$3,409.4

Task Calculate the following profitability ratios: profit margin, return on assets, and return on equity. Assume that the industry averages for these ratios are as follows: profit margin, 12 percent; return on assets, 18 percent; and return on equity, 25 percent. Evaluate Western Grain’s profitability relative to the industry averages. Why is this information useful?

Profit margin

= net earnings = 680.7 sales 6,295.4

= 10.81%

Return on assets

= net earnings = 680.7 assets 4,237.1

= 16.07%

Return on equity

= net earnings = 680.7 equity 1,713.4

= 39.73%

Comparison of Western Grain Ratios with the Industry

Profit margin Return on assets Return on equity

Western Grain 10.81% 16.07% 39.73%

Industry 12% 18% 25%

Difference −1.19% −1.93% 14.73%

A comparison of the profitability ratios shows that Western Grain has a lower profit margin, which indicates that Western is not operating as efficiently as the average firm in the industry. The lower return on assets indicates that Western does not generate as much profit per $1 of assets as the average firm in the industry. This could be due to inefficient asset utilization or because Western has high equipment costs compared to the industry. By comparing these ratios, Western should be able to determine areas for improvement in performance.

Solve the Dilemma: Exploring the Secrets of Accounting You have just been promoted from vice president of marketing of BrainDrain Corporation to president and CEO! That’s the good news. Unfortunately, while you know marketing like the back of your hand, you know next to nothing about finance. Worse still, the “word on the street” is that BrainDrain is in danger of failure if steps to correct large and continuing financial losses are not taken immediately.

Accordingly, you have asked the vice president of finance and accounting for a complete set of accounting statements detailing the financial operations of the company over the past several years.

Recovering from the dual shocks of your promotion and feeling the weight of the firm’s complete accounting report for the very first time, you decide to attack the problem systematically and learn the “hidden secrets” of the company, statement by statement. With Mary Pruitt, the firm’s trusted senior financial analyst, by your side, you delve into the accounting statements as never before. You resolve to “get to the bottom” of the firm’s financial problems and set a new course for the future—a course that will take the firm from insolvency and failure to financial recovery and perpetual prosperity.

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1. Describe the three basic accounting statements. What types of information does each provide that can help you evaluate the situation?

The three basic accounting statements are the income statement, the balance sheet, and the statement of cash flow. The income statement shows the profitability of a firm over a period of time—its overall revenues and the costs incurred in generating those revenues. The balance sheet is a snapshot of a company’s financial position at a given moment and indicates what the organization owns or controls and the various sources of funds used to pay for these assets (debt or equity). In other words, it shows what is owned (and who owns it) and what is owed.

The statement of cash flows provides information about the movement of cash through the firm from the beginning of an accounting period to the end.

2. Which of the financial ratios are likely to prove to be of greatest value in identifying problem areas in the company? Why? Which of your company’s financial ratios might you expect to be especially poor?

Students’ answers may vary but should include logical justification. For example, profitability ratios (profit margin, return on assets, and return on equity) are likely to be of great value (at least initially) because they measure how much operating or net income an organization is able to generate relative to its assets, owners’ equity, and sales. Simply, is the firm making or losing money? Because the firm is in trouble, debt, asset utilization, and liquidity ratios may be poor.

3. What are the limitations of ratio analysis?

The main limitation of ratio analysis is that accounting practices of different organizations are never quite the same. Hence, making comparisons with ratios is never quite like comparing apples to apples. Another limitation is that a single or even a set of ratios provides only part of the financial story. Other information is needed to evaluate clearly a firm’s performance. For example, strategic objectives and environmental (business environment, social/political environment, etc.) factors may impede or facilitate the firm’s ability to perform, thus biasing conclusions drawn merely from ratio analysis.

CONNECT ACTIVITIES Financing the Shirt on Your Back: Threadless Learning Objective: 14-1: Describe the different uses of accounting information.

Activity Summary: In 2003, two young entrepreneurs each invested $500 to begin Threadless as a mail-order business delivering t-shirts made from crowdsourced designs. By fostering their entrepreneurial energy while also making sound financial decisions, Threadless has grown into a multimillion-dollar business that provides t-shirts and other textiles printed with creative designs.

This activity is important because understanding basic accounting and financial statements will be important to your success as a manager. The goal of this activity is to apply accounting and financial concepts to an entrepreneurial business.

How to Use Activity: The video describes how Threadless’s accounting needs have changed as the company has gown and evolved. Have the students focus on the importance of accounting and 01-375 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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finance to the success of a company.

Class Discussion: What accounting terms and financial statements did you learn from this video? iSeeIt! Video Case: The Accounting Cycle Learning Objective: 14-2: Demonstrate the accounting process.

Activity Summary: Accounting is the recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions. This short video describes how a small business prepares the information used in the accounting cycle.

How to Use Activity: This video provides a brief overview of the accounting cycle, detailing the six steps. Divide the class into six groups and assign them one of the six steps. Then, have each group develop a short 5-min presentation on what their step of the process entails. Debrief as a class.

Class Discussion: Why is the accounting cycle important? Is it necessary to follow the steps in sequence? Why or why not? What would happen if an accountant skipped a step?

Catching Up on Financials for Board Oversight Learning Objective: 14-1: Describe the different uses of accounting information.

Activity Summary: Students will become familiar with the financial language used to describe accounting principles. They’ll explore a fictitious example of being invited to serve on the board of a company and helping Cori prepare for the meeting.

How to Use Activity: On the flip side of the accounting spectrum, over time companies have maliciously manufactured accounting statements for various reasons. Invite students to research famous corporate accounting scandals and present what happened, how they did it, and how they got caught. (Note to Professor: Some examples include Waste Management in 1998, Enron in 2001, and Bernie Madoff in 2008.)

Class Discussion: What might be the motivations behind accounting statement malfeasance? What can be put into place to reduce the amount of accounting crime?

BONUS TEACHING RESOURCES Additional Discussion Questions 1. What is the accounting equation? Which financial statement (income statement or balance sheet) is most similar to the accounting equation?

The accounting equation is: Assets = Liabilities + Owners’ equity. The balance sheet is most similar because it has sections for assets, liabilities, and equity.

2. What is meant by the liquidity of assets?

Liquidity refers to how easily asset accounts can be converted into cash.

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3. In measuring a firm’s performance, many investors and managers prefer industry analysis or industry ratios. What is the advantage in using industry ratios?

The advantage is that by using industry ratios, one is comparing one company with other firms in the same industry.

4. What are some different types of liabilities?

Liabilities include both short-term and long-term liabilities such as accounts payable, notes payable, and accrued expense.

5. What is a junk bond? Why do investors buy junk bonds?

A junk bond offers higher rates of return than other bonds but at higher risk because of the greater likelihood of default. Investors are willing to buy junk bonds because they offer higher rates of return than other bonds. The problem is that junk bonds have a greater likelihood of failure or default.

6. What do companies do with retained earnings?

Retained earnings are earnings that are retained and reinvested in the assets of the firm; they belong to the owners in the form of equity.

7. Why is the prime rate of interest important for business firms?

The prime rate is the interest rate banks charge their best customers for short-term loans. These are the lowest possible rates for short-term loans. As the prime rate fluctuates up or down, businesses are interested in how much short-term loans will cost them.

Controversial Issue Can You Really Play Games with Ratios?

Ratio analysis can be a very important ingredient in financial analysis. And the textbook explains how various ratios can provide fresh, new insights.

But it must be remembered that sets of figures can be tampered with to present varying pictures of a firm’s financial health. Even if there is no intention to mislead stockholders or some other constituency, sometimes, among financial statements, one situation getting worse can make another situation look better.

Here are some examples of how ratios can fool you. A rule of thumb on the current ratio (current assets divided by current liabilities) is that 2 to 1 (or two times) is good. Suppose a firm has current assets of $400,000 and current liabilities of $300,000. By dividing $300,000 into $400,000, you arrive at a current ratio of 1.33—not very good. Just before this ratio is to be shown to stockholders, the finance officer is able to borrow $200,000 of long-term funds and use these funds to pay off $200,000 of the current liabilities. If you calculate the current ratio with $100,000 divided by $400,000, it is 4 to 01-377 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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1 (or four times). That’s quite an improvement in the current ratios, but a deterioration of the longterm debt situation.

Speaking of long-term debt, let’s see how a deterioration of debt and retained earnings pictures can improve return on equity. First, here is a greatly simplified version of the liabilities and equities side of a balance sheet for a company experiencing some financial difficulties.

Total debt Common stock Retained earnings

$

2,700,000 2,000,000 2,000,000

$

6,700,000

For this first year, the firm made a net profit of $80,000. Since total equity is $4,000,000, that income is a return on equity of .02 or 2 percent. The firm wants to pay a 15 percent return to its common stockholders. To do this, the board feels it is best to borrow $300,000 in order to make payment of a cash dividend. This means at the end of next year, the right side of the simple balance sheet will look like this: Total debt Common stock Retained earnings

$

3,000,000 2,000,000 1,700,000

$

6,700,000

Although the loan of $300,000 provided the cash with which to make the dividend payments, the payment of dividends comes out of retained earnings. If the next year the firm has a net income of $80,000, the return on equity goes up to .0216 or 2.16 percent—even though the debt is higher and retained earnings are lower.

Discussion Question 1. As these examples have indicated, games can be played with figures and ratios. What are some other quirks in the system?

Some other quirks in the system that are worth investigating include the following: high and unhealthy receivables can make the current ratio look great; high and unhealthy inventories can make a current ratio look great; a high inventory turnover can look good, but it may be a sign that stocks of merchandise are running too low; total asset turnover can look good because a firm does not have enough assets to accomplish its mission.

Term Paper or Project Topic 1. Accounting as a Profession 2. History of Accounting Education 3. Functions of the Corporate Financial Manager 01-378 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Guest Speaker Suggestions 1.

2.

3.

4.

An accountant to address aspects of the job.

A financial manager of a local company to speak about financial management of the firm.

An accounting professor to speak about accounting responsibilities, auditing, and so on.

A professor to speak about ethical concerns and issues in accounting.

Teaching Suggestions 2. This chapter is not intended to cover all accounting principles but to give students an insight into accounting and the information statements developed by accountants. In addition, many of the terms used by accountants in financial statements are basic to interpreting and analyzing companies. Rather than pure memorization of terms, students should understand the overall concepts of the chapter.

3. Present the lecture using “Lecture Outline and Notes” and slides planned for the chapter.

4. Get copies of different annual reports for the class to look over. Sometimes companies will give educational institutions copies of old annual reports. Many are downloadable from the internet.

The students, using the annual report data, could “crunch” selected accounting ratios to analyze the company’s financial health. This is especially helpful if the students can use 3–5 years’ worth of financial data. The discussion should focus on the analysis and application of the ratios and historical trends in the data.

5. To help students understand the objectives of the chapter, go over “Check Your Progress” at the end of the chapter.

Chapter 14: Money and the Financial System SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Willing to Lose: Young Investors Day Trade Entrepreneurship in Action: Why Dogecoin Is No Longer a Joke Going Green: Is the World Bank Serious About Sustainability?

Technology and the Economy: Digging into the Digital Wallet So You’re Interested in Finance or Banking END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Money and the Financial System See for Yourself Case: Taking a Bite Out of Purchasing Power Parity with the Big Mac Index Team Exercise SUPPLEMENTAL TEACHING RESOURCES 01-379 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Check Your Progress Get Involved Build Your Skills: Managing Money Solve the Dilemma: Seeing the Financial Side of Business CONNECT ACTIVITIES The Race to Develop Digital Currency iSeeIt! Video Case: Equity and Debt Financing Making Money Work for Molly's Meal Maker BONUS TEACHING RESOURCES Additional Discussion Questions Controversial Issue Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY From Bay Street to Main Street, both overseas and at home, money is the one tool used to measure personal and business income and wealth. We begin our discussion with a definition of money and then explore some of the many forms money may take. Next, we examine the roles of the Bank of Canada and other major institutions in the financial system. Finally, we look at the securities markets, where stocks and bonds are traded.

LEARNING OBJECTIVES LO 14-1

Define the functions, characteristics, and various types of money.

LO 14-2

Specify how the Bank of Canada manages the money supply and regulates the Canadian banking system.

LO 14-3

Compare and contrast chartered banks, trust companies, credit unions/caisses populaires, and electronic banking.

LO 14-4

Distinguish among non-banking institutions such as insurance companies, pension funds, mutual funds, and finance companies.

LO 14-5

Describe investment banking and the various securities markets.

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KEY TERMS AND DEFINITIONS automated banking machine (ABM)

The most familiar form of electronic banking, which dispenses cash, accepts deposits, and allows balance inquiries and cash transfers from one account to another.

Bank of Canada

An independent agency of the federal government established in 1934 to regulate the nation’s banking and financial industry.

bank rate

The rate of interest the Bank of Canada charges to loan money to any banking institution to meet reserve requirements.

brokerage firms

Firms that buy and sell stocks, bonds, and other securities for their customers and provide other financial services.

Canada Deposit Insurance Corporation (CDIC)

A federal Crown corporation that insures bank accounts.

certificates of deposit (CDs)

Savings accounts that guarantee a depositor a set interest rate over a specified interval as long as the funds are not withdrawn before the end of the period—six months or one year, for example.

chartered banks

The largest and oldest of all financial institutions, relying mainly on chequing and savings accounts as sources of funds for loans to businesses and individuals.

chequing account

Money stored in an account at a bank or other financial institution that can be withdrawn without advance notice; also called a demand deposit.

credit cards

Means of access to preapproved lines of credit granted by a bank or a finance company.

credit controls

The authority to establish and enforce credit rules for financial institutions and some private investors.

credit union /caisse populaire

A financial institution owned and controlled by its depositors, who usually have a common employer, profession, trade group, or religion.

cryptocurrency

A digital exchange medium that uses secure online ledgers enabled by blockchain technology.

debit card

A card that looks like a credit card but works like a cheque; using it results in a direct, immediate, electronic payment from the

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cardholder’s chequing account to a merchant or third party. desired reserves

The percentage of deposits that banking institutions hold in reserve.

electronic funds transfer (EFT)

Any movement of funds by means of an electronic terminal, telephone, computer, or magnetic tape.

exchange-traded funds (ETFs)

An insurance fund established in 1933 that insures individual bank accounts.

finance

The study of how money is managed by individuals, companies, and governments.

finance companies

Businesses that offer short-term loans at substantially higher rates of interest than banks.

insurance companies

Businesses that protect their clients against financial losses from certain specified risks (death, accident, and theft, for example).

investment banker

Underwrites new issues of securities for corporations, states, and municipalities.

monetary policy

Means by which the Fed controls the amount of money available in the economy.

money

Anything generally accepted in exchange for goods and services; also called currency.

money market funds

Accounts that offer higher interest rates than standard bank rates but with greater restrictions.

mutual fund

An investment company that pools individual investor dollars and invests them in large numbers of well-diversified securities.

open market operations

Decisions to buy or sell Treasury bills (short-term debt issued by the Canadian government) and other investments in the open market.

over-the-counter (OTC) market

A network of electronically linked dealers.

pension funds

Managed investment pools set aside by individuals, corporations, unions, and some nonprofit organizations to provide retirement income for members.

primary market

The market where firms raise financial capital.

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reward cards

Credit cards made available by stores that carry a benefit to the user.

savings accounts

Accounts with funds that usually cannot be withdrawn without advance notice; also known as time deposits.

secondary markets

Stock exchanges and over-the-counter markets where investors can trade their securities with others.

securities markets trust companies

The mechanism for buying and selling securities.

Corporations that act as a trustee and usually also provide banking services.

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CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, and KEY TERMS learners will need to take away from the course.

LO 141

Define the functions, characteristics, and various types of money.  Introduction  Money in the Financial System o Functions of Money o Characteristics of Money o Types of Money

I.

Key Terms:  Finance  Money  Chequing account  Savings accounts  Money market funds  Certificates of Deposit (CDs)  Credit cards  Reward cards  Debit card  Cryptocurrency

Lecture Outline and Notes: Money in the Financial System A. Finance is the study of money, how it’s made, how it’s lost, and how it’s managed by individuals, companies, and governments.

B. Money (or currency) is anything generally accepted in exchange for goods and services.

1. Many things have served as money: salt, cattle, and precious metals. a. Most of these materials were limited-supply commodities that had their own value to society.

2. “IOUs,” slips of paper that could be exchanged for a specified supply of the underlying commodity, were developed later.

3. Finally, fiat money is paper money not readily convertible to a precious metal, such as gold; it did not gain full acceptance until the 1930s.

C. Functions of Money 1. Medium of Exchange a. Money serves as a medium of exchange, making it easier for people to buy and sell goods and services and reducing the need for barter—the trading of one product or service for another of similar value. b. Bartering was inefficient because it was not always divisible and can be complicated in multiple-party transactions.

2. Measure of Value a. Money serves as a measure of value, or a common standard for the value of all goods and services.

3. Store of Value a. Money acts as a store of value, or as a way to maintain the value of accumulated wealth until it is needed to purchase goods or services. b. Unfortunately, the value of stored money is directly dependent on the health of the economy. Inflation and deflation are both problematic for the economy (discussed in more detail later).

D. Characteristics of Money (Table 14.1) 1. Acceptability

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a. To be effective, money must be readily acceptable as a way to pay for goods and services and settle debts. b. Acceptability is probably the most important characteristic of money: people must believe in and trust the value of what they use as money.

2. Divisibility a. To facilitate exchanges, money must be easily divided into smaller units of value.

3. Portability a. For money to function as a medium of exchange, it must be easily moved and carried. b. Most societies use paper money and metal coins.

4. Stability a. Money must be stable and maintain its declared face value. b. Stability allows people who wish to postpone purchases and save their money to do so without fear that it will decline in value, as during periods of inflation. c. Instability destroys confidence in a nation’s money, and it will ultimately lose acceptability.

5. Durability a. Because it is in continuous use, money must be durable in order to maintain stability and acceptability.

6. Difficulty to Counterfeit a. Money must be difficult to duplicate illegally in order to maintain stability and acceptability. b. Because modern technology makes it easier to counterfeit paper money, most nations employ special papers and other techniques to thwart counterfeiting E. Types of Money 1. Paper money and coins are the most visible types of money, but there are many others.

2. A chequing account (also called a demand deposit) is money stored in an account that can be withdrawn without advance notice.

3. Savings accounts, also called time deposits, are funds in an interest-earning account that usually cannot be withdrawn without advance notice and/or have limits on the number of withdrawals per period. They are not usually used for transactions.

4. Money market funds are similar to interest-bearing chequing accounts but with more restrictions. a. Generally, in exchange for higher interest rates, the owner of a money market account can write only a limited number of cheques each month, and there may be a restriction on the minimum amount of each cheque.

5. Certificates of deposit (CDs) are savings accounts that guarantee a depositor a set interest rate but require the funds to be left in the financial institution for a specified period. a. If you withdraw funds early from a CD, you may face a substantial financial penalty.

6. Credit cards allow you to promise to pay at a later date by using preapproved lines of credit granted by a bank or finance company. a. They are a popular substitute for cash because of their convenience, easy access, and acceptance around the world. b. Credit cards allow cardholders great flexibility in paying off their purchases. c. Credit cards may be issued by banks, travel and entertainment companies, and 01-386 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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retail store chains. d. Credit card interest rates can be very high and consumer credit card debt is a major cause for concern. Credit cards are one of the most expensive ways to borrow money (although some people choose to pay off their credit card debt monthly).

7. Reward cards are credit cards that carry a benefit to the user.

8. A debit card looks like a credit card but works like a cheque; use of a debit card results in a direct, immediate, electronic payment from the cardholder’s chequing account to a merchant or third party.

9. Cryptocurrency is a digital exchange medium—often called tokens or coins—that uses secure online ledgers enabled by blockchain technology. a. Bitcoin is the most popular, but it has a fluctuating price. b. Cryptocurrencies are not favored by governments because the transactions are difficult to trace, making them useful for illegal transactions.

Specify how the Bank of Canada manages the money supply and Key Terms: regulates the Canadian banking system.  Bank of Canada  The Canadian Financial System  Monetary policy o The Bank of Canada  Open market operations  Desired reserves  Bank rate  Credit controls II. The Canadian Financial System A. The Bank of Canada 1. The nation’s central bank is the Bank of Canada, commonly called “the Bank,” founded in 1934 as a crown corporation responsible for promoting the economic and financial welfare of Canada. a. The Bank of Canada uses different tools to regulate money supply (Table 14.2).

2. The Bank of Canada has five major responsibilities: a. To conduct monetary policy. b. To issue Canada’s bank notes and be responsible for their design and security, distribution, and replacement c. To promote safe, sound, and efficient financial systems. d. To provide high-quality, effective, and efficient funds-management services for the federal government, the Bank, and other clients. e. To supervise payment service providers.

3. Monetary Policy a. Monetary policy refers to the Bank’s methods of controlling the amount of money available in the economy. b. Monetary policy is necessary to balance the supply of and demand for money to minimize economic fluctuations (inflation/deflation). c. The Bank fine-tunes the money supply with four basic tools.

4. Open market operations are the buying and selling of Treasury bills and other investments in the open market by the Bank of Canada. a. This tool is the most commonly employed. b. To expand the supply of money, the Bank buys securities. c. To decrease the supply of money, the Bank sells securities.

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5. The second major tool is desired reserves, the percentage of deposits that the Bank requires banks to hold in reserve; these cannot be loaned to businesses or consumers. a. Changes to the reserves will change how much banks will lend. Because reserves have such a powerful effect on the money supply, the Bank uses open market operations to implement monetary policy.

6. The third tool is the bank rate, the interest rate the Bank of Canada charges for money it lends to any banking institution to meet reserve requirements. a. The Bank is the “lender of last resort” to these institutions. b. When the Bank wants to expand the money supply, it lowers the bank rate; when it wants to decrease the money supply, it raises the bank rate.

7. The final tool available to the Bank is credit controls—the authority to establish and enforce credit rules for financial institutions and some private investors.

8. The Financial System a. The Bank works to promote safe, sound, and efficient financial systems. b. The Bank works with other agencies and market participants to promote the safe and efficient operation of the system’s key elements.

9. Currency a. The Bank issues banknotes and is responsible for designing, producing, and distributing them.

10. Funds Management a. The Bank acts as the fiscal agent for the Government of Canada.

Compare and contrast chartered banks, trust companies, credit Key Terms: unions/caisses populaires, and electronic banking.  Chartered banks  Banking Institutions  Trust companies  Future of Banking  Credit unions/caisses populaires  Canada Deposit Insurance Corporation (CDIC)  Electronic funds transfer (EFT)  Automated banking machine (ABM) A. Overview of the Canadian Financial Services Sector (Table 14.3) B. Banking Institutions 1. Many banks today are hybrids in that they perform two or more functions that were traditionally separated in the banking industry of the past.

2. Chartered banks are the largest and oldest of all financial institutions and rely mainly on chequing and savings accounts as their major source of funds for loans to businesses and individuals. a. Banks today offer a number of services: consumer loans, credit cards, safedeposit boxes, trusts, and securities. b. Legislation permits chartered banks to offer insurance and investment banking products as well. This has placed Canadian banks on the same competitive footing as European banks. c. Banks are increasingly merging, even across international borders. The most

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recent financial crisis and recession accelerated consolidation.

3. Trust Companies are financial institutions that act as fiduciaries or corporate trustees and operate under either provincial or federal legislation and conduct the same activities as a bank.

4. Credit unions/Caisses Populaires are financial institutions owned and controlled by their depositors, who usually have a common employer, profession, trade group, or religion.

5. Insurance for Banking Institutions a. The Canada Deposit Insurance Corporation (CDIC) was established in 1967 to provide an insurance fund that insures individual bank accounts. b. Should a member bank fail, its depositors can recover all of their funds, up to $100,000. c. Limited certain kinds of high-risk trading activities.

C. Electronic Banking 1. Electronic funds transfer (EFT) is the transfer of funds by means of an electronic terminal, telephone, computer, or magnetic tape. The most commonly used EFTs are automated teller machines, automated clearinghouses, and home banking systems.

2. Automated banking machines (ABMs) are the most familiar form of electronic banking and dispense cash, accept deposits, and transfer funds from one account to another.

3. Online banking gives customers access to a growing number of financial services. a. People can utilize banking services through home computers, laptops, PDAs, and smartphones. b. Increasingly sophisticated transactions can be carried out online. c. Computers and telecommunications technology have revolutionized world commerce. i. Consumers and small businesses can now make a bewildering array of financial transactions at home or on the go 24 hours a day. ii. Computers and handheld devices have made online banking convenient.

However, hackers have stolen millions from banking customers by tricking them into visiting websites and downloading malicious software that gives the hackers access to their passwords.

D. Future of Banking 1. Rapid advances in technology are forcing the banking industry to change.

2. More services than ever are available electronically and online.

3. Shadow banking refers to companies performing banking functions of some sort that are not regulated by banking regulators.

Distinguish among non-banking institutions such as insurance Key Terms: companies, pension funds, mutual funds, and finance companies.  Insurance companies  Non-Banking Institutions  Pension funds  Mutual fund  Exchange-traded funds (ETFs)  Brokerage firms  Finance companies A. Non-banking Institutions 1. Insurance companies are businesses that protect their clients against financial losses

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from certain specified risks in exchange for a fee.

2. Pension funds are managed investment pools set aside by individuals, corporations, unions, and some nonprofit organizations to provide retirement income for members. a. Registered retirement savings plans (RRSPs) are a type of private pension fund set up by individuals to provide for their retirement needs; taxes on the interest earned are deferred until withdrawal upon retirement. b. The Tax-Free Savings Account (TSFA) is similar to an RRSP, but the interest is taxfree upon retirement because investors do not deduct their contributions at the time they are made. c. Most corporations provide some kind of pension plan for their employees. d. The Canada Pension Plan/Quebec Pension Plan (CPP/QPP), the largest pension plan, is publicly financed. The federal government collects funds from payroll taxes paid by both employers and employees. Employers deduct this money from employees’ paycheques.

4. Mutual funds pool investors’ funds and invest them in large numbers of welldiversified securities. a. Because of the large numbers of people investing in any one mutual fund, the funds can afford to invest in hundreds or thousands of securities at any one time, minimizing the risks of any single security that does not do well. b. Mutual funds provide professional financial management for people who lack the time and/or expertise to invest in particular securities. c. Money market funds invest in short-term debt securities issued by governments and large corporations.

5. Exchange-traded funds (ETFs) are similar to mutual funds in that they invest in a pool of assets.

6. Brokerage firms a. Brokerage firms buy and sell stocks and bonds for their customers and provide other financial services.

7. Diversified firms and Finance Companies a. Recently, a number of traditionally nonfinancial firms have moved into the financial field. b. Finance companies are businesses that offer short-term loans at substantially higher rates of interest than banks; they are often a lender of last resort for individuals and businesses with poor credit ratings.

Describe investment banking and the various securities markets.

Key Terms:  The Securities Markets  Securities markets o Investment Banking  Primary market o Stock Markets  Secondary market o The Over-the-Counter Market  Investment banking o Measuring Market Performance  Investment banker  Over-the-counter (OTC) market III. The Securities Markets D. Securities markets provide the mechanism for buying and selling securities.

1. A company that needs more money may be able to obtain financing by issuing stock.

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E.

F.

G.

H.

Ferrell et al: Business: A Changing World, 8ce

2. When stock is for the first time, it is called a new issue.

3. A company that offers its stock to the public for the very first time is said to be “going public,” and the sale is called an initial public offering.

4. New issues are sold directly to the public and to institutions through the primary market, the market where firms raise financial capital. After the first sale, the securities trade in the secondary markets by brokers.

5. Secondary markets are stock exchanges where investors trade their securities with other investors rather than with the company that issued the stock or bonds. a. Secondary markets permit the trading of previously issued securities. b. Secondary market trades may take place on organized exchanges or in what is known as over-the-counter markets.

Investment Banking 1. Investment banking is the sale of stocks and bonds for corporations. a. Investment bankers help firms to establish prices for their securities as well as to assist in mergers.

Stock Markets 1. Formerly exchanges were divided into organized exchanges and over-the-counter markets.

2. The TMX Group, the NYSE and NASDAQ are now publicly traded companies (previously were not-for-profit organizations). a. Both exchanges bought or merged with electronic exchanges for cheaper and faster trading than floor trading. b. NASDAQ was traditionally an electronic market.

The Over-the-Counter Market 1. The over-the-counter (OTC) market is a network of dealers all over the country linked by computers, telephones, and Teletype machines. a. Mostly consists of penny stocks, other small stocks, and illiquid bank stocks. b. NASDAQ is no longer considered an OTC market because it is now classified as an exchange.

Measuring Market Performance 1. There are a variety of averages and indexes available for comparison purposes. a. An index compares current stock prices with those in a specified base period. b. An average is the average of certain stock prices.

2. Many investors follow the activity of the S&P/TSX 60 to see whether the stock market has gone up or down. Thirty companies currently make up the index.

(Figure 14.1 and Table 14.4).

3. Investors must be well-informed to make sound financial decisions.

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Willing to Lose: Young Investors Day Trade Robinhood is a financial services company that processes online stock trades without commissions.

During the stay-at-home lockdowns of the COVID-19 pandemic in 2020, day trading—speculating on securities within the same trading day—became popular for many young investors in their 20s and 30s. One question is whether these types of traders will be taken advantage of by professional, big institutional traders who have access to stock data by the second and build mathematical algorithmic trading models.

1. Why do you think that Robinhood is so popular with young investors?

Answers will vary, but most students will mention the fact that the trades are commission free and permit fractional share purchases.

2. What do professional and institutional investors think about Robinhood investors?

Institutional investors have suggested that while the generation of Robinhood investors might have short-term success, buying these types of companies on the hope that they will survive is not the way to build. Given the amount of “real-time” data available to professionals, it is very hard for amateurs to be successful in the long term.

3. What is the “Odd Lot Theory” and does it make any sense to you?

The Odd Lot Theory goes that small investors are prone to making emotional decisions and they buy at market tops and sell at market bottoms. Answers will vary as to whether it makes sense to an individual student.

Entrepreneurship in Action: Why Dogecoin Is No Longer a Joke 1. What is cryptocurrency?

Cryptocurrency is a digital currency that uses cryptography (writing or solving codes) for security and is not issued by any government.

2. How are cryptocurrencies purchased?

Cryptocurrency is backed by a decentralized network of computers that use computing power to keep up with and verify transactions. Using blockchain technology, transfers of funds between parties are validated, coded, and lumped together on a chronological, public ledger.

3. Why are cryptocurrencies such as Dogecoin risky investments?

The risks include the following: The lack of a centralized entity makes it vulnerable to illicit activities, such as money laundering and tax evasion, and cryptocurrencies do not have a stable value and are subject to speculation.

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Going Green: Is the World Bank Serious About Sustainability?

Environmental groups have accused the World Bank of funding projects that harm the environment.

As the importance of sustainability grows, the World Bank has taken steps to curb climate change and support renewable energy initiatives. The World Bank adopted a new set of environment and social policies called the Environmental and Social Framework (ESF) which applies to all new World Bank investment project financing.

1. Describe what the World Bank does. Why is it important?

The World Bank provides loans and other financial assistance to developing countries. The loans fund a variety of projects, including education, infrastructure, and public administration.

2. Why is sustainability becoming a major issue for the World Bank?

Environmental groups have accused the World Bank of funding projects that harm the environment and the importance of sustainability has grown.

3. Do you feel that the World Bank should make sustainability a priority?

Answers will vary.

Technology and the Economy: Digging into the Digital Wallet 1. Do you think digital wallets will revolutionize electronic banking and in-store transactions?

Answers will vary, but students need to support their answer, but most students will answer that digital wallets will have a tremendous impact.

2. How do you think digital wallets will affect traditional banks?

Again, answers will vary, but students need to support their answer. Many wallet apps have the added convenience of storing loyalty cards, plane tickets, and event tickets which will probably force traditional banks to respond.

3. What are some of the risks of digital wallets? What can be done to mitigate these risks?

Many consumers are concerned about the risk of identity theft, and many businesses do not have the technology to accept these types of payments.

Consumers can add an additional layer of protection to use multi- or two-factor authentication on their mobile device.

So You’re Interested in Financial Systems or Banking Why are internships a good way to try out an industry before going into it as a career?

Just because classes in a certain field are interesting, it does not mean that you will enjoy working in that industry. Internships provide hands-on, real-world experience with jobs that you are interested in applying for after graduation. They are a low-stakes way to try on different fields until you find one 01-393 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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that fits. Internships also are a great way to network and build up valuable connections before you get out into the working world. They also signal to future employers that you are interested in learning and working hard and are willing to take extra steps to be successful.

END OF CHAPTER TEACHING RESOURCES Build Your Business Plan: Money and the Financial System An approach to this chapter would be for students to assume that business is an initial success (oh, if wishes were horses, all beggars would ride!). Involve the students in a discussion of what they should do with their money. Should they reinvest it in the business? Pay off new equipment early? Try to impress on them that many businesses are seasonal or may experience declining profits during an economic decline, so they need to be prepared for it. Those who fail to plan, plan to fail!

At this point, students should be in the final stages of their written business plan and are beginning to plan and organize their oral presentations. Tell the students they should look at the judges as possible investors for their business. Remind them that they need to capture and hold the audience’s attention in the oral presentation.

See for Yourself Case: Taking a Bite Out of Purchasing Power Parity With the Big Mac Index In 1986, Pam Woodall introduced the Big Mac Index as an illustration of purchasing power parity (PPP), which is the theory that currencies will go up or down in value to keep their purchasing power consistent across countries.

The Big Mac Index is based on the theory of PPP that says, in the long run, exchange rates should move toward the rate that would equalize the prices of an identical basket of goods and services in any two countries. Big Mac is used since it is sold in 140 countries. There are numerous limitations including transportation and promotion costs, inflation, and so on. Despite its limitations, the PPP still serves its purpose every year by providing a quick and easy measure of currency values. Users should not rely too heavily on its calculations and should always investigate further.

1. What is purchasing power parity?

Purchasing power parity (PPP) is the theory that currencies will go up or down in value to keep their purchasing power consistent across countries.

2. Why is a McDonald’s Big Mac used to create the index?

McDonald’s was chosen because it is sold in 140 countries and is familiar to those trying to understand PPP. 3. What are the limitations of the Big Mac Index?

The limitations of PPP include the following: the idea that the price of a Big Mac will be dependent on local production, transportation costs, and promotion costs and that there may be price variation based on geographic location (e.g., city versus rural area). Other issues not 01-394 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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taken into account in the PPP include government intervention (taxes and tariffs), market competition (monopolies), and inflation.

Team Exercise Mutual funds pool individual investor dollars and invest them in a number of different securities.

Students will go to finance.yahoo.com and select some top-performing funds using criteria such as sector, style, or strategy. They will assume that their group has $100,000 to invest in mutual funds.

Each group will select five funds in which to invest, representing a balanced (varied industries, risk, etc.) portfolio. Students will then defend their selections.

SUPPLEMENTAL TEACHING RESOURCES Check Your Progress 1. What are the six characteristics of money? Explain how the dollar has those six characteristics. a. Acceptability—the dollar is acceptable as payment for goods and services and settlement of debts. b. Divisibility—money must be divisible into small units to facilitate exchanges. The dollar is divisible into pennies, nickels, dimes, and quarters. c. Portability—money must be easily transported. The dollar is lightweight and folds easily. d. Durability—dollars last an average of 18 months and can be folded thousands of times. e. Stability—the dollar is reasonably stable. A dollar will buy a dollar’s worth of goods and services today or next week. f.

Difficulty of counterfeiting—the dollar is extremely difficult to counterfeit because of the paper and ink used in printing.

2. What is the difference between a credit card and a debit card? Why are credit cards considerably more popular with consumers?

A credit card allows consumers to make purchases and pay for them over time at a specified interest rate. With a debit card, the amount of a purchase is immediately deducted from the consumer’s account if enough funds are available. Credit cards are considerably more popular with consumers because they allow instant financing of purchases and are generally accepted around the world. Debit cards, however, are beginning to grow in popularity because of their convenience.

3. Discuss the economic goals the Bank of Canada must try to achieve with its monetary policy.

The Bank of Canada’s basic goal is defined as regulating, “credit policy and currency in the best interests of the economic life of the nation”. This basic goal is seen to be best served by maintaining low inflation while encouraging long-term stable economic growth. It does this by controlling the money supply, influencing interest rates and oversight of the clearing and payments system.

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4. Explain how the Bank of Canada uses open market operations to expand and contract the money supply.

The open market activities used to expand the money supply involve the Bank of Canada buying government securities. More money is placed in circulation because the Bank of Canada pays cash for the securities. The Bank of Canada contracts the money supply by selling government securities. Money is transferred from the buyers’ accounts into the Bank of Canada’s account, thus reducing the supply of money.

5. What are the basic differences between chartered banks and trust companies?

Although both institutions offer chequing accounts, savings accounts, and make loans, chartered banks loan mainly to individuals and businesses, and trust companies primarily make mortgage loans and offer trustee services.

6. Why do credit unions charge lower rates than chartered banks?

Credit unions charge lower rates because they are owned by their members and operated for them. Chartered banks must return a significant return on investment for their shareholders, whereas credit union members, who are the owners, prefer to get their returns in the form of higher interest rates on accounts and lower rates on loans.

7. Why do finance companies charge higher interest rates than chartered banks?

Finance companies charge higher rates because they are usually a lender of last resort for customers whose other options have been exhausted. They assume a higher risk level and compensate by charging a higher interest rate.

8. How are mutual funds, money market funds, and pension funds similar? How are they different?

Mutual funds, money market funds, and pension funds are similar in that each type of fund pays interest based on the performance of a portfolio of securities. In addition, individual investors do not select the specific securities in which the investment is made. The portfolio is managed for the investor and may include a wide variety of securities. Money market funds, however, focus on investment in short-term securities and function more like specialized chequing accounts. Finally, unlike mutual funds and money market funds, pension funds are generally not accessible (without penalty) until the investor retires.

9. What are some of the advantages of electronic funds transfer systems?

Advantages of electronic funds transfer include greater security, greater efficiency and convenience, and lower costs in completing financial transactions.

Get Involved 1. Survey the banks and credit unions in your area, and put together a list of interest rates paid on the various types of accounts. Find out what, if any, restrictions are in effect for CDs and savings accounts. In which type of account and in what institution would you deposit your money? Why? 01-396 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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Students’ answers will vary depending upon their locations.

2. Survey the same institutions as above, this time inquiring as to the rates asked for each of their various loans. Where would you prefer to obtain a car loan? A home loan? Why? Students’ answers will vary depending upon their locations.

Build Your Skills: Managing Money Background You have just graduated from college and have received an offer for your dream job (annual salary: $45,000). This premium salary is a reward for your hard work, perseverance, and good grades. It is also a reward for the social skills you developed in college doing service work as a tutor for high school students and interacting with the business community. You are engaged and plan to be married this summer. You and your spouse will have a joint income of $200,000, and the two of you are trying to decide the best way to manage your money.

Task Research available financial service institutions in your area, and answer the following questions.

This exercise is designed to have students research (through the Chamber of Commerce, Internet, etc.) available financial services in the local area. This chapter provides the professor with a good opportunity to ask someone from the local financial community to speak to the class about the issues posed in this question. The answers for questions 1 and 2 are based on chapter material. The answer to question 3 is not covered in the text but is designed to help students understand that it is never too early to start financial planning for retirement.

1. What kinds of institutions and services can you use to help manage your money?

There are a wide variety of banking and nonbanking institutions that can help individuals manage money. Banking institutions include commercial banks, savings and loans, and mutual savings banks. Nonbank institutions include insurance companies, pension funds, mutual funds, brokerage firms, and finance companies. While nonfinancial firms such as General Electric Capital exist, they specialize in financing large businesses rather than individuals.

2. Do you want a full-service financial organization that can take care of your banking, insurance, and investing needs, or do you want to spread your business among individual specialists?

Why have you made this choice?

Each of the institutions mentioned in the answer to the first question has traditionally specialized in limited products. For example, savings and loans primarily made housing loans, brokerage firms primarily sold securities to the public, and insurance companies sold life, property, and casualty insurance. However, in the past few decades, a consolidation of financial services has been taking place. Answers to the question of whether to have many specialized providers or one provider of financial services will vary, of course. Considerations in making such a decision should include cost (which may be lower with the one-stop approach), privacy, time, and the knowledge base of the individual. As evidenced by recent mergers, the trend is to 01-397 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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provide full-service, one-stop financial shopping to consumers.

3. Which single financial institution is likely to be best able to meet your needs now? Why? Student research should include information on Retirement Savings Plans. Discussion could center on whether students predict government pension plans alone will provide for their retirement and if not, alternative strategies they may use for retirement planning. Research should also include information about RRSPs and TSFAs. To provide a real-life example, professors may wish to explain the retirement plan utilized by their university.

Solve the Dilemma: Seeing the Financial Side of Business Dr. Stephen Hill, a successful optometrist, has tinkered with various inventions for years. Having finally developed what he believes is his first saleable product (a truly scratch-resistant and lightweight lens), Hill has decided to invest his life savings and open Hill Optometrics to manufacture and market his invention.

Unfortunately, despite possessing true genius in many areas, Hill is uncertain about the “finance side” of business and the various functions of different types of financial institutions in the economy. He is, however, fully aware that he will need financial services such as chequing and savings accounts, various short-term investments that can easily and quickly be converted to cash as needs dictate, and sources of borrowing capacity—should the need for either short- or long-term loans arise. Despite having read mounds of brochures from various local and national financial institutions, Hill is still somewhat unclear about the merits and capabilities of each type of financial institution. He has turned to you, his 11th patient of the day, for help.

1. What services of each financial institution is Hill’s new company likely to need?

From chartered banks, Hill would need short- and long-term financing, chequing accounts, and short-term investment capabilities. From savings and loan associations or mutual savings banks, Hill would need savings account services and perhaps mortgage services if he chooses to use his personal home to finance his business operation. Finally, from a credit union, Hill would need chequing and savings account services, access to financing (probably through mortgage), and short-term investment opportunities.

2. Which single financial institution is likely to be best able to meet Hill’s small company’s needs now? Why? Hill’s new company is likely to need the services of a chartered bank. Specifically, it will need services such as short- and long-term financing, corporate (and/or personal) chequing accounts, and the availability of short-term investments (money market accounts, certificates of deposit, and so forth). In addition, many chartered banks offer financial consultation to small business owners, a service Hill may find desirable. Credit unions represent another possibility if one is available in his area that provides services for small businesses. These needs may go unmet at savings and loan or mutual savings financial institutions.

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CONNECT ACTIVITIES The Race to Develop Digital Currency Learning Objectives: 14-2 Describe various types of money. 14-3 Specify how the Federal Reserve Board manages the money supply and regulates the American banking system.

Activity Summary: While paper money and coins are the most visible type of currency, they are insignificant when compared to the value of money kept in savings, chequing, and other monetary accounts. As global business and technology continue to expand, we must be aware of the issues and benefits of digital currencies. Students will read a case about digital currency. iSeeIt! Video Case: Equity and Debt Financing Learning Objective: 14-5 Describe investment banking and the various securities markets.

Activity Summary: This short video describes how a business could raise additional funds by either borrowing money (debt), selling ownership in the company (equity), or using a combination of both.

How to Use Activity: Extend this activity by creating a personal connection—connecting debt financing to a student’s life through the understanding of purchasing an automobile. Create a link between the forms of debt financing from the business environment to a major life purchase. (Note to Professor: A cross-curricular connection can be generated by having students factiously role-play the purchasing of a car through the use of tracking a down payment, a loan, interest, and more through spreadsheet software.)

Class Discussion: How would you describe debt and equity? What are the positive and negative effects of borrowing money?

Making Money Work for Molly’s Meal Maker Learning Objective: 14-2 Describe various types of money.

Activity Summary: Students will learn about a business named Molly’s Meal Maker and how she balances the responsibilities of operating a business with her financial future. Students will learn about money and financial systems throughout the case.

How to Use Activity: Utilizing the basic concepts about money presented in the video and throughout the chapter, have students create their own personal budget. Students can create a budget on a sheet of paper or utilizing a spreadsheet application like Microsoft Excel or Google Sheets. Reinforce to students the importance of having a budget and responsible spending.

Class Discussion: Why is having a budget important? How do you know whether you can afford something? What items do you buy that you consider “needs?” What items do you consider “wants?”

How much money should you save?

BONUS TEACHING RESOURCES Additional Discussion Questions 1. What is meant by a demand deposit?

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A demand deposit is money left in an account in a financial institution that can be withdrawn without advance notice.

2. Why have credit cards become a popular substitute for money?

Credit cards have become popular because they are a convenient substitute for carrying cash; they allow people to avoid having to carry large sums of money and also provide short-term credit.

3. What are the advantages of automated banking machines (ABMs) for customers? For banks?

For customers, ABMs offer 24-hour service, ready for providing cash or accepting deposits.

Convenience of location is another benefit for customers. For banks, the main benefit of ABMs is lowered cost per transaction. ABM transactions cost banks less than half that of personal teller transactions.

Controversial Issue The Historical Struggle: Sales Manager versus Credit Manager The careful handling of accounts receivable is a must for a successful firm that sells on credit. As in so many aspects of finance, the precarious equilibrium is the secret of astute management, and when that equilibrium is allowed to deteriorate, there will be problems for the firm. In most firms, there are two opposing forces that influence the optimum point of balance. Those forces are the credit manager and the sales manager.

The credit manager is charged with seeing that the firm does not extend credit to bad risks. The credit manager has at his or her disposal a whole arsenal of devices to determine and ensure the creditworthiness of those who want to charge items at the store. The credit manager knows that the way to avoid risk altogether is to demand cash for all purchases. This way no one would default on payments because there would be no payments to worry about, only an up-front, before-delivery lump-sum payment by the customer to the store. Much as he or she may want to ignore the fact, the credit manager knows that such a pure, risk-free environment will greatly discourage sales. So, the credit manager allows credit contracts for those people who have evidence that they can pay on time and completely. The problem is that the credit manager tends to interpret that evidence in a manner slightly different from that of his antagonist in this financial drama—the sales manager.

The sales manager might approach a client by saying, “Out of work now, Mr. Cline? But those relief payments are coming in regularly, aren’t they? Good. Then you can easily afford $50 monthly payments on this sofa. Sign here, and we’ll have our truck deliver the sofa to your house today. Thanks for the business.”

You can imagine how the credit manager would react when he interviews Mr. Cline and sees the firm is expecting $50 a month from a relief recipient. The credit manager will refuse credit to Mr. Cline— and the sales manager will hit the ceiling. “No credit; what are you talking about? Aren’t you credit 01-400 Copyright © 2023 by McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.

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people playing on our team? How can we make sales if you people turn everyone down?”

Successful firms stress to both credit and sales staff that both are important elements and that striking a fair balance does not mean defeat for either side but a victory for the firm.

Discussion Questions 1. Can you devise strategies for the two viewpoints in a firm to live together harmoniously?

Students’ answers will vary. They must explain and support their strategies, however.

2. How can both the sales manager and credit manager learn to appreciate each other’s responsibilities?

Students’ answers may vary. One possible way, however, would be for the firm to stress the importance of both and encourage lots of communication between the two managers. By communicating their side, each manager may be able to explain his or her position to the other in a practical, rather than a defensive, manner.

Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 1. One of the programs at The Canadian Foundation for Economic Education (CFEE) (cfee.org/ourprograms) 2. One of the financial literacy programs at the Canadian Bankers Association website (cba.ca/about-your-money-students) 3. The Behavioural Bias Checker on the OSC website (www.getsmarteraboutmoney.ca) 4. Security Concerns With Online Banking Guest Speaker Suggestions 1. An online financial literacy seminar (cba.ca/about-your-money-students).

2. A representative from a financial institution who can speak about budgeting, saving, investing, borrowing, and so on.

3. A representative of a firm providing mutual funds.

4. An investment advisor to discuss different aspects of stocks and bonds.

5. A professor specializing in banking and finance to speak about topics pertinent to the chapter.

Teaching Suggestions 1. Start out by having the class read an article related to financial markets that you select from the NextGen Edition of The Globe and Mail, The Financial Post or a similar publication. Have students discuss with the person sitting next to them how this article relates to the chapter content.

2. Use the “Lecture Outline and Notes” to review chapter content.

3. Cover “Get Involved” in class.

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