Business Essentials, 10E Ronald J Ebert Solution Manuals

Business Essentials, 10E

By Ronald J. Ebert Ricky W. Griffin

Email: Richard@qwconsultancy.com

INTRODUCTION TO BUSINESS BUSG 1301 SYLLABUS

COURSE DESCRIPTION The course introduces the student to the contemporary business world, the business of managing, people in organizations, the principles of marketing, managing information, and financial issues.

INSTRUCTOR INFORMATION Professor: Phone: E-mail: Office Hours: TBA TEXTBOOK INFORMATION: Ebert and Griffin. Business Essentials 10e, Prentice Hall, 2015 SEMESTER/LOCATION/TIME Spring College Campus: M and W, 11:30 AM to 1:00 PM 16 Weeks: January 17 to May 14, 201X CRN 30792 CREDIT: 3 SEMESTER HOURS PREREQUISITES None COURSE GOALS The primary objective is to give the student an understanding of basic business principles. Global business, entrepreneurship, management, marketing, information technology, and financial management will be discussed. Another purpose of this course is to provide an opportunity for the student to learn first-hand about a business through the interview process.

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1

COURSE CONTENT STUDENT LEARNING OUTCOMES Upon completion of this course, the student should be able to: 1.

2.

3.

4.

5.

6.

Discuss how businesses achieve success by demonstrating ethical behavior.

Explain the strategies for business success in the relationship era.

Demonstrate the use of empowerment in management.

Describe the elements of customer-driven marketing.

Demonstrate the use of technology in business.

Discuss the basic elements of financial management and investing.

STATEMENT OF FOUNDATION SKILLS AND WORKPLACE COMPETENCIES (SCANS SKILLS) XYZ College/University is committed to preparing every student with the knowledge and skills needed to succeed in today’s dynamic work environment. Toward this end, the following foundation skills and workplace competencies have been designed into the curriculum for this course: Foundation Skills • Demonstrates Basic Skills—Reading (F1), Writing (F2), Arithmetic (F3), Mathematics (F3), Listening (F4), Speaking (F5) • Demonstrates Thinking Skills—Creative (F6), Decision making (F7), Problem solving (F8), Seeing things through the mind’s eye (F9), Knowing how to learn (F10), Reasoning (F11) • Exhibits Personal Qualities—Responsibility (F12), Self-esteem (F13), Social (F14), Self-management (F15), Integrity/Honesty (F16), Workplace Competencies • Manages Resources—Allocates time (C1), Allocates money (C2), Allocates material and facility resources (C3), Allocates human resources (C4) • Exhibits Interpersonal Skills—Participates as team member (C5), Teaches others (C6), Serves clients/customers (C7), Exercises leadership (C8), Negotiates to arrive at decisions (C9), Works with cultural diversity (C10) • Manages Information—Acquires and evaluates (C11), Organizes and maintains (C12), Interprets and Communicates (C13), Uses computers to process (C14) • Uses Systems and Technology—Understands systems (C15), Monitors and corrects performance (C16), Improves and designs systems (C17), Selects technology(C18), Applies technology to task (C19), Maintains and troubleshoots (C20) LAB REQUIREMENTS None STUDENTS WITH DISABILITIES ADA STATEMENT ACADEMIC HONESTY

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2

SCHOLASTIC DISHONESTY (STUDENT HANDBOOK) Students are responsible for conducting themselves with honor and integrity in fulfilling course requirements. Penalties and/or disciplinary proceedings may be initiated by College System officials against a student accused of scholastic dishonesty.

“Scholastic dishonesty” includes, but is not limited to, cheating on a test, plagiarism, and collusion. “Cheating” on test includes: • • • • • • •

Copying from another student’s test paper.

Working collaboratively in tests, which are supposed to be submitted individually.

Using materials during a test that are not authorized by the person giving the test.

Collaborating with another student during a test without authority.

Knowingly using, buying, selling, stealing, transporting, or soliciting in whole or in part the contents of an unadministered test.

Bribing another person to obtain a test that is to be administered.

Purchasing a test and submitting it.

“Plagiarism” means the appropriation of another’s work and the unacknowledged incorporation of that work in one’s own written work offered for credit.

“Collusion” means the unauthorized collaboration with another person in preparing written work offered for credit.

ATTENDANCE AND WITHDRAWAL POLICIES COURSE REQUIREMENTS Students will complete a group project, three essay exams, one final examination, team exercises, an online presentation, and discussion questions.

GRADING POLICY The student will be evaluated as follows: Major exam 1 Major exam 2 Major exam 3 Group project Presentation (online) Final exam Homework Total

..

15% 15% 15% 15% 10% 15% 15% 100%

3

Grading Scale: A = 90–100 B = 80–89 C = 70–79 D = 60 – 69 F = Below 60 A grade of “I” (incomplete) is conditional and the student receiving this grade must arrange with the instructor to complete the work for the course within six months after the end of the term.

This requires a document signed by the student prior to the final exam.

EXTRA CREDIT Students who are failing may speak to the instructor about extra credit, which may be assigned at the instructor’s discretion.

TESTING There will be three major exams, a final, and a group project/presentation. The final will be comprehensive. There will be many small online activities which will make up the equivalent of one exam grade and will also be counted as participation. In addition, there may be several unannounced quizzes during the semester if students come to class unprepared. Tests are not accepted late.

MAKE-UP POLICY It is expected that assignments, including the term project, will be completed on time. Late work will NOT be accepted. Projects must be e-mailed to the professor within the time frame and online tests will be removed from the course platform after the listed date. Students should coordinate with the instructor should the student miss a major component of the grade.

PROJECT, ASSIGNMENTS, PORTFOLIO, AND PRESENTATION PERFORMANCE OBJECTIVES Given the specifications for a semester project, the guidelines for a class presentation, in-class team exercises, class assignments, class reports, quizzes and exams, and exercises should be typed. Projects are not accepted late.

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4

Week 1

2

3

4

Date

Lecture topic and selected In-Class Exercises Course introduction and overview The U.S. Business Environment What do you know about business?

Scanning the environment Comparing economic systems VIDEO: BancFirst: Economics & Banking

Chapter

Understanding Business Ethics and Social Responsibility What’s ethical in business?

Ethical judgment making Can ethics be taught?

VIDEO: Jones Soda

2

Entrepreneurship, New Ventures, and Business Ownership The role of small business The wide world of risk Entrepreneurship and the growth of business VIDEO: Wild Planet

3

Understanding the Global Context of Business Shoes in the global marketplace Assessing your own culture VIDEO: Mini

4

1

Business Plan Part 1

4

5

Managing the Business The management process Sam Adams makes headway How do your goals stack up?

VIDEO: Pizza Hut

5

Organizing the Business Organizational structure Centralization versus decentralization Making the grade VIDEO: MyGym

6

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5

Week

Date

Topic

Chapt er

TEST 1 Chapters 1–6 Operations Management and Quality for Producing Goods and Services Are you getting what you paid for?

Do you really have to be on time for that meeting in Cairo?

VIDEO: Method

7

Business Plan Part 2 6

7

Employee Behavior and Motivation Balancing inducements and contributions What are you looking for in a job?

Motivation in global firms VIDEO: Whole Foods

8

Leadership and Decision Making Are you a leader or a manager?

Transformational vs. transactional Was Steve Jobs a charismatic leader?

VIDEO: Southwest Airlines

9

Human Resource Management and Labor Relations Writing a job description Working with friends What motivates employees?

VIDEO: Patagonia

10

Business Plan Part 3 8

9

Marketing Processes and Consumer Behavior Assessing the marketing environment Data mining Social networking and job seeking VIDEO: DC Shoes

11

Developing and Pricing Products Why do they charge more?

Getting a stimulus boost with pricing and promotion VIDEO: Joby

12

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6

Distributing and Promoting Products What’s the best way to reach them?

13

TEST 2: Chapters 7–11 Business Plan Part 4 Information Technology (IT) for Business IT devices LaidOffCamp Is that ethical?

VIDEO: Zip Car 10

The Role of Accountants and Accounting Information Do you use accounting?

Interpreting financial statements Annual reports VIDEO: POPS Diner

13

15

Business Plan Part 5 11

12

Understanding Money and the Role of Banking How much would that be in, say, chocolate bars?

Your check is not in the mail Fixing the system on a national scale VIDEO: BancFirst: Financial Management

16

Managing Business Finances What should I buy?

What’s wrong with a little inside scoop?

Accountability goes professional VIDEO: Capital Advisors

17

TEST 3: Chapters 14–17 Business Plan Part 6 FINAL EXAM

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INTRODUCTION TO BUSINESS BUSG 1301 SYLLABUS

COURSE DESCRIPTION The course introduces the student to the contemporary business world, the business of managing, people in organizations, the principles of marketing, managing information, and financial issues.

INSTRUCTOR INFORMATION Professor: Phone: Email: Office Hours: TBA TEXTBOOK INFORMATION: Ebert and Griffin. Business Essentials 10e, Prentice Hall, 2015 SEMESTER/LOCATION/TIME Spring College Campus: M and W, 11:30 AM to 1:00 PM 16 Weeks: January 17 to May 14, 201X CRN 30792 CREDIT: 3 SEMESTER HOURS PREREQUISITES None COURSE GOALS The primary objective is to give the student an understanding of basic business principles. Global business, entrepreneurship, management, marketing, information technology, and financial management will be discussed. Another purpose of this course is to provide an opportunity for the student to learn first-hand about a business through the interview process.

..

1

COURSE CONTENT STUDENT LEARNING OUTCOMES Upon completion of this course, the student should be able to: 1.

2.

3.

4.

5.

6.

Discuss how businesses achieve success by demonstrating ethical behavior.

Explain the strategies for business success in the relationship era.

Demonstrate the use of empowerment in management.

Describe the elements of customer-driven marketing.

Demonstrate the use of technology in business.

Discuss the basic elements of financial management and investing.

STATEMENT OF FOUNDATION SKILLS AND WORKPLACE COMPETENCIES (SCANS SKILLS) XYZ College/University is committed to preparing every student with the knowledge and skills needed to succeed in today’s dynamic work environment. Toward this end, the following foundation skills and workplace competencies have been designed into the curriculum for this course: Foundation Skills • Demonstrates Basic Skills—Reading (F1), Writing (F2), Arithmetic (F3), Mathematics (F3), Listening (F4), Speaking (F5) • Demonstrates Thinking Skills—Creative (F6), Decision making (F7), Problem solving (F8),Seeing things through the mind’s eye (F9), Knowing how to learn (F10), Reasoning (F11) • Exhibits Personal Qualities—Responsibility (F12), Self-esteem (F13), Social (F14), Self-management (F15), Integrity/Honesty (F16), Workplace Competencies • Manages Resources—Allocates time (C1), Allocates money (C2), Allocates material and facility resources (C3), Allocates human resources (C4) • Exhibits Interpersonal Skills—Participates as team member (C5), Teaches others (C6), Serves clients/customers (C7), Exercises leadership (C8), Negotiates to arrive at decisions (C9), Works with cultural diversity (C10) • Manages Information—Acquires and evaluates (C11), Organizes and maintains (C12), Interprets and Communicates (C13), Uses computers to process (C14) • Uses Systems and Technology—Understands systems (C15), Monitors and corrects performance (C16), Improves and designs systems (C17), Selects technology(C18), Applies technology to task (C19), Maintains and troubleshoots (C20) LAB REQUIREMENTS None STUDENTS WITH DISABILITIES ADA STATEMENT ACADEMIC HONESTY

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2

SCHOLASTIC DISHONESTY (STUDENT HANDBOOK) Students are responsible for conducting themselves with honor and integrity in fulfilling course requirements. Penalties and/or disciplinary proceedings may be initiated by College System officials against a student accused of scholastic dishonesty.

“Scholastic dishonesty” includes, but is not limited to, cheating on a test, plagiarism, and collusion. “Cheating” on test includes: • • • • • • •

Copying from another student’s test paper.

Working collaboratively in tests, which are supposed to be submitted individually.

Using materials during a test that are not authorized by the person giving the test.

Collaborating with another student during a test without authority.

Knowingly using, buying, selling, stealing, transporting, or soliciting in whole or in part the contents of an unadministered test.

Bribing another person to obtain a test that is to be administered.

Purchasing a test and submitting it.

“Plagiarism” means the appropriation of another’s work and the unacknowledged incorporation of that work in one’s own written work offered for credit.

“Collusion” means the unauthorized collaboration with another person in preparing written work offered for credit.

ATTENDANCE AND WITHDRAWAL POLICIES COURSE REQUIREMENTS Students will complete a group project, three essay exams, one final examination, team exercises, an online presentation, and discussion questions.

GRADING POLICY The student will be evaluated as follows: Major exam 1 Major exam 2 Major exam 3 Group project Presentation (online) Final exam Homework Total

15% 15% 15% 15% 10% 15% 15% 100%

..

3

Grading Scale: A = 90–100 B = 80–89 C = 70–79 D = 60 – 69 F = Below 60 A grade of “I” (incomplete) is conditional and the student receiving this grade must arrange with the instructor to complete the work for the course within six months after the end of the term.

This requires a document signed by the student prior to the final exam.

EXTRA CREDIT Students who are failing may speak to the instructor about extra credit, which may be assigned at the instructor’s discretion.

TESTING There will be three major exams, a final, and a group project/presentation. The final will be comprehensive. There will be many small online activities which will make up the equivalent of one exam grade and will also be counted as participation. In addition, there may be several unannounced quizzes during the semester if students come to class unprepared. Tests are not accepted late.

MAKE-UP POLICY It is expected that assignments, including the term project, will be completed on time. Late work will NOT be accepted. Projects must be emailed to the professor within the time frame and online tests will be removed from the course platform after the listed date. Students should coordinate with the instructor should the student miss a major component of the grade.

PROJECT, ASSIGNMENTS, PORTFOLIO, AND PRESENTATION PERFORMANCE OBJECTIVES Given the specifications for a semester project, the guidelines for a class presentation, inclass team exercises, class assignments, class reports, quizzes and exams, and exercises should be typed. Projects are not accepted late.

..

4

Week 1

Date

Lecture topic and selected In-Class Exercises Course introduction and overview The U.S. Business Environment For the online course, use: What do you know about business Scanning the environment Comparing economic systems VIDEO: BancFirst: Economics & Banking BizSkill: Supply and Demand and

Chapter 1

2

Understanding Business Ethics Responsibility For the online course, use: What’s ethical in business?

Ethical judgment making Can ethics be taught?

VIDEO: Jones Soda BizSkill: Ethics & Social Responsibility

Social

2

3

Entrepreneurship, New Ventures, and Business Ownership For the online course, use: The role of small business The wide world of risk Entrepreneurship and the growth of businesses VIDEO: Wild Planet BizSkill: Are You an Entrepreneur?; Getting Your Business Off the Ground

3

4

Understanding the Global Context of Business For the online course, use: Shoes in the global marketplace Assessing your own culture VIDEO: Mini BizSkill: Going Global

4

Business Plan Part 1 5

Managing the Business For the online course, use: The management process Sam Adams makes headway How do your goals stack up?

VIDEO: Pizza Hut

5

..

5

6

BizSkill: Plan for Success Organizing the Business For the online course, use: Organizational structure Centralization versus decentralization Making the grade VIDEO: MyGym

6

TEST 1 Chapters 1–6 7

Operations Management and Quality for Producing Goods and Services For the online course, use: Are you getting what you paid for?

Do you really have to be on time for that meeting in Cairo?

VIDEO: Method BizSkill: Improving a Business

7

Business Plan Part 2 8

Employee Behavior and Motivation For the online course, use: Balancing inducements and contributions What are you looking for in a job?

Motivation in global firms VIDEO: Whole Foods BizSkill: Team Management

8

9

Leadership and Decision Making For the online course, use: Are you a leader or a manager?

Transformational vs. transactional Was Steve Jobs a charismatic leader?

VIDEO: Southwest Airlines

9

10

Human Resource Management and Labor Relations For the online course, use: Writing a job description What motivates employees?

Working with friends VIDEO: Patagonia BizSkill: HR Manaugement/Hiring a New Employee

10

Business Plan Part 3

..

6

11

Marketing Processes and Consumer Behavior For the online course, use: Assessing the marketing environment Data mining Social networking and job seeking VIDEO: DC Shoes BizSkill: Product Development

11

12

Developing and Pricing Products For the online course, use: Why do they charge more?

Getting a stimulus boost with pricing and promotion VIDEO: Joby BizSkill: Pricing Strategies and Objectives

12

Distributing and Promoting Products For the online course, use: What’s the best way to reach them?

13

TEST 2: Chapters 7–11 13

Information Technology (IT)5for Business For the online course, use: IT devices LaidOffCamp Is that ethical?

VIDEO: Zip Car BizSkill: Technology Direction

14

14

The Role of Accountants and Accounting Information For the online course, use: Do you use accounting?

Interpreting financial statements Annual reports VIDEO: POPS Diner BizSkill: OBM & Financial Statements

14

Business Plan Part 5 15

Understanding Money and the Role of Banking For the online course, use: How much would that be in, say, chocolate bars?

Your check is not in the mail Fixing the system on a national scale

..

16

7

VIDEO: BancFirst: Financial Management BizSkill: Adapting to the Economic Environment 16

Managing Business Finances For the online course, use: What should I buy?

What’s wrong with a little inside scoop?

Accountability goes professional VIDEO: Capital Advisors BizSkill: Conducting a SWOT Analysis

17

TEST 3: Chapters 14–17 Business Plan Part 6 FINAL EXAM NOTE: In an online course, frequent “checks” are particularly important. To test student comprehension of chapter material, create a test in your course management system that will pull a random block of 15 to 25 questions from the Test Bank questions for each chapter. (Only show the students their score and their submitted answers. Do not show correct answers in the feedback). Allow your students to take the quiz up to three times, and report their highest grade.

This forces students to look critically through the chapter.

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Chapter 1: The U.S. Business Environment

Chapter Overview Many students come to an introduction to business class not quite sure what it’s all about. The course has something for everyone, from those who have been in the business world a while to those just getting started. As the book unfolds, you’ll develop an understanding of the foundations of business and will be able to apply what you already know (or what you are starting to learn) about business to many aspects of the course.

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

Describes global economic systems according to the means by which they control the factors of production.

Shows how markets, demand, and supply affect resource distribution in the United States.

Discusses the elements of private enterprise and the degrees of competition in the U.S. economic system.

Explains the importance of the economic environment to business and identifies the factors used to evaluate the performance of an economic system.

Learning Objectives 1. Define the nature of U.S. business and identify its main goals and functions.

2. Describe the external environments of business and discuss how these environments affect the success or failure of any organization.

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

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

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

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LIST OF IN-CLASS ACTIVITIES: AUTHOR’S CHOICE Activity 1. Ice-Breaker: What Do You Know About Business?

2. Small Group Discussion: Scanning the Environment 3. Up for Debate: Comparing Economic Systems

Description Students assess their level of knowledge about business and set their own learning goals for the class.

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

Teams of students discuss types of economic systems.

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Time Limit

20 min.

25 min.

30 min.

1-2

LECTURE OUTLINE Learning Objective 1: Define the nature of U.S. business and identify its main goals and functions.

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

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

2. Opportunity and Enterprise: Unmet consumer demands provide promising opportunities for potential business success.

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

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

Time Limit: 20 minutes

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Learning Objective 2 Describe the external environments of business and discuss how these environments affect the success or failure of any organization.

The External Environments of Business The external environment consists of everything outside an organization’s boundaries that might affect it. Economists examine six major dimensions of the external environment.

1. Domestic Business Environment. The domestic business environment refers to the environment in which a firm conducts its operations and derives its revenues.

2. Global Business Environment. The global business environment refers to the international forces that affect a business; various factors affect the global environment at both the general and immediate levels.

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

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

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

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

Use In-Class Activity 2: Small Group Discussion: Scanning the Environment Time Limit: 25 minutes

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Learning Objective 3: Describe the different types of global economic systems according to the means by which they control the factors of production.

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

A. Factors of Production A basic difference between economic systems is the way in which they manage their resources, known as factors of production. Economists focus on five factors of production: 1. Labor: The human resource element in businesses, labor includes the physical and intellectual contributions people make while engaged in economic production.

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

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

4. Physical Resources: The tangible things that organizations use to conduct their business are physical resources.

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

KEY TEACHING TIPS •

The most important factors of production are entrepreneurial skills and informational resources. The more a country can create an environment that promotes entrepreneurship and harnesses knowledge and information, the better of it will be.

•

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

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

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

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

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

2. Market Economies: Producers and consumers control production and allocation decisions through supply and demand. The political basis of a market economy is capitalism, which allows the private ownership of the factors of production and encourages entrepreneurship by offering profits as incentives.

3. Mixed Market Economies: This type of economy features characteristics of both planned and market economies; many countries are moving from planned systems to mixed market systems through privatization, which involves the transformation of governmentcontrolled businesses into privately owned enterprises. In the partially planned system called socialism, the government owns and operates selected major industries. The U.S. Government’s bailout of U.S. banks and other financial institutions in 2009 involved the government taking an ownership to keep tabs on how tax dollars (used to bailout the banks and financial institutions) were being used. Critics of government intervention were quick to label the bailout as a move toward socialism.

KEY TEACHING TIPS •

Remind students that a government’s level of control distinguishes capitalism from socialism. If you have foreign students in your class, you may want them to say a bit about the economic system in their native country.

•

Make sure students understand that a mixed market economy is characterized by government ownership of major industries working alongside privately owned industries that smooth out fluctuations in output and unemployment and to stabilize prices.

•

Remind students that an economic system is defined by how it allocates factors of production. In a planned economy, the government owns and controls these factors; in a market economy, producers/consumers buy and sell what they choose.

•

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

•

Ask students to give their opinions about the government bailout of banks and financial institutions. In addition, you could ask students to research and report on any new stories

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concerning the bailout that appear in publications such as the Wall Street Journal. It is never too early to get students to regularly read the business news!

Use In-Class Activity 3: Class Discussion: Up for Debate: Comparing Economic Systems Time Limit: 30 Minutes QUICK QUESTIONS • Give an example of a country with a planned economy.

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

• How is the economic system different in this country?

• In retrospect do you think the government bailout of banks and financial institutions was a wise move? Why or, why not?

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Learning Objective 4 Show how markets, demand, and supply affect resource distribution in the United States, identify the elements of private enterprise, and explain the various degrees of competition in the U.S. economic system.

The Economics of Market Systems Market systems allow businesses the flexibility to decide what to produce, how much to produce, and what price to charge; customers are a driving force in market systems because they decide what to buy and at what price. Demand and supply are the predominant forces that guide decisions about what to buy and what to sell.

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

1. The Laws of Demand and Supply: Demand is the willingness and ability of buyers to purchase a product; supply is the willingness and ability of producers to offer a good or service for sale. The law of demand states that buyers will purchase more of a product as its price drops; the law of supply states that producers will offer more of a product for sale as its price increases. a. The Demand and Supply Schedule: The demand and supply schedule indicates how much of a product will be sold at various prices. Generally speaking, the more consumers are willing to pay for a good, the more producers are likely to divert resources to make more of the good. Conversely, as the price at which consumers are willing to pay for a produce falls, production becomes less profitable and producers cut back on production to divert resources to more profitable areas. b. Demand and Supply Curves: A demand curve shows how many products will be demanded at different prices; a supply curve shows how many products will be supplied at various prices. The point at which the curves intersect is the market price (or equilibrium price). c. Surpluses and Shortages: With a surplus, the quantity supplied exceeds the quantity demanded; quantity demanded exceeds quantity supplied with a shortage.

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

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

1. Degrees of Competition. Economists have identified four degrees of competition in a private enterprise system: a. Perfect Competition. Many small firms exist in an industry; no single firm is powerful enough to influence price. b. Monopolistic Competition. Few sellers, but many buyers exist, so buyers focus on numerous differentiation strategies, such as brand names, design, and advertising. c. Oligopoly. An industry has only a handful of sellers; market entry is difficult because large capital investment is needed. d. Monopoly. An industry or market has only one producer; that producer enjoys complete control over price.

KEY TEACHING TIPS •

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

•

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

•

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

•

Remind students that a monopoly is characterized by (a) many buyers, (b) only one seller, and (c) prices being set by the one seller.

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QUICK QUESTIONS • Which level of competition best describes the market in each of the following scenarios? o Your local Pizza Hut (monopolistic competition) o A local farmer selling apples for applesauce (perfect competition) o Cell phone service (oligopoly) o Apple store(monopolistic competition) o Local utility/power company (monopoly) HOMEWORK Visit a Shopping Mall!

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

At-Home Completion Time: 1 to 1.5 hours

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Learning Objective 5 Explain the importance of the economic environment to business and identify the factors used to evaluate the performance of an economic system.

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

1. Economic Growth, Aggregate Output, and Standard of Living. Aggregate output is the total quantity of goods and services produced by an economic system during a given period. Simply put, an increase in aggregate output is growth. Standard of living refers to the total quantity and quality of goods and services that can be purchased with the currency used in an economic system; standard of living increases when the quantity of goods and services increases, and the economic system provides more of the goods and services people want. The business cycle is the pattern of short-term expansions and contractions in an economy and one important use of economic measures is to help governments and businesses understand where in the business cycle they currently are.

2. Gross Domestic Product (GDP): The GDP is the total value of all goods and services produced within a given period through domestic factors of production; GDP is a measurement of aggregate output. Gross national product (GNP) refers to the total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located. a. Real Growth Rate: Real growth depends on output increasing at a faster rate than population; the real growth rate of the U.S. economic system seems quite healthy and the U.S. standard of living should be increasing. b. GDP per Capita: GDP per capita means GDP per person. GDP divided by total population equals GDP per capita. c. Real GDP: Real GDP means that GDP has been adjusted to account for changes in currency values and price changes. d. Purchasing Power Parity: Purchasing power parity is the principle that exchange rates are set so that the prices of similar products in different countries are about the same.

3. Productivity: Productivity compares how much a system produces with the resources needed to produce it; increases in productivity yield increases in the standard of living. a. Balance of Trade: A country’s balance of trade is the economic value of all the products that it exports minus the economic value of its imported products. A positive balance results when the value of a country’s exports is greater than its imports; that

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is, more money is flowing into the country as a result of exporting. A negative balance results when a country imports more than it exports. b. National Debt: A country’s national debt is the amount of money that is owed to creditors.

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

1. Inflation: Inflation occurs when widespread price increases plague an economic system; the amount of money in the economic system exceeds the amount of actual output.

Inflation can be measured by the consumer price index (CPI), which weighs prices of typical products purchased by consumers living in urban areas. Inflation rate equals Change in price index/Initial price index 100.

2. Unemployment. Unemployment is the level of joblessness among people actively seeking work in an economic system; when unemployment is high, a surplus of available workers exists. Unemployment is sometimes a symptom of a recession, when aggregate output declines, or of a depression, a prolonged and deep recession. For example, during downturns in the business cycle people in different sectors may lose their jobs at the same time. As a result, overall income and spending may decline to the extent that businesses begin to implement cost saving measures—including reduction in force (downsizing), leading to more unemployment 3. Recession and Depression. Aggregate output is measured to determine whether an economy is going through a recession. Governments and economists define a recession as a period during which aggregate output, as measured by real GDP, declines. The U.S. economy went into recession in 2008 and many economists predict that we began to emerge in 2011. A prolonged and deep recession is a depression.

C. Managing the U.S. Economy The government manages the U.S. economic system through both fiscal and monetary policies. Fiscal policies manage the collection and spending of revenues; tax increases can function as fiscal policies. Monetary policies focus on controlling the size of the nation’s money supply; the government can influence banks to lend money and can influence the supply of money by manipulating interest rates. Stabilization policy is made up of both fiscal and monetary policies; the goal is to smooth KEY TEACHING TIPS •

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

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•

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

•

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

•

Make sure students understand that inflation occurs when overall price levels go up because too much money is floating around; as a result, purchasing power declines.

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

At-Home Completion Time: 1–2 hours

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

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

Time Limit: 20 minutes What to Do: 1. Ask each student to take out a piece of paper and divide it into two columns. In the first column, students should write the most important four or five things they currently know about business, and in the second column, the four or five things they would like to learn.

Tell them that if they are having difficulty coming up with items to list, they should take a look at the table of contents in the text. It will give them some clues so that this task doesn’t frustrate them. (5 minutes) 2. Divide students into groups of three to five people and ask them to share their lists with each other. As they listen, they can delete or add anything that seems relevant. (5 minutes) 3. Ask them to switch groups, so that they are with all new people, and repeat the process of sharing their lists. (5 minutes) 4. Ask students to switch to a third group of all new people. With this group, the goal is to synthesize their lists into one big idea of what they know, and one big idea of what they want to learn. (5 minutes) Don’t Forget: This activity allows students to get to know each other as well as set expectations for the course.

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

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

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In-Class Activity 2: Small Group Discussion: Scanning the Environment Activity Overview: This activity asks students to consider how various parts of the external environment affect businesses and industries.

Time Limit: 25 minutes What to Do: 1. For larger groups, divide the class into four-member groups; for smaller groups, divide the class into two-member groups.

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

3. Ask each group to consider what variables from the technological, political-legal, sociocultural, and economic environments affect their assigned industry. (15 minutes) 4. Ask a spokesperson from each group to share their input. (10 minutes) Don’t Forget: Remind students that external environmental elements can change dramatically, affecting specific industries differently over time.

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

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In-Class Activity 3: Up for Debate: Comparing Economic Systems Activity Overview: This activity gets students talking about how similar and different the U.S. economic system is to other systems.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups. Ask the groups to assume they have just overheard a classmate say, “The United States is becoming more socialist everyday—with all the government control.” Have each group list reasons why the statement could be true and reasons why the statement could be false. (15 minutes) 2. Reassemble the class and discuss each group’s thoughts. (15 minutes) Don’t Forget: Remind students that a government’s level of control distinguishes capitalism from socialism. If you have foreign students in your class, you may want them to say a bit about the economic system in their native country.

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

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1. The benefits of businesses are: businesses produce most of the goods and services consumed, employ most working people, create new innovations, and provide opportunities for new businesses to serve as suppliers. Further, businesses contribute to the quality of life and the standard of living.

A business can negatively affect society if it produces goods and services that harm consumers or the environment. An example would be a company that uses a hazardous chemical in its production process and dumps the chemical into a nearby lake causing serious illness. (Learning Objective 1, AACSB – reflective thinking) 2. The five factors of production are labor, capital, entrepreneurs, physical resources, and information resources. All five factors are crucial; however, their relative importance depends on the product and industry. In the software development business, for example, labor and information resources are especially important, but the business couldn’t survive without capital and physical resources (computers), and it wouldn’t have been launched without an entrepreneur. (Learning Objective 3 – AACSB – application of knowledge) 3. The curve that describes the range of possible prices that a buyer will pay for a range of quantities demanded by a buyer is the demand curve. The curve that describes the range of price that a seller can charge for a range of quantities supplied by the seller is called the supply curve. The point where the demand curve and the supply curve intersect is the point at which the intentions of buyers and sellers coincide. The price at this point is the equilibrium price. (Learning Objective 4) 4. Inflation is both good and bad because it can lead to a spiral of rising wages chasing rising prices, which decreases the standard of living. It is good because at moderate levels, it can signal the beginning of a period of economic growth. Monetary policy, particularly the ability to adjust interest rates, is government’s most powerful tool to control inflation.

(Learning Objective 5 - AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 5. Answers will vary but students will probably discuss trends in birth and unemployment rates as well wage rates. (Learning Objective 2 – AACSB – application of knowledge) 6

Answers will vary; however, the Pokémon craze provides an example of a shortage followed by a surplus. A few years ago, Pokémon trading cards were selling for 10 to 20 times their list price. Later, Pokémon cards were selling for less than half price as stores attempted to clear out their inventory. Any clearance sale illustrates the concept of surplus driving down prices. The classic example of a shortage is scalpers selling event tickets at inflated prices. In both cases, the market eventually determines a price at which all the supply can be sold.

(Learning Objective 4 – AACSB – application of knowledge)

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7. Answers will vary, but all students should include prices paid for consumer goods and the availability of desirable jobs. Managers are affected by inflation because it tends to drive up wages and by unemployment because it affects their ability to find workers. Also, both inflation and unemployment affect consumer and industrial demand, which play a key role in management. (Learning Objective 5 – AACSB – application of knowledge) 8. A nation’s economic growth can be measured through its aggregate output, resulting standard of living, GDP, and productivity. Economic stability, on the other hand, refers to the condition in which the amount of money available in an economic system and the quantity of goods and services produced in it are growing at the same rate. (Learning Objective 5 – AACSB –reflective thinking) APPLICATION EXERCISES 9. Visit a Local Shopping Mall: Answers will vary, but students should focus on the criteria for competition discussed in the chapter. For example, businesses with direct competitors operate within monopolistic competition; products are often differentiated by style, color, quality levels, and brand names. If only a few sellers of a product exist, as in an oligopoly, products will be quite similar, and a change in price by one seller will mean a change in price by all sellers. (Learning Objective 4 – AACSB – application of knowledge) 10. Interview a Business Owner: Answers will vary, but students should recognize that demand and supply affect every business in some way. Typical factors of production cited in this answer include capital, labor, physical resources, information resources, and entrepreneurship. Economic indicators affect businesses differently at different times, depending on whether they are manufacturers or retailers. Ultimately, price increases in an industry will affect the buying power of consumers, which will affect how much is produced and purchased. (Learning Objective 4 – AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE ASSIGNMENT 1- 11 - 14 (AACSB interpersonal relations and teamwork, analytical thinking, application of knowledge) Groups should consider domestic business environment, global business environment, technological environment, political-legal environment, sociocultural environment, and economic environment when identifying three trends that will create business opportunities.

The student should answer the following questions: • What is my product or service?

• Who are my customers?

• Where are my customers located?

• Is my business idea easily copied?

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

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BUILDING YOUR BUSINESS SKILLS FOLLOW-UP QUESTIONS–PAYING THE PRICE OF E-BUSINESS (AACSB - interpersonal relations and teamwork, analytical thinking, application of knowledge) 15. Suppliers who provide extras, such as e-mail, Web pages, chat rooms, instant messaging, news, weather, travel directions, shopping networks, and so on will be able to pump up demand. In order to provide these additional services, suppliers will need to invest in the necessary technology, equipment, and staff. They would do well to focus their spending on those extras that would create loyalty, making it more difficult for consumers to change services based on price alone.

16. No, not when competition is based on speed of delivery, quality of goods or services, wide selection, personalized service, premium image, or some other nonmonetary factor.

17. It may be difficult to speculate. Answers will vary; however, if services offered are differentiated in ways suggested, monopolistic competition will likely prevail.

EXERCISING YOUR ETHICS: PRESCRIBING A DOSE OF COMPETIVE MEDICINE (AACSB – Ethical understanding and reasoning, reflective thinking) QUESTIONS TO ADDRESS 18. Because prescription drugs are essentially the same regardless of the supplier, the market has determined an equilibrium price at which supply and demand are equal. Competition keeps the price in check. One of the pharmacies could raise its prices only if it offered additional services that differentiated its products enough that consumers were willing to pay extra. However, the owner of the competing pharmacy needs to keep in mind that if he raises prices too high, other suppliers will find a way into the market.

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

20. Answers will vary, but students should at least acknowledge the ethical issues. For example, engaging in collusion inhibits the fair operation of the market. One competitor is dealing unfairly with another, and the innocent consumers are paying for it.

TEAM EXERCISE: MAKING THE RIGHT DECISION 1- 21 - 23 (AACSB – Ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking) Based on an analysis of the situation and the various factors, the team members will have different perspectives on the three options. The students will probably focus on supply and demand, the external business environment, competition, etc., and which option generates the most profit and stability based on their situation.

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CASES: WHAT GOES UP….CAN GO EVEN HIGHER! (Learning Objectives 3 and 4, AACSB –Reasoning, reflective thinking) At the end of this case, students should be able to answer the following questions: How do the concepts of supply and demand affect businesses?

What is an equilibrium price?

What factors affect supply?

What factors affect demand?

30. The basic factors of production in the petroleum industry are capital investments in exploration, petroleum extraction, and refining. Additionally, petroleum is a natural resource that varies dramatically from country to country. The students will also note that petroleum will become much scarcer in the future.

31. Future demand should grow as economies recover from the global recession with emphasis on surging demand in Asia and South America. Students should also discuss the decline in the physical supply of petroleum which combined with changes in demand will lead to lower production and higher prices.

32. The economic indicators most directly affected by energy prices are: GDP, Balance of Trade, and inflation.

33. Students will have totally different perspectives generating much discussion.

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

TAKING A BITE OUT OF INTERNET RADIO (Learning Objectives 3 and 4, AACSB –Reasoning, reflective thinking) 35. Students should focus on the competitive, social, technological, and economic factors that will affect the success or failure of Apple’s ITunes radio.

36. After students conduct their environmental analysis, they should be able to identify several factors (both positive and negative) that will impact demand.

37. Students should focus on the characteristics of the competitive structure and which best fits the internet radio market.

38. Students will probably have very mixed responses depending on their perspective on privacy on “data mining”.

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39. Some students will think that the market is too crowded already and Apple should not undertake this venture others will note the success of the Apple brand and the goodwill it generates. Those students will focus on the opportunities for success.

Once students have answered the questions, discuss their answers as a class. As students discuss their answers, make sure they touch on the following points

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Chapter 2: Understanding Business Ethics and Social Responsibility

Chapter Overview Just because others see something as ethical, doesn’t mean you will agree. There is not always a yes/no, right/wrong, black/white answer to everything. We all develop a personal code of ethics that we carry over into our jobs. Sometimes we decide what is ethical based on what is acceptable to others—even though the behavior may be unethical.

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

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

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

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

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

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

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

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LIST OF IN-CLASS ACTIVITIES: AUTHOR’S CHOICE Activity 1. Ice-Breaker: What’s Ethical in Business?

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

Description Students share their views on business ethics.

Students discuss how ethical norms affect ethical judgments.

Students discuss varying opinions on ethics training as a class.

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Time Limit 20 min.

15 min.

30 min.

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

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

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

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

2 Individual Values and Codes. Individuals’ personal codes of ethics are determined by a combination of factors.

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

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

2. Behavior toward the Organization. Conflict of interest, confidentiality, and honesty are ethical issues. A conflict of interest occurs when an activity may benefit the individual to the detriment of the organization. Many organizations have policies that forbid buyers and other personnel from accepting gifts from suppliers or customers thus avoiding even the appearance of bribery.

3. Behavior toward Other Economic Agents. Ethics also comes into play in the relationship between the firm and a number of primary agents of interests, such as customers, suppliers, competitors, stockholders, dealers, and unions. In 2009, Bernard Madoff’s Ponzi scheme (investment scam) cost hundreds of clients their life savings as he led them to believe that their investments were safe.

C. Assessing Ethical Behavior 1. A similar process that is often recommended when making ethical decisions is for the person to (1) gather relevant information, (2) analyze the facts to determine the most appropriate moral values, and (3) make an ethical decision based on the rightness or

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wrongness of the proposed activity or policy. Although ethical judgments are not always easy to make or even always agreed upon, this process does at least give a good starting point for an ethical decision making process.

Ethical norms include: 1.

2.

3.

4.

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

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

Justice: Is it consistent with what’s fair?

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

D. Company Practices and Business Ethics Many companies set up codes of conduct and develop clear ethical positions on how the firm and its employees will conduct business.

1. Adopting Written Codes. Almost all major corporations have written codes of ethics.

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

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

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

• What are some examples of conflicts of interest?

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

Time Limit: 20 minutes Use In-Class Activity 2: Class Discussion: Ethical Judgment Making Time Limit: 15 minutes

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

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

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

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

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

4. Suppliers. Partnership arrangements with suppliers can enhance market image and firm reputation.

5. Local and International Communities. Contributing to local and global programs has a positive impact on the community.

B. Contemporary Social Consciousness Views toward social responsibility continue to evolve as managers work to meet the needs of various stakeholders in their business practices.

1. The concept of social responsibility has been developing since the days of John D. Rockefeller, J. P. Morgan and Cornelius Vanderbilt.

2. Unfortunately, the recent spate of corporate scandals colors the public’s perception of business in negative hues.

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

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

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

Time Limit: 20 minutes HOMEWORK Social Responsibility Now is a good time to assign Application Exercises 9 from the end-of-chapter materials as homework. This assignment asks students to think about prioritizing various groups of stakeholders toward which an organization acts socially responsible.

At-Home Completion Time: 30 minutes

Key Teaching Tip for Online Classes The End of Chapter, Building Your Business Skills. To Lie or Not to Lie: That Is the Question is a good online assignment. Have students post their responses in Step 1 to the class discussion board. For Step 3 have students work as small virtual teams to draft a corporate code of ethics.

Let their fellow classmates critique and post comments.

At-Home Completion Time: 30 minutes for individual assignments and 45 minutes for group project.

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

Areas of Social Responsibility A. Responsibility toward the Environment 1. Air Pollution: Under new laws, many companies must install special devices to limit pollutants they expel into the air.

2. Water Pollution: Increased awareness of chemical and waste dumping and the resulting dangers has led to improved water quality in many areas of the country.

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

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

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

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

C. Responsibility toward Employees 1. Legal and Social Commitments: Recruiting, hiring, training, promoting, and compensating are the basis for social responsibility toward employees; a whistle-blower is an employee who discovers and tries to end a company’s unethical, illegal, or irresponsible actions by publicizing them. Most organizations now have whistleblower policies to protect whistleblowers from retaliation.

D. Responsibility toward Investors Improper Financial Management: Insider trading occurs when someone uses confidential information to benefit from the purchase or sale of stocks. Misrepresentation of finances is where unethical managers project profits that they do not expect to get or hide losses and expenses incurred to boost paper profits. Misrepresentation of Finances In maintaining and reporting its financial status, every corporation must conform to generally accepted accounting principles

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

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

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Learning Objective 4:

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

Implementing Social Responsibility Programs A. Approaches to Social Responsibility 1. Obstructionist Stance: Organizations do as little as possible to solve social or environmental problems.

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

3. Accommodative Stance: The organization meets its legal and ethical requirements but will also go further in certain cases.

4. Proactive Stance: Firms that adopt this approach take to heart the arguments in favor of social responsibility.

B. Social Responsibility and the Small Business Many big-business responses to ethical and social responsibility issues apply to small businesses; differences are primarily differences of scale. Small business owners are faced by the same ethical dilemmas as the large companies that we more frequently read about. It is important that small companies develop ethical policies and procedures like their larger counterparts. Small businesses can often get advice from trade organizations or state governments to help them develop ethical codes of practices.

KEY TEACHING TIPS •

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

•

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

•

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

•

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

• Make sure students understand that social responsibility programs must be initiated and

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supported by top management; ultimately, a social responsibility program involves everyone in the organization.

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

HOMEWORK Identifying Approaches to Social Responsibility Now is a good time to assign Application Exercise 10 from the end-of-chapter materials in the textbook. The assignment asks students to use newspapers, magazines, and other references to identify three companies that take a defensive stance to social responsibility, three that take an accommodative stance, and three that take a proactive stance.

At-Home Completion Time: 1 hour

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Learning Objective 5

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

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

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

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

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

B. How Organizations Influence Government Just as governments can influence businesses, so too can businesses influence the government.

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

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

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

4. Favors: Finally, organizations sometimes rely on favors and other influence tactics to gain support. Although these favors may be legal, they are still subject to criticism.

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Learning Objective 6

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

Managing Social Responsibility The demands for social responsibility placed on contemporary organizations by an increasingly sophisticated and educated public are stronger than ever.

A. Formal Organizational Dimensions 1. Legal Compliance: Legal compliance is the extent to which the organization conforms to local, state, federal, and international laws.

2. Ethical Compliance: Ethical compliance is the extent to which the members 3. Philanthropic Giving: Finally, philanthropic giving is the awarding of funds or gifts to charities or other worthy causes. of the organization follow basic ethical (and legal) standards of behavior.

B. Informal Organizational Dimensions 1. Organization Leadership and Culture: Leadership practices and Organizational culture can go a long way toward defining the social responsibility Stance an organization and its members will adopt. Ethical leadership often sets the tone for the entire organization.

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

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

More formally, an organization may sometimes actually evaluate the effectiveness of its social responsibility efforts. Additionally, some businesses occasionally conduct a corporate social audit, a formal and thorough analysis of the effectiveness of a firm’s social performance.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1. Students should address the circumstances of each issue: legal implications, personal codes of ethics, and the effect of the decision on others. They should also refer to the four ethical considerations discussed in the chapter (utility, rights, justice, caring). (Learning Objective 1, AACSB -analytical thinking, application of knowledge) 2. Stakeholders include customers, employees, investors, suppliers, and the firm’s local communities. Most businesses should be concerned with all stakeholder groups, although areas of emphasis may differ for individual businesses. (Learning Objective 2, AACSB analytical thinking) 3. The major areas include the environment, customers, employees, and investors. (Learning Objective 3, AACS B- analytical thinking) 4. The four basic approaches to social responsibility are: • Obstructionist: Does as little as possible to promote social responsibility.

• Defensive: Meets minimal legal requirements regarding social responsibility.

• Accommodative: Exceeds minimum requirements only by special request.

• Proactive: Actively seeks opportunities to contribute to the social environment.

(Learning Objective 4, AACSB, analytical thinking) 5. Governments influence organizations through direct and indirect regulation. (Learning Objective 5, AACSB - analytical thinking)

QUESTIONS FOR ANALYSIS 6. Answers will vary, but students should comment that wrongdoing, which directly affects them as an individual will likely prompt them to blow the whistle quickly. Wrongdoing that indirectly affects them or another department or division may tend to be ignored longer and least likely prompt the individual to blow the whistle. (Learning Objective 6, AACSB application of knowledge) 7. Answers will vary, but many students will recognize the importance of balancing the attention given to each of the areas. Some companies, such as retailers, will affect the environment little; in these instances, students will likely recognize responsibility toward the customer as being the most important. On the other hand, many students will recognize that manufacturers need to pay particular attention to the environment in the implementation of their production processes. (Learning Objective 4, AACSB -application of knowledge)

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8. The challenges will vary widely from country to country depending on the host country laws.

It is an accepted business practice in many countries to bribe government officials to “facilitate” projects. Since this is illegal under the Foreign Corrupt Practices Act, this puts American companies at a disadvantage. If the company does bribe a foreign official there are tremendous, ethical as well as legal and financial considerations. (Learning Objective 5, AACSB -application of knowledge, ethical understanding and reasoning) APPLICATION EXERCISES 9. Students personal code of ethics will probably focus on personal relationships, honesty, lying etc. This exercise gives students an opportunity to consider the impact of their ethical behavior. (Learning Objective 1, AACSB -application of knowledge) 10. Students should remember that a defensive stance is one in which companies do everything that is required of them legally, but nothing more. Companies taking an accommodative stance meet their legal and ethical requirements, but also go further in certain cases.

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

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

BUILDING YOUR BUSINESS SKILLS: TO LIE OR NOT TO LIE (Learning Objective 1, AACSB -application of knowledge, ethical understanding and reasoning) 15. Answers will vary, but students may consider such factors as the person’s sense of right and wrong, desire for gain at any cost, and culture as possible factors.

16. Answers will vary, but most students will cite examples that reflect combinations of contradictory ideas.

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

18. Students’ answers will depend on who might be harmed in the lies. Students should

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recognize that inflating sales and revenue data on official company statements to increase stock value potentially harms stakeholders and the reputation of the company more than merely telling someone on the phone that the boss is “in a meeting” when he or she is not.

Students should also note the legal issues when responding to the ethical dilemmas.

EXERCISING YOUR ETHICS: THE CASE OF ORPHAN DRUGS (Learning Objective 4, AACSB -application of knowledge, ethical understanding and reasoning) 19. Answers will vary, but students may notice that defending social responsibility yields personal PR benefits. This also happens on a larger scale to companies that promote social responsibility.

20. Answers will vary, but many students will likely accept that businesses should act in socially responsible ways as long as such actions are in compliance with the law and meet the needs of stakeholders.

21. Answers will vary, but students should note that, unlike business, the primary purpose of these kinds of organizations is to promote the greater social well-being.

TEAM EXERCISE: ON THE VERGE OF COLLAPSE (Learning Objective 4, AACSB application of knowledge, interpersonal relations and teamwork, ethical understanding and reasoning) The students should discuss the various groups to whom they are responsible: the stockholders, employees, the suppliers, the suppliers’ employees, etc. This exercise should also generate a lot of discussion about profits versus ethics and how a company should and could balance the two.

CASES IS FAIR TRADE REALLY FAIR? (Learning Objective 4, AACSB -application of knowledge, ethical understanding and reasoning) 27. The biggest trade-off is the price to the consumer who is willing to pay the much higher price of fair trade cocoa. Answers will vary but many students will think the trade-offs maybe very unfair to consumers 28. Answers will vary depending on students’ tastes, incomes, etc.

29. Students will note that some parties might label products “fair trade” when in fact they are not. Under this scenario, a company could make additional profits without benefitting those whom fair trade is supposed to help.

30. Fair trade might actually harm the producers if it prices their products out of the market. If consumers deem the price too high, they may simply stop buying fair trade products.

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WHEN MOTHER NATURE STORMS IN (Learning Objective 5, AACSB -application of knowledge, ethical understanding and reasoning) 31. Many students will probably respond that many retailers did not maintain prices but instead took of advantage of the situation. Other students will note that many other retailers acted ethically and responsively.

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

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

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

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

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

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Chapter 3: Entrepreneurship, New Ventures, and Business Ownership Chapter Overview Have you ever wanted to be your own boss? Think of going to work when you want to. Think of how it would be to call your own shots. Although it’s not easy, starting your own business can be rewarding. The U.S. economic system welcomes entrepreneurship and offers various forms of business ownership. This chapter discusses small business, its importance to the U.S. economy, and the popular areas of small business. It looks at: • • • • • •

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

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

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

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

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

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

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

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

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LIST OF IN-CLASS ACTIVITIES: AUTHOR’S CHOICE Activity 1. Ice-Breaker: The Role of Small Business 2. Up for Debate: The Wide World of Risk 3.Small-Group Discussion: Entrepreneurship and the Growth of Businesses 4. Small-Group Discussion: What’s the Next Big Thing?

5. Small-Group Discussion: How Can We Succeed in the Software Industry?

Description Students discuss the role of small business in their communities.

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

Time Limit 15 min.

30 min.

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

20 min.

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

45 min.

Students identify the factors that help a company in the software industry become a success.

30 min.

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

What Is a “Small” Business?

A small business is independent (that is, not part of a larger business) and has relatively little influence in its market. The US Department of Commerce and the Small Business Administration (SBA), define the size of a business based on its industry and the number of employees. According to SBA standards, a small business can have as many as 1,500 employees.

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

1. Job Creation. Small businesses are an important source of new jobs; in recent years, small businesses have accounted for 40 percent of all new jobs in the high-technology sectors of the economy alone.

2. Innovation. Small business supplies 55 percent of all innovations that reach the U.S. marketplace.

3. Contributions to Big Business. Most products made by big businesses are sold to consumers by small ones.

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

2. Retailing. Retailers account for 12 percent of all firms with fewer than 20 employees; retail businesses let entrepreneurs focus limited resources on narrow market segments.

3. Construction. About 12 percent of businesses with fewer than 20 employees are involved in construction.

4. Wholesaling. Wholesalers buy products from manufacturers and sell them to retailers; wholesalers are the middlemen. About 5 percent of all firms are in this category 5. Finance and Insurance. These firms account for about 4 percent of all firms with fewer than 20 employees.

6. Manufacturing. More than any other industry, manufacturing lends itself to big business. Still, about 4 percent of firms with fewer than 20 employees are involved in manufacturing.

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

8. Other. The remaining 4 percent or so of small businesses with fewer than 20 employees are in other areas, including research and development laboratories and independent media companies.

KEY TEACHING TIP •

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

QUICK QUESTION •

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

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

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

Entrepreneurship Entrepreneurs are people who assume the risk of business ownership. Entrepreneurship is the process of seeking business opportunities under conditions of risk. Many entrepreneurs are driven to launch new businesses by the goal of gaining independence from working for somebody else and securing a financial future for themselves. Many such businesses, however, may not aspire to grow the businesses much beyond their capacity to run them.

A. Entrepreneurial Characteristics Successful entrepreneurs are often distinguished from others through a set of characteristics, including: 1. Resourcefulness.

2. A concern for customer relations.

3. A desire for autonomy.

4. The ability to handle ambiguity.

5. A desire for risk-taking.

6. A need for personal freedom.

7. The opportunity for creative expression.

KEY TEACHING TIPS •

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

•

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

QUICK QUESTIONS •

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

•

What are some common characteristics shared by all entrepreneurs?

Use In-Class Activity 2: Up for Debate: The Wide World of Risk Time Limit: 30 minutes Use In-Class Activity 3: Small-Group Discussion: Entrepreneurship and the Growth of Businesses Time Limit: 45 minutes

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Learning Objective 3:

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

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

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

2. Identifying New Markets: Successful entrepreneurs also excel at discovering whole new markets.

3. First-Mover Advantages: A first-mover advantage is any advantage that comes to a firm because it exploits an opportunity before any other firm does.

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

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

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

3. Financial Planning: This is the entrepreneur’s plan for turning all activities into dollars.

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

1. Buying an Existing Business: Existing businesses have already proven their ability to attract consumers and to establish rapport with lenders, buyers and suppliers, and the ..

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community. Most consultants recommend that entrepreneurs buy existing businesses because the odds of success are greater.

2. Franchising: A franchise agreement involves two parties, a franchisee (the local owner) and a franchiser (the parent company). Franchisees benefit from the parent corporations experience and expertise. The franchiser may pick the store location, negotiate the lease, purchase equipment, and supply financing. Startup costs vary quite widely. For example, a McDonald’s franchise costs between $506,000 to $1.6 million. Probably the most expensive franchises are professional sports teams and cost on average $957 million.

3. Starting from Scratch: Risks with this approach are greater than with buying an existing business. However, starting from scratch does allow the entrepreneur to operate without the commitments, policies, errors, etc., of a predecessor.

D. Financing the Small Business Many sources for business financing are available. Personal resources account for more than two-thirds of all money invested; smaller portions of funding come from banks, independent investors, and government loans.

1. Venture capital companies are groups of investors seeking to profit on companies with growth potential; money is invested in return for partial ownership. Small business investment companies are licensed to borrow money from the SBA and invest it in or loan it to small businesses.

2. SBA Financial Programs: Under the SBA’s 7(a) loans program, small businesses may borrow from commercial lenders with the SBA guaranteeing to repay a maximum of 75 percent of the loan. The SBA’s special purpose loans target businesses with special needs, such as those meeting international demands. For loans under $35,000, the SBA offers a micro-loan program.

Aside from its financing role, the SBA offers management counseling programs at virtually no cost. One of the SBA’s management counseling projects is its Small Business Development Center (SBDC) program.

3. Other Sources of Financing include overseas financing and the internet.

KEY TEACHING TIPS •

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

•

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

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•

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

QUICK QUESTIONS

• What is the purpose of a business plan?

•

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

•

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

•

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

•

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

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

Time Limit: 45 minutes

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

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

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

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

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

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

5. Better Survival Rates: New businesses now have a better chance of survival than ever before; the SBA estimates that at least 44 percent of all new businesses can expect to survive for four years.

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

2.

3.

4.

Managerial incompetence or inexperience Neglect Weak control systems Insufficient capital

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

2.

3.

4.

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

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KEY TEACHING TIPS •

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

•

Although starting a new business is risky, make sure you tell students that the smallbusiness failure rate has declined since the 1980s. The SBA estimates that 40 percent of all new start-ups now survive at least six years.

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

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

Time Limit: 30 minutes

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

Noncorporate Business Ownership A. Sole Proprietorships A sole proprietorship is owned and usually operated by one person; about 73 percent of all U.S. businesses are sole proprietorships.

1. Advantages of Sole Proprietorships: Freedom, ease in forming, low start-up costs, and tax benefits are the advantages of this form of ownership.

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

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

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

2. Disadvantages of Partnerships: Unlimited liability in that each partner may be liable for the debts incurred in the name of the partnership, lack of continuity, difficulty of transferring ownership, and little or no guidance for conflict resolution are the major drawbacks of this form of ownership.

3. Alternatives to General Partnerships: Because of the disadvantages of partnerships, general partnerships are the least popular forms of business. Limited partnerships have been formed to compensate for some of these disadvantages. This type of agreement allows for limited partners who do not share in a firm’s management and is liable only to the limits of said partner’s investment. There is however a requirement that there is at least one general partner who actively manages a firm and has unlimited liability for the debt.

Master Limited Partnerships is a form of ownership that sells shares to investors who receive profits and pays taxes from profits.

C. Cooperatives Cooperatives combine the freedom of sole proprietorships with the financial power of corporations. These groups of sole proprietorships or partnerships agree to work

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together for their common benefit.

KEY TEACHING TIPS •

Make sure that students understand the different forms of business ownership. For example, a sole proprietorship is owned and usually operated by one person; 73 percent of all U.S. businesses are sole proprietorships.

•

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

•

Remind students that a general partnership is a sole proprietorship multiplied by the

number of partner-owners.

•

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

•

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

QUICK QUESTIONS •

What are some of the advantages and disadvantages of sole proprietorships?

•

What are some of the advantages and disadvantages of partnerships?

HOMEWORK Interview a Sole Proprietor or General Partner Now is a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. The assignment asks students to interview the owner/manager of a sole proprietorship or a general partnership and determine why the person chose that form of ownership.

At-Home Completion Time: 60 minutes

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

Corporations Both large and small corporations account for 20 percent of all businesses, but generate about 90 percent of all sales revenues in the United States.

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

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

2. Disadvantages of Incorporation. Difficulty in ease of transferring ownership, control, and cost are drawbacks of incorporation. In addition, double taxation plagues a corporation, because a regular corporation must pay income taxes on profits and stockholders must pay taxes on income returned by their investments.

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

C. Managing a Corporation.

Once the corporate entity comes into existence, it must be managed by people who understand the principles of corporate governance.

1. Corporate Governance. Defined by the firm’s bylaws, corporate governance involves stockholders, the board of directors, and corporate officers. a. Stockholders are the owners of a corporation. Corporations sell shares, called stock, to investors who then become stockholders, or shareholders. Profits are distributed among stockholders in the form of dividends, and corporate managers serve at stockholders’ discretion.

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b. The board of directors is the governing body of the corporation. c. Appointed by the board of directors, officers oversee the day-to-day operations of the corporation. The chief executive officer, or CEO, oversees overall operations.

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

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

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

4. Mergers and Acquisitions: A merger occurs when two firms combine to create a new company; in an acquisition, one firm buys another outright. In an acquisition, one firm buys another outright. Many deals that are loosely called mergers are really acquisitions.

5. Divestitures and Spin-Offs: A divestiture occurs when a firm sells off unrelated and/or underperforming businesses. When a firm sells part of itself to raise capital, the strategy is known as a spin-off.

KEY TEACHING TIPS •

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

•

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

•

Students don’t always understand why companies merge. Discuss with them possible reasons, including an attempt to eliminate redundant costs, increase buying power, eliminate manufacturing over-capacity, and gain access to new expertise and personnel.

QUICK QUESTIONS • •

What is meant by “double taxation”?

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

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HOMEWORK Franchise Now is a good time to assign Application Exercise 10 from the end-of-chapter materials in the textbook. The assignment asks students to research a popular food industry franchise analyzing the requirements to purchase as well as the up front and ongoing cost.

At-Home Completion Time: 30 minutes

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

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

2. Ask students to share how those businesses are important to their towns or communities, whether small businesses in the area complement each other in the products and services they offer, and in what way(s) these businesses help big businesses. (10 minutes).

Don’t Forget: Be sure to review the definition of small business prior to the activity.

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

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

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and have them list various examples of how entrepreneurial spirit has been/is evident throughout this country’s history. How is entrepreneurship valuable to an economic system? In what types of businesses is entrepreneurship especially important? (15 minutes) 2. Reassemble the class and discuss the degree of entrepreneurial spirit evidenced by the group.

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

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

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In-Class Activity 3: Small-Group Discussion Entrepreneurship and the Growth of Businesses Activity Overview: This activity asks students to weigh the importance of entrepreneurship in the development of fast-growing businesses; this activity is based on Application Exercise 10 of the end-of-chapter materials ( page 82).

Time Limit: 20 minutes What to Do: 1. Divide the class into small groups and ask each group to identify two or three of the fastestgrowing businesses in the United States. (5 minutes) 2. Ask each group to consider what role entrepreneurship has played in the growth of these firms. (5 minutes) 3. Reassemble the class and ask students to share their results. (10 minutes) Don’t Forget: A number of fast-growing businesses are flourishing in the United States; students can consider assessing some of the more popular, commonly cited businesses like JetBlue, Starbucks, Walmart, Dell, and Southwest Airlines. (If students require a little extra time to research a company, you may want to use this activity as a homework assignment.)

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

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

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

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

What is my product or service?

Who are my customers?

Where are my customers located?

Is my business idea easily copied?

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

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

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

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

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

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

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

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In-Class Activity: Conjuring up Profits?

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

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

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

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

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

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

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

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

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

(Learning Objective 4, AACSB –application of knowledge) 3. Reasons for failure include managerial incompetence or inexperience, neglect, weak control systems, and insufficient capital. Reasons for success include hard work and dedication, market demand for the products or services being provided, managerial competence, and luck. (Learning Objective 3, AACSB –application of knowledge) 4. The basic forms of noncorporate business ownership include proprietorships and partnerships. Proprietors answer to no one but themselves, and they enjoy easy entry and exit into and out of the market. Further, tax laws permit owners to treat sales revenues and operating expenses as part of their personal finances, paying taxes based on their personal tax rate. However, proprietors experience unlimited liability, making them liable for all debts incurred by the business. Finally, proprietors face a potential lack of continuity and can depend only on their own resources and, perhaps, limited managerial and financial capabilities. The partnership, on the other hand, can grow by being able to add new talent and money. In addition, the skills and experience of one partner can complement the skills and experience of another partner. As with the proprietorship, big drawbacks facing a partnership are unlimited liability and potential lack of continuity.

(Learning Objective 5, AACSB – reflective thinking) QUESTIONS FOR ANALYSIS 5. Answers will vary but many students want to start their own business so this question should generate a lively discussion. Their analysis should contrast their personality characteristics with those of successful entrepreneurs. (Learning Objective 2, AACSB –application of knowledge) 6. Answers will vary, but many students will choose businesses within those industries that offer ease in market entry, primarily because resource availability may be limited to most students; they may not have built much personal credit and are likely not at the peak of their income-earning capacity. (Learning Objective 4, AACSB –application of knowledge)

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7. Answers will vary, but some students may find the added difficulty in starting from scratch especially challenging, but preferable. Others will likely want to benefit from an existing business. Learning Objective 4 8. Such corporations may choose to remain private if control retention is the aim. Many closely held corporations choose to become public to generate additional funding. (Learning Objective 5, AACSB – reflective thinking)

APPLICATION EXERCISES 9. Answers will vary, but most students will reveal that proprietors in small businesses are attracted to the simplicity in starting up and in being their own boss, in spite of the disadvantage of unlimited liability. Those contemplating changing the form of business ownership may be considering the advantages of additional capital and/or forms of managerial expertise added to the business. (Learning Objective 2, AACSB –application of knowledge) 10. This should be an interesting and eye opening exercise. Students should carefully evaluate the costs and the various success rates among popular restaurant concepts. A good source of information for this exercise is Restaurant News. (Learning Objective 3, AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISES 3- 11- 15 (Learning Objective 3, AACSB - application of knowledge and interpersonal relations and teamwork) This exercise helps students focus on the reality of being an entrepreneur, the costs of starting a business, obtaining financing, and the steps that an entrepreneur has to follow to have any chance of success. Students should discuss the pros and cons of various forms of financing noting the likelihood of obtaining said financing, start-up costs, and the pros and cons of various forms of ownership. Although there are no right or wrong answers, students should have engaged in rigorous discuss and analysis before presenting their answers.

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

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

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

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

ANSWERS TO EXERCISING YOUR ETHICS: BREAKING UP IS HARD TO DO (Learning Objective 5, AACSB –ethical understanding and reasoning, analytical thinking) 19. Mark’s additional responsibilities are not necessarily worth a $2,000 salary increase.

Connie’s desire to take $2,000 worth of inventory may not be reasonable.

20. Answers will vary, but students should consider how the contributions from both partners would change.

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

TEAM EXERCISE: PUBLIC OR PRIVATE? THAT IS THE QUESTION

(Learning Objective 5, AACSB –Interpersonal relations and teamwork, analytical thinking) Encourage the students to really try to view this case from their perspective assigned roles since many students may have a difficult time seeing a different perspective.

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CASES: LAUNCHING A BUSINESS IN THE GYM (Learning Objective 5, AACSB - analytical thinking, application of knowledge) 27. Netflix has been successful because it has focused on convenience and ease of use for which consumers are very willing to pay. It continually innovates to stay ahead of competitors.

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

29. Just as Netflix has driven Blockbuster out of business, it is possible that another competitor could emerge that would be a threat Netflix. Students might suggest a strategic alliance with television and movie producers to secure Netflix position.

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

ICE CREAM HEADACHE (Learning Objective 3, AACSB - analytical thinking, application of knowledge) 31. Answers will vary, but some students may find the added difficulty in starting from scratch challenging, but preferable due to the increased chance of success. Others will likely want to benefit from a well established franchise.

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

33. The responses will include: SBA programs, banks, personal savings, and franchisor sponsored credit.

34. A potential franchisee could contact the FTC for information, search the internet for articles on a particular franchise, and contact current franchisees to hear about their experiences and concerns.

35. Answers will vary depending on students’ interest.

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

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

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

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

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

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

LEARNING OBJECTIVES 1. Discuss the rise of international business and describe the major world marketplaces, trade agreements, and alliances.

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

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

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

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

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LIST OF IN-CLASS ACTIVITIES: AUTHOR’S CHOICE Activity 1. Ice-Breaker: Shoes in the Global Marketplace

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

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

2. In-Class Activity: Assessing Your Own Culture

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Time Limit 20 min.

20 min.

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

The Contemporary Global Economy The world economy is becoming a single interdependent system through the process of globalization. The total volume of international trade is more than $18.2 trillion. Exports are products that are produced domestically and shipped for sale abroad; imports are products that are produced abroad but sold domestically. International trade is becoming increasingly important to most nations and their largest businesses. Governments and businesses are more aware of the benefits of globalization to businesses and shareholders. New technologies have made travel, communication, and commerce faster and cheaper. In addition, competitive pressures push firms into foreign markets to keep up with competitors.

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

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

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

2. Geographic Clusters. North America is the world’s largest marketplace and most stable economy. Europe includes both Western and Eastern regions. The European Union now integrates all regions of Europe, creating a larger unified marketplace. Though Japan has dominated Pacific Asia, other important commerce centers include China, Thailand, Malaysia, Singapore, Indonesia, South Korea, Taiwan, the Philippines, and Australia. China, the world’s most densely populated country now boasts the world’s third-largest economy, behind only the European Union and the United States.

B. Trade Agreements and Alliances Virtually every nation has formed treaties with other nations to promote free trade. No country is totally self-sufficient; every country relies on imports and exports.

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

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

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

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

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

A. Balance of Trade. A country’s balance of trade is the total economic value of all the products that it exports minus the economic value of all the products that it imports. A trade deficit occurs when a country’s imports exceed its exports. A trade surplus occurs when a country’s exports exceed its imports B. Balance of Payments. Balance of payments refers to the flow of money into or out of a country. A country’s balance of payments results primarily from its balance of trade, though other contributing factors include money spent by tourists, foreign aid, and the buying and selling of currency.

C. Exchange Rates An exchange rate is the rate at which a nation’s currency can be exchanged for the currency of another. Fluctuations in exchange rates can greatly affect a country’s balance of trade.

With fixed exchange rates, the value of a country’s currency remains relatively constant to that of another country. With floating exchange rates, the value of a country’s currency relative to another currency varies with market conditions. Throughout most of 2009 the United States criticized China for its inflexible exchange rate policy—China being one of the few countries that still uses fixed exchange rates.

D. Forms of Competitive Advantage Managers need to understand forms of competitive advantage when making decisions about international competition.

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

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

3. National Competitive Advantage. National competitive advantage derives from factor conditions, demand conditions, related and supporting industries, and strategies, structures, and rivalries.

KEY TEACHING TIPS •

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

•

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

•

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

•

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

•

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

•

Make sure that students understand that the balance of payments reflects the inflow and outflow of money as a result of a country’s balance of trade.

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

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

• What countries are currently members of the European Union?

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

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

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

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

1. Gauging International Demand. Foreign demand for a company’s product may be greater than, the same as, or weaker than domestic demand. Determining international demand may require market research and/or prior market entry of competitors.

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

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

KEY TEACHING TIPS •

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

•

Make sure students do not confuse outsourcing with offshoring. A U.S. company can outsource to another U.S. company. Offshoring always implies outsourcing to other countries. Students typically confuse these two terms, so it is worth emphasizing the difference.

•

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

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

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

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

1.

Exporters and Importers Representing the lowest level of global involvement, exporters and importers conduct only a small part of their business globally. An exporter distributes and sells products in a small number of foreign countries. An importer buys products in foreign markets and then imports them for resale in its home country.

2.

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

3.

Multinational Firms Multinational firms—firms that design, produce, and market products in many nations — do not ordinarily think of themselves as having domestic and international divisions. Planning and decision making are geared to international markets.

Headquarters locations are almost irrelevant. It is important not to underestimate the economic impact of multinational firms. In 2012 the largest 500 multinationals accounted for $1.6 trillion in profits from $24.9 trillion total revenues. They employed tens of millions of people, paid billions in taxes, and brought equipment and services from thousands of other firms across the world.

C. International Organizational Structures Whether an importer, exporter, international firm, or multinational firm, a firm’s level of global involvement will influence the firm’s choice of international organizational strategies.

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

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

3. Branch Offices. To gain more direct control and a more tangible presence in

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foreign countries, a firm will send some of its own managers to overseas branch offices with this arrangement.

4. Strategic Alliances. Strategic alliances include a company and a foreign partner that combine resources and capital to begin a new business.

5. Foreign Direct Investment. Foreign direct investment means buying or establishing tangible assets in a foreign country.

KEY TEACHING TIPS •

Empathize that the largest of multinational firms now have revenues that exceed the Gross Domestic Product (GDP) of many nations. The influence that these large companies are having on world economics is increasing.

•

Remind students that independent agents often act as sales representatives

QUICK QUESTIONS • What are licensing arrangements?

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

• How many US multinational companies can you name?

• How many Japanese multinational companies can you name?

• How many European Companies can you name?

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

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

A. Values, Symbols, Beliefs, and Language Cultural values and beliefs are often unspoken; they may even be taken for granted by those who live in a particular country. Cultural factors do not necessarily cause problems for managers when the cultures of two countries are similar.

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

1. The first dimension is social orientation. Social orientation is a person’s beliefs about the relative importance of the individual versus groups to which that person belongs.

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

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

Uncertainty orientation is the feeling individuals have regarding uncertain and ambiguous situations.

4. The fourth dimension of cultural values is goal orientation. In this context, goal orientation is the manner in which people are motivated to work toward different kinds of goals.

5. A fifth dimension is called time orientation. Time orientation is the extent to which members of a culture adopt a long-term versus a short-term outlook on work, life, and other elements of society.

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

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

A. Economic Differences When trading with different types of economic systems, firms must be aware of the level of government involvement in a given industry.

B. Legal and Political Differences Governments can present many trade barriers in international business, including the control of the flow of capital and the use of tax legislation to encourage or discourage global activity in given industries.

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

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

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

This guarantees that a percentage of the profits remain in that country.

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

5. Cartels and Dumping. Cartels are associations of producers that control supply and prices. Many (but not all) countries forbid dumping—selling a product abroad for less than the cost of production at home. United States law forbids both cartels and dumping.

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KEY TEACHING TIPS •

Remind students that it is not only entrepreneurs who factor in risk in their assessment of business opportunities. Even large organizations carefully examine the risk factors involved in Foreign Direct Investment opportunities.

•

Multinational companies carefully monitor the economic issues, such as population size and growth, economic, and political stability, the levels of corruption and a nation’s geographical location in making FDI decisions.

•

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

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

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

Use In-Class Activity 3: Assessing Your Own Culture Discussion Time Limit: 20 minutes Students often think of how different other cultures are from the U.S. culture. This discussion helps students recognize how foreign the U.S. culture really is to business managers from other countries.

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

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

Time Limit: 20 minutes What to Do: 1. Ask students to remove their shoe and note the country in which it was made. Go around the class and keep a tally of country of origin. Most students will have shoes from China. (5 minutes) 2.

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

3.

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

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

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

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

Time Limit: 20 minutes

What to Do: 1. Ask students to form groups.

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

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

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

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

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ANSWERS FOR END OF CHAPTER EXERCISES & ACTIVITIES QUESTIONS FOR REVIEW 1. Governments and businesses are more aware of the benefits of globalization to businesses and shareholders. These benefits include the potential for higher standards of living and improved business profitability. New technologies have made international travel, communication, and commerce faster and cheaper than ever before. Finally, there are competitive pressures; sometimes a firm must expand into foreign markets simply to keep up with competitors.

Critics would say the disadvantages include the possibility of businesses exploiting workers in less-developed countries and bypassing domestic environmental and tax regulations. Another possibility is that globalization might lead to the loss of cultural heritages and often benefits the rich more than the poor. (Learning Objective 1, AACSB –analytical thinking) 2. The three levels are importing/exporting, international business, and multinational business.

Examples will vary. (Learning Objective 3, AACSB –analytical thinking) 3.

The elements of National Competitive Advantage are factor conditions, demand conditions, related and supporting industries, and strategies, structures, and rivalries. (Learning Objective 3, AACSB –analytical thinking)

4. Students should focus on the levels of involvement and organizational structures discussed in the chapter. Some firms merely import or export. Others may utilize an independent agent that represents the company in foreign markets. Licensing allows a company to grant exclusive rights to a foreign company to manufacture or market their products. Branch offices allow the domestic company to maintain its own employee base overseas. Finally, a strategic alliance allows a domestic company to partner with a foreign company in working toward a common purpose. (Learning Objective 3, AACSB –analytical thinking) QUESTIONS FOR ANALYSIS 5. Answers will vary, but students may indicate that many electronics items, for example, are imported from Japan, South Korea, China, and Taiwan; technological expertise among companies there is often perceived as being superior. Linens and clothing, for example, have likely been imported from a variety of countries. (Learning Objective 4, AACSB – analytical thinking and application of knowledge) 6. When discussing the first dimension social orientation, students should note the United States emphasis on individualism with the interests of the individual take precedence. On the power

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orientation dimension, Americans tend to be more power tolerant and willing to question authority.

Research suggests that Americans also are more tolerant regarding uncertainty and ambiguity.

On the fourth dimension of goal orientation Americans appear to display moderately aggressive goal behavior. On the final dimension, time orientation, research suggests that people in the United States have a moderate time orientation compare to other countries.

(Learning Objective 4, AACSB –analytical thinking and application of knowledge) 7. Answers will vary, but students should comment on the effects of unrestricted imports on the domestic economy and the effect of tariffs on prices, employment, and competition.

Unrestricted imports certainly increase competition and can alter employment levels eventually. Also, pricing on domestically produced goods will likely be held lower in order to compete with the foreign goods and the increase in supply in some instances. On the other hand, protectionist tariffs make domestic products look more attractive in terms of price and limit consumers’ product options. (Learning Objective 2, AACSB –application of knowledge) 8. Answers will vary, but students should comment on the possibility that conduct considered unethical in the home country will damage the firm’s reputation, backfire abroad, or lead to situations in which the legality of its actions could be called into question.

(Learning Objective 4, AACS –analytical thinking and application of knowledge) APPLICATION EXERCISES 9. Students will consult various sources to better understand the huge disparities in wealth between the high-income, upper-middle, and lower-middle income countries.

(Learning Objective 5, AACSB –analytical thinking and application of knowledge) 10. Answers and sources will vary, but students should focus on cultural dimension differences and the impact on businesses operating in China. (Learning Objective 5, AACSB – analytical thinking and application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE (Learning Objective 2, AACSB –analytical thinking and application of knowledge) 11. Exchange rates will affect the businesses differently depending on the type of business and whether they plan to sell their product overseas or domestically. Exchange rates could affect the cost of producing or selling a product.

12. Answers will vary depending on the type of business venture. With e-commerce, many students may source products internationally.

13. Again answers will vary dramatically depending on the product chosen by the team.

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14. Again, some ventures will be impacted by international environmental factors and others will experience minimal effects.

BUILDING YOUR BUSINESS SKILLS: FINDING YOUR PLACE (Learning Objective 5, AACSB –analytical thinking and application of knowledge) 15. Anything that will increase brand recognition and, therefore, sales both in the United States and abroad would be promising. Least promising steps would include focusing solely on local Italian markets where Lang’s products may lack the made-in-Italy cachet that gives them potential elsewhere.

16. It suggests that she should focus on marketing activities that build the brand.

17. Answers will vary, but students should touch on the fact that cultural differences make it difficult for U.S. women to do business in male-dominated cultures where they may be expected to behave in unaccustomed ways and where there are fewer women in business to offer cultural role models. Lang should be businesslike in all her dealings and give a firm but polite refusal to inappropriate invitations. A consistent response may help her eventually cut down on the number of such instances.

18. Some students may feel that since Lang’s firm employs no U.S. workers, the consulate’s treatment is “fair.” Others may feel that because Lang herself is a citizen, the treatment is unfair.”

19. Some will feel that Lang needs to personally control the design and manufacturing end of her business, others may feel that she should focus on spreading the word about the brand in the United States and Europe.

20. It is unlikely that Lang’s firm can remain a one-person operation for long if it is to be successful.

EXERCISING YOUR ETHICS: PAYING HEED TO FOREIGN PRACTICES ?

(Learning Objective 4, AACSB -application of knowledge, ethical understanding and reasoning) 21. The key ethical issue is whether to pay bribes to establish your business in this foreign country. Does it make sense to extend the U.S. sense of ethical behavior, codified in law (i.e., never pay bribes), to a country that doesn’t consider bribes to be unethical or illegal?

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

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

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

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

CASES: THE EMBARGO GRINDS ON (Learning Objective 2, AACSB -application of knowledge, ethical understanding and reasoning) 29. Students will have differing answers based on their perceptions of the ethics of the embargo.

If a student does answer “yes”, he/she might suggest exploring an alliance with a Canadian company or a supplier in another country that is already importing coffee from Cuba.

30. Again, answers will vary but it is obvious that the embargo is much less effective than 50 years ago. The world economy is much more globally oriented than it was and companies chase business and profits internationally.

31. The students should explore a variety of options including international alliances and research the steps that companies in other countries used to gain a foothold in Cuba.

NOT MY CUP OF TEA (Learning Objective 4, AACSB –analytical thinking and application of knowledge) 32. Companies like Starbucks recognize that to achieve sustainable growth, it needs to expand beyond its domestic borders. Although, the Chinese are currently consumers of large amounts of coffee, tastes change over time. Since many Chinese are travelling internationally, they are increasingly exposed to different cultures and products.

33. Starbucks has adapted to the Chinese culture by customizing its product offerings. Starbucks has also enlarged the store after recognizing that the Chinese like to meet and socialize at the store.

34. Answers will vary depending on students’ perception of cultural changes.

35. This may impact Starbucks if a manager was forced to choose between Starbucks policy and a local Chinese policy. It is likely that the manager would face tremendous turmoil and not necessarily view it from Starbucks point of view.

36. China could erect trade barriers such as using local content laws requiring a large percentage of the products sold in Starbucks originate in China. The Chinese could also use their

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business practice laws making it more difficult to open additional Starbucks.

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

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

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

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

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

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

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

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

2. What should my business plan look like?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DESCRIPTION OF BUSINESS What will your business do?

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

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

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

IDEAL CUSTOMER Briefly describe your ideal customer. What are they like in terms of age, income level, and so on?

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

OUR ADVANTAGES Why will customers choose to buy from your business, instead of your competition?

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

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

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

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

Hint: To help you consider issues of social responsibility, refer to the discussion of social responsibility in Chapter 2. What steps can you take to be a good citizen in the community?

Consider also how you may need to be socially responsible toward your customers and, if applicable, investors, employees, and suppliers.

GLOBAL ISSUES Do you think that you’ll sell your product in another country? If so, what countries would you choose, and why? What challenges will you face?

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

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Chapter 5: Managing the Business Chapter Overview What makes a good manager? Think back to a favorite manager with whom you have worked. What made that manager effective? Perhaps the manager assigned special roles in setting organizational goals.

Or perhaps he or she was an exceptional communicator, expressed empathy, or was an effective motivator.

Now think back to a “poor” manager you’ve worked with. What made that manager ineffective? Maybe he or she was too controlling, lacked communication skills, or showed favoritism toward subordinates.

Whatever the reason, many people’s future managerial roles will be affected by their past experiences.

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

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

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

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

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

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

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

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LIST OF IN-CLASS ACTIVITIES: AUTHOR’S CHOICE Activity 1. Ice-Breaker: The Management Process 2. Class Discussion: How Do Your Goals Stack Up? 3. Small-Group Discussion: SWOT Analysis 4. Up for Debate: I Can’t Believe This Has Happened!

5. Up for Debate: Who Creates Corporate Culture?

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

Students write down their short-term, intermediate, and long-term goals Students brainstorm in small groups in order to complete a SWOT analysis.

Students are divided into teams to discuss crisis management.

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

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Time Limit 30 min.

30 min.

30 min.

20 min.

30 min.

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

The Management Process All corporations depend on effective management; the principles of management apply to all kinds of organizations.

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

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

2. Organizing Organizing involves the arranging of a firm’s resources into a coherent structure.

Organization charts help everyone understand roles and reporting relationships, key parts of the organizing function.

3. Leading When leading, a manager works to guide and motivate employees to meet the firm’s objectives.

4. Controlling Controlling is the process of monitoring a firm’s performance to make sure that it is meeting its goals.

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

1. The Science of Management Many management problems and issues can be approached in ways that are rational, logical, objective, and systematic.

2. The Art of Management Even though managers may try to be scientific as often as possible, they must frequently make decisions and solve problems on the basis of intuition, experience, instinct, and personal insights.

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C. Becoming a Manager How does one acquire the skills necessary to blend the science and art of management and become a successful manager? Although there are as many variations as there are managers, the most common path involves combination of education and experience.

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

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

KEY TEACHING TIPS •

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

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

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

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

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

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

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

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

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

A. Levels of Management The three basic levels of management are top, middle, and first-line.

1. Top Managers. This level is responsible for the firm’s overall performance and effectiveness. Top managers set general policies and formulate strategies, approve all significant decisions, and represent the company in dealing with stockholders, the board of directors, other businesses, and government. Common titles for top managers include President, Vice President, Treasurer, Chief Executive Officer (CEO), and Chief Financial Officer (CFO).

2. Middle Managers. This level is responsible for implementing the strategies, policies, and decisions made by top managers. Titles such as Plant Manager, Operations Manager, and Division Manager designate middle-management slots.

3. First-Line Managers. Duties of managers at this level depend on the job, though firstline managers spend most of their time supervising the employees who report to them.

Those who hold such titles as Supervisor, Office Manager, Project Manager, and Group Leader are first-line managers.

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

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

2. Operations Managers. These managers are responsible for the production system in which a firm produces goods and/or services, inventory and inventory control, and quality control.

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

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

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

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

TEACHING TIPS •

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

•

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

HOMEWORK Interview a Manager Now is a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. The assignment asks students to interview a manager in order to further their understanding of levels, functions, and areas of management.

At-Home Completion Time: 45 minutes

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

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

A. Managerial Roles Research offers a number of interesting insights into the nature of managerial roles. Based on detailed observations of what executives do, it appears that many of their activities fall into 10 different roles.

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

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

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

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

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

B. Basic Management Skills Effectiveness in management results from the development of a variety of skills among managers.

1. Technical Skills Technical skills are the skills needed to perform specialized tasks. These skills are developed through a combination of education and experience. Technical skills are especially important for first-line managers who spend most of their time with the day-today operations of the production system.

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2. Human Relations Skills Absolutely necessary for managerial success, human relations skills are skills in understanding and getting along with people. These skills are important at all management levels.

3. Conceptual Skills Especially prevalent among top managers, conceptual skills involve the ability to diagnose and analyze different situations and to see beyond the present situation.

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

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

C. Management Skills for the Twenty-First Century Competing globally and managing technology are two major challenges facing managers today.

1.

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

2. Management and Technology Skills. New forms of technology increase the manager’s need to process, organize, and interpret a plethora of information.

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

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

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

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

2. Kinds of Goals. Every firm has a purpose and a mission. A mission statement is a statement of how the firm will achieve its purpose in the environment in which it operates. In addition, every firm needs long-term goals, which look at five years or more into the future; intermediate goals, which focus on a period of one to five years; and short-term goals, which are set for one year.

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

2. Business (or Competitive) Strategy. Business (or competitive) strategy focuses on improving the company’s competitive position.

3. Functional Strategy. With functional strategy, managers in specific areas decide how best to achieve corporate goals by being as productive as possible.

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

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

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2. Step 2: Analyzing the Organization and Its Environment: SWOT Analysis. After strategic goals have been established, managers usually attempt to assess both their organization and its environment. A common framework for this assessment is called a SWOT analysis. This process involves assessing organizational strengths and weaknesses (the S and W) and environmental opportunities and threats (the O and T).

Environmental analysis involves scanning the external environment for threats and opportunities. Threats include changing consumer tastes, hostile takeovers, and some competitor actions. Organizational analysis involves scanning the internal environment for strengths and weaknesses. Strengths include surplus cash, a dedicated workforce, technical expertise, etc.

3. Step 3: Matching the Organization and Its Environment. This step in strategy formulation involves matching a firm’s strengths and weaknesses to its opportunities and threats. This step is credited as the foundation for successful planning.

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

Usually set by the board of directors and top management, strategic plans focus on steps needed to meet strategic goals. Usually involving upper and middle managers, tactical plans are concerned with implementing certain aspects of the strategic plans; tactical plans are short-range plans. Middle and lower-level managers develop operational plans, geared toward short-term goals.

KEY TEACHING TIPS •

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

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

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Students often confuse the types of strategy. Highlight the difference between corporate strategy, business strategy, and functional strategy.

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

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

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QUICK QUESTIONS •

What are the purposes of goal setting?

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What is included in your college’s mission statement?

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What is the difference between environmental analysis and organizational analysis?

Use In-Class Activity 3: Class Discussion: How Do Your Goals Stack Up? Time Limit: 30 minutes Use In-Class Activity 4: Small-Group Discussion: SWOT Analysis Time Limit: 30 minutes

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

Contingency Planning and Crisis Management

Because business environments are often difficult to predict and because the unexpected can create major problems, most managers recognize that even the best-laid plans sometimes simply do not work out. Two common methods of dealing with the unknown and unforeseen are contingency planning and crisis management.

A. Contingency Planning Contingency planning is planning for change; it identifies ways in which a company will respond to change.

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

KEY TEACHING TIPS •

It’s important to point out that a contingency plan may not always work. Changes in internal and external variables can force changes to even the most well thought-out plan.

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Remind students that the most successful organizations are those that make their mission statements clear, remain open about internal policies and external relationships, and are adaptive to change.

Use In-Class Activity 5: Up for Debate: I Can’t Believe This Has Happened!

Time Limit: 20 minutes

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

Management and the Corporate Culture Corporate culture—the shared experiences, stories, beliefs, and norms that characterize an organization—greatly influences management philosophy, style, and behavior and must be understood by management in order to be effectively communicated to others in the organization.

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

B. Changing Culture This involves analyzing the company’s environment, formulating a vision of a new company, and setting up appraisal and compensation systems for employees who enforce the new values.

QUICK QUESTIONS •

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

In a beauty salon?

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

Use In-Class Activity 6: Up for Debate: Who Creates Corporate Culture?

Time Limit: 30 Minutes

HOMEWORK Comparing Corporate Cultures Now is a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. The assignment gives students an opportunity to compare and contrast the corporate cultures of two local companies with which they are familiar.

At-Home Completion Time: 30 minutes

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

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

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

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

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

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

Time Limit: 30 minutes What to Do: 1. Ask students to write down one or two of their long-term goals, focusing on the five-yearplus horizon. (10 minutes) 2. Ask students to write down one or two intermediate goals—focusing on a one- to five-year horizon—that may help them to achieve their long-term goals. (10 minutes) 3. Ask students to identify one or two short-term goals—covering a range of less than one year—that may help them to achieve their intermediate goals. (10 minutes) Don’t Forget: Remind students that the achievement of short-term goals can support the achievement of intermediate goals, which can ultimately support long-term goals.

Wrap-Up: Wrap up the exercise by reminding students that goal setting in organizations is driven by corporate, business, and functional strategies; however, the process is dynamic. Organizational environments and situations can change. As a result, goals may need to be reshaped.

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

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

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

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

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

Time Limit: 20 minutes What to Do: 1. Divide the class into small groups and ask each group to assume you have been suddenly called away for the next three weeks, but that class must go on. Appropriate course material, course objectives, and all syllabus content must be covered in a classroom setting—but there is no time to bring in a replacement instructor. Instead, the students themselves are responsible.

2. Each group must decide on the best way to continue. How can material and objectives be adequately covered? Who should carry out the instruction? (20 minutes) Don’t Forget: For smaller class sizes, you might complete this as an individual activity.

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

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

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

Time Limit: 30 minutes What to Do: 1. Divide the class into three-member groups and ask them to discuss among themselves who creates corporate culture. Ask the groups to consider these conversation starters: (15 minutes) a. If top managers create corporate culture, how do they get everyone else to follow? b. If first-line managers or employees create corporate culture, how do they get top managers to go along with it? c. How often does corporate culture change? d. When corporate culture changes, what typically causes the change?

2. Reassemble the class and discuss each group’s answers. (15 minutes) Don’t Forget: Corporate culture is not always a direct result of top managers’ actions. Sometimes corporate culture is created by first-line managers, employees, or even everyone in the organization.

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

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ANSWERS FOR END OF CHAPTER EXERCISES & ACTIVITIES QUESTIONS FOR REVIEW 1. Top managers are strategic planners responsible for corporate performance and formulating the mission, goals, and overall corporate strategy. Middle managers are tactical planners responsible for implementing tops management’s strategies. First-line managers spend most of their time working with and supervising employees. (Learning Objective 2, AACSB – analytical thinking) 2. The four main purposes are (a) to provide direction and guidance for managers at all levels; (b) to help firms allocate resources; (c) to help define corporate culture; and (d) to help managers assess performance. (Learning Objective 4, AACSB – analytical thinking) 3. The three basic steps in strategy formulation include (a) setting strategic goals that stem from the organization’s mission statement; (b) analyzing the organization and its environment for strengths, weaknesses, opportunities, and threats; and (c) matching environmental threats and opportunities against the organization’s strengths and weaknesses.

(Learning Objective 4, AACSB – analytical thinking) 4. Corporate culture is the shared stories, experiences, beliefs, and norms that characterize an organization. Factors that form culture can range from the personality of the founder, to the firm’s overall philosophy, to daily operating methods. Culture is sustained by communicating the culture to all employees and by rewarding and promoting those who understand and maintain the culture. (Learning Objective 6, AACSB – analytical thinking) QUESTIONS FOR ANALYSIS 5. The planning practices identified will vary from strategy to tactical to operational in nature.

Further, every organizational structure varies, depending on the number of people working in the organization. Leading or motivating, depends on the number of subordinates or group members present and, perhaps, the types of diversity. Controlling is the one function that ties back to the planning process; if the plan is not going according to expectations, changes are made to guide the organization in the right direction. (Learning Objective 4, AACSB – application of knowledge) 6. Answers will vary, although top administrative officials are top managers; mid-level staff and administrators are middle managers; and lower-level staff are closest to first-line managers. (Learning Objective 2, AACSB –application of knowledge) 7. Answers will vary but should include early warning system, an evacuation plan, an analysis of alternative energy/power sources, alternative sites for operation in case of emergency

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shutdown. Encourage students to be creative when answering this question. (Learning Objective 5, AACSB –application of knowledge) 8. The older firm is likely to have many established traditions, norms, and layers of management. Decision making is probably concentrated at the top of the organization. Cultural elements are likely to be rather conservative. The newer e-commerce firm probably has a culture that stems directly from the personality of its founders. The firm likely has a flat hierarchy, and all employees likely use their conceptual and decision-making skills. Most cultural elements are probably fluid and freewheeling. (Learning Objective 2, AACSB – application of knowledge) APPLICATION EXERCISES 9. Answers will vary, but students should cover each of the management activities and skills.

(Learning Objective 3, AACSB –application of knowledge) 10. Answers will vary, but students should focus on areas where the firms are likely to be similar, such as in the type and extent of skills that managers typically use, and different, such as target markets, philosophies, and management styles. (Learning Objective 6, AACSB –application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 5- 11 - 16 (AACSB –Interpersonal relations and teamwork, analytical thinking, application of knowledge) In this exercise students are focusing on the expertise necessary to successfully run their business. They should incorporate information from their SWOT analysis to determine their goals and strategies. The students should also incorporate lessons learned from this chapter to develop detailed contingency plans.

BUILDING YOUR BUSINESS SKILLS – SPEAKING WITH POWER (AACSB - Written and oral communication, application of knowledge) 17. The more a manager has mastered the power content of speech, as McGinty defines it, the more likely he or she is to communicate effectively. Students will have varying ideas as to the effects of “powerful speech” at different levels of the firm, although it would be seen as a positive attribute at every level.

18. Answers will vary, but students should be able to apply the criteria listed in the exercise.

19. Answers will vary, but students should recognize the value of effective communication.

20. Answers will vary, but may include the ease with which personal presentations can provide the same information to many people at one time, the opportunity to address questions immediately, and the opportunity to draw on the charismatic effect of powerful speakers for motivation and leadership purposes.

21. Many students will identify communication processes within organizations as being directly

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affected by the corporate culture itself. Personal communication skills and methods exercised within an organization may be partly shaped by the culture of the organization.

EXERCISING YOUR ETHICS: TIME FOR THE AX? (AACSB – Ethical understanding and reasoning, reflective thinking) 22. The key ethical issue is social responsibility with regard to key stakeholders. There is a clear conflict between the responsibility to maximize short-term profits for investors and the responsibility to maximize social profit for the community in the wake of the tropical storm.

23. Answers will vary, but students should acknowledge the possibility of simply continuing business as usual.

24. Answers will vary, but students should acknowledge that it is often difficult to make decisions that will positively impact all stakeholders involved. Some individuals exercise higher levels of ethical behavior and acts of social responsibility than others.

TEAM EXERCISE: DREAMS CAN COME TRUE (AACSB –Interpersonal relations and teamwork, reflective thinking) This exercise helps students focus on developing a mission statement and how to derive appropriate goals based on the company’s mission.

CASES: WANT TO KNOW THE FUTURE? JUST GOOGLE IT… (Learning Objectives 1 and 3 AACSB –Reasoning, reflective thinking) 29. This case cites the example of the two company founders engaging in planning and analysis when diversifying through key acquisitions and alliances. This case always describes the function of leading to ensure Google continues to foster a highly productive company culture of innovation.

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

31. Sergey Brin and Larry Page clearly had goals and a strategy in mind for their company but take a much more informal approach to strategic planning and goal setting versus many more traditional companies.

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

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WHEN OLD IS NEW AND NEW IS OLD (Learning Objectives 3 and 4, AACSB –Reasoning, reflective thinking) 33. Students should describe the strategic nature of the decisions that the CEO of J.C. Penney must make to create a viable business plan, reorganize the functional departments, lead and inspire the employees to create a new company culture, and control to ensure the company’s survival. As stated in the case, there will have to be thoughtful and continued analysis.

34. Although answers will vary but most students will probably consider conceptual and decision-making skills to be the most important to Mike Ullman’s success.

35. – 37. The last three questions of this case should generate a lively discussion with passionate answers focusing on failed strategy, too quick implementation, lack of careful analysis, and the ultimate question of the company’s long term viability.

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Chapter 6: Organizing the Business Chapter Overview Like a thumbprint, every organization has a unique structure. Some new business start-ups begin with a simple structure and over time evolve into an elaborate structure. All organizational structures change, but some change more quickly than others.

This chapter presents the building blocks of organizational structure—specialization and departmentalization. It also describes centralization and decentralization, delegation, and authority as the key ingredients in establishing the decision-making hierarchy. Along the way, the chapter looks at the differences among functional, divisional, matrix, and international organizational structures and examines the most popular new forms of organizational design.

Finally, the chapter explores the informal organization and intrapreneuring.

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

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

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

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

5. Describe the informal organization and discuss intrapreneuring.

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LIST OF IN-CLASS ACTIVITIES: AUTHOR’S CHOICE Activity 1. Ice-Breaker: Organizational Structure

2. Small-Group Discussion: Centralization versus Decentralization 3. Up for Debate: Making the Grade 4. Up for Debate: Who Runs the Grapevine?

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

Students consider the advantages of centralization and decentralization.

Students are divided into teams to discuss the advantages and disadvantages of intrapreneurship at FedEx. Students are divided into teams to discuss “who” within the organization most likely creates the grapevine.

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

What Is Organizational Structure?

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

A. Organization Charts Organizational charts are prepared to clarify structure and to show employees where they fit into a firm’s operations. The chain of command represents the hierarchy of who reports to whom in the organization.

B. Determinants of Organizational Structure Numerous factors influence the planning and creating of an efficient organizational structure.

Managers not only consider the organization’s purpose, mission, and strategy, but also the organization’s size, technology, and environmental changes.

KEY TEACHING TIP •

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

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Many factors play a part in determining an organization’s optimal structure, including the organization’s mission, strategy, size, and environment. Most organizations change their structures on a continuing basis.

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

QUICK QUESTIONS •

What does an organization chart tell us?

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

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

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

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

A. Specialization Job specialization, a natural part of an organization’s growth, is the process of identifying the specific jobs that need to be done and designating the people who will perform them. Job specialization may even involve breaking jobs into small components prior to assigning them to individuals.

B. Specialization and Growth. In a very small organization, the owner may perform every job.

As the firm grows, however, so does the need to specialize jobs so that others can perform them.

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

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

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

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

4. Customer Departmentalization. This grouping of jobs simplifies shopping by providing identifiable store segments.

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

6. Multiple Forms of Departmentalization. Larger companies tend to adopt different types of departmentalization for various levels.

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KEY TEACHING TIPS •

An interesting point to make is that larger companies tend to adopt different types of departmentalization for various levels of the company.

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

QUICK QUESTIONS •

What type of company might opt to use process departmentalization?

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What type of company might opt to use functional departmentalization?

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What type of company might opt to use customer departmentalization?

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

Establishing the Decision-Making Hierarchy The decision-making hierarchy is created by assigning tasks, performing tasks, and distributing authority.

A. Distributing Authority: Centralization and Decentralization Some managers make the conscious decision to retain as much decision-making authority as possible at the higher levels of the organizational structure; others decide to push authority as far down the hierarchy as possible.

1. Centralized Organizations. In a centralized organization, authority is held by upperlevel management.

2. Decentralized Organizations. In a decentralized organization, authority is delegated to lower levels of management.

3. Tall and Flat Organizations. Tall organizations are multi-tiered, characterized by many layers of employees; flat organizations have few layers of employees.

4. Span of Control. A manager’s span of control is the number of people managed by one supervisor; many factors can lead to a wide or narrow span of control.

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

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

C. Three Forms of Authority Forms of authority result when individuals are delegated authority and responsibility in a firm. Various forms of authority may be found in any given company.

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

2. Staff Authority. This authority is found among departments of advisors and counselors, including specialists, such as lawyers, engineers, accountants, and human resource personnel. These individuals help line departments in making decisions, but do not have the authority to make final decisions.

3. Committee and Team Authority. This is the authority that is granted to committees and teams that play central roles in the firm’s daily operations. Employees are typically empowered to plan and organize their own work and to perform that work with minimal supervision.

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KEY TEACHING TIPS •

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

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

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

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

QUICK QUESTIONS •

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

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Why do managers sometimes have trouble delegating authority?

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

Use In-Class Activity 2: Small-Group Discussion: Centralization versus Decentralization Time Limit: 30 minutes

HOMEWORK Interview a Manager Now is a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. This assignment asks students to interview a manager to gain first-hand knowledge of how the delegation process is actually carried out at a local service business.

At-Home Completion Time: 1 to 2 hours

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

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

A. Functional Structure Often used by most small- and medium-sized firms, functional organizations divide job responsibilities by functional areas, such as marketing or finance.

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

C. Matrix Structure Sometimes a “combination” structure—one that combines two separate structures—works better than either simpler structure alone. A so-called matrix structure is organized along two dimensions, instead of just one, by combining, for example, a functional and a divisional structure.

D. International Structure International organizational structures have been developed in response to the need to manufacture, purchase, and sell in global markets.

E. Organizational Design in the Twenty-First Century.

Among the most popular new forms of organization are team organization, virtual organization, and learning organization.

1. Team Organization. Team organization relies mostly on project-type teams; people float from one project to another as dictated by their skills and the demands of the projects.

2. Virtual Organization. This organization has little or no formal structure; this organization exists only in response to its own needs.

3. Learning Organization. The learning organization works to integrate continuous improvement with continuous employee learning and development.

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KEY TEACHING TIPS •

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

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Remind students that there are several forms of international structure, depending on the degree with which an organization depends on foreign companies to manufacture, purchase, and sell its products.

QUICK QUESTIONS •

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

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

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

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

A. Informal Groups Informal groups are groups of people who decide to interact among themselves. Informal organization can be just as powerful as formal organization.

B. Organizational Grapevine The grapevine or the rumor mill is an informal communication structure in which people communicate through ways that transcend the formal communication processes.

C. Intrapreneuring A relatively new concept, intrapreneuring, is encouraged among businesses as a way of enhancing creativity and flexibility in large, bureaucratic structures.

KEY TEACHING TIPS •

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

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

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

QUICK QUESTIONS •

What is the informal organization at your job?

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

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

Time Limit: 30 minutes

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

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

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

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In-Class Activity 2: Small-Group Discussion Centralization versus Decentralization Activity Overview: This activity encourages students to consider the advantages and disadvantages of centralization and decentralization within organizations.

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

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

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

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

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

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

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

Time Limit: 30 minutes What to Do: 1. Divide the class into two- or three-member teams and ask them to discuss within their groups where the grapevine begins within an organization. Is it top managers? Is it mostly males or females? Is the grapevine generated from specific departments? Is it generated from those people with the most seniority? (15 minutes) 2. Reassemble the class as a whole and debate the small groups’ thoughts. (15 minutes) Don’t Forget: The grapevine is not likely to be generated in the same way within every organization. In addition, information changes as it “moves” from person to person. Remind students that they will be merely considering generalizations in this activity.

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

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1. Departmentalization follows one (or any combination) of five forms: a. functional departmentalization based on functions or activities b. product departmentalization based on products or services offered c. process departmentalization based on production processes used to create goods and services d. customer departmentalization based on customer types or customer groups e. geographic departmentalization based on geographic area (Learning Objective 1 – AACSB – application of knowledge) 2. In a centralized organization, decision-making authority is retained at the top levels of the organization. Centralized authority systems typically require multiple layers of management and thus tall organizational structures. Conversely, in a decentralized organization, most decision-making authority is delegated to lower levels of management. Decentralized firms tend to have relatively fewer layers of management, resulting in a flat organizational structure.

(Learning Objective 3 – AACSB – application of knowledge) 3. Responsibility is the duty to perform an assigned task; authority is the power to make the decisions necessary to complete that task. Responsibility and authority should be closely linked for any given assignment. (Learning Objective 3 – AACSB – application of knowledge) 4. Some of the reasons managers have difficulty delegating authority include that (a) they fear that employees can’t do anything as well as they can; (b) they fear that something will go wrong if someone else does it; (c) they fear that the employee will “show up” the manager; (d) they are too bogged down in day-to-day activities to delegate; (e) they don’t know how to delegate; and (f) they want to keep control. (Learning Objective 3 – AACSB – application of knowledge) 5. The company’s informal organization is the everyday social connections among employees that can transcend formal job-related relationships, creating a very powerful dynamic, which can either support or disrupt a firm’s effectiveness. (Learning Objective 5 – AACSB – application of knowledge)

QUESTIONS FOR ANALYSIS 6. College organization structures do differ, but most colleges will use a functional structure with a President as its head and cabinet members overseeing various departments such as academic affairs, finance, student development, advancement, and admission. If the student

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includes the academic divisions in the organization chart he/she will likely include Deans of Schools (or Divisions or Faculties) and individual departments that comprise each school.

(Learning Objective 4 – AACSB – reflective thinking) 7. Answers will vary, but the firm will probably begin with a centralized structure in which the owner will either perform or oversee every job. Various types of departmentalization will probably emerge as the firm grows, and it may become more decentralized as management delegates authority downward. With additional growth, the firm may advance from a functional to a divisional or matrix organization. (Learning Objective 4 – AACSB – application of knowledge) 8. A divisional structure consists of corporate divisions that operate as relatively autonomous units under the larger corporate umbrella. In a matrix structure, however, group members report to two or more managers, usually one line and one staff manager. The matrix structure is often used to address specific issues on a project-by-project basis. Answers to the second part of the question—how would students feel about working in a matrix organization— will vary, but students should address the pros and cons of reporting to more than one manager.

(Learning Objective 4 – AACSB –application of knowledge)

APPLICATION EXERCISES 9. Answers will vary, but managers in fast-food restaurants typically delegate tasks like cleaning, cooking, serving, and so on. Depending on the size of the business, ordering, scheduling, and payroll functions may be delegated as well. (Learning Objective 3 – AACSB –application of knowledge) 10. Answers will vary but after researching the company, the student should from viewing the company’s organizational chart determine the type of structure. An organization chart represents the firm’s structure and shows where employees fit into the hierarchy.

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

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BUILDING YOUR BUSINESS SKILLS: GETTING WITH THE PROGRAM (Learning objective 3 –A ACSB - analytical thinking, application of knowledge) 15. Dissatisfied employees can obtain other jobs easily, so firms will try to limit turnover by creating the most satisfactory work environment possible.

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

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

EXERCISING YOUR ETHICS: I HEARD IT THROUGH THE GRAPEVINE (Learning objective 3 - AACSB – Ethical understanding and reasoning, reflective thinking) 18. The ethical issues revolve around the employee’s responsibility to the company. While he claims that he is not using company resources directly, he is using an extra hour of company time. In addition, he is assuming no conflict of interest, but without directly discussing the issue with his manager, he cannot be sure of this.

19. Answers will vary, but many students will suggest that if the coworker’s activity does not harm anyone or get in the way of his or her job, little might be said. On the other hand, responses will depend on whether the employee is getting paid during his or her lunch break. If he or she is not getting paid, there is likely not going to be a problem.

20. Answers will vary; whether the employee is getting paid during the lunch break will likely determine how individuals would react to this situation.

EXERCISING YOUR ETHICS: TEAM EXERCISE 6- 21 – 25 (AACSB – Ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking) Students may be inclined to frame this issue in terms of individual rights versus those of the group. They need to consider the impact of their decision on the whole organization rather just the individuals involved in the immediate decision and the long term consequences.

CASES: PUSHING THE PRODUCT (Learning objectives 2, 3, 4 –A ACSB - analytical thinking, application of knowledge) 26. Students will identify at least 5 examples related to organization structure including functional and divisional organizational structures, multidivison, related diversification, specialization, and centralized decision making.

27. Students will suggest that the organizational structure impacts the decision making, flexibility, coordination, and strategy. The students will probably note that the current structure enhances employee specialization and top down decision making and control but may make the

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company less flexible and slower to respond to environmental trends.

28. Answers will vary from a return to a divisional structure and or a combination of structures.

29. Again, answers will vary but will probably focus on the evolution of the business model after the bankruptcy and spinoff.

HEARD IT THROUGH THE GRAPEVINE (Learning objective 5 –A ACSB - analytical thinking, application of knowledge) 30. Answers will vary depending on the size and type of company where the students are employed.

31. Students perspective will frame their answer to this question. Some students may think since there are less layers of managers and more subordinates that there will be more gossip.

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

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

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

Learning Objectives 1. Explain the meaning of the term production or operations and describe the three kinds of utility that operations processes provide for adding customer value.

2. Identify the characteristics that distinguish service operations from goods production.

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

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

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

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

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

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

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

Description Students discuss perceptions of service quality.

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

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Time Limit 25 min.

20 min.

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CHAPTER OUTLINE TEACHING NOTES AND SUGGESTIONS Learning Objective 1: Explain the meaning of the term production or operations.

What Does “Operations” Mean Today?

Service operations (or service production) provide tangible and intangible services; firms that make tangible products are engaged in activities for goods operations (or goods production). The term operations (or production) refers to all the activities involved in making products—goods and services—for customers.

Growth in the Services and Goods Sectors Historically, agriculture was the dominant sector in the early years of the United States.

Thereafter, manufacturing grew, becoming the economic backbone from the nineteenth century into the mid-twentieth century. Services then began a rapid climb in economic importance in terms of both number of employees and percentage of gross domestic product (GDP)—the value of all goods and services produced by the economy, excluding foreign income.

KEY TEACHING TIP Remind students that operations refers to all the activities involved in making products—goods and services—for customers.

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

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

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Learning Objective 2: Identify the characteristics that distinguish service operations from goods production.

Creating Value Through Operations Both services and goods provide consumers with utility, which is the ability of a product to satisfy a human want or need—in terms of form, time, and place. Form utility is created merely through transforming raw materials into finished goods. Time utility is created when marketers make products available when consumers want them. Place utility is created when products are made available where they are convenient for consumers.

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

A. Differences between Service and Goods Manufacturing Both services and manufacturing operations transform raw materials into finished products.

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

2. Services Can Be Intangible and Unstorable. Intangibility refers to the untouchable value consumers receive in the form of pleasure, gratification, or a feeling of safety; unstorability refers to the idea that a service is often wasted, if it is not used.

3. Customer’s Presence in the Operations Process. Service operations often acknowledge the customer as part of the service transaction itself.

4. Intangibles Count for Service Quality. Customers use different measures to judge services and goods because services include intangibles, not just physical objects.

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

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

2. Service Production Processes: Extent of Customer Contact. In high-contact systems,

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such as a city metro system, the customer must be a part of the service. Managers must therefore be concerned with issues of cleanliness, punctuality, and customer friendliness.

In low-contact systems, such as a mail sorting office, customers do not have to be present while the service transaction is being performed.

KEY TEACHING TIPS •

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

•

Reinforce that goods are produced; services are performed.

•

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

•

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

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

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

• What is the intangible and unstorable nature of services?

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

HOMEWORK Interview a Manager Now might be a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment asks students to interview a manager to access firsthand information involved in planning a service operation.

At-Home Completion Time: 1 to 2 hours

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

Business Strategy as the Driver of Operations Companies go about selecting the kind of production that is best for their business based on the firm’s larger business strategy.

A. The Many Faces of Production Operations Every company identifies a strategy that it can use for winning customer orders; such strategies often include quality, lower prices, flexibility, and dependability.

1. Business Strategy Determines Operations Capabilities. Operations capability refers to the activity or process that production must do especially well, with high proficiency.

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

KEY TEACHING TIP Remind students that operations capabilities are activities that production must do especially well; top-priority operations capabilities include quality, low price, flexibility, and dependability.

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Learning Objective 4: Identify the major factors that are considered in operations planning.

Operations Planning Managers from many departments contribute to the firm’s decisions about operations management; this is a process of logical steps upon which the success of the firm depends. The overall business plan guides operations planning, as do qualitative and quantitative forecasts.

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

B. Location Planning Facility location affects production costs and flexibility. Depending on the site of its facility, a company may either be capable of producing a low-cost product or may find itself at an extreme cost disadvantage.

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

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

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

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

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

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

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

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

KEY TEACHING TIPS •

Point out that operations control requires managers to monitor performance by comparing results with detailed plans and schedules and then making any necessary changes.

•

Make sure students understand that materials management is the process by which managers plan, organize, and control the flow of materials from sources of supply through distribution of finished goods Reinforce that lean production systems are designed to avoid inefficiencies, eliminate unnecessary inventories, and improve production processes.

• •

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

•

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

•

Students may forget that the best location for a manufacturer depends on proximity to supplies and customers, wage rates, labor availability, and the area’s infrastructure; the best location for a service provider depends largely on nearness to customers.

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

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

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

•

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

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•

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

•

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

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

At-Home Completion Time: 1 hour

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

Operations Scheduling Operations scheduling involves developing timetables for acquiring the resources needed for production.

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

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

C. Staff Schedules and Computer-Based Scheduling Staff schedules specify assigned working times in upcoming days for each employee on each work shift. Computer-based scheduling can handle multi-shift activities for many employees—both part-time and full-time—accommodating vacation times, holiday adjustments, and daily adjustments in staffing for unplanned absences.

D. Project Scheduling 1. The Gantt Graphical Method: Named after its developer, Henry Gantt, a Gantt chart

breaks down large projects into steps to be performed and specifies the time required to perform each one.

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

KEY TEACHING TIPS •

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

•

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

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

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

Time Limit: 20 minutes

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

Operations Control Operations control includes materials management and quality control. Both activities ensure that schedules are met and products delivered, both in quantity and in quality.

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

Inventory control includes the receiving, storing, handling, and counting of all raw materials, partly finished goods, and finished goods.

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

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

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

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

Quality Improvement and Total Quality Management It is not enough to control quality by inspecting products and monitoring service operations as they occur. Businesses must also consider building quality into products and services.

A. The Quality-Productivity Connection It’s no secret that quality and productivity are watchwords in today’s competitive environment.

Productivity is a measure of economic performance: It compares how much we produce with the resources we use to produce it B. Managing for Quality Total Quality Management (TQM) includes all of the activities necessary for getting quality goods and services into the marketplace; this process involves all parts of the business, including customers, suppliers, and employees. To bring all the interests of the stakeholders together, TQM involves planning, organizing, directing, and controlling.

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

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

C. Tools for TQM Hundreds of tools have proven useful for quality improvement, ranging from statistical analysis of production data, to satisfaction surveys of customers, to competitive product analysis—a process by which a company analyzes a competitor’s products to identify desirable improvements.

1. Value-Added Analysis. Value-added analysis refers to the evaluation of all work activities, material flows, and paperwork to determine the value that they add for customers.

2. Quality Improvement Teams. Quality improvement teams are groups of employees from various work areas who meet regularly to define, analyze, and solve common production problems.

3. Getting Closer to the Customer. Customers are the driving force for all business activity; the most successful firms keep close to their customers and know what they want in the products they consume.

4. The ISO Series. ISO 9000 is a certification program attesting to the fact that a firm or laboratory has met the quality-management requirements set by the

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International Organization for Standardization. The ISO 14000 program certifies improvements in environmental performance. It requires a firm to develop an environmental management system: a plan documenting how the company has acted to improve its performance in using resources and in managing pollution.

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

KEY TEACHING TIPS •

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

•

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

•

Remind students that ISO 14000 guarantees that a company has an environmental management system, a plan documenting improved use of resources and pollution management.

QUICK QUESTIONS • What do companies try to achieve with value-added analysis?

• What are some examples of “internal” customers? What does “getting closer to the customer” mean?

• What does it mean when a company is ISO 9000 certified?

• Who is responsible for ensuring TQM within an organization?

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Learning Objective 8: Explain how a supply chain strategy differs from traditional strategies for coordinating operations among firms.

Adding Value Through Supply Chains A supply chain (or value chain) for any product is the flow of information, materials, and services that starts with raw-materials suppliers and continues through other stages in the operations process until the product reaches the end customer.

A. The Supply Chain Strategy Supply chain strategy is based on the idea that members of the chain, working as a coordinated unit, will gain competitive advantage.

1. Supply Chain Management. Supply chain management (SCM) looks at the supply chain as a whole in order to improve the overall flow through a system composed of companies working together.

2. Reengineering Supply Chains for Better Results. The results often include lower costs, faster service, and the coordination of flows of information and materials.

B. Outsourcing and Global Supply Chains Outsourcing is the strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials or services. Global outsourcing creates new operations jobs for supply chain management and, sometimes, the need for more or different types of employee training.

QUICK QUESTIONS • Who are the supply chain members for a manufacturer of baked goods?

• How can the reengineering of supply chains add value?

HOMEWORK Business Plan Now is a good time to assign Part 2 of the Business Plan. In this second section, students are asked to devise goals for their company, analyze the internal and external factors affecting their business, and discuss the organization structure of their business.

At-Home Completion Time: 2 to 3 hours For the complete instructions for this part assignment refer to the instructions at the end of this chapter. The entire business planning project (including a sample business plan) can be seen in the Business Plan Project section of these Instructor’s Manual files.

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In-Class Activity 1: Ice-Breaker Are You Getting What You Paid For? Activity Overview: This activity is designed to get students to think about how to perceive service quality.

Time Limit: 25 minutes What to Do: 1. Divide the class into groups of two to four members and ask each group to think of three services, such as cell phone service, restaurants, a barber or hair salon, insurance agent, or various repair services. (5 minutes) 2. Ask groups to think of ways in which buyers of those services measure the level of service quality they are receiving. (10 minutes) 3. Reassemble the class and ask each group to reveal what they discussed. (10 minutes) Don’t Forget: Measuring the quality of manufactured goods—often through durability, functionality, sturdiness, and so on—is often easier and provides more consistency than measuring service quality. Not everyone measures service quality in the same way.

Wrap-Up: Remind students that service quality is often measured by the tangible evidence of the service— such as a manicured lawn, a tailored suit, and so on. However, service quality can also be measured by examining the characteristics of the service performer; these might include reliability, assurance, responsiveness, etc.

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In-Class Activity 2: Supplemental Case Study Discussion The Perils of Over Producing and Under Producing Activity Overview: This activity asks students to apply the concepts of lean manufacturing to a case study.

Time Limit: 30 minutes What to Do: 1. In advance, make copies of the Supplemental Case Study (see pages 7-24 and 7-25 of this Instructor’s Manual) and distribute them to students.

2. Divide students into groups and ask them to read the case and answer the questions in their small groups. (15 minutes) a. Why do you think some firms have had difficulty keeping up with demand? Do you think it is possible to take lean manufacturing methods too far? Why or why not? b. Why don’t manufacturers experiencing the kinds of problems described in the case build their production capacity back up as a solution? c. What effect do you think running factories and facilities around the clock has on employees? How does employee response to continued overtime affect the firm? d. What should a company do when its capacity far exceeds the demand for its products?

3. Once students have answered the questions, discuss their answers as a class. As students discuss their answers, make sure they touch on the following points: (10 minutes) a. Global demand can be especially difficult to predict. Firms have probably underestimated demand, trimmed production capacity too much, or both. It would take an exceptionally nimble production and operations management system to meet the spikes in demand some firms have experienced without difficulty. b. Building capacity back up takes several years and poses a risk that demand will have slowed again by the time it is in place. It is also quite costly. c. Employees burn out and eventually leave; creating high turnover that costs the firm in recruiting and training costs (both time and money). In addition, the firm can experience higher retention costs to keep employees on staff, such as overtime, bonuses, and extra time off.

Don’t Forget: Remind students to consider the companies in the case when answering the questions; answers could vary if other company or industry examples are used.

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Wrap-Up: Close by reminding students that certain production systems work more efficiently in some industries than in others. In industries with extremely volatile external environments, businesses tend to be more reactive to change and may find that reacting to sudden changes in demand is an everyday occurrence. (5 minutes)

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

Activity Overview: This activity asks students to express their feelings about punctuality.

Time Limit: 20 minutes What to Do: 1. Divide the class into four-member teams. Ask each team to discuss some real-life situations that require them to be on time. Who benefits from punctuality? (5 minutes) 2. Ask the groups to discuss certain job fields that are time-clock driven. Why are they timeclock driven? Are there any situations discussed in Step 1 that require punctuality but in which punctuality is not entirely necessary? (5 minutes) 3. Reassemble the class as a whole and ask students to discuss each group’s input. (10 minutes) Don’t Forget: Punctuality can be culture-driven; demand for punctuality is situation-specific.

Wrap-Up: Wrap up the activity by discussing the advantages of being on time.

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BUSINESS PLAN PROJECT PART 2 THE BUSINESS OF MANAGING Assignment Overview: The second part of the business plan project asks students to think about goals of their business, some internal and external factors affecting the business, as well as the organizational structure of the business. As part of this assignment, students are asked to complete a simple SWOT analysis, an organizational chart, and a floor plan. These analyses and charts will vary greatly depending on the scope of the business. Encourage as much detail as possible so students can get a clear picture of the true costs of owning a business. Make sure your expectations are clear as to what format (for example, handwritten or electronic) you would like to see the organizational charts and floor plans submitted.

Files to Provide Students: For this part of the project, students will be asked to complete Part 2: The Business of Managing. If students have already started working on the business plan project, they should continue using the student template they began working on in Part 1.

Part 2 Estimated At-Home Completion Time: If done well, this section will require a minimum of 2 to 3 hours. Instructor feedback will improve the quality of student responses so you may wish to spend class time working on the plan.

Homework Deliverable from Students: The length of this section should be somewhat consistent, although some variance can be expected in the organizational chart and floor plan, based on the size of the business. You should expect at least three to five pages in this section.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1. By converting raw materials and human skills into finished goods and services, production creates form utility. Time utility is value that is created by making products available when consumers want them. Place utility makes products available where they are convenient for consumers.

(Learning objective 1 – AACSB – application of knowledge) 2. Service operations focus on performance, process and outcome, service characteristics, customer-service links, and service quality considerations. Goods production operations focus on tangible product features and functions as well as on the production processes themselves, including production efficiency.

(Learning objective 1 – AACSB – application of knowledge) 3. In a low-contact system, customers are not in contact with the service provider; in a highcontact system, the service buyer must be present during the transaction.

(Learning objective 2 – AACSB – application of knowledge) 4. Capacity planning, location planning, layout planning, quality planning, and methods planning are the five major categories of operations planning.

(Learning objective 5 – AACSB – application of knowledge) 5. Since there is a prescribed curriculum, depending on your majors, most students will answer that their college is a make-to-stock process. A few students who are enrolled in flexible programs will mention that their college also offers make-to-order production process is since they are enrolled in a program and taking courses that are more flexible and may better meet the students’ needs. (Learning Objective 4 – AACSB – reflective thinking) QUESTIONS FOR ANALYSIS 6.

Disney theme park strategy focuses on quality and dependability. Most student will state that methods planning and operations control is very important since Disney focuses on customer services and consistency in theme park visitors’ experiences. Additional activities of importance sill include layout planning and capacity planning so the theme park activities operate smoothly. operations Also, detailed scheduling for both staff and visitors will be a priority. (Learning Objective 5 – AACSB – reflective thinking)

7. Answers will vary greatly, but students should remember that internal customers and suppliers are those people or entities whose work is involved primarily with other workers inside of the organization. (Learning Objective 2 – AACSB – reflective thinking) 8. TQM includes all of the activities necessary for getting high-quality goods and services into the marketplace. TQM must consider all aspects of the organization including customers,

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suppliers, and employees, who are all responsible for achieving quality. Students will obviously focus on activities that most impact them.

(Learning objective 7 – AACSB – application of knowledge)

APPLICATION EXERCISES 9. Answers will vary, but process charts should include a logical starting point, show all the steps, and show the predecessor relationships—which tasks must be complete before a task can start. (Learning objective 5 – AACSB – application of knowledge) 10. Answers will vary, but many managers will reveal that the top concern is delivering what the customer wants and the costs involved in creating and delivering the service.

(Learning objective 2 – AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE assignment 7- 11 – 15 (Learning objectives 2 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Answers will vary but students should note regardless of the type of business, every business will have a service component. Remind students that service quality is often measured by the tangible

evidence of the service and there will be different perceptions on service quality. When analyzing the key operations characteristics, students should focus on operations planning and the activities or processes that the business needs to consistently perform well to survive and flourish.

In analyzing the planned production activities students should consider lean manufacturing concepts to improve its business, how the layout of a facility affect its operations, how products offer different forms of utility to customers, and how companies activities impact the triple bottom line.

When looking at supply chain management the students should focus on the supply chain as a whole in order to improve the overall flow of their business.

BUILDING YOUR BUSINESS SKILLS: THE ONE-ON-ONE ENTREPRENEUR (Learning objectives 2 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) 16. Answers will vary, but students should point out that technology makes customization easier, cheaper, and more accessible than ever before, which raises customer expectations.

17. Answers will vary, but it seems quite likely that consumers will expect more from products and services that are tailored just for them.

18. The trend creates new needs and wants that entrepreneurs can fill. Whether the product is a personalized holiday ornament, floor mats, ink pens, or sweatshirts, consumers are attracted to

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the ability to tailor specific products to their own unique tastes. Entrepreneurs can pick up on these opportunities in providing these options to consumers.

19. Answers will vary, although human relations skills clearly play a critical role in any personal, one-to-one business. A doctor, for example, may be valued more for medical skills than human relations skills, while a manicurist may be valued more for human relations skills.

EXERCISING YOUR ETHICS: PROMISES, PROMISES (Learning objectives 4 - AACSB – Ethical understanding and reasoning, reflective thinking) 20. The salesperson should have communicated the potential contract with his or her boss, knowing that the contract would require a 20-percent increase in production capacity.

However, with a large layoff of employees previously—and knowing that the company needs the business—the salesperson may have assumed that production would not be a problem.

21. Answers will vary, but students should mention that you should be honest with the manager of King Kong Mufflers, letting him know that the company can react to the large order, that the company does have the production capacity, but that the workforce will need to be expanded, which may take a little time up front.

22. Answers will vary, but students should keep in mind that proper delivery to the customer is a priority. Without the production capacity, that cannot be done.

TEAM EXERCISE: CALCULAT ING THE COST OF CONSCIENCE (Learning objectives 6 - AACSB – Ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking) In this exercise the students will be faced with the real world dilemma of cost versus benefits.

Students will probably initially be very sympathetic to Ruth and her situation. The students will need to consider not only the quality issues but also, the company’s reputation, costs, profits, information from the previous chapters including chain of command, delegation, authority and Ruth’s apparent decision to not get input from upper management before making such an important decision.

CASES: PASSENGER AND AIRLINES: FRIENDS AND FOES? 7-27-31 (Learning objectives 4, 5 – AACSB analytical and reflective thinking, application of knowledge) 27. Answers will vary based on the extent of the students’ airline travel and their experiences.

Most students will define quality in terms of safety, delayed departures, on-time arrival, employee’ rudeness, lost luggage claims, and overbooking. Most students will cite safety as being an important measure.

28. Controllable service activities: overbooking, lost luggage, and employee’ rudeness.

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Uncontrollable activities: delayed departures (due to weather), cancellations, late arrivals.

29. Process flowcharts could help with handling passenger loads and luggage. Before creating the charts, you would need information on the type and length of activities, performance measures, historical trends, etc.

30. Students answers will vary depending on the articles that the students used in their search but US Air and Delta will likely be mentioned due to on time arrival, increased baggage handling fees, etc. Many students will probably cite declining revenues, the economic downturn, and multiple mergers as reasons for declining quality.

31. Students will probably answer that airline travel is preceded by an uncomfortable, unpleasant screening process that often puts passengers in a negative frame of mind before they even reach the gate and they are unenthusiastic about airline travel. Their answers will probably focus on more customer updates and information through electronic and online communication, better training for employees to deal with unhappy customers.

TELECOMMUNTING BOOSTS QUALITY AND PRODUCTIVITY…OR DOES IT? 7- 32-36 (Learning objectives 7– AACSB analytical and reflective thinking, application of knowledge) 32. Students will likely define quality in terms of timeliness, accuracy, and usefulness.

33. Some students will agree and others will indicate that “checking in” might not be the best measure of productivity. Other measures cited by students will probably include: new product development, revenues, costs, and customer satisfaction.

34. Students will likely break the jobs into two categories: those requiring “face” time, i.e., receptionist, maintenance staff and “lone wolf” types of positions such as computer programmers.

35. Again, students will probably break the job into two categories.

36. As in question 34, students’ answers will probably include revenue, costs, customer satisfaction, and new product developments.

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CRAFTING A BUSINESS PLAN: PART 2: THE BUSINESS OF MANAGING MISSION STATEMENT Provide a brief mission statement for your business.

Hint: Refer to the discussion of mission statements in Chapter 5. Be sure to include the name of your business, how you will stand out from your competition, and why a customer will buy from you.

BUSINESS GOALS Consider the goals for your business. What are three of your business goals for the first year? What are two intermediate to long-term goals?

Hint: Refer to the discussion of goal setting in Chapter 5. Be as specific and realistic as possible with the goals you set. For example, if you plan on selling a service, how many customers do you want by the end of the first year, and how much do you want each customer to spend? If you plan on selling a good, how many do you hope to sell?

SWOT ANALYSIS Perform a basic SWOT analysis for your business, listing its main strengths, weaknesses, opportunities, and threats.

Hint: We explained previously what factors you should consider in your basic SWOT analysis.

Look around at your world, talk to classmates, or talk to your instructor for other ideas in performing your SWOT analysis.

MANAGEMENT Who will manage the business?

Hint: Refer to the discussion of managers in Chapter 5. Think about how many levels of management as well as what kinds of managers your business needs.

ORGANIZATION CHART Show how the “team” fits together by creating a simple organizational chart for your business. Make sure your organizational chart indicates who will work for each manager as well as each person’s job title.

Hint: Most businesses start off quite small. However, as you create your organizational chart, consider what your business will look like in the future. What different tasks are involved in the business? Who will each person report to in the organizational structure? Refer to the discussion of organizational structure in Chapter 6 for information to get you started.

FLOOR PLAN Create a floor plan of the business. What does it look like when you walk through the door?

Hint: When sketching your floor plan, consider where equipment, supplies, and furniture will be located. Ask your instructor how he or she would like you to submit the floor plan for your business.

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RAW MATERIALS AND SUPPLIES Explain what types of raw materials and supplies you will need to run your business. How will you produce your good or service? What equipment do you need? What hours will you operate?

Hint: Refer to the discussion of operations earlier in this chapter for information to get you started.

QUALITY ASSURANCE What steps will you take to ensure that the quality of the product or service stays at a high level? Who will be responsible for maintaining the quality of the product or service (or both)?

Hint: Refer to the discussion of quality improvement and Total Quality Management in this chapter for information to get you started.

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Chapter 8: Employee Behavior and Motivation Chapter Overview What motivates you to do well at your job? Is it money? Respect? Recognition? Every employee in an organization has his or her own set of motivating factors.

This chapter discusses the basic forms of behaviors that employees exhibit in organizations, as well as the nature and importance of individual differences among employees. It also explains the meaning and importance of psychological contracts and the person-job fit in the workplace.

Finally, the chapter presents some time-tested models and concepts of employee motivation, and some strategies and techniques used by organizations to improve employee motivation.

Learning Objectives 1. Identify and discuss the basic forms of behaviors that employees exhibit in organizations.

2. Describe the nature and importance of individual differences among employees.

3. Explain the meaning and importance of psychological contracts and the person-job fit in the workplace.

4. Identify and summarize the most important models and concepts of employee motivation.

5. Describe some of the strategies and techniques used by organizations to improve employee motivation.

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LIST OF IN-CLASS ACTIVITIES: AUTHOR’S CHOICE Activity 1. Ice-Breaker: Balancing Inducements and Contributions

Description Students discuss the psychological contract between themselves and their jobs.

Students are divided into teams to express their opinions about important job criteria.

Students examine the challenges stemming from trying to motivate employees in a global company.

2. Up for Debate: What Are You Looking for in a Job? 3. Small-Group Discussion: Motivation in Global Firms

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Time Limit 20 min.

40 min.

25 min.

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CHAPTER OUTLINE TEACHING NOTES AND SUGGESTIONS Learning Objective 1: Identify and discuss the basic forms of behaviors that employees exhibit in organizations.

Forms of Employee Behavior Employee behavior is the pattern of actions by the members of an organization that directly or indirectly influences the organization’s effectiveness.

A. Performance Behaviors Performance behaviors are the total set of work-related behaviors that the organization expects employees to display.

B. Organizational Citizenship Organizational citizenship includes the positive employee behaviors that do not directly contribute to the bottom line.

C. Counterproductive Behaviors Counterproductive behaviors detract from, rather than contribute to, organizational performance. Such behaviors include absenteeism, which occurs when an employee does not show up for work, and turnover, which occurs when people quit their jobs.

KEY TEACHING TIPS •

Students should be able to identify employee behavior as the pattern of actions by members of an organization that directly or indirectly influences the organization’s effectiveness.

•

Reinforce that counterproductive behaviors include absenteeism, turnover, theft and sabotage, and sexual and racial harassment. You might ask students what counterproductive behaviors they have observed at their jobs.

QUICK QUESTIONS •

What are some typical performance behaviors expected of you in the workplace?

•

What are some examples of employee behaviors that exemplify organizational citizenship?

Use In-Class Activity 1: Ice-Breaker: Balancing Inducements and Contributions Time Limit: 20 minutes

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Learning Objective 2: Describe the nature and importance of individual differences among employees.

Individual Differences between Employees Individual differences are personal attributes that vary from one person to another; they may be physical, psychological, and emotional. Two basic categories include personality and attitudes.

A. Personality at Work Personality is the relatively stable set of psychological attributes that distinguish one person from another.

1. The “Big Five” Personality Traits. The “big five” personality traits include agreeableness, conscientiousness, emotionality, extraversion, and openness. Agreeableness is a person’s ability to get along with others. Highly conscientious people tend to focus on only a few things at one time in contrast to less conscientious people who are often pursue a wider range of interests, but are also often disorganized with less self-discipline.

People with positive emotionality are relatively more poised calm and secure. People with negative emotionality are more excitable, insecure and reactive. Extraversion refers to a person’s comfort level with relationships and openness reflects how open or rigid a person’s beliefs are.

2. The Myers-Briggs Framework. Another interesting approach to understanding personalities in organizations is the Myers-Briggs framework. This framework, based on the classical work of Carl Jung, differentiates people in terms of four general dimensions.

These are • Extraversion (E) Versus Introversion (I), Sensing (S) Versus Intuition (N), Thinking (T) Versus Feeling (F), and Judging (J) Versus Perceiving (P). The Myers-Briggs Type Indicator (MBTI) is a popular questionnaire that some organizations use to assess personality types. It is among the most popular selection instruments used today, with as many as 2 million people taking it each year. Research suggests that the MBTI is a useful method for determining communication styles and interaction preferences.

3. Emotional Intelligence. Emotional intelligence refers to the extent to which people are self-aware, can manage their emotions, can motivate themselves, express empathy for others, and possess social skills.

4. Other Personality Traits at Work. Locus of control is the extent to which people believe that their behavior has a real effect on what happens to them. A person’s selfefficacy is that person’s belief about his or her capabilities to perform a task.

Authoritarianism the extent to which a person believes that power and status differences are appropriate within hierarchical social systems such as organizations.

Authoritarianism the extent to which a person believes that power and status differences are appropriate within hierarchical social systems such as organizations. Self-Esteem the extent to which a person believes that he or she is a worthwhile and deserving individual.

Risk Propensity the degree to which a person is willing to take chances and make risky decisions

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B. Attitudes at Work Attitudes reflect our beliefs and feelings about specific ideas, situations, or other people.

Important attitudes are job satisfaction, which reflects the extent to which people have positive attitudes toward their jobs, and organizational commitment, which reflects an individual’s identification with the organization and its mission.

1. How Attitudes Are Formed. Attitudes are formed by a variety of forces, including our personal values, our experiences, and our personalities.

2. Attitude Structure. Attitudes are usually viewed as stable dispositions to behave toward objects in a certain way. Attitudes contain three components: cognition, affect, and intention.

3. Cognitive Dissonance. When two sets of cognitions or perceptions are contradictory or incongruent, a person experiences a level of conflict and anxiety called cognitive dissonance.

4. Key Work-Related Attitudes. People in an organization form attitudes about many different things. Employees are likely to have attitudes about their salary, their promotion possibilities, their boss, employee benefits, and so on. Especially important attitudes are job satisfaction and organizational commitment.

KEY TEACHING TIPS •

Remind students that individual differences may be physical, psychological, or emotional.

•

Make sure students understand that people with high EQs may perform better than others, especially in jobs that require high interpersonal interaction and involve influencing the work of others.

QUICK QUESTION What can you say about each of the “big five” personality traits?

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Learning Objective 3: Explain the meaning and importance of psychological contracts and the person-job fit in the workplace.

Matching People and Jobs Managers like to have a good match between people and the jobs they are performing.

A. Psychological Contracts A psychological contract is the overall set of expectations held by employees and the organization regarding what employees will contribute to the organization (contributions) and what the organization will provide in return (inducements). Recent trends in downsizing have led to changes in the psychological contract. Whereas firms used to be able to offer some degree of job security as part of the psychological contract, nowadays other forms of inducement like training and flexible work schedules are often needed to attract and retain people.

B. The Person-Job Fit The person-job fit refers to the extent to which a person’s contributions and the organization’s inducements match one another.

KEY TEACHING TIPS •

Students often have trouble understanding the concept of the psychological contract.

Make sure they understand that it is the set of employee expectations about the contributions that they will make to the organization, and the inducements the organization will provide in return.

•

Reinforce that a good person-job fit is one in which the employee’s contributions match the inducements the organization offers.

QUICK QUESTION How might a company benefit from high degrees of job satisfaction and organizational commitment among its employees?

Use In-Class Activity 2: Up for Debate: What Are You Looking for in a Job? Time Limit: 40 minutes

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HOMEWORK Interview a Manager Now is a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment asks students to interview a manager and identify sources of job satisfaction at that company.

At-Home Completion Time: 1–2 hours

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Learning Objective 4: Identify and summarize the most important models and concepts of employee motivation.

Basic Motivation Concepts and Theories Motivation is the set of forces that cause people to behave in certain ways. There are a number of major studies and theories of employee motivation.

A. Classical Theory According to the classical theory of motivation, employees are motivated solely by money.

Frederick Taylor, the father of scientific management, proposed that paying workers more money would prompt them to produce more.

B. Early Behavioral Theory The Hawthorne effect is the tendency for productivity to increase when workers believe they are receiving special attention from management.

1. Human Resources Model: Theories X and Y. McGregor’s Theory X is the managerial assumption that workers are lazy and need direction; Theory Y is the managerial assumption that workers are energetic, cooperative, and self-motivated.

2. Maslow’s Hierarchy of Needs Model. Maslow proposed that workers each have a set of needs that they seek to fulfill in their jobs, and these needs are arranged in a hierarchy of importance. These needs are physiological, safety, social, self-esteem, and selfactualization. Maslow further proposed that lower-level needs must be met before higherlevel needs; and once one set of needs is met, it ceases to motivate behavior.

3. Two-Factor Theory. Herzberg proposed that job satisfaction depends on motivating factors, such as recognition in the workplace, as well as the presence of hygiene factors, such as work conditions. Hygiene factors do not enhance satisfaction, but they do prevent dissatisfaction. Research suggests that the theory works only in some situations.

4. Other Important Needs. McClelland’s acquired needs theory hypothesized three other needs, the needs for achievement, affiliation, and power.

C. Contemporary Motivation Theory Recently, more complex models of employee behavior and motivation have been developed.

1. Expectancy Theory. This theory suggests that employees are especially motivated to work toward rewards when they have a greater probability of achieving them. This theory explains why people may not work as hard when their salaries are based solely on seniority, for example.

2. Equity Theory. This theory focuses on employees’ perceptions of fairness and unfairness in the workplace. Many people evaluate their treatment by the organization relative to the treatment of others.

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KEY TEACHING TIPS •

To begin a discussion on motivation, you might want to ask students what motivates them on the job.

•

Remind students that according to the classical theory of motivation, workers are motivated by money; paying them more money should prompt them to produce more goods.

•

Make sure students understand the distinction between Theory X (workers are lazy) and Theory Y (workers want to do a good job).

•

Make sure students understand that hygiene factors affect motivation and satisfaction only if they are absent or fail to meet expectations.

•

Students often forget that equity theory focuses on social comparisons—people evaluating their treatment by the organization relative to the treatment of others.

QUICK QUESTIONS •

What is the theory behind scientific management?

•

Does the Hawthorne effect still apply to people in the workplace?

•

Why are Theory Y managers more likely to have satisfied and motivated employees?

•

Based on Maslow’s hierarchy of needs, what is an example of how physiological needs take precedence over safety and social needs?

•

How does expectancy theory apply when a student feels that the harder she or he studies for an exam the greater the likelihood of a good grade?

•

How is the comparison of employee inputs relative to outputs similar to the “psychological contract”?

Use In-Class Activity 3: Small-Group Discussion: Motivation in Global Firms Time Limit: 25 minutes

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HOMEWORK Satisfaction and Motivation Now might be a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. This exercise asks students to think about what makes employees satisfied and motivated.

At-Home Completion Time: 30–45 minutes

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Learning Objective 5: Describe some of the strategies and techniques used by organizations to improve employee motivation.

Strategies and Techniques for Enhancing Motivation Understanding what motivates workers is only one part of the manager’s job. The other part is applying that knowledge.

A. Reinforcement/Behavior Modification Positive reinforcement is used when a company or manager provides a reward when employees exhibit desired behaviors; punishment is used to change behavior by presenting people with unpleasant consequences if they exhibit undesired behaviors.

B. Using Goals to Motivate Behavior Management by objectives (MBO) is a system of collaborative goal setting, extending through all levels of an organization. MBO is primarily concerned with the implementation of plans in organizations.

C. Participative Management and Empowerment In participative management and empowerment, employee suggestions and opinions are welcomed. Employees may feel more committed to the firm’s goals if they have helped to shape them.

D. Team Structures Some companies benefit from using team management. Although teams are often less effective in traditional and rigidly structured bureaucratic organizations, they can help smaller, more flexible organizations make decisions quickly and effectively, enhance communication, and encourage organizational members to feel more like a part of an organization.

E. Job Enrichment and Job Redesign Both of these programs typically increase worker satisfaction in jobs that lack motivating factors.

1. Job Enrichment Programs. These programs attempt to add motivating factors to job activities.

2. Job Redesign Programs. These programs attempt to create a better fit between employees and their jobs by restructuring work. Job redesign can usually be carried out through combining tasks, forming natural work groups, and/or establishing client relationships. a. Combining Tasks. Enlarging jobs and increasing their variety can make employees feel that their work is more meaningful.

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b. Forming Natural Work Groups. People who perform different jobs on the same projects are candidates for natural work groups that help employees see the place and importance of their jobs in the total structure of the firm. c. Establishing Client Relationships. Allowing employees to interact with customers can increase job variety.

F. Modified Work Schedules 1. Work-Share Programs. These programs allow employees to share a single, full-time job. Employees appreciate the schedule flexibility to accommodate their personal needs, and firms can reduce turnover and save on the cost of benefits.

2. Flextime Programs and Alternative Workplace Strategies. Flextime programs allow workers to choose their working hours by adjusting a standard work schedule.

3. Alternative Workplaces. A rapidly growing number of U.S. workers do a significant portion of their work via telecommuting. Telecommuting allows employees to perform some or all of their jobs away from standard office settings.

4. Advantages and Disadvantages of Modified Schedules and Alternative Workplaces.

Some advantages include (a) more freedom in employees’ personal lives; (b) ability of employees to coordinate work around family members’ schedules; (c) an increased sense of freedom for employees; and (d) higher commitment and satisfaction for employees.

Some disadvantages include: (a) the inability of employees to meet deadlines; (b) coordinating work schedules with family members’ schedules; and (c) employer perceptions that unobserved workers are not actually working.

KEY TEACHING TIP Students often confuse the following topics. Job enrichment is designed to add one or more motivating factors to job activities; job redesign acknowledges that different people want different things from their jobs.

QUICK QUESTIONS •

What are examples of positive reinforcement and punishment in the workplace?

•

What contributions and inducements might have built the psychological contract between American Girl and its employees, especially in the early days of production?

•

With management by objectives, managers and subordinates set goals and evaluate progress over time. What are some advantages and disadvantages of MBO?

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•

Participative programs are not for everyone. What are some drawbacks of such programs?

•

What are some advantages and disadvantages of using teams in organizations?

•

In what types of situations might employees benefit from work-share programs and flextime programs?

•

What are some drawbacks of relying on telecommuting?

Use In-Class Activity 4: Business Accountability Handout Discussion: Setting Some Standards for TLC Time Limit: 30 minutes

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IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker Balancing Inducements and Contributions Activity Overview: This activity asks students to think about the psychological contract between themselves and their jobs.

Time Limit: 20 minutes What to Do: 1. Divide students into three-member groups. Remind students what it means to have a psychological contract, and what person-job fit refers to. (5 minutes) 2. Tell each student to interview his or her partners, asking the partners to assess the balance of contributions and inducements at their jobs. Is the psychological contract even for both sides?

Do the contributions outweigh the inducements? If the contributions and inducements do not balance, what has to happen so they will be in balance? (15 minutes) 3. Reassemble the class and ask students to share the information they’ve obtained in their interviews. (10 minutes) Don’t Forget: Some students may not feel comfortable revealing the name of their employer in this scenario; if so, they can refer to the employer as “Company X.” Wrap-Up: Close with a recap of the psychological contract and highlight how a good person-job fit occurs when employee contributions and company inducements line up. Ultimately, this results in higher performance and more positive attitudes.

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In-Class Activity 2: Up for Debate What Are You Looking for in a Job? Activity Overview: This activity asks students to express their opinions about important job criteria and compare these with other students.

Time Limit: 40 minutes What to Do: 1. Ask students to think about what is important to them in a job, ranking the following items, with 1 being the most important and 10 being the least important. (10 minutes) • • • • • • • • • •

Working Conditions Quality of Coworkers/Mentors Salary Benefits Location of Job Level of Challenge/Responsibility Training Programs Offered Advancement Opportunities Job Security Job Title

2. Divide the class into four-member teams.

3. Ask each team to compare their rankings. What conclusions can they draw? While they are doing this, students could potentially go to the board or an overhead slide and mark their rankings on a table you create; this would give you an overview of the class. (10 minutes) 4. Reassemble the class as a whole and have each group share their findings with the class. (10 minutes) 5. Look at the list of items that people ranked highest in general. Talk about how companies can actually accomplish these. For example, how would a company provide ideal working conditions for its employees? (10 minutes) Don’t Forget: There are no right or wrong answers to this exercise.

Wrap-Up: Wrap up the discussion by reminding students that this is the challenge in any organization— people are motivated by different things. Business owners and managers must find ways to motivate every employee so they have high job satisfaction.

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In-Class Activity 3: Small-Group Discussion Motivation in Global Firms Activity Overview: This activity asks students to think about the increased challenges that stem from trying to motivate employees in a global company.

Time Limit: 25 minutes What to Do: 1. Divide the class into small groups and ask them to discuss what types of additional difficulties may arise when attempting to motivate employees in a global company as compared with a domestic company. (10 minutes) 2. Reassemble the class and discuss group comments. (15 minutes) Don’t Forget: Cultural differences can be difficult to assess; students may want to think of differences in perceptions of time, personal space, punctuality, reasons for working, and communication when completing this assignment.

Wrap-Up: Remind students that a good rule of thumb when motivating workers in a global company is to always treat employees with respect, to be sensitive to local cultures, and to follow laws of the host country; the rest might come a little easier.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1. The “big five” personality traits include agreeableness, conscientiousness, emotionality, extraversion, and openness.

(Learning Objective 2 – AACSB – application of knowledge) 2. Attitudes reflect our beliefs and feelings about specific ideas, situations, or other people.

Important attitudes are job satisfaction, which reflects the extent to which people have positive attitudes toward their jobs, and organizational commitment, which reflects an individual’s identification with the organization and its mission.

(Learning Objective 3 – AACSB – application of knowledge) 3. The two are somewhat similar in that they both depict hierarchical needs; however, Maslow describes five basic needs, whereas Herzberg describes two categories of needs. In both cases, lower-level needs must be satisfied first. However, in Maslow’s model, when needs are met, they cease to be motivating, whereas in Herzberg’s model, hygiene factors only affect motivation in that they are absent or fail to meet expectations.

(Learning Objective 4 – AACSB – application of knowledge) 4. Participative management encourages employees to offer opinions and suggestions on how they do their jobs and on how the firm is operated. As a result of helping to shape the organization’s goals, employees are more committed to achieving them. Furthermore, virtually all employees appreciate knowing that managers will listen to their input.

(Learning Objective 5 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 5. In answering this question, students should cite their overall set of expectation versus the organization’s regarding what they have contributed to the organization and what the organization has provided in return.

(Learning Objective 3 – AACSB – reflective thinking) 6. Answers will vary depending on students’ personal and family experiences in their careers.

Students should discuss personal factors and job related factors including hygiene and motivating factors.

(Learning Objective 4 – AACSB – reflective thinking) 7. Early levels of satisfaction might stem from the excitement of landing a first career job. As workers reach their late twenties, a range of factors might account for the drop: perceived inequities among their coworkers and between their coworkers and management, boredom with the daily grind, a lack of anticipated advancement, financial pressure for family

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obligations, etc. In later years, job satisfaction may increase as workers either gain more responsibility and control of their work life or come to terms with their jobs as they stand.

(Learning Objective 3, 4 – AACSB – reflective thinking) 8. Answers will vary, but many people would suggest that the worker improve his job skills— through training and education—that might open doors to more job variety. In addition, many students will suggest that the worker talk with his or her manager about enriching his current job.

(Learning Objective 5 – AACSB – reflective thinking) APPLICATION EXERCISES 9. Answers will vary, but many will suggest that the employees be empowered to make certain decisions early on and that you commit a certain amount of resources early on for any additional training and education that they might want/need.

(Learning Objective 5 – AACSB –application of knowledge) 10. Answers will vary, but should include discussions of the strategies reviewed in the chapter.

For some manufacturing companies, resources are plentiful and managers can afford to provide a higher-than-average wage and competitive benefits. Job enrichment and open communication throughout an organization are also satisfaction factors.

(Learning Objective 5 – AACSB –application of knowledge)

BUILDING YOUR BUSINESS SKILLS: TOO MUCH OF A GOOD THING (Learning objective 4 –A ACSB - analytical thinking, application of knowledge) 16. Answers will vary, but will most likely focus on revamping the pay/incentive structure to reward those employees for performance, thereby increasing accountability.

17. Answers will vary, but students should recognize that the new corporate culture will be alienating for some and will only be effective for others if the company generously shares rewards with employees.

18. Answers will vary, but students should consider that the change process would likely be long term. It may be most effective to begin the process with newer employees, working backward to longtime employees who tend to be less flexible. Behavior modification and reinforcement may be the most effective strategies.

EXERCISING YOUR ETHICS: TOO MUCH OF A GOOD THING 19. The new HR manager is deeply concerned that the behavior modification approach demonstrates a lack of respect for employees.

20. Answers will vary, but students should recognize that proceeding with the behavior modification plan is a direct order from the supervisor. Therefore, as a suggestion, the HR manager will likely begin with a few broad rewards and punishments for common behaviors,

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then add to the list as all of the employees begin to feel comfortable with what is being implemented.

21. Answers will vary, but students will probably consider including elements of expectancy theory while implementing the behavior modification approach.

TEAM EXERCISE TAKING ONE FOR THE TEAM 8 - 22 – 24 (AACSB 2 – Ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking) When approaching this exercise students will probably have mixed feelings. Are the employees about to lose their jobs or is this an opportunity to complete a challenging project that could have a positive impact on your career? How do you accomplish an important task when not everyone is as motivated as you are? This should generate a lot of interesting discussion.

CASES: Chicken or Eggs? 8- 25 – 29 (Learning objectives 2, 3, 4 –A ACSB - analytical thinking, application of knowledge) Students’ perspective will frame their answer to these questions based on their personalities and past experiences. Every person in an organization is fundamentally different from everyone else.

To be successful, managers must recognize that these differences exist and attempt to understand them. They also need to understand why people work.

Searching for a Great Place to Work 8- 30 – 34 (Learning objectives 2, 3, 4 –A ACSB - analytical thinking, application of knowledge) 30. Most students will answer that Page and Brin most identified with Theory Y since they emphasized the need for “happy, motivated employees”.

31. Google’s approach is to emphasize the higher level motivation factors such as social needs and self-esteem to motivate their workers.

32. Google pays their employees well and ensures that the working conditions exceed expectations so that the hygiene factors are irrelevant and can then motivate their employees through opportunities for achievement, recognition, and interesting work.

33. Students will vary but probably individuals who desire a high degree of autonomy in their work, optimistic with a high degree of self-efficacy will probably do well at Google.

Individuals who need constant reinforcement, structure, etc. would probably not be well suited to Google.

34. Again, answers will vary depending on students’ perspective. Students will identify new work schedules, flex programs, etc. to motivate employees.

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Chapter 9: Leadership and Decision Making Chapter Overview Think of a really effective leader with whom you have worked. What made him or her such a good leader? Was it his or her personality? Was it the way he or she handled a crisis? All good leaders have their own “bag of tricks” to motivate, inspire, and influence their employees to work toward company goals.

This chapter focuses on several approaches to leadership and describes transformational and charismatic perspectives on leadership. It also looks at types of leadership substitutes and neutralizers, as well as several contemporary issues in leadership—seeing leaders as coaches and examining gender and cross-cultural issues in leadership. This chapter also: • • •

Discusses strategic leadership, ethical leadership, and virtual leadership.

Relates leadership to decision making.

Discusses both rational and behavioral perspectives on decision making.

Learning Objectives: 1. Define leadership and distinguish it from management.

2. Summarize early approaches to the study of leadership.

3. Discuss the concept of situational approaches to leadership.

4. Describe transformational and charismatic perspectives on leadership.

5. Identify and discuss leadership substitutes and neutralizers.

6. Discuss leaders as coaches and examine gender and cross-cultural issues in leadership.

7. Describe strategic leadership, ethical leadership, and virtual leadership.

8. Relate leadership to decision making and discuss both rational and behavioral perspectives on decision making.

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LIST OF IN-CLASS ACTIVITIES: AUTHOR’S CHOICE Activity 1. Ice-Breaker: Are You a Leader or a Manager?

2. Small-Group Discussion: Transformational vs.

Transactional 3. Up for Debate: Was Steve Jobs a Charismatic Leader?

Description Students assess their own abilities as leaders and managers.

Students identify a business or political leader and identify transformational or transactional characteristics of that leader.

Students are asked to read the Entrepreneurship and New Ventures feature in the textbook and discuss the charisma of Steve Jobs

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Time Limit 20 min.

20 min.

30 min.

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CHAPTER OUTLINE Learning Objective 1: Define leadership and distinguish it from management.

The Nature of Leadership Leadership includes the processes and behaviors used by someone, such as a manager, to motivate, inspire, and influence the behaviors of others.

A. Leadership and Management Leadership differs from management in a number of ways: A person can be a manager, a leader, both, or neither. Management focuses primarily on the activities of planning, organizing, leading, and controlling. Leadership, in contrast, is much more closely related to activities such as agenda setting, aligning, inspiring, and monitoring.

B. Leadership and Power Power the ability to affect the behavior of others.

1. Legitimate Power. Power granted through the organizational hierarchy.

2. Reward Power. The power to give or withhold rewards.

3. Coercive Power. The power to force compliance by means of psychological, emotional, or physical threat.

4. Referent Power. Power based on identification, imitation, loyalty, or charisma.

5. Expert Power. Power derived from information or expertise.

QUICK QUESTION What distinguishes leadership from management? In other words, can someone be a manager and not a leader, or a leader and not a manager?

Use In-Class Activity 1: Ice-Breaker: Are You a Leader or a Manager?

Time Limit: 20 minutes

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Learning Objective 2: Summarize early approaches to the study of leadership.

Early Approaches to Leadership A. Trait Approaches to Leadership The trait approach to leadership focuses on identifying the essential leadership traits in individuals. Although the trait approach was all but abandoned several decades ago, in recent years, it has resurfaced.

B. Behavioral Approaches to Leadership The behavioral approach to leadership focuses on the behaviors employed by effective leaders; this research led to the identification of two basic forms of leader behavior: taskfocused leader behavior, which occurs when a leader focuses on how tasks should be performed in order to meet certain goals; and employee-focused leader behavior, which occurs when a leader focuses on the satisfaction, motivation, and well-being of his or her employees.

KEY TEACHING TIPS Students often confuse the various approaches to leadership. Remind them that the trait approach focuses on identifying traits that indicate leadership ability, including intelligence, dominance, self-confidence, energy, activity, and knowledge.

Remind students to keep the behavioral approach to leadership separate from the trait approach.

The behavioral approach focuses on behaviors used by effective leaders

QUICK QUESTIONS •

What is the difference between task-focused leader behavior and employee-focused leader behavior?

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The trait approach was all but abandoned several decades ago. Why?

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The situational approach suggests that leaders can vary their use of authority to fit the situation. What are some situational characteristics that affect decision making?

HOMEWORK Interview a Manager Now might be a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. The assignment asks students to get a manager’s perspective regarding whether leadership can be taught.

At-Home Completion Time: 1 hour

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Learning Objective 3: Discuss the concept of situational approaches to leadership.

The Situational Approach to Leadership The situational approach to leadership assumes that the appropriate leader behavior varies from one situation to another. This approach was first proposed as a continuum of leadership behavior.

This continuum ranges from the one extreme of having the leader make decisions alone (i.e., task-focused) to having employees make decisions with only minimal guidance from the leader.

Leadership characteristics considered include: • The managers value system • Confidence in subordinates • Personal style • Subordinate characteristics • Tolerance for ambiguity • Level of knowledge, experience, and motivation • The complexity of the task • The level of interest in the task

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Learning Objective 4: Describe transformational and charismatic perspectives on leadership.

Leadership Through the Eyes of Followers Another recent perspective that has been adopted by some leadership experts focuses on how leaders are seen through the eyes of their followers.

A. Transformational Leadership Transformational leadership focuses on the importance of leading for change; it is the set of abilities that allows a leader to recognize the need for change, to create a vision to guide that change, and to execute the change effectively. Transactional leadership is essentially the same as management in that it involves routine, regimented activities. Only highly skilled leaders tend to be able to succeed in both transactional and transformational realms.

B. Charismatic Leadership Charismatic leadership is a type of influence based on a leader’s personal charisma; charismatic leaders are likely to have a lot of self-confidence, confidence in their beliefs and ideals, and a strong need to influence people. Charismatic leaders: 1. Envision likely future trends 2. Energize others 3. Enable others

KEY TEACHING TIPS •

Remind students that some leaders are able to adopt either transformational or transactional perspectives, depending on their circumstances; others are able to do one or the other, but not both.

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Point out to students that someone with charisma is more likely to influence others than someone without charisma.

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It is worth noting that taking over a leadership role from someone who is highly charismatic is a challenge and early positive results are important for them to gain credibility.

QUICK QUESTION What attributes make a leader charismatic?

Use In-Class Activity 2: Small-Group Discussion: Transformational vs. Transactional Time Limit: 20 minutes Use In-Class Activity 3: Up for Debate: Was Steve Jobs a Charismatic Leader?

Time Limit: 30 minutes

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Learning Objective 5: Identify and discuss leadership substitutes and neutralizers.

Leadership Substitutes and Neutralizers A. Leadership Substitutes Leadership substitutes are individual, task, and organizational characteristics that tend to outweigh the need for a leader to initiate or direct employee performance. In other words, when certain individual abilities, experiences, training, knowledge, motivation, and/or professional orientation are present people can perform well without a designated leader. An ER specialist knows what to do whether a leader is present or not.

B. Leadership Neutralizers Leadership neutralizers are factors that may render certain leadership behaviors ineffective.

Examples of leadership neutralizers include norms, group cohesion, elements of the job, and organizational factors. An example would be an inexperienced leader assigned to a very experienced group with long standing performance norms and high productivity. Another example might be a worker on an assembly line—he or she can only work as fast at the belt moves and motivational attempt on behalf of leaders can necessarily change production rates, although such leadership might be able to reduce errors and absenteeism.

KEY TEACHING TIP Students often confuse leadership substitutes and leadership neutralizers. Leadership neutralizers are factors that can render various leadership behaviors ineffective.

QUICK QUESTIONS •

What are some examples of possible leadership neutralizers?

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Leadership substitutes are characteristics that outweigh the need for a leader to initiate or direct employee performance. What are some examples of leadership substitutes?

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Learning Objective 6: Discuss leaders as coaches and examine gender and cross-cultural issues in leadership.

The Changing Nature of Leadership A. Leaders as Coaches Many organizations are becoming less hierarchical, changing the role of the leader from “overseer” to “coach.” Mentoring helps less-experienced employees learn the ropes and better prepares them to advance within the organization. The role of the executive coach is also growing in organizations. This is where middle or even senior managers and leaders work with an external coaching consultant to develop a plan to enhance their own leadership, managerial, and life skills.

B. Gender and Leadership Contrary to stereotypes, female leaders are not necessarily more nurturing or supportive than male leaders; and male leaders are not systematically more harsh, controlling, or task-focused than female leaders. Females do tend to be more democratic in making decisions; males tend to be more autocratic.

C. Cross-Cultural Leadership Culture encompasses both international differences and diversity-based differences within one culture. Cross-cultural factors play a growing role in organizations as their workforces become more diverse.

KEY TEACHING TIP Students often remember that culture refers to international differences among people, but they often forget that culture also includes diversity-based differences within one culture.

QUICK QUESTIONS •

Is the United States a collectivist culture or an individualist culture?

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“A new role for a leader is to become a coach, rather than an overseer.” Explain this statement. What has brought about this change in leadership focus?

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Do men and women tend to lead differently? If so, how?

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Learning Objective 7: Describe strategic leadership, ethical leadership, and virtual leadership.

Emerging Issues in Leadership A. Strategic Leadership Strategic leadership is a leader’s ability to understand the complexities of both the organization and its environment and to lead change in the organization.

B. Ethical Leadership Ethical leadership is a leader’s ability to maintain high ethical standards for his or her own conduct, to unfailingly exhibit ethical behavior, and to hold others in the organization to the same standards.

C. Virtual Leadership Virtual leadership refers to leadership that is exhibited when leaders and their employees work in locations that are far from one another.

QUICK QUESTIONS Virtual leadership involves managing employees who work in different locations than the manager. What are some advantages and disadvantages of virtual leadership from the manager’s perspective?

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Learning Objective 8: Relate leadership to decision making and discuss both rational and behavioral perspectives on decision making.

Leadership, Management, and Decision Making Decision making—choosing one alternative from among several options—is a critical management skill.

A. The Nature of Decision Making Decision making is the act of choosing one alternative from among a set of alternatives.

1. Types of Decisions. Managers must make many different types of decisions.

In general, however, most decisions fall into one of two categories: programmed and nonprogrammed. A programmed decision is one that is relatively structured or recurs with some frequency (or both). Nonprogrammed decisions, on the other hand, are relatively unstructured and occur much less often.

2. Decision-Making Conditions. Just as there are different kinds of decisions, there are also different conditions in which decisions must be made. State of Certainty is when the decision maker knows with reasonable certainty what the alternatives are and what conditions are associated with each alternative. State of Risk is when the availability of each alternative and its potential payoffs and costs are all associated with probability estimates.

State of Uncertainty is when the decision maker does not know all the alternatives, the risks associated with each, or the likely consequences of each alternative

B. Rational Decision Making There are a number of steps in the rational decision-making process.

1. Recognizing and Defining the Decision Situation. There must be a stimulus or spark to initiate the process; managers must develop a complete understanding of the problem, its causes, and its relationship to other factors.

2. Identifying Alternatives. Alternative courses of action must be developed; the more important the decision, the more attention is directed to developing alternatives.

3. Evaluating Alternatives. Managers must weigh the pros and cons and the feasibility of all alternatives to the problem.

4. Selecting the Best Alternative. Finding multiple acceptable alternatives may be possible; selecting just one alternative and rejecting all the others might not be necessary.

5. Implementing the Chosen Alternative. Implementation is sometimes fairly easy; whereas in other situations implementation is difficult.

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6. Following Up and Evaluating the Results. Managers should make sure that the chosen alternative has served it original purpose.

C. Behavioral Aspects of Decision Making 1. Political Forces in Decision Making. Political forces contribute to the behavioral nature of decision making. A coalition is an informal alliance of individuals or groups formed to achieve a common goal.

2. Intuition. Intuition is an innate belief about something, often without conscious consideration. Intuition is often thought of as a “hunch.”

3. Escalation of Commitment. Escalation of commitment occurs when managers become so committed to the course of action they have chosen that they stay with it, even when it appears to have been wrong.

4. Risk Propensity and Decision Making. Risk propensity is the extent to which a decision maker is willing to gamble when making a decision.

KEY TEACHING TIPS •

Remind students that they often engage in rational decision making, which occurs when a manager makes a decision by selecting and implementing a “best” alternative.

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A coalition is an informal alliance of individuals or groups formed to achieve a common goal; point out that this goal is often a preferred decision alternative.

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Remind students that when they have a “hunch,” it is intuition, which is an innate belief about something, often without conscious consideration.

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Point out that every individual has a varying level of risk propensity, which is the extent to which a person is willing to gamble when making a decision.

QUICK QUESTIONS •

What are some typical constraints that can limit the identification of alternatives?

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If an alternative appears not to be working, what are the manager’s options?

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For what types of decisions would the rational decision-making model apply? Why?

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Escalation of commitment involves selecting a course of action and then becoming so committed to it that managers stay with it, even when it appears to be wrong. Why do some managers stay with a course of action even when they know it to be wrong?

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HOMEWORK Airbus versus Boeing Now is a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment gives students a chance to further research the decisions made in the running example throughout the textbook by Boeing and Airbus and weigh the two companies’ decisions.

At-Home Completion Time: 45 minutes

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IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker Are You a Leader or a Manager?

Activity Overview: This activity provides students with a chance to interview a classmate, then discuss their own leadership potential with that classmate.

Time Limit: 20 minutes What to Do: 1. After reviewing the differences between “managers” and “leaders,” ask students to think about their own leadership and management potential. Assign each student to a partner, asking each one to briefly interview the other to find out how each would assess his or her own management and leadership potential. (10 minutes) 2. Reassemble the class and ask for volunteers who are willing to share any information about their own personal assessments and/or introduce their interviewee to discuss some of the topics discussed in the interview. (10 minutes) Don’t Forget: Some students will already have some managerial/leadership experience upon which to draw.

For those who don’t, ask them to consider a situation where they have been able to display management or leadership qualities (in a school club or a circle of friends, for example); or, ask them to identify characteristics and behaviors in their own bosses that they admire, and then assess whether they could emulate those behaviors and characteristics. This may help them to better distinguish their leadership potential from their management potential.

Wrap Up: Wrap up the discussion by reminding students that some managers are both leaders and managers.

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In-Class Activity 2: Small-Group Discussion Transformational vs. Transactional Activity Overview: This activity asks students to assess the leadership characteristics of selected leaders, identifying transformational and transactional characteristics among them.

Time Limit: 20 minutes What to Do: 1. Divide the class into small groups and ask each group to come up with a business or political leader with whom all are familiar. Based on the leader selected, each group should identify their selected leader as being either transformational or transactional. (10 minutes) 2. Reassemble the class as a whole to discuss each group’s input. (10 minutes) Don’t Forget: People can perceive leadership differently. Groups should make their assessments based on the descriptions of transactional and transformational leadership given in the textbook.

Wrap-Up: Bring the activity to a close by providing a quick overview of both types of leadership, identifying some cited leadership characteristics from the groups’ discussions for further definition.

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In-Class Activity 3: Up for Debate Was Steve Jobs a Charismatic Leader?

Activity Overview: This activity asks students to assess the leadership characteristics of one of the most successful entrepreneurs in the world.

Time Limit: 30 minutes What to Do: 1. Ask students to read about Steve Jobs in the Entrepreneurship and New Ventures feature on page 231, considering his traits and behaviors as a leader and making notes about whether he was a charismatic leader. (10 minutes) 2. Ask the class as a whole to discuss those traits and behaviors that might indicate that Steve Jobs had a high or low level of charisma. (20 minutes) Don’t Forget: This assignment can be completed using any number of successful (or unsuccessful) entrepreneurs.

Wrap-Up: Bring the activity to a close by discussing how what one person views as charismatic may not be viewed as charismatic by another individual.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1. Leadership includes the processes and behaviors used by someone to motivate, inspire, and influence the behaviors of others. Management, however, tends to focus on results and identifying deviations. Leaders focus on energizing people to overcome bureaucratic hurdles to help reach goals. A manager may or may not be a leader; management can often be carried out via some formal authority within the organization, while leadership may potentially be carried out by anyone in the organization. (Learning Objective 1 – AACSB – application of knowledge) 2. The trait approach to leadership focuses on identifying specific leadership traits that may indicate one’s leadership potential. The behavioral approach to leadership determines what specific behavior may indicate leadership effectiveness; two dimensions researched include task-focused leader behavior and employee-focused leader behavior. The situational approach assumes that appropriate leader behavior varies from one situation to another.

(Learning Objective 2 – AACSB – application of knowledge) 3. Leadership substitutes are individual, task, and organizational characteristics that tend to outweigh the need for a leader to initiate or direct employee performance. Leadership neutralizers tend to render certain leadership behaviors ineffective, based on the presence of the neutralizers; norms and cohesiveness in a group, for example, can be so strong that there is very little an individual manager can do to influence the group. (Learning Objective 5 – AACSB – application of knowledge) 4. The rational decision-making model begins with (1) recognizing and defining the decision situation. Decision makers then (2) identify alternatives, remembering that various constraints often limit their alternatives; (3) evaluate the alternatives; (4) select the best alternative; (5) implement the chosen alternative; and (6) follow up and evaluate the results.

(Learning Objective 1 – AACSB – application of knowledge)

QUESTIONS FOR ANALYSIS 5. Legitimate Power is granted through the organizational hierarchy. Reward Power is the power to give or withhold rewards. Coercive Power is the power to force compliance by means of psychological, emotional, or physical threat. Referent Power is the power based on identification, imitation, loyalty, or charisma. Expert Power is the power derived from information or expertise. (Learning Objective 1 – AACSB – application of knowledge) 6. Students should discuss various scenarios where tend the leader needs to initiate or direct employee performance and focus on the task, as well as various leadership neutralizers, which render task leadership behaviors ineffective such as dealing with professionals and other highly skilled employees. (Learning Objective 5 – AACSB – application of knowledge)

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7. There are a number of concerns that followers typically have in virtual organizations. One concern is making sure instructions are clearly understood. In the absence of nonverbal communication, it is sometimes difficult to assess the relative importance of different tasks.

The second problem is loneliness and isolation. Research is showing that people who are working from home sometimes feel isolated from the daily interactions that typically take place in organizations. One problem for the leaders of virtual organizations is that they must work harder to develop a positive work culture. Team leaders may not know their team members personally and this may make appropriate task assignments more difficult.

(Learning Objective 7 – AACSB – application of knowledge) 8.

Answers will vary but will focus on the behavioral characteristics of the leaders such as selfconfidence, out-going personality, and the need to influence people.

(Learning Objective 8 – AACSB – application of knowledge)

APPLICATION EXERCISES 9. Answers will vary but will focus on the behavioral aspects of political forces and coalitions, intuition, escalation of commitment, and risk propensity that especially impacts minority leaders. (Learning Objective 8 – AACSB – application of knowledge) 10. There will be a range of answers with some students describing her leadership style in terms of her behaviors, others will focus on her decision-making style, and still others will focus on her gender and its impact on her decisions. Students’ thoughts on her effectiveness will depend on their perspectives on the ethics of her decisions and whether they agree with her them. (Learning Objective 3, 4, 5, 6 – AACSB – reflective thinking)

BUILDING A BUSINESS SKILLS: CONTINUING TEAM EXERCISE ASSIGNMENT 9- 11 – 15 (Learning objectives 2, 3, 4, 5 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Answers will be determined by the type of business, (bricks and mortar, e-commerce, etc.) the team’s perspective on the role the leader needs to play, each team member’s preferred leadership style, the number and type of employees, etc.

When answering this question, the students should be reminded of the type of traits/skills and decisions the leader might need to possess: 1. Communication, 2. Financial, 3. Strategic/tactical decisions. 4. Ethical, 5. Interpersonal, 6.Vision, etc.

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BUILDING YOUR BUSINESS SKILLS: LEARNING TO LEAD (Learning objectives 2, 3, 4 - AACSB analytical and reflective thinking, application of knowledge) 16. Students will likely conclude that there are certain characteristics, traits, and skills that might indicate “leadership” and/or “management” among individuals. Student assessments will be situation-specific and could be difficult to prove either way.

17. Some students may feel that some of these traits are accurate indicators of effective leadership. However, some students may feel that certain traits are more critical in an industry of this type than of another type.

18. This question should generate much discussion. Similar to whether ethics or morals can be taught, deciding whether leadership can be taught may involve an assessment of whether one feels that certain traits are acquired versus ascribed.

19. Students will likely agree that a wide array of factors will affect leadership traits and training programs. Additionally, based on individual’s personalities, these factors are likely to impact each person differently.

EXERCISING YOUR ETHICS: EXERCISING CHARISMA (Learning objective 8 - AACSB – Ethical understanding and reasoning, reflective thinking) 20. As owner and CEO, you have to make the best decision for the organization. It might be common for individuals to envy characteristics of others, but letting those wrong feelings—in this case, jealousy—get in the way of the strategic direction of the company can be detrimental.

21. Pushing all personal feelings aside, most managers would choose to terminate the one employee that was measurably the lowest performing. In making decisions such as this, an individual will likely face criticism from certain employees regardless of the decision made.

22. Answers will vary, but students will want to keep a high degree of ethics in mind when making such decisions.

TEAM EXERCISE: FORCING THE HAND 9- 23 – 26 (AACSB – Ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking) This exercise should encourage thoughtful discussion on the nature of leadership, responsibilities of a leader, the decision-making process, and the impact a leader’s personality has on an organization.

CASES: LEADERSHIP STRETCHED TO THE BRINK 9- 27– 30 (Learning objectives 1, 2, 3, 4 - AACSB analytical and reflective thinking, application of knowledge) When discussing this case, students should focus on how today’s leaders spend less time “managing” and more time aligning their companies activities with current trends. This case also

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focuses on the fast paced, changing nature of business and thus the role of the leader. The students should recognize that not every company or leader is the same, thus there are a range of behaviors and expectations with an emphasis on flexibility and communication. With the change in technology, leaders can literally work 24/7 and need a constant stream of effective information. This also means leaders have less personal time and they need to recognize the real possibility of “burn-out” and find ways to avoid it. Most students will also probably answer that leaders in the future will face an even faster pace, be globally and culturally aware, and face ever more constant stressors.

THE MAN BEHIND THE GENIUS (Learning objective 3, 4 –A ACSB - analytical thinking, application of knowledge) 31. Most students will think that Steve Jobs was a charismatic leader citing various behavioral characteristics such as confidence, desire for excellence, etc.

32. Answers will vary but many students will cite the challenge and excitement of working with a ground breaking leader such as Jobs.

33. Answers will vary but most students will probably focus on Steve Jobs’ high standards, drive, perfectionism, and lack of compassion.

34. Again, answers will vary with most students seeing Jobs as an intuitive, risk taker, and

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Chapter 10: Human Resource Management and Labor Relations Chapter Overview Human resource management involves a steady stream of activities. An HR manager’s job revolves around a set of functions including HR planning, staffing, developing employees, appraisal, and compensation and benefit.

This chapter covers each of these functions, including how managers plan for their organization’s HR needs and ways in which organizations select, develop, and appraise employee performance. The chapter also describes the main components of a compensation system and some of the legal issues involved in hiring, compensating, and managing workers.

Finally, the chapter discusses workforce diversity, the management of knowledge workers, the use of a contingent workforce and why workers organize into labor unions.

A career in HR management can be rewarding, but given the dynamic nature of the external environment, keeping abreast of changes and incorporating those necessary changes into these HR management functions is also challenging.

Learning Objectives 1. Define human resource management discuss its strategic significance, and explain how managers plan for their organization’s human resource needs.

2. Discuss the legal context of human resource management and identify contemporary legal issues.

3. Identify the steps in staffing a company and discuss ways in which organizations recruit and select new employees.

4. Describe the main components of a compensation system and describe some of the key legal issues involved in hiring, compensating, and managing workers in today’s workplace.

5. Describe how managers develop the workforce in their organization through training and performance appraisal.

6. Discuss workforce diversity, the management of knowledge workers, and the use of a contingent workforce as important changes in the contemporary workplace.

7. Explain why workers organize into labor unions and describe the collective bargaining process.

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LIST OF IN-CLASS ACTIVITIES: AUTHOR’S CHOICE Activity 1. Ice-Breaker: Writing a Job Description

Description Students write a job description for both the instructor’s job and the student’s job.

Students are divided into teams to discuss the motivational elements behind employees creating their own job titles.

Students consider what incentives might motivate workers.

2. Up for Debate: Working with Friends 3. Small-Group Discussion: What Motivates Employees?

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Time Limit 45 min.

30 min.

30 min.

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CHAPTER OUTLINE Learning Objective 1: Define human resource management and explain how managers plan for their organization’s human resource needs.

Defining Human Resource Management Human resource management (HRM) is the set of organizational activities directed at attracting, developing, and maintaining an effective workforce.

A. The Strategic Importance of HRM The importance of HRM has grown dramatically in the last several years; this stems from increased legal complexities, the recognition that human resources are a valuable means for improving productivity, and today’s awareness of the costs associated with poor human resource management.

B. Human Resource Planning Human resource planning is the starting point for attracting qualified human resources.

1. Job analysis. Job analysis is a systematic analysis of jobs within an organization. The job analysis results in: (a) the job description, which lists the duties and responsibilities of a job, its working conditions; and the tools, materials, equipment, and information used to perform it; and (b) the job specification, which lists the skills, abilities, and other credentials and qualifications needed to perform the job effectively.

2. Forecasting HR Demand and Supply. Forecasting the supply of labor involves forecasting the internal supply—the number and type of employees who will be in the firm at some future date—and the external supply—the number and type of people who will be available for hiring from the labor market at large. a. Replacement Charts. Replacement charts list each important managerial position, who occupies it, how long that person will probably stay in it before moving on, and who is now qualified or soon will be qualified to move into it. b. Skills Inventories. Employee information systems (skills inventories) contain information on each employee’s education, skills, work experience, and career aspirations.

3. Matching HR Supply and Demand. After comparing future demand and internal supply, managers can make plans to manage predicted shortfalls or overstaffing. During the downturn of 2008–2009 many firms found it necessary to reduce the size of their workforce. Others did not reduce their workforce but reduced the number of hours each employee spent at work.

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KEY TEACHING TIPS •

Remind students that HRM is the set of organizational activities directed at attracting, developing, and maintaining an effective workforce.

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Students often confuse these terms: A job description lists what you do in the job, including the duties and responsibilities; a job specification lists the skills and abilities you bring with you to the job.

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Remind students that forecasting the supply of labor includes both an internal and external forecast.

QUICK QUESTIONS •

Why has the role of human resource management increased in importance in the last several years?

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How can an HR manager benefit from the use of a replacement chart?

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How can an HR manager benefit from the use of an employee information system?

Use In-Class Activity 1: Ice-Breaker: Writing a Job Description Time Limit: 45 minutes

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Learning Objective 2: Discuss the legal context of human resource management and identify the contemporary legal issues The Legal Context of HR Management A. Equal Employment Opportunity Numerous federal and state laws, federal guidelines, presidential executive orders, and judicial decisions mandate equal employment opportunity, which is nondiscrimination in employment on the basis of race, color, creed, sex, or national origin. Title VII of the Civil Rights Act of 1964 forbids discrimination in all areas of the employment relationship The Equal Employment Opportunity Commission (EEOC) has responsibility for enforcing Title VII, the Equal Pay Act, and the Americans with Disabilities Act. A business with government contracts must have on file a written affirmative action plan—a written statement of how the organization intends to actively recruit, hire, and develop members of relevant protected classes.

B. Compensation and Benefits Fair Labor Standards Act sets a minimum wage and requires the payment of overtime rates for work in excess of 40 hours per week Equal Pay Act of 1963 requires that men and women be paid the same amount for doing the same job Employee Retirement Income Security Act (ERISA) of 1974 ensures the financial security of pension funds by regulating how they can be invested Family and Medical Leave Act (FMLA) of 1993 requires employers to provide up to 12 weeks of unpaid leave for family and medical emergencies.

C. Labor Relations Union activities and management’s behavior toward unions constitute another heavily regulated area. The National Labor Relations Act (also known as the) Wagner Act, passed in 1935, sets up a procedure for employees to vote on whether to have a union. The National Labor Relations Board (NLRB) was established by the Wagner Act to enforce its provisions. Following a series of severe strikes in 1946, the Labor-Management Relations Act (also known as the Taft-Hartley Act) was passed in 1947 to limit union power.

D. Health and Safety The Occupational Safety and Health Act of 1970 holds that every employer has an obligation to furnish each employee with a place of employment that is free from hazards that cause or are likely to cause death or physical harm.

E. Other Legal Issues 1. AIDS in the Workplace. Employers cannot legally require an AIDS test or any other medical examination as a condition for making an offer of employment. Organizations must treat AIDS like any other disease covered by law; employers cannot discriminate against a person with AIDS, and they should try to educate coworkers about AIDS.

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2. Sexual Harassment. Sexual harassment is defined by the EEOC as unwelcome2. sexual advances in the work environment. With quid pro quo harassment, the harasser offers to exchange something of value for sexual favors. Lewd jokes, unwelcome comments, and so on constitute a hostile work environment.

3. Employment-at-Will. The concept of employment-at-will holds that both employer and employee have the mutual right to terminate an employment relationship anytime for any reason and with or without advance notice to the other.

4. The PATRIOT Act. In response to the terrorist attacks of September 11, 2001, the U.S. Government passed legislation to increase its powers to investigate and prosecute suspected terrorists. The HRM implications are that certain individuals (including ex-convicts and aliens from other countries deemed by the U.S. Government to have repeatedly provided support for acts of international terrorism) are ineligible to work with potentially dangerous biological agents.

KEY TEACHING TIPS •

Reiterate that protected classes consist of individuals who share characteristics—such as race, color, religion, gender, age, disability status, and national origin—as indicated by a given law.

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Reinforce that sexual harassment includes (a) quid pro quo, in which the harasser offers something of value for sexual favors, and (b) hostile work environment, in which lewd behavior displayed by another employee is offensive.

QUICK QUESTIONS •

What is the purpose of an affirmative action plan?

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What does OSHA guarantee?

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Learning Objective 3: Identify the tasks in staffing a company and discuss ways in which organizations select new employees.

Staffing the Organization Staffing the organization is one of the most complex and important tasks of good HR management.

A. Recruiting Human Resources Recruiting is the process of attracting qualified persons to apply for the jobs that are open.

1. Internal Recruiting. Internal recruiting means considering present employees as candidates for openings.

2. External Recruiting. External recruiting involves attracting people outside of the organization to apply for jobs.

B. Selecting Human Resources The intent of the selection process is to gather from applicants information that will predict their job success and then to hire the candidates likely to be most successful. The organization can only gather information about factors that can be used to predict future performance; validation is the process of determining the predictive value of that information.

1. Application Forms. An application form is a method of gathering information about the applicant’s work history, educational background, and other job-related data; the application form should not contain questions about areas unrelated to the job, such as gender, religion, or national origin.

1. Tests. Tests of ability, skill, aptitude, or knowledge relevant to a particular job are usually the best predictors of job success, although tests of general intelligence or personality are occasionally useful as well.

3. Interviews. In a structured interview, questions are written in advance, and all interviewees follow the same question list with each candidate; in an unstructured interview, questions are asked at random.

4. Other Techniques. Organizations often require applicants to take physical exams and drug tests. Some organizations also run credit checks on prospective employees.

KEY TEACHING TIPS •

Remind students that new employees are found both internally and externally in the recruitment process.

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Remind students that all applicant information gathered in the selection process can be used to predict job success.

QUICK QUESTIONS •

What are the benefits and drawbacks of internal recruiting? External recruiting?

•

When do you think tests are useful in the selection process?

•

Why are interviews sometimes a poor predictor of job success? In what way(s) might an interview be an accurate predictor of job success?

HOMEWORK Interview a Manager Now might be a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment asks students to interview an HR manager at a local company and identify the steps in the selection process for an open position at that company.

Note: To give students greater insight into the work of an HR manager, they may also want to ask the following questions: •

What are the greatest challenges facing someone in your position?

•

What is the best part and least favorite part of your job?

•

What advice would you give someone who wants to get into this line of work?

At-Home Completion Time: 1 hour

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Learning Objective 4: Describe the main components of a compensation and describe some of the key legal issues involved in hiring, compensating, and managing workers in today’s workplace.

A. Compensation and Benefits A major factor in retaining skilled workers is a company’s compensation system—the total package of rewards that it offers employees in return for their labor.

1. Wages and Salaries Wages are paid hourly for time worked. A salary is an amount paid per year for discharging the responsibilities of a job. Companies may set wages and salaries by looking at competitors’ rates. In addition, firms must decide how their wage and salary levels will compare for different jobs.

2. Incentive Programs Incentive programs are special pay programs designed to motivate high performance. a. Individual Incentives. A bonus may be awarded to employees upon their reaching a sales quota or performance goal. Merit salary systems link rises to performance levels in non-sales jobs. Pay-for-performance (or variable pay) goes to middle managers on the basis of companywide performance, business-unit performance, personal record, or all three factors. b. Companywide Incentives. These programs apply to all employees in a firm. In profit-sharing plans, a firm’s profits earned above a certain level are distributed to employees. Gain-sharing plans distribute bonuses to employees when a firm’s costs are reduced through greater work efficiency. Pay-for-knowledge plans distribute pay to workers who learn new skills and become proficient at different jobs.

3. Benefits Programs Benefits are compensation other than wages and salaries, including social security retirement benefits, workers’ compensation insurance, health and life insurance, and paid vacations and holidays. Most companies are required by law to provide social security retirement benefits and workers’ compensation insurance (insurance for compensating workers injured on the job). a. Retirement Plans. Retirement plans are set up to pay pensions to workers when they retire. Contributions are made either totally by the company or by both the company and the employee. In recent years more companies have run into problems because they have not set aside enough money to cover the retirement funds for their workers. Some major companies have stopped contributing toward retirement accounts while others have transitioned employees to riskier 401(k) plans. b. Containing the Costs of Benefits. To contain the costs of benefits, employees can select from a variety of benefit alternatives in what is known as a cafeteria benefits plan.

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KEY TEACHING TIPS •

Point out that a compensation system includes more than just wages and salaries; it includes incentives and employee benefit programs.

•

Students often confuse the types of incentive plans: Profit-sharing plans distribute profits earned above a certain level to employees; gainsharing plans distribute bonuses to employees who achieve greater work efficiency; and pay-for-knowledge plans encourage workers to learn new skills.

QUICK QUESTIONS •

In what way(s) is variable pay a better motivator than a merit raise?

•

How can an organization benefit from offering incentive programs to its employees?

•

How does a cafeteria benefit plan allow a company to cut costs?

Use In-Class Activity 3: Small-Group Discussion: What Motivates Employees?

Time Limit: 30 minutes

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Learning Objective 5: Describe how managers develop the workforce in their organization through training and performance appraisal.

Developing the Workforce A. Training As its name suggests, on-the-job training occurs while an employee is at work. Off-the-job training takes place at locations away from a work site. This approach offers a controlled environment and allows focused study without interruptions. Training is a necessary practice if the organization wants to maintain a qualified and effective workforce.

1. Assessing Training Needs. The first step in developing a training plan is to determine what needs exist. As training programs are being developed, the manager should set specific and measurable goals specifying what participants are to learn. Managers should also plan to evaluate the training program after employees complete it.

2. Common Training Methods. After a company hires new employees, it must acquaint them with the firm and their new jobs. On-the-job training occurs while employees are at work. Off-the-job training takes place at locations away from work, such as in simulated work environments or in classrooms. Vestibule training takes place in simulated work environments that make the off-the-job training more realistic.

B. Performance appraisal Performance appraisals are designed to show workers precisely how well they are doing their jobs. Typically, the appraisal process involves a written assessment issued on a regular basis. As a rule, however, the written evaluation is only one part of a multistep process.

This process begins when a manager defines performance standards for an employee.

Performance appraisals measure an employee’s performance on job requirements and jobrelated goals. Most companies have a step-by-step process for dismissing or demoting employees. In addition, firms usually have a plan to decide which employees will remain employees when downsizing or making cutbacks.

1. Common Appraisal Methods. Two basic categories of appraisal methods commonly used in organizations are objective methods and judgmental methods. Objective measures of performance include actual output (number of units produced), scrap rate, dollar volume of sales, and number of claims processed. Judgmental methods, including ranking and rating techniques, are the most common way to measure performance.

2. Errors in Performance Appraisal. Errors or biases can occur in any kind of rating or ranking system. One common problem is recency error, the tendency to base judgments on the subordinate’s most recent performance because it is most easily recalled.

Halo error is allowing the assessment of an employee on one dimension to “spread” to ratings of that employee on other dimensions. One interesting innovation in performance

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appraisal used in some organizations today is called 360-degree feedback, in which managers are evaluated by everyone around them—their boss, their peers, and their subordinates.

3. Performance Feedback. The last step in most performance appraisal systems is giving feedback to subordinates about their performance. This is usually done in a private meeting between the person being evaluated and his or her boss.

QUICK QUESTIONS 1. What types of training are offered at your place of work?

2. What do you think would be the biggest challenges of giving an employee performance appraisal?

Use In-Class Activity 2: Up for Debate: Working with Friends Time Limit: 30 minutes

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Learning Objective 6: Discuss workforce diversity, the management of knowledge workers, and the use of a contingent workforce as important changes in the contemporary workplace.

New Challenges in the Changing Workplace New challenges arise as the economic and social environments of business change.

A. Managing Workforce Diversity Workforce diversity is the range of workers’ attitudes, values, beliefs, and behaviors that differ by gender, race, age, ethnicity, physical ability, and other relevant characteristics; many U.S. organizations are now creating more diverse workforces, embracing more women, ethnic minorities, and foreign-born employees than ever before.

B. Managing Knowledge Workers Traditionally, employees added value to organizations because of what they did or because of their experience; today, however, many employees add value because of what they know.

1. The Nature of Knowledge Work. Knowledge workers tend to work in high-tech firms and are usually experts in some abstract knowledge base; they require highly specialized training, and not every organization is willing to make the human capital investments necessary to take advantage of these jobs.

2. Knowledge Worker. Management and Labor Markets—organizations that need knowledge workers must introduce regular market adjustments in order to pay them enough to keep them.

A. Contingent and Temporary Workers 1. Trends in Contingent and Temporary Employment. A contingent worker is a person who works for an organization on something other than a permanent or full-time basis.

2. Managing Contingent and Temporary Workers. The keys to understanding how to use such workers involve careful planning and understanding their advantages and disadvantages within the organization. In addition, managers must assess the real cost of using contingent workers.

KEY TEACHING TIP Remind students that workforce diversity is the range of workers’ attitudes, values, beliefs, and behaviors that differ by gender, race, age, ethnicity, physical ability, and so on.

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QUICK QUESTIONS •

How can an organization benefit from welcoming a diverse workforce?

•

How do knowledge workers add value to an organization?

•

What are some advantages and disadvantages of hiring contingent workers?

HOMEWORK Search for three companies that are considered great places to work.

Now might be a good time to assign Application Exercise 9 from the end-of-chapter materials as homework.

At-Home Completion Time: 1 hour

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Learning Objective 7: Explain why workers organize into labor unions and describe the collective bargaining process.

Dealing with Organized Labor A labor union is a group of individuals working together to achieve shared job-related goals, such as higher pay, shorter working hours, more job security, greater benefits, or better working conditions. Labor relations refers to the process of dealing with employees who are represented by a union. Collective bargaining is the process by which union leaders and managers negotiate common terms and conditions of employment for the workers re represented by unions.

A. Unionism Today Since the mid-1950s, U.S. labor unions have experienced increasing difficulties in attracting new members. In 2007 only 12.1 percent of the U.S. labor force is represented by a labor union.

1. The Future of Unions. The future of unions depends on the future composition of the workforce. Unions will most likely evolve to assume new roles and responsibilities, such as having a voice in management. Even large and influential unions such as the United Auto Workers (UAW) were forced to make significant concessions during the large-scale restructuring of the U.S. auto industry in 2008–2009.

B. Collective Bargaining Collective bargaining is an ongoing process involving the drafting and administering of the terms of a labor contract.

1. Reaching Agreement on Contract Terms. By law, union leaders and management representatives must negotiate “in good faith.”

2. Contract Issues. In the past, most union-management bargaining situations were characterized by union themselves fighting against wage cuts rather than striving for wage increases. Now, the contract can address any number of issues, including: a. Compensation. A cost-of-living adjustment (COLA) is one of the most common tools for securing wage increases. Wage reopener clauses provide for renegotiated wage rates at preset times during the duration of the contract. b. Benefits. Typical employee benefit issues include the cost of insurance, retirement, paid holidays, and working conditions. c. Job Security. In many cases, demands for job security include the promise that a company will not move to another location and that, if the workforce is reduced, seniority will be used to determine which workers lose their jobs.

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3. When Bargaining Fails. An impasse occurs when, after a series of bargaining sessions, management and labor have failed to agree on a new contract or a contract to replace an agreement that is about to expire. a. Union Tactics. When their demands are not met, unions may bring a variety of tactics to the bargaining table. Strikes. A strike occurs when employees walk off the job and refuse to work.

Other union tactics include picketing, in which workers march at the entrance to the firm with signs explaining their reasons for striking; boycotts, in which union members agree not to buy products of a targeted employer; and a work slowdown, in which workers perform their jobs at a much slower pace than normal. b. Management Tactics. Lockouts occur when employers deny employees access to the workplace. A firm can also hire temporary or permanent replacements called strikebreakers.

4. Mediation and Arbitration. In mediation, a neutral third-party offers advice and suggestions in settling a labor-management dispute; in voluntary arbitration, the neutral third party dictates a settlement between the two sides, which have agreed to submit to outside judgment. Compulsory arbitration is used to settle disputes between the government and public employees.

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KEY TEACHING TIPS •

Remind students that the official term describing the process of dealing with employees represented by a labor union is labor relations.

•

Remind students that collective bargaining is much like the negotiation process. When involved with collective bargaining, both labor and management present demands and then focus on identifying the bargaining zone.

•

Be sure to distinguish between the types of strikes: (a) the economic strike, which is triggered by stalemates in the bargaining process and (b) the sympathy strike, occurring when one union strikes in sympathy with another.

•

Students often confuse mediation and arbitration. Mediation involves a third party who makes recommendations to solve a dispute; arbitration involves a third party who makes a legally binding decision to solve a dispute.

QUICK QUESTIONS •

In most sectors, unions are in a weakened position compared with many decades ago.

How has this affected the way in which labor works with management?

•

What issues are typically most important to union negotiators when collective bargaining with management?

•

When bargaining fails between labor and management, what are some union tactics that can be brought to the bargaining table? Management tactics?

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IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker Writing a Job Description Activity Overview: This activity asks students to write a job description for an instructor and for a student.

Time Limit: 45 minutes What to Do: 1. Review what is included in a job description, then ask students to think about what variables should be included in their instructor’s job description and what should be included in a student’s job description, if one were to exist, making individual notes along the way. (10 minutes) 2. Split the class into small groups, asking members of each group to share what they came up with in Step 1. (10 minutes) 3. Ask each group to further discuss what should be included in their instructor’s job description and in a student’s job description, considering any other factors that might come to mind that have not already been discussed. Write a final job description for both instructor and student. (10 minutes) 4. Reassemble the class and discuss each group’s suggestions.(15 minutes) Don’t Forget: There are many roles that instructors play in a college or university other than what students see in the classroom.

Wrap-Up: Review the purpose of a job description, highlighting some of the major elements included in most college or university instructors’ job descriptions.

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In-Class Activity 2: Up for Debate Working with Friends Activity Overview: This activity asks students to consider the pros and cons of working with friends.

Time Limit: 30 minutes What to Do: 1. Divide the class into three-member groups and ask them to read the Entrepreneurship and New Ventures feature on page 248 of the textbook. (10 minutes) 2. Ask groups to consider the pros and cons of working with friends. Do you think Netflix’s strategy of seeking to meet employees’ needs makes good business sense? (10 minutes) 3. Regroup the class as a whole and discuss each group’s input, then ask the class to come up with a final decision. (10 minutes) Don’t Forget: To arrive at a final decision, groups may have to resort to voting.

Wrap-Up: Wrap up the activity by briefly discussing what students think the future of the video/DVD industry might look like. Do students believe we will have video rental stores in the future? Will Netflix survive the increasing move to video streaming?

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In-Class Activity 3: Small-Group Discussion What Motivates Employees?

Activity Overview: This activity asks students to consider what companywide incentives might motivate workers who work in specific jobs.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and assign each group to one of the jobs below: (5 minutes) • Cook at a fast-food restaurant • Waitress at a local diner • Groundskeeper • Computer technician at a small firm • Janitor • College professor 2.

Ask each group to brainstorm what incentives would be especially motivating for a worker performing the assigned job; remind students to consider both tangible and intangible incentives. (10 minutes)

3.

Reassemble the class and ask each group to share their results, allowing all students to share input. (15 minutes)

Don’t Forget: This activity can be completed using any type of job as the basis for discussion. Remind students to consider “reasonable” costs to the company as they brainstorm for ideas.

Wrap-Up: Bring the activity to a close by recapping each group’s conclusion, reminding students that tangible incentives, such as various benefits packages, can be motivating but that intangible incentives, such as employee recognition programs, can also be motivating.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1. Internal recruiting builds morale and motivation for other employees who see peers being promoted; in addition, with internal recruiting, there is no need to teach the culture and the nature of the business. In discussing disadvantages of internal recruiting, students will likely add that such recruiting may lead to fewer new ideas, may create other openings in the company that will need to be filled, and may create resentment among other employees who are not promoted. External recruiting, on the other hand, brings new ideas and expertise, increases workforce diversity, and provides new information about the competition and the marketplace. Disadvantages of external recruiting include increased training costs and temporary efficiency loss, loss of morale among current employees, and friction regarding salary differences if the outsider is more highly paid.

(Learning Objective 3 – AACSB – application of knowledge) 2. Employers need to ensure that workers are performing their jobs correctly and efficiently in order to prevent costly errors. Also, in order to be socially responsible to employees, suppliers, shareholders, and customers, firms must train their workers in the latest technology, the most efficient production processes, and the nature of the industry.

(Learning Objective 5 – AACSB – application of knowledge) 3. Individual incentives may include bonuses, merit pay, or pay-for-performance.

Companywide incentives include profit-sharing plans, gain-sharing plans, and pay-forknowledge plans. Mandatory benefits include social security and workers’ compensation insurance, while optional benefits include health and life insurance, stock purchase plans, retirement programs, and family-friendly benefits, such as flextime, subsidized cafeterias, subsidized or free child care, sick days, vacations, employee recognition awards, etc.

(Learning Objective 4 – AACSB – application of knowledge) 4. Knowledge workers are employees who add value to organizations because of what they know. To retain these workers, companies need to compensate them sufficiently.

(Learning Objective 6 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 5. Answers will vary, but should include discussion of drug abuse’s impact on the workplace and issues of employee privacy. (Learning Objective 2 – AACSB – reflective thinking) 6. These workers may feel they have satisfactory wages, adequate benefits, satisfactory working conditions, and reasonable job security. (Learning Objective 4 – AACSB – reflective thinking) 7. Answers will vary, but many students will recognize that a diverse workforce provides more creativity, a variety of opinions and decision making styles, and opportunities for creating a competitive advantage. The challenges are those diverse opinions may create communication

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problems possibly creating conflict in the organization.

(Learning Objective 6 – AACSB – reflective thinking) 8. Answers will vary, but many students will express satisfaction in merely finding a job in their chosen industry after graduation, while some students will be more aggressive in finding more tangible benefits in their jobs. (Learning Objective 4 – AACSB – reflective thinking) APPLICATION EXERCISES 9. Answers will vary but students will probably focus on companies that pay better, provide better benefits, and flexible working conditions, i.e. Google, etc.

(Learning Objective 4 – AACSB – application of knowledge) 10. Answers will vary based on the company and the position. However, most HR managers will reveal how certain recruitment tools work better than others, how certain jobs require preemployment testing, and how the value placed on the interview process may vary depending on the job or other factors. (Learning Objective 3 – AACSB – application of knowledge) BUILDING YOUR BUSINESS SKILLS: CONTINUING TEAM EXERCISE ASSIGNMENT 19- 11 – 15 (AACSB 2, 3, 4 –interpersonal relations and teamwork, reflective thinking) Answers will be determined by the type of business, (bricks and mortar, e-commerce, etc.), the numbers and types of employees needed, the competition, prevailing wages, projected company’ finances, normal industry practices, etc.

BUILDING YOUR BUSINESS SKILLS: STARTING FROM SCRATCH (AACSB 3 –interpersonal relations and teamwork, reflective thinking) 16. Answers will vary, but will likely focus on the skills required for the position. Most will probably feel that they need additional information.

17. Answers will vary widely based on the students’ job experiences and familiarity with job descriptions.

18. Answers will vary, but most groups will recruit using the internet, colleges/universities, and possibly print media.

19. Again, answers will vary widely based on students’ interview and work experiences.

ANSWERS TO EXERCISING YOUR ETHICS: OPERATING TACTICALLY (Learning objective 7 - AACSB – Ethical understanding and reasoning, reflective thinking) 20. The key ethical issue is dishonesty—your manager is encouraging you to deliberately mislead employees and to actively interfere with organizing activities. Furthermore, terminating a key organizer is blatant intimidation.

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21. Basic arguments for extreme measures to fight unionization include the need to limit spending on human resources. Basic arguments against extreme measures include the questionable ethics of this approach and the negative impact on morale, which could negatively affect efficiency and effectiveness.

22. Answers will vary, but older, more experienced managers may be more likely to stand up to their bosses, refusing to mislead their employees.

TEAM EXERCISE: HANDLING THE LAYOFFS 10 - 23 – 26 (AACSB 2, 6 – Ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking) This should be an interesting discussion because students will bring their own perspectives on race, gender, job performance to this exercise. Students should focus on job performance and contributions to the company when making their decisions but the discussion will be wide ranging covering the legal issues, diversity, perception, etc.

CASES: A UNIQUE PARTNERSHIP DRIVES WEGMANS 10- 27 – 29 (LEARNING OBJECTIVE 4 – AACSB – REFLECTIVE THINKING) When discussing this case, students should focus on the pros and cons of internal and external recruiting recognizing that internal recruitment builds loyalty and often leads to lower employee turnover but recognizing that not everyone position can be filled from within plus external recruits can bring a different perspective.

When discussing the training program, students need to focus on the skills that the managers will ultimately need. The employee appraisal question should generate much discussion with many students basing their answers on how effective they think their company’s annual appraisal is.

CASES: FOOD FOR THOUGHT (LEARNING OBJECTIVE 4 – AACSB – REFLECTIVE THINKING) 30. Students’ perspective will frame their answer to this question based on their current pay and salary history.

31. Again, students’ answers will be based on their personal experiences.

32. Most students will think that the scholarship benefits Wegmans by creating employee loyalty and better trained employees.

33. The benefits that Wegmans provides should reduce employee turnover and provide the company with skilled employees compared to its competitors.

34. Again, students’ answers will be based on their perspective on pay and benefits.

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CRAFTING A BUSINESS PLAN Part 3: People in Organizations This part of the business plan asks students to think about their employees, the jobs they will be performing, and the ways in which they can lead and motivate them. Students take the different job titles they created in the organizational chart in Part 2 and give thought to the skills that employees will need to bring to the job before they begin. They also consider the training they’ll need to provide employees after they are hired, as well as how they’ll compensate their employees. Part 3 of the business plan also asks students to consider how they’ll lead employees and keep them happy and motivated.

Files to Provide Students: For this part of the project, students will be asked to complete Part 3: People in Organizations (see below). If students have already started working on the business plan project, they should continue using the student.

Part 3 Estimated At-Home Completion Time: If done well, this section will require a minimum of 3 to 5 hours. As noted previously, because some companies will have more job descriptions and job specifications than others, you may want to limit the number you ask students to complete.

Homework Deliverable from Students: The length of this section should be somewhat consistent, although some variance can be expected depending on the size and complexity of the business. You should expect at least 3 to 5 pages in this section.

STUDENT BUSINESS PLAN PROJECT TEMPLATE PART 3: PEOPLE IN ORGANIZATIONS

CORPORATE CULTURE What do you see as the “corporate culture” of your business? What types of employee behaviors, such as organizational citizenship, will you expect?

Hint: Will your business demand a casual environment or a more professional environment?

Refer to the discussion on employee behavior in Chapter 8 for information on organizational citizenship and other employee behaviors.

LEADERSHIP PHILOSOPHY What is your philosophy on leadership? How will you manage your employees day-to-day?

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Hint: Refer to the discussion on leadership in Chapter 9 to help you formulate your thoughts.

JOB DESCRIPTIONS Looking back at your organizational chart in Part 2, briefly create a job description for each team member.

Hint: As you learned in Chapter 10, a job description lists the duties and responsibilities of a job; its working conditions; and the tools, materials, equipment, and information used to perform it. Imagine your business on a typical day. Who is working and what are each person’s responsibilities? (Note that if your business is very large, you should ask your instructor how many positions he or she would like you to create job descriptions for.)

JOB SPECIFICATIONS Next, create a job specification for each job, listing the skills, credentials, and qualifications needed to perform the job effectively.

Hint: As you write your job specifications, consider what you would write if you were making an ad for the position. What would the new employee need to bring to the job in order to qualify for the position?

Insert Job Title #1: Insert Needed Skills/Credentials/Qualification for Job: Insert Job Title #2: Insert Needed Skills/Credentials/Qualification for Job: Insert Job Title #3: Insert Needed Skills/Credentials/Qualification for Job: TRAINING EMPLOYEES What sort of training, if any, will your employees need once they are hired? How will you provide this training?

Hint: Refer to the discussion of training in Chapter 10. Will you offer your employees on-the-job training? Off-the-job training? Vestibule training?

COMPENSATION A major factor in retaining skilled workers is a company’s compensation system—the total package of rewards that it offers employees in return for their labor. Part of this compensation system includes wages/salaries. What wages or salaries will you offer for each job? Why did you decide on that pay rate?

Hint: Refer to Chapter 10 for more information on forms of compensation. You may also want to check out sites like www.salary.com, which includes a salary wizard you can use to determine how much people with different job titles are making in your area and across the United States.

INCENTIVES As you learned in Chapter 10, incentive programs are special programs designed to motivate high performance. What incentives will you use to motivate your workforce?

Hint: Be creative and look beyond a simple answer, such as giving pay increases. Ask yourself,

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who are my employees and what is important to them? Refer to Chapter 10 for more information on the types of incentives you may want to consider.

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Chapter 11: Marketing Processes and Consumer Behavior Chapter Overview Many students think that marketing is merely sales or advertising. Actually, sales and advertising are just a small part of the overall marketing process. Think of a product that you buy often. You might not realize that everything about that product—from the time it is created, produced, packaged, and shipped to you—involves various facets of marketing.

This chapter explains the concept of marketing and discusses the five forces that constitute the external marketing environment. It also explains the purpose of a marketing plan, identifies the four components of the marketing mix, and discusses the necessity of identifying market segments. As the chapter unfolds, many variables surrounding both the consumer and organizational markets are discussed, as well as a focus on distinguishing features between products and services and the importance of branding and packaging. The chapter also discusses the consumer buying process, organizational markets, and key considerations in the new product development process. Finally, it looks at the challenges that arise in adopting an international marketing mix and the ways in which small businesses can benefit from an understanding of the marketing mix.

Learning Objectives 1. Explain the concept of marketing and identify the five forces that constitute the external marketing environment.

2. Explain the purpose of a marketing plan and identify its main components.

3. Explain market segmentation and how it is used in target marketing.

4. Discuss the purpose of marketing research, and compare the four marketing research methods.

5. Describe the consumer buying process and the key factors that influence that process.

6. Discuss the four categories of organizational markets, and the characteristics of Business-to-Business (B2B) buying behavior.

7. Discuss the marketing mix as it applies to small business.

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

Description

1. Ice-Breaker: Assessing the Marketing Environment

Students consider various elements from the marketing environment that affect specific industries.

Students consider all the valuable information they give to others about themselves.

Students are divided into teams to debate the advantages and disadvantages of using Social Networking to find jobs Students consider what a foreign visitor might notice about the American marketplace.

2. Small-Group Discussion: Data Mining 3. Up for Debate: Social Networking and Job Seeking

4. Small-Group Discussion: Never Give a German a Yellow Rose

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Time Limit 30 min.

20 min.

30 min.

30 min.

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CHAPTER OUTLINE Learning Objective 1: Explain the concept of marketing and identify the five forces that constitute the external marketing environment.

What Is Marketing?

The American Marketing Association defines marketing as “a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders.”

A. Delivering Value Consumers buy products that offer the best value when it comes to meeting their needs and wants.

1. Value and Benefits. Value compares a product’s benefits with its costs; benefits include the product’s functions and emotional satisfactions associated with owning, experiencing, or possessing it.

2. Value and Utility. Products provide utility, which is the product’s ability to satisfy a human want or need. Marketing strives to provide four kinds of utility—form utility, time utility, place utility, and ownership utility.

B. Goods, Services, and Ideas Consumer goods are tangible products that consumers purchase for final consumption; firms that sell these goods are engaged in consumer marketing. Industrial goods are products that are purchased by companies to be used in further production of goods; firms that sell products to other businesses are engaged in industrial marketing. Services are products with intangible (nonphysical) features, such as professional advice, improved safety procedures, timely information for decisions, or a resort vacation. Service marketing is the application of marketing for services.

C. Relationship Marketing Relationship marketing focuses on building long-lasting relationships between customers and suppliers.

1. Data Warehousing and Data Mining for Building Customer Relationships. Data warehousing is the compiling and storage of consumer data; data mining allows for the sifting, sorting, and searching for previously undiscovered customer information and preferences.

D. The Marketing Environment Marketing decisions are affected by various influences in the external environment.

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1. Political and Legal Environment. Political activities may result in favorable laws and regulations that may open new international business opportunities.

2. Sociocultural Environment. Elements from this segment of the environment include changing demographics, values and religion, buying behaviors, preferences, and activities as well as many other factors.

3. Technological Environment. Technological change happens so quickly in some industries that existing products become obsolete very quickly, while new-product introductions replace them.

4. Economic Environment. Economic conditions affect many facets of marketing, including consumer spending patterns and marketers’ plans for product offerings, pricing, and promotional strategies.

5. Competitive Environment. All marketers compete for the purchasing power of consumers. This sometimes occurs through product differentiation and consumer segmentation. Substitute products may not look alike or they may seem very different from one another, but they can fulfill the same need; brand competition occurs between similar products; international competition matches domestic products against foreign products.

KEY TEACHING TIPS •

Students often forget that marketing is more than just advertising and sales. It is a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships.

•

Make sure that students grasp the concept of utility—the ability of a product to satisfy a human want or need—as it is a difficult concept for some students.

•

Consumer marketing involves the sale of consumer goods and services to consumers; industrial marketing involves the sale of industrial goods and services to other companies.

•

Relationship marketing emphasizes building lasting relationships with customers and suppliers. What do organizations hope to gain from relationship marketing?

•

Make sure students understand the distinction between data warehousing and data mining.

•

Reinforce that every marketer is faced with forces from the external environment, including the political-legal, sociocultural, technological, economic, and competitive environments.

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•

Reinforce that although price may be the easiest of the Four Ps to change, a price that is too high fails to attract buyers, and a price that is too low yields little profit.

•

Make sure students understand that place is concerned with all of the activities involved in getting products from producers to consumers.

•

Reinforce that promotion refers to techniques—advertising, personal selling, sales promotions, publicity, and PR—for communicating information about products.

•

Remind students that the marketing mix consists of product, price, promotion, and placement. It is affected by variables such as consumer characteristics, consumer needs, emerging marketing, and competition.

•

Stress that the elements of the marketing mix—the Four Ps—are treated similarly by small businesses and large businesses; only the implementation may change.

QUICK QUESTIONS •

How does a marketer create form utility, time utility, place utility, and ownership utility?

•

What are some examples of consumer goods? What about industrial goods?

•

Relationship marketing emphasizes building lasting relationships with customers and suppliers. What do organizations hope to gain from relationship marketing?

•

Make sure students understand the distinction between data warehousing and data mining.

•

What are some common political-legal factors that affect marketing?

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What are some common sociocultural factors that affect marketing?

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What are some common technological factors that affect marketing?

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What are some common economic factors that affect marketing?

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What are some examples of competing products?

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Why do marketers attempt to differentiate their products?

Use In-Class Activity 1: Ice-Breaker: Assessing the Marketing Environment Time Limit: 30 minutes Use In-Class Activity 2: Small-Group Discussion: Data Mining Time Limit: 20 minutes ..

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HOMEWORK CRM and the Marketing Mix Now is a good time to assign Application Exercise 9 from the end-of-chapter materials as homework This assignment is designed to get students thinking about how to use the different elements of the marketing mix to create an ongoing relationship with customers.

At-Home Completion Time: 30 minutes

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Learning Objective 2: Explain the purpose of a marketing plan and identify its main components.

The marketing plan—a detailed strategy for focusing marketing efforts on customers’ needs and wants. Therefore, marketing strategy begins when a company identifies a customer need and develops a product to meet it. Starbucks’s revised strategy in our opening case, for example, recognizes consumers’ needs for more affordable coffee products in a down-turned economy.

Every well founded plan should begin with objectives or goals setting the stage for everything that follows. Marketing objectives, the goals the marketing plan intends to accomplish, are the foundation that guides all of the detailed activities in the plan.

A. Marketing Strategy: Planning the Marketing Mix A company’s marketing managers are responsible for planning and implementing all the activities that result in the transfer of goods or services to its customers. These activities culminate in the marketing plan—a detailed strategy for focusing marketing efforts on consumer needs and wants. The marketing mix consists of the “Four Ps” of marketing: product, pricing, place, and promotion.

1. Product. The product is a good, service, or idea designed to fill a consumer need.

Meeting consumer needs often requires that marketers change existing products. a. Product Differentiation. Product differentiation is the creation of a feature or image that makes a product differ enough from existing products to attract consumers.

2. Pricing. Pricing must be set to support a variety of costs, yet prices cannot be so high that consumers turn to competing products.

3. Place (Distribution). Distribution activities are concerned with getting the product from the producer to the consumer.

4. Promotion. Promotion refers to techniques of communicating information about products. Promotion includes a combination of personal selling and/or nonpersonal selling, including advertising, sales promotion, and public relations.

5. Blending it all Together: Integrated marketing strategy ensures that the Four Ps blend together so that they are compatible with one another and with the company’s nonmarketing activities as well.

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Learning Objective 3: Explain market segmentation and how it is used in target marketing.

Target Marketing and Market Segmentation Target markets are groups of people with similar wants and needs who can be expected to show interest in the same products. Market segmentation divides a market into categories of consumer types, based on geographic, demographic, and psychographic variables.

A. Identifying Market Segments Members of a market segment must share common traits that will affect their purchasing decisions.

B. Geographic Segments Consumers in certain geographic regions exhibit characteristics and buying patterns that are typical of those regions. Geographic variables are the geographical units, from countries to neighborhoods that may be considered in a segmentation strategy.

C. Demographic Segments Demographic variables describe populations, including such traits as age, income, gender, ethnic background, marital status, race, religion, and social class.

D. Geo-demographic variables Geo-demographic segmentation is a combination strategy. Geo-demographic variables are a combination of geographic and demographic traits and is becoming the most common segmentation tool.

E. Psychographic Segments Psychographic variables include life styles, opinions, interests, and attitudes.

F. Behavioral Segmentation Behavioral segmentation uses behavioral variables to market items, including such areas as heavy users.

KEY TEACHING TIP The consumer buying process consists of a series of steps taken by consumers when making purchases: (a) Problem/Need Recognition, (b) Information Seeking, (c) Evaluation of Alternatives, (d) Purchase Decision, and (e) Postpurchase Evaluation.

QUICK QUESTIONS • • •

What demographic variables would affect your purchase of a cell phone?

How can psychographic variables—unlike geographic and demographic variables—be changed by marketing efforts?

What factors might consumers consider when evaluating alternatives in the consumer buying process?

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HOMEWORK Target Marketing and Market Segmentation Now is a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment is designed to get students thinking about secondary data sources and how to apply it to target marketing and the basis upon which target markets are segmented.

At-Home Completion Time: 45 minutes

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Learning Objective 4: Discuss the purpose of marketing research, and compare the four marketing research methods.

Marketing research Marketing research, the study of what customers need and want and how best to meet those needs and wants, is a powerful tool for gaining decision-making information.

A. The Research Process Market research can occur at almost any point in a product’s life cycle. Typically, however, it’s used in developing new or altered products.

1. Study the current situation. What is the need and what is being done to meet it?

2. Select a research method. In choosing from a wide range of methods, marketers must consider the effectiveness and costs of different options.

3. Collect data. We distinguish here two types of research data. Secondary data are already available from previous research. When secondary sources are unavailable or inadequate, researchers must obtain primary data, new data from newly performed research.

4. Analyze the data. Data are of no use until organized into information.

5. Prepare a report. This report should sum up the study’s methodology and findings. It should also identify solutions and, where appropriate, make recommendations on a course of action.

B. Research Methods The success of a research study often depends on the method a research team uses. There are four basic methods of market research.

1. Observation. Observation involves watching and recording consumer behavior.

2. Surveys . One way to get useful information is by taking surveys, a method of collecting data in which the researcher interacts with people to gather facts, attitudes, or opinions, either by mailing out or e-mailing questionnaires, by telephone calls, or by conducting face-to-face interviews.

3. Focus Group. In a focus group, participants are gathered in one place, presented with an issue, and asked to discuss it.

4. Experimentation. Experimentation compares the responses of the same or similar people under different circumstances.

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Learning Objective 5: Describe the consumer buying process and the key factors that influence that process.

Understanding Consumer Behavior Consumer behavior is the study of the decision process by which people buy and consume products.

A. Influences on Consumer Behavior Influences on consumer behavior can include psychological, personal, social, and/or cultural elements. When consumers exhibit brand loyalty, they regularly purchase products because they are satisfied with the products’ performance or benefits.

B. The Consumer Buying Process Various models have been constructed to help marketers understand how consumers come to purchase products; marketers eventually use this information to develop marketing plans.

The consumer buying process includes five steps: 1. Problem/Need Recognition. The consumer recognizes a problem or a need.

2. Information Seeking. Consumers seek information from personal sources, marketing sources, public sources, and experience.

3. Evaluation of Alternatives. Consumers compare products before deciding which one(s) meet their needs.

4. Purchase Decision. Ultimately, consumers make purchase decisions. Rational motives involve the logical evaluation of product attributes, such as cost, quality, and usefulness.

Emotional motives involve nonobjective factors and include sociability, imitation of others, and aesthetics.

5. Postpurchase Evaluation. Only satisfied customers will likely make repeat purchases.

QUICK QUESTIONS •

What are some examples of psychological influences and personal influences on consumers? What about social influences and cultural influences?

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What is the difference between rational motives and emotional motives when consumers make a purchase decision? Are emotional motives related to psychographics?

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Learning Objective 6:

Discuss the four categories of organizational markets, and the characteristics of Business-to-Business (B2B) buying behavior.

Organizational markets and buying behaviors are quite different from consumer markets and consumer behaviors.

A. Business Marketing Organizational markets fall into three categories: industrial, reseller, and government/ institutional markets.

1. Services Market. The services companies market encompasses the many firms that provide services to the purchasing public 2. Industrial Market. The industrial market includes businesses that buy goods that are either converted into other products or goods that are used up during production.

3. Reseller Market. The reseller market consists of marketing intermediaries, such as wholesalers and retailers that buy products and resell them.

3. Government and Institutional Market. In addition to federal and state governments, the institutional market consists of nongovernment organizations, such as hospitals, churches, and museums, that also use supplies and equipment as well as legal, accounting, and transportation services.

B. B2B Buying Behavior Organizational buying behavior bears little resemblance to consumer buying practices.

Demand for industrial products is stimulated by differences in buyers and buyer-seller relationships.

1. Differences in Buyers. Industrial buyers are trained, professional, specialized, and expert.

2. Differences in the Buyer-Seller Relationship. Industrial buying situations often involve frequent, enduring buyer-seller relationships.

C. Social Media and Marketing Social networking as used by marketers today refers to communications that flow among people and organizations interacting through an online platform that facilitates building social relations among its users.

1. Viral Marketing and Social Networking. Viral marketing is a form marketing that relies on social networking and the Internet to spread information like a “virus” from person to person.

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2. Web-Driven Revenue with Social Networking. Although many major consumer companies have their own Facebook page, small businesses, too, use social media channels to increase revenues by networking with customers in target markets.

D. The International Marketing Mix Foreign consumers differ from domestic buyers in language, customs, business practices, and consumer behavior. Marketing products internationally means mounting a strategy to support global business operations.

1. International Products Some products can be marketed internationally without modifications, whereas other products need to be modified to fit the needs of a local market.

2. International Pricing Many factors that affect domestic pricing also affect international pricing; additional factors affecting global pricing are the costs of transportation and selling abroad.

3. International Distribution Distribution networks in other countries may be costly. Many domestic marketers hire foreign agents to assist with selling, advertising, and providing information about local markets.

4. International Promotion Many American promotional tactics do not succeed in other countries. Marketers must consider differences in language and culture when promoting products abroad.

KEY TEACHING TIP In the consumer market, buying and selling transactions are visible to the public. Equally important, though far less visible, are organizational (or commercial) markets.

QUICK QUESTIONS • • • • •

How are farmers and manufacturers, for example, included in the industrial market?

What are the roles of wholesalers and retailers in the reseller market?

How are consumer-seller relationships different from buyer-seller relationships?

Why is social media especially important to small businesses? Remind students that one consideration when determining the difference between domestic pricing and international pricing is the higher cost of transporting and selling products abroad.

Reinforce that marketers face an extreme advantage when distributing products abroad if they can deliver through already-established networks.

Use In-Class Activity 4: Small-Group Discussion: Never Give a German a Yellow Rose Time Limit: 30 minutes

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Learning Objective 8: Discuss the marketing mix as it applies to small business.

Small Business and the Marketing Mix Far more small businesses fail than succeed. The successful small businesses have learned skillful application of the marketing mix and careful consideration of each element in the marketing mix.

A. Small-Business Products Understanding the target market and the targeted group’s wants is critical.

B. Small-Business Pricing Profits are often determined by accurately assessing costs from the start. Haphazard pricing can sink a firm with a good product.

C. Small-Business Distribution The most critical aspect of distribution for small businesses is facility location.

D. Small-Business Promotion Understanding promotional costs, as well as benefits of chosen promotional tools, may be the most critical steps involved.

KEY TEACHING TIP Students need to understand that establishing the Marketing Mix is especially critical for Small Businesses.

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IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker Assessing the Marketing Environment Activity Overview: This activity asks students to consider various elements from the marketing environment that affect specific industries.

Time Limit: 30 minutes What to Do: 1. Divide the class into five-member groups and assign an industry to each group. For example, you may use the automotive industry, fast-food industry, apparel industry, airline industry, and the banking industry. (5 minutes) 2. Ask each group to discuss how variables from each of the five environments highlighted in the textbook—the political-legal, sociocultural, technological, economic, and competitive environments—affect their assigned industry. (10 minutes) 3. Reassemble the class and discuss each group’s input. (15 minutes) Don’t Forget: With groups of five students, you can assign each student to analyze one of the environments.

After this activity is completed, you can ask students to further research their assigned industry to find additional environmental variables that are currently affecting it.

Wrap-Up: Review the five marketing environments presented in the textbook and some of the common variables that come from each. Remind students that, in many cases, the same variables from each respective environment affect a number of different industries.

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In-Class Activity 2: Small-Group Discussion Data Mining Activity Overview: This activity asks students to think about all the valuable information about themselves that they give to others.

Time Limit: 20 minutes What to Do: 1. Divide students into small groups and ask them to discuss and make a list of all the locations where they freely give valuable personal information. (10 minutes) 2. Reassemble the class and compile the groups’ lists. Are the lists similar? For what purposes is this information used by others? (10 minutes) Don’t Forget: You can also use this activity as an in-class debate with students considering the pros and cons of data mining.

Wrap-Up: Bring the activity to a close by briefly discussing the purpose of data mining and its advantages and disadvantages from a consumer’s perspective.

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In-Class Activity 3: Up for Debate Social Networking and Job Seeking Activity Overview: This activity asks students to debate the advantages of social networking to find job opportunities.

Time Limit: 30 minutes What to Do: 1. Divide the class into three-member groups and ask them to read the Entrepreneurship and New Ventures feature on page 291 of the textbook. (5 minutes) 1. Ask each group to discuss the following questions: (15 minutes) a. What are the advantages and disadvantages of using a social networking site like LinkedIn to find jobs? b. What would you say to a friend of suspect character who asked you to introduce him/her to one of your LinkedIn connections? Would you introduce him/her even if it might reflect badly on you or damage your own LinkedIn network?

3. Bring the class together and debate the groups’ answers. (10 minutes) Don’t Forget: To ask students how much time they spend on MySpace of Facebook each week. Do they regard these social networking sites as having any potential for finding jobs?

Wrap-Up: Bring the activity to a close by encouraging students to continually build up their network of contacts as they are a great source of information for potential job openings.

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In-Class Activity 4: Small-Group Discussion Never Give a German a Yellow Rose Activity Overview: This activity asks students to consider what a foreign visitor might notice about the American marketplace.

Time Limit: 30 minutes What to Do: 1. Divide students into small groups and ask them to assume that they will be receiving a foreign visitor. At this point, individual groups can select the home country of their visitor if it will help with the assignment.

2. Tell each group to assume that the visitor wants to know what he or she might be able to observe about the American marketplace. In general, the visitor is curious about the various elements of the marketing mix. For example, in considering products, you might mention product assortment and the use of brands; for promotion, you might mention the most popular media options used for specific products and what consumers are attracted to in an advertisement. Ask each group to come up with some suggestions. (15 minutes) 3. Regroup the class and have each group share some of their suggestions. (15 minutes) Don’t Forget: Parts of the marketing mix can often be quite similar from one culture to the next; however, elements of the marketing mix can also vary, depending on the product and the culture into which the product is being sold.

Wrap-Up: Close the activity with a short discussion of the elements of the marketing mix and how these elements can change from one culture to the next, depending on the product and the culture into which the product is being sold.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1. Five outside factors comprise a company’s external environment and influence its marketing programs: (1) the political and legal environment (2) the sociocultural environment (3) the technological environment (4) the economic environment and (5) the competitive environment. (Learning Objective 1 – AACSB – application of knowledge) 2. Answers will vary, but students should focus on the benefits versus costs, since a value package is a combination of all the product features and benefits—all bundled together—that are found to be attractive to the consumer. Benefits include not only the functions of the product, but also the emotional satisfaction but this has to be compared to the costs of the product. Students should recognize that “cost” isn’t just the out-of-pocket expenditure but includes the emotional cost and buyer’s time in making the purchase. A satisfied customer perceives the benefits derived from the purchase to be greater than its costs.

(Learning Objective 1 – AACSB – application of knowledge) 3. Market segmentation is a method of breaking consumers into mutually exclusive groups based on similar characteristics that are likely to affect consumption. By identifying and targeting segments that are most likely to purchase its products, an organization can tailor its marketing efforts in terms of product features and benefits, pricing, packaging, promotion, and distribution.

(Learning Objective 3 – AACSB – application of knowledge) 4. Both deal with the way people purchase and consume products. However, organizational buyers are professional, specialized, and expert, relying less on product image. Buyer-seller relationships tend to be longer lasting.

(Learning Objective 5 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 5. Answers will vary, but should include how students will tailor their marketing efforts in terms of product features and benefits, pricing, packaging, promotion, and distribution.

(Learning Objective 2 – AACSB – application of knowledge, reflective thinking) 6. Although answers will vary, using the five-step process, including: need recognition, search for information, evaluation of information, purchase decision, and post-purchase evaluation, students will explore how such a major and expensive decision of choosing a college occurs.

(Learning Objective 5 – AACSB – application of knowledge, reflective thinking) 7. Students should at the minimum cite the economic and socio-cultural differences and how those differences will impact everything from the product itself (the look of the hotel, customer service expectations, etc.) price, place (location based on customer needs and wants), and promotion. (Learning Objectiv 6 – AACSB – application of knowledge, reflective thinking)

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8. Students will select a wide variety of goods and services so the marketing campaign kits will vary. However, the kits should contain information on why the product is “fashionable” and its value proposition so that the buzz can begin.

(Learning Objective 6 – AACSB – application of knowledge, reflective thinking)

APPLICATION EXERCISES 9. The students should focus on meeting customer’s needs and wants and ensuring the product meets customer’s expectations to create an ongoing relationship. The product and pricing strategies should reinforce the customer’s perceptions. The place and promotion strategies should reinforce the product and customer connection.

(Learning Objective 1 – AACSB – application of knowledge, reflective thinking) 10. Answers will vary, but students should focus on data mining to build stronger enterpriseclient relationships. If a company has a clearer picture of a consumer’s preferences they can better tailor the product itself, its price, promotion, and distribution to fit the customer’s needs and preferences.

(Learning Objective 1, 4 – AACSB – application of knowledge, reflective thinking) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE ASSIGNMENT 11-12-15 (Learning objectives 2, 3, 4, 5 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) This assignment gives students an opportunity to design a complete marketing plan for their business. They should use the framework referenced in “Developing the Marketing Plan” and formulate an appropriate marketing strategy focused on the needs and wants of potential customers.

BUILDING YOUR BUSINESS SKILLS: DEALING WITH VARIABLES 11-16 -24 (Learning objectives 2 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) 21. Answers will vary, but students should include specific information for each of the market segmentation factors.

22. Answers will vary. Students may identify low competition and seasonality for heating and air conditioning use as being important factors. For example, mild year-round temperatures place less emphasis on the need for either heating or air conditioning.

23. Answers will vary, though demographic and psychographic variables have little influence on the need for heating and air conditioning in climates with extreme weather conditions.

24. These ads are likely targeted to middle- to higher-income owners of older homes who need to replace heating or air conditioning systems or are willing to pay for upgraded equipment for greater comfort. They may also target affluent buyers who are building a home.

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EXERCISING YOUR ETHICS: WEIGHING THE ODDS (Learning objectives 2 - AACSB analytical and reflective thinking, ethical understanding and reasoning) 25. The key ethical issues are integrity, product safety, and communication. The company has invested enormous effort in information collecting and evaluating the safety and effectiveness of the product.

26. Since there is a possibility that the product is harmful to some potential users and there could be liability issues if consumers are injured, the two managers are obligated to share the new data with company executives.

27. Answers will vary but most students will probably recommend postponement of the launch.

Students will want to consider the negative impact and again the legal liability if further studies are not conducted on this product.

TEAM EXERCISE: HOME AWAY FROM HOME 11- 28 – 32 (AACSB –Interpersonal relations and teamwork, reflective thinking) The students’ responses to the Action Steps may vary dramatically due to the different perspectives. Students should be encouraged to explore all the issues including: the target market (students and their parents), the environmental factors, political-legal, economic, competitive, etc. Students should also review the consumer buying behavior model and the market segmentation variables that will impact the purchase. Finally, the students should create a marketing mix plan based on their target market.

CASES: STARBUCKS BREWS A NEW MARKETING MIX- 33– 37 (Learning objectives 1, 2, 3, 4 - AACSB analytical and reflective thinking, application of knowledge) 33. Economic and competitive forces resulting from the recession have resulted in the realignment of the Starbuck’s marketing strategy.

34. The changes in the marketing strategy have impacted all aspects of the marketing mix including: the products offered, the price, promotion, and distribution.

35. The new strategy has helped Starbucks create a better customer relationship program and helped Starbucks focus more on its core business which should lead to continue success. At the time there was a concern that there would be a backlash from current customers that would lead to failure of this new strategy.

36. The new strategy has continued to help Starbucks boost sales and the costs are the reduced revenue from the new promotions.

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37. The Starbucks marketing strategy does impact its established luxury products because it permits Starbucks to continue positioning itself as the “home of affordable luxury” and serve a variety of demographics.

WHERE HAS ALL THE MIDDLE GONE? (Learning objectives 1, 2, 3, 4 - AACSB analytical and reflective thinking, application of knowledge) 38. P & G’s new marketing strategy is to reposition its products and target new market segments including the lower income and wealthier customers.

39. Most students will cite the economic, competitive environment, and the socio-cultural forces as having the main impact on P & G’s new strategic plan.

40. Most students will probably conclude that face-to-face interviews would be most effective because it might be difficult to contact low-end customers and they want to gain the trust of the potential customers to gather in-depth info.

41. P & G is using demographic, psychographic, and behavioral variable to determine its target market and better meet the customers’ needs and wants.

42. Most students will state that all of the components of the marketing mix: product, price, place, and promotion have been effected by the changes in the customer base for P & G.

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Chapter 12: Developing and Pricing Products Chapter Overview By now, students have grasped that the marketing mix—or the Four Ps—is built around the characteristics and needs of the target market. This chapter brings the Four Ps another step forward by discussing product and pricing.

As the chapter unfolds, many variables surrounding both the consumer and organizational markets are discussed, as well as a focus on distinguishing features between products and services and the importance of branding and packaging.

Specifically, the chapter identifies the various pricing objectives that govern pricing decisions and the price-setting tools used in making these decisions. It discusses pricing strategies and identifies the pricing tactics that can be used for setting prices.

Learning Objectives 1. Explain the definition of a product as a value package and classify goods and services.

2. Describe the new product development process.

3. Describe the stages of the product life cycle (PLC) and methods for extending a product’s life.

4. Identify the various pricing objectives that govern pricing decisions, and describe the price-setting tools used in making these decisions.

5. Discuss pricing strategies that can be used for different competitive situations and identify the pricing tactics that can be used for setting prices.

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LIST OF IN-CLASS ACTIVITIES: AUTHOR’S CHOICE Activity 1. Ice-Breaker: Why Do They Charge More?

2. Up for Debate: Getting a Stimulus Boost with Pricing and Promotion

Description Students consider pricing strategies behind some well-known competing brands.

Students are divided into teams to discuss the pros and cons of relying on distributors to help push products through distribution channels.

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Time Limit 30 min.

30 min.

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CHAPTER OUTLINE

Learning Objective 1: Explain the definition of a product as a value package and classify goods and services.

What Is a Product?

In order to develop the marketing mix and plan their strategies effectively, marketers must consider what consumers buy when they purchase products; marketers must begin by understanding product features and benefits.

A. The Value Package Product features are the tangible and intangible qualities that are built into products; product benefits include what products can do emotionally or physically for consumers. Today’s consumer regards a product as a bundle of attributes—benefits and features—that, taken together, marketers call the value package.

B. Classifying Goods and Services Goods and services may be classified according to their prospective buyers; buyers may be classified as buyers of consumer products or buyers of industrial products.

1. Classifying Consumer Products. Convenience goods (such as milk and newspapers) and convenience services are consumed rapidly and regularly. They are inexpensive and are purchased often and with little output of time and effort. Shopping goods and shopping services are more expensive and are purchased less often than convenience products. Consumers often compare brands, sometimes in different stores. They may also evaluate alternatives in terms of style, performance, color, price, and other criteria.

Specialty goods and specialty services are extremely important and expensive purchases. Consumers usually decide on precisely what they want and will accept no substitutes. They often go from store to store, sometimes spending a great deal of money and time to get a specific product.

2. Classifying Organizational Products. Expense items are goods and services consumed within one year by other suppliers of services or producers of goods. Capital items are permanent, long-lasting goods and services that have expected lives of more than one year.

C. The Product Mix The product mix is the total assortment of all goods and/or services that a marketer makes available for sale.

1. Product Lines. A group of products that are closely related because they function in a similar manner (flavored coffees) or are sold to the same customer group (stop-in coffee drinkers) who will use them in similar ways is a product line.

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KEY TEACHING TIPS •

Remind students that a value package is a combination of all the product features and benefits—all bundled together—that are found to be attractive to the consumer.

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Make sure students understand the distinction between a product mix (the total assortment of all goods and services available from a marketer) and a product line (a group of products that function in a similar manner or are sold to the same customer group who will use them in similar ways).

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Learning Objective 2: Describe the new product development process.

Developing New Products To expand or diversify to survive, marketers must develop and successfully introduce streams of new products. Competition and shifting consumer preferences cause marketers to continually monitor and frequently change their offerings.

A. The New-Product Development Process Product development is a long, complex process. New products usually involve carefully planned and sometimes risky commitments of time and resources.

B. Product Mortality Rates. Estimates indicate that it takes 50 new product ideas to generate one product that reaches that marketplace; only a few of the survivors become successful.

Speed to Market. The quicker a product enters the marketplace, the more likely it is to survive. Introducing new products ahead of competitors allows companies to become market leaders.

C. The Seven-Step Development Process To increase their chances of developing a successful new product, many firms adopt some version of a seven-step process for developing physical goods.

1. Product ideas. Product development begins with a search for ideas for new products.

Ideas typically come from consumers, the sales force, R&D departments, suppliers, or engineering personnel.

2. Screening. This stage is designed to eliminate ideas that do not mesh with the firm’s abilities or objectives.

3. Concept testing. Once ideas have been screened, companies use market research to get consumers’ input about benefits and prices.

4. Business analysis. After gathering consumer opinions, marketers compare production costs and benefits to see whether the product meets minimum profitability goals.

5. Prototype development. Once the firm has determined the potential profitability of a product, engineering, R&D, or design groups produce a prototype.

6. Product testing and test marketing. Applying lessons from the prototype, the company goes into limited production.

7. Commercialization. If test marketing proves positive, the company begins full-scale production and marketing.

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D. Variations in the Process for Services The development of services involves many of the same stages. Basically, steps 2, 3, 4, 6, and 7 are the same. There are, however, important differences in steps 1 and 5: Service ideas. The search for service ideas includes defining the service value package, identifying the tangible and intangible features that characterize the service, and stating service specifications. Service process design. Instead of prototype development, services require a three-part service process design.

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Learning Objective 3: Describe the stages of the product life cycle (PLC) and methods for extending a product’s life.

A. The Product Life Cycle Every product passes through a series of stages during its limited profit-producing life.

1. Stages in the Product Life Cycle. The product life cycle is a natural process in which products are born, grow, mature, decline, and die. The stages include: introduction, which begins when the product enters the marketplace; growth, when sales and profits climb; maturity, when sales growth begins to slow; and decline, when sales and profits continue to fall.

B. Extending Product Life: An Alternative to New Products 1. Product Extension. In product extension, an existing product is marketed globally instead of just domestically.

2. Product Adaptation. With product adaptation, the product is modified for greater appeal in different countries.

3. Reintroduction. Reintroduction means reviving, for new markets, products that are becoming obsolete in older ones.

C. Identifying Products Branding and packaging are two tools that allow consumers to identify products in the marketplace.

1. Branding Products Brand names are symbols for characterizing products and distinguishing them from one another; branding is the process of using symbols to communicate the features and qualities of products. Brand awareness is the brand name that first comes to your mind when you consider a particular product category. a. Gaining Brand Awareness i. Product Placements. A product placement is a promotional tactic for brand exposure in which characters in television, film, music, magazines, or video games use a real product that is visible to viewers.

2. Types of Brand Names a. National Brands. These are brand-name products produced by, widely distributed by, and carrying the name of a manufacturer. b. Licensed Brands. These are brand-name products that carry the name of an organization or individual.

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c.

Private Brands. These are brand-name products that a wholesaler or retailer has commissioned from a manufacturer.

D. Packaging Products A product’s package serves several purposes; the packaging can serve as an in-store advertisement, a display for the brand name, an identifier of product features and benefits, and can reduce the risk of damage and increase the difficulty of stealing.

KEY TEACHING TIPS • • • •

Stress that high mortality rates indicate that out of many new ideas, only a few products reach the market.

Reinforce that the product life cycle is a series of stages through which a product passes during its commercial life; the duration of a product’s life cycle varies.

Remind students that both product placements and viral marketing help marketers gain brand awareness.

Make sure students understand that branding is the process of using symbols to communicate the qualities of a particular product made by a particular producer.

QUICK QUESTIONS • • • • • •

Can you think of any recent examples of a product that benefited from its speed to market?

What happens in the decline stage of the product life cycle?

How does successful branding lead to brand awareness?

Why is viral marketing sometimes more successful than traditional media options?

What is the difference between national, licensed, and private brands?

What are some purposes of packaging?

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Learning Objective 4: Identify the various pricing objectives that govern pricing decisions, and describe the pricesetting tools used in making these decisions.

Determining Prices In pricing, managers decide what the company will get in exchange for its products.

A. Pricing to Meet Business Objectives Pricing objectives are the goals that sellers hope to achieve in pricing products for sale.

Marketers’ pricing strategies are influenced by a variety of factors. Some companies are profit-maximizing pricing objectives, while others have market-share pricing objectives. The seller’s pricing decision is critical for determining the firm’s revenue, which is the selling price times the number of units sold.

REVENUE = SELLING PRICE X UNITS (QUANTITY) SOLD 1. Profit-Maximizing Objectives. Some companies set prices to maximize profits and, therefore, have profit-maximizing pricing objectives. Marketers attempt to set prices to sell the number of units that will generate the highest possible profits.

2. Market Share Objectives. Some firms want to dominate the market or secure high market share and, therefore, have market share pricing objectives. Market share is determined by estimating the total percent of the market that the marketer is currently supplying; a business may be willing to accept minimal profits or even losses to establish market share.

B. Price-Setting Tools Marketers must estimate the potential impact before deciding on final prices. Tools used for this purpose are cost-oriented pricing and breakeven analysis.

1. Cost-Oriented Pricing. Cost-oriented pricing considers the need to cover production costs and the cost of the merchandise. Markup is the amount added to an item’s total cost to earn a profit; markup is usually stated as a percentage of the product’s selling price. Using cost-oriented pricing, a firm will cover variable costs—costs, such as materials bought to make the product, that change with the number of units of a product produced and sold. It will also make some money to pay fixed costs—costs, such as annual rent, that must be paid regardless of the number of units produced and sold.

2. Breakeven Analysis: Cost-Volume-Profit Relationships. Breakeven analysis assesses costs versus revenues for various sales volumes. It shows, at any particular selling price, the financial result—the amount of loss or profit—for each possible volume of sales. The breakeven point is how many of a product must be sold so that total revenues exactly cover both fixed and variable costs.

Breakeven Point =

Total Fixed Cost Price – Variable Cost

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KEY TEACHING TIPS •

Reinforce that pricing enables managers to decide what the firm will get in exchange for its products; pricing objectives are the goals they hope to achieve in pricing products.

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Make sure students understand that cost-oriented pricing considers profit and a firm’s need to cover production costs and the costs of the merchandise.

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Breakeven analysis can be a tough concept for students so you may want to reinforce the concept and the formula: Breakeven Point (in units) = Total Fixed Cost/Price – Variable Cost.

QUICK QUESTION How do marketers achieve profit-maximizing objectives and market-share objectives?

Use In-Class Activity 1: Ice-Breaker: Why Do They Charge More?

Time Limit: 30 minutes

HOMEWORK Pricing Now might be a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment encourages students to consider the pricing objectives behind familiar products.

At-Home Completion Time: 30 minutes

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Learning Objective 5: Discuss pricing strategies that can be used for different competitive situations and identify the pricing tactics that can be used for setting prices.

Pricing Strategies and Tactics Pricing strategies are planned activities that affect the marketing mix. Pricing tactics are ways that managers implement a firm’s pricing strategies.

A. Pricing Strategies 1. Pricing Existing Products. A firm can price existing products above, below, or at or near market price. Marketers that price products above market rely on the assumption that higher prices are accompanied by higher quality. Pricing below the market can succeed if the firm can offer a product of acceptable quality.

2. Pricing New Products. If a marketer can differentiate a product from all others, the marketers may implement price skimming, in which price is initially set high to earn large profits. Such a strategy will attract competitors to enter the marketplace with lower prices. With penetration pricing, price is initially set low to create consumer interest and to stimulate trial purchases. Profit is low; therefore, the marketer relies on raising prices as consumer acceptance grows.

3. Fixed versus Dynamic Pricing for Online-Business. Dynamic pricing works because information flow on the Web notifies buyers of changes in product availability. Examples of dynamic pricing include eBay’s traditional auction bidding while eBay’s Buy It Now is an example of fixed pricing.

B. Pricing Tactics Price lining involves offering all items in certain categories at a limited number of prices. A store predetermines three or four price points at which a particular product will be sold. Price lining involves setting each price level with a specific type of customer in mind and then packaging and promoting products accordingly. Psychological pricing takes advantage of the fact that customers are not completely rational when making buying decisions. One type of psychological pricing, odd-even pricing, is based on the theory that customers prefer prices that are not stated in even dollar amounts. Discounts are price reductions designed to stimulate sales.

KEY TEACHING TIPS •

Students often confuse these terms: With price skimming, price is initially set high to cover costs and generate a profit; with penetration pricing, price is initially set low to establish a new product in the market.

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Reinforce that price lining offers all items in certain categories at a limited number of prices at price points, whereas odd-even pricing is based on the theory that customers prefer prices that are not stated in even dollar amounts, such as $.99 and $1.99.

QUICK QUESTIONS •

How has dynamic pricing benefited Web users over traditional fixed pricing strategies?

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When might sellers resort to using discounts?

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IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker Why Do They Charge More?

Activity Overview: This activity asks students to consider pricing strategies behind some well-known competing products.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask each group to come up with four sets of competing products or services; in most cases, students will select products that are similar, but carry a different brand name, such as Blue Bonnet Margarine versus Prairie Farms Margarine. (10 minutes) 2. Ask students to discuss the “average” price of each product and be able to explain the reasoning for one brand’s price being higher than the competing brand. (10 minutes) 3. Reassemble the class as a whole and ask for each group’s input. (10 minutes) Don’t Forget: Students will come up with a variety of reasons for differing products’ prices. Some will be more difficult to explain than others. For example, almost everyone knows that a one-night stay at the Holiday Inn Express is less costly than a stay at the Ritz-Carlton because the Ritz-Carlton offers more amenities. Price differences between Del Monte spinach and Jolly Green Giant spinach might be more difficult to explain.

Wrap-Up: Bring the activity to a close by reminding students of the role pricing plays in the marketing mix and the common types of pricing strategies and tactics seen in the marketplace.

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In-Class Activity 2: Up for Debate Getting a Stimulus Boost with Pricing and Promotion Activity Overview: This activity asks students to how firms are changing their distribution messages during economic downtimes.

Time Limit: 30 minutes What to Do: 1. Ask students to read the Managing in Turbulent Times feature of the textbook, making a list of as many pros and cons of relying on a distributor as possible. (10 minutes) 2. Divide the class into small groups to discuss their pros and cons of price discounts, free shipping, and integrated promotion and distribution. Do the pros outweigh the cons? (10 minutes) 3. Reassemble the class to debate the pros and cons as a group. Do the pros outweigh the cons?

(10 minutes) Don’t Forget: Retailers are constantly looking for ways to get an edge in the market place. Remind students that retailers will use all of the 4 Ps (price, promotion, product, and place) to add value and try to get an edge in competitive markets.

Wrap-Up: Ask students to clip advertisement from newspaper or magazine, or print online advertisements that show how retailers are seeking to use pricing and promotion to boost demand. Get the students to bring them to the next class and vote on the one that is most innovative.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1. Breakeven analysis and cost-oriented pricing are usually used together to measure the potential impact on pricing objectives and cost prior to deciding on final prices. Both of these tools allow managers to identify prices that enable companies to reach their objectives.

(Learning Objective 4– AACSB – application of knowledge) 2. Price skimming allows marketers to recoup development costs and/or earn high profits early because the price is set high in the beginning. This strategy may be especially effective for products with few substitutes or competitors. Penetration pricing is an attempt to create awareness and stimulate trial purchases by setting prices low. Once consumer loyalty is built, marketers may be able to raise prices without losing customers.

(Learning Objective 5– AACSB – application of knowledge) 3. The various classifications of consumer and industrial products include: • Consumer products • Convenience goods and services—candy, ATM services • Shopping goods and services—clothing, car repair • Specialty goods and services—houses, interior design, industrial products • Expense items—inventory, repair bills • Capital items—computer servers, long-term maintenance contracts (Learning Objective 1 – AACSB – application of knowledge) 4. Answers will vary, but students should focus on the benefits versus costs, since a value package is a combination of all the product features and benefits—all bundled together—that are found to be attractive to the consumer. Benefits include not only the functions of the product, but also the emotional satisfaction but this has to be compared to the costs of the product. Students should recognize that “cost” isn’t just the out-of-pocket expenditure but includes the emotional cost and buyer’s time in making the purchase. A satisfied customer perceives the benefits derived from the purchase to be greater than its costs.

(Learning Objective 1 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 5. 1. Introduction Stage, Prices are high, there are few models, little competition, sales and profits are at their lowest, and companies focus on consumer awareness. 2. Growth Stage, prices drop, competition, sales and profit increase. 3. Maturity Stage is typically the longest stage with sales and profits peaking then declining, increased competition leads to lower prices and increased promotional expenses. 4. The final stage is the Decline Stage. Profits, sales, completion, and promotion decline. Eventually, the product dies.

(Learning Objective 3 – AACSB – application of knowledge, reflective thinking)

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6. A narrow product mix permits a company to focus its efforts on a core product and one or two target markets. A wide product mix gives a company more flexibility if one product does not do as well. Additionally, they can appeal to a multiple target markets.

(Learning Objective 2 – AACSB – application of knowledge, reflective thinking) 7. Breakeven units = Fixed costs/(selling price – variable costs) Breakeven units =$600,000/($6 – $3) = 200,000 books Learning Objective 4 – AACSB – application of knowledge, reflective thinking) 8.

Price skimming is entering the market at a high price and gradually lowering it. This approach works well for durable products that will be purchased infrequently. A penetration approach is entering the market a low price and gradually increasing it. This approach works well for consumables since customers will be purchasing the product frequently.

(Learning Objective 5 – AACSB – application of knowledge, reflective thinking)

APPLICATION EXERCISES 9. Students answers will vary but many will pick popular brands and describe the features in terms of price, comfort, gas mileage, service, reputation, etc.

(Learning Objective 1 – AACSB – application of knowledge, reflective thinking) 10. Answers will vary, but may include profit-maximizing (a great deal of competitive information, including number of competitors, competitive prices, and so on) and market share (breakeven point).

(Learning Objective 2 – AACSB – application of knowledge, reflective thinking) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE ASSIGNMENT 12 - 11 – 15 (Learning objectives 2, 4, 5 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Depending on the type of business venture, teams’ product mix and pricing strategies will vary widely. Teams should be able to justify that their strategies are consistent with the needs and wants of the target market.

BUILDING YOUR BUSINESS SKILLS: THE GREAT OUTDOORS (Learning objectives 1, 4 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) 16. Answers will vary but most teams will recognize that camping for most consumers is no longer a necessary but a leisure option for individuals with disposable income. Additionally, many of today’s campers want “frills” and the ability to extend the conveniences of their homes to the “great outdoors”.

17. Again, answers will vary with many groups focusing on ease of use, durability, “frills”, and convenience.

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18. Given the long lasting durability of the products and the target market, a prestige pricing strategy should work well.

19. A skimming pricing strategy would be more appropriate for their new products.

EXERCISING YOUR ETHICS: DRIVING A LEGITIMATE BARGAIN (Learning objective 1 - AACSB – Ethical understanding and reasoning, reflective thinking) 20. The key ethical issues are integrity and communication. Matt has invested enormous effort in information collecting and evaluating alternatives, expecting that once he had made the purchase decision, the dealer would come through on its end of the bargain. One possibility is that the sales representative and the sales manager simply had not communicated, but this becomes an ethical issue when the sales representative has the responsibility to establish contracts without the authority to deliver results.

21. Since the contract has been signed, the minimal obligation of the car company is to offer the 2015 model at the 2014 price.

22. Answers will vary. Students will want to consider the negative impact on the local marketplace if the customer leaves completely dissatisfied. Especially, with social media, this situation could go viral.

TEAM EXERCISE: (Learning objectives 4 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) After completing the Action Steps, students will better understand the impact of pricing strategies, what pricing strategies are available to marketers, and the objectives companies try to achieve through pricing.

Answers to 26: Formula = TFC/vc-price.

1300/15 – 5 = BE @ $15 = 1300 units/month 1300/20 – 5 = BE @ $20 = 867 units/month 1300/25- 20 = BE @$25 = 650 units/month 1300/30-25 = BE @$30 = 520 units/month

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CASES: iTUNES IS IT (Learning objectives 4, 5 - AACSB analytical and reflective thinking, application of knowledge) 28. The overhead for a brick-and-mortar retail music store will be higher. They have to pay rent, utilities, maintain more staff and thus have possibly higher payroll cost, maintain more inventory, etc. than an online business. The higher cost impacts their pricing and “bottom” line. The advantage to the customer of a brick-and-mortar retail music store is immediate gratification in the purchase but may come in the form of a higher price and less of an assortment of merchandise. With an online store there is a possibly lower price and wider selection of merchandise but depending on what is purchased, the delivery may be delayed.

29.The iTune target market includes tech savvy teens as well as Baby Boomers looking to replace dated products. The economic competitive, and technological changes could have a big impact on the pricing of iTune products.

30. Apple would possibly have to consider lowering its prices and or some form of “bundling” so customers would get better perceived value.

31. Apple might benefit by joint advertising and again a “bundling” of a music product with its digital-music-player products.

32. Answers will vary but many students will agree that the current strategy is working so there is no reason to change.

CHANGING PRICING TACTICS CAN COST A PRETTY PENNEY (Learning objectives 4 - AACSB analytical and reflective thinking, application of knowledge) 33. The CEO Ron Johnson, thought the loyal customers would appreciate the “truth in pricing” approach and the opportunity to buy the products at a discount from a “fake” price without special promotions and regardless of the day and time.

34. JC Penney target customers are more likely middle aged and older females motivated by the “thrill” of the “hunt”, the excitement of a sale where everyone is trying to purchase the same product at a discount. For the JC Penney customer, it is the whole shopping experience not just the purchased product. The Apple target customers are younger, “tech savvy”, less price sensitive, and more interested in the product they are purchasing rather than the shopping experience.

35. Companies have to consider the target market when creating a pricing strategy since each segment is going to respond differently in terms of price and perceived value.

36. The differences in the product offerings clearly impact the pricing strategies. Apple’ products are less “seasonal” and lend themselves to less of an urgency to sell. Apple’s pricing would be impacted more by competitors’ need products and introduction of their own

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new models. JC Penney products tend to be more fashion items that have to be sold in a relatively short season.

37. Many Apple products are sold online and in multiple electronic retailers, “Best Buy”, etc. with narrow product offerings that can be sold under a “consistent” three-tier pricing strategy. JC Penney’s is offering a wide product mix in a department store setting that does not tend to lend itself to a “one size” fits all approach to pricing.

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Chapter 13: Distributing and Promoting Products Chapter Overview By now, students have grasped that the marketing mix—or the Four Ps—is built around the characteristics and needs of the target market. This chapter brings the Four Ps another step forward by discussing pricing, distribution, and promotion.

Specifically, the chapter identifies the various pricing objectives that govern pricing decisions and the price-setting tools used in making these decisions. It discusses pricing strategies and identifies the pricing tactics that can be used for setting prices. It examines the meaning of distribution mix and identifies the different channels of distribution. Along the way, the chapter examines the role of wholesalers, different types of retailing, the role of e-intermediaries, and the major activities in the physical distribution process. Finally, the chapter looks at the objectives of promotion, the considerations in selecting a promotional mix, the tasks involved in personal selling, sales promotions, and publicity and public relations.

Learning Objectives 1. Explain the meaning of distribution mix and identify the different channels of distribution.

2. Describe the role of wholesalers and the functions performed by e-intermediaries.

3. Describe the different types of retailing and explain how online retailers add value for advertisers and consumers on the Internet.

4. Define physical distribution and describe the major activities in the physical distribution process.

5. Identify the objectives of promotion, the considerations in selecting a promotional mix, and discuss the various kinds of advertising promotions.

6. Outline the tasks involved in personal selling and describe the various types of sales promotions.

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LIST OF IN-CLASS ACTIVITIES: AUTHOR’S CHOICE Activity 1. Ice-Breaker: Why Do They Charge More?

2. Up for Debate: Getting a Stimulus Boost with Pricing and Promotion 3. Up for Debate: What’s the Best Way to Reach Them?

Description Students consider pricing strategies behind some well-known competing brands.

Students are divided into teams to discuss the pros and cons of relying on distributors to help push products through distribution channels.

Students discuss different ways that a product can be promoted to one specific target market.

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Time Limit 30 min.

30 min.

30 min.

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Learning Objective 1: Explain the meaning of distribution mix and identify the different channels of distribution.

The Distribution Mix The distribution mix is the combination of distribution channels that a firm selects to get a product to final consumers.

A. Intermediaries and Distribution Channels Intermediaries help to distribute a producer’s goods, either by moving them or by providing information that stimulates their movement from sellers to customers. Wholesalers are intermediaries who sell products to other businesses for resale to final consumers. Retailers sell products directly to consumers. The nature of the product and the target market greatly affect whether intermediaries are used.

1. Distribution of Goods and Services. A distribution channel is the path that a product follows from producer to final consumer. a. Channel 1: Direct Distribution. In a direct channel, the product travels from the producer to the consumer or to the industrial buyer, without intermediaries. b. Channel 2: Retail Distribution. In Channel 2, producers distribute consumer products through retailers. c. Channel 3: Wholesale Distribution. Wholesalers enter the distribution network primarily for the purpose of storage. d. Channel 4: Distribution by Agents or Brokers. Channel 4 uses sales agents or brokers who represent producers and sell to consumers, industrial users, or wholesalers. They receive commissions based on the prices of the goods they sell.

Sales agents generally deal in the related product lines of a few producers, and form long-term relationships to represent those producers and meet the needs of steady customers. Brokers match numerous sellers and buyers as needed, often without knowing in advance who they will be.

2. The Pros and Cons of Nondirect Distribution. Nondirect distribution becomes higher priced for end users because each distribution link charges a markup or commission.

However, intermediaries can save consumers time by reducing the number of contacts made, and save consumers money by providing speed of delivery, storability, and less cost by buying cheaply in bulk from manufacturers and then passing savings on to final consumers.

B. Distribution Strategies 1. Intensive Distribution. Intensive distribution means distributing through as many channels and channel members as possible (both wholesalers and retailers).

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2. Exclusive Distribution. With exclusive distribution, a manufacturer grants the exclusive right to distribute or sell a product to a limited number of wholesalers or retailers, usually in a given geographic area.

3. Selective Distribution. Using selective distribution, a producer selects only wholesalers and retailers that will give a product special attention in sales effort, display and promotion advantage, and so forth.

C. Channel Conflict and Channel Leadership 1. Channel Conflict. Channel conflict occurs when members of the channel disagree over roles or rewards.

2. Channel Leadership. Usually one channel member—the channel captain —can determine the roles and rewards of the others.

KEY TEACHING TIPS • •

The distribution channel strategy depends on the nature of the product and the target market.

Each of the intermediaries plays a very specific role in distributing the product.

QUICK QUESTIONS •

What are some activities involved between manufacturing and retail? How is value added in these activities? Remind students of the various benefits that intermediaries provide in the distribution process.

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No intermediaries are involved in a direct channel. What are some products that flow through Channel 2?

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Channel 3 emerged as a way of reducing the need for floor space among retailers. What products might pass through Channel 3?

HOMEWORK Now might be a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. This assignment encourages students to consider the supply chain and how being a member affects its marketing decisions.

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Learning Objective 2: Describe the role of wholesalers and the functions performed by e-intermediaries.

Wholesaling Wholesalers perform various functions, which may include storing, providing an assortment of products, and offering delivery, credit, and product information.

A. Merchant Wholesalers Most wholesalers are independent operations that sell various consumer or business goods produced by a variety of manufacturers. The largest group, merchant wholesalers, buys products from manufacturers and sells them to other businesses. They own the goods that they resell and usually provide storage and delivery.

Full-service merchant wholesalers (about 80 percent of all merchant wholesalers) provide value-adding services, including credit, marketing advice, and merchandising services.

Limited-function merchant wholesalers provide fewer services, sometimes merely storage.

Drop shippers don’t even carry inventory or handle products; they take orders from customers, negotiate with producers to supply goods, take title to them, and arrange for shipment.

B. Agents and Brokers Agents and brokers, including online e-agents, serve as independent sales representatives for many companies’ products. Unlike wholesalers, agents and brokers do not own their merchandise.

C. The Advent of the E-Intermediary E-intermediaries are Internet-based channel members who perform one or both of two functions: (1) collect information about sellers and present it to consumers; or (2) help deliver Internet products to buyers.

1. Syndicated Sellers. Syndicated selling occurs when one website offers another commission for referring customers.

2. Shopping Agents. Shopping agents (e-agents), gather, sort, and present accurate information to help Internet consumers compare Web sites, stores, prices, and product features. Many consumers use e-agents when purchasing airline tickets.

3. Business-to-Business Brokers. E-commerce intermediaries provide online value-adding services for business customers.

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Learning Objective 3: Describe the different types of retailing and explain how online retailers add value for advertisers and consumers on the Internet.

Retailing Varying greatly in size, retailers represent the end of the distribution channel, making the sale of goods or services to final consumers.

A. Types of Brick-and-Mortar Retail Outlets U.S. retail operations vary by type, size, pricing strategies, location, range of services, or range of product lines.

1. Product-Line Retailers. Retailers that feature broad product lines include department stores, which are arranged into specialized departments and handle a wide range of goods; supermarkets, which offer a wide selection at low prices; and, specialty stores, which are small stores that carry a line of related products.

2. Bargain Retailers. Bargain retailers carry wide ranges of products and come in many forms: discount houses, which feature a large number of items at low prices; catalog showrooms, which allow customers to view displays, place orders, and wait briefly while clerks retrieve orders from warehouses; factory outlets, which are manufacturer-owned stores that avoid wholesalers and retailers by selling merchandise directly from factory to consumer; wholesale clubs, which offer large discounts on a wide range of brand-name merchandise to customers who pay annual membership fees.

3. Convenience Stores. Convenience stores offer ease of purchase of a narrow assortment of products with higher prices.

B. Nonstore Retailing Some retailers sell some or all of their products without stores. Major types of nonstore selling include direct-response retailing, in which firms make contact with customers both to inform them about products and to receive sales orders. Mail order (or catalog marketing) is a popular form of direct-response retailing. Less popular in recent years is telemarketing—the use of the telephone to sell directly. In direct selling, companies sell door-to-door or through home-selling parties.

C. Online Retailing Over 85 percent of the world’s online population—over 1 billion customers— have made purchases on the Internet on such sites as eBay.com, iTunes and Amazon.com.

1. Electronic Catalogs. Electronic catalogs use the Internet to display products for both retail and business customers.

2. Electronic Storefronts and Cybermalls. Electronic storefronts allow consumers to collect information about products and buying opportunities, whereas cybermalls are collections of virtual storefronts representing diverse products.

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3. Interactive and Video Retailing. Interactive marketing allows both retail and B2B customers to interact with multimedia sites using voice, graphics, animation, film clips, and access to live human advice. Video marketing lets viewers shop at home from TV screens by phoning in or e-mailing orders.

KEY TEACHING TIPS • • • •

Students easily confuse the work of agents and brokers. Agents form long-term relationships to represent just a few producers, while brokers match numerous sellers and buyers.

Students often confuse the various types of bargain retailers. It may help to review the functions of each type: discount houses, catalog showrooms, factory outlets, and wholesale clubs.

Review the functions of nonstore retailing, including direct-response retailing, mail order, telemarketing, and direct selling.

Emphasize the variety of e-intermediaries and the impact on marketing.

QUICK QUESTIONS •

How do online retailers benefit from the use of syndicated sellers?

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How do online consumers benefit from shopping agents (e-agents)?

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How do online retailers and consumers benefit from electronic retailing?

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How can consumers benefit from interactive and video marketing?

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Learning Objective 4: Define physical distribution and describe the major activities in the physical distribution process.

Physical Distribution refers to the activities needed to move products efficiently from manufacturer to consumer. Two primary activities include warehousing and transportation.

A. Warehousing Operations Storing or warehousing, is a major part of distribution management. Private warehouses are owned by a single manufacturer, wholesaler, or retailer that needs storage space on a regular basis; public warehouses are independently owned and rent space to firms that need it.

B. Transportation Operations Factors involved in choosing a transportation method include the nature of the product, the distance it must travel, the speed with which it must be received, and the customers’ wants and needs.

Transportation Modes. The most common modes are trucks, railroads, planes, water carriers, and pipelines.

Trucks. The advantages of trucks include flexibility for any-distance distribution, fast service, and dependability.

Planes. Air is the fastest mode of transportation for physical goods. However, it is also the most expensive form of transportation.

High Speed Digital Transmission. Online transmission is a newer, faster, and the less expensive means of distribution than all other modes. It is restricted to products such as music, images, movies, and software.

Water Carriers. Water is the least expensive mode, but also the slowest.

Railroads. Railroads can economically transport high-volume, heavy, bulky items, such as cars, steel, and coal. However, their delivery routes are limited by fixed, immovable rail tracks.

Pipelines. Pipelines are slow and are used to transport liquids and gases. They are also inflexible, but for specialized products they provide economical and reliable delivery.

C. Distribution through Supply Chains as a Marketing Strategy Instead of just offering advantages in product features, quality, price, and promotion, many firms have turned to supply chains that depend on distribution as a cornerstone of business strategy.

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QUICK QUESTIONS •

How can intermediaries provide added value to customers?

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What is the difference between a private warehouse and a public warehouse?

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What are the advantages and disadvantages of relying on the following modes of transportation: trucks, planes, water carriers, railroads, and pipelines?

Use In-Class Activity 2: Up for Debate: Getting a Stimulus Boost with Pricing and Promotion Time Limit: 30 minutes

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Learning Objective 5: Identify the important objectives of promotion, the considerations in selecting a promotional mix, and discuss the various kinds of advertising promotions.

Promotion is any technique designed to sell a product; it is a message that a marketer sends to consumers about its product(s).

A. Promotional Objectives Marketers may use promotion to accomplish a number of tasks, such as communicating information, positioning products, adding value, or controlling sales volume. Positioning is the process of establishing an easily identifiable product image in the minds of consumers by fixing, adapting, and communicating the nature of the product itself.

B. Promotional Strategies 1. Pull Strategy. A pull strategy appeals directly to consumers who will demand the product from retailers.

2. Push Strategy. Using a push strategy, a firm markets its product to wholesalers and retailers who then persuade customers to buy it.

C. The Promotional Mix Marketers use four types of promotional tools: advertising, personal selling, sales promotions, and publicity and public relations. The best combination of these tools—the best promotional mix—depends on many factors. A marketer’s product, its target audience, and its budget are all important considerations in building the promotional mix.

Buyers must recognize the need to make a purchase prior to searching for product or service information. Buyers then compare competing products and services before purchasing one.

Buyers then evaluate the purchase. There are five stages to this process: 1. When buyers first recognize the need to make a purchase, marketers use advertising and publicity to make sure buyers are aware of their products.

2. As buyers search for information about available products, advertising and personal selling are important methods to educate consumers.

3. Personal selling can become vital as buyers compare competing products. Sales representatives can demonstrate product quality, features, and performance in comparison with competitors’ product.

4. When buyers are ready to purchase products, sales promotion can give consumers an incentive to buy. Personal selling can help by bringing products to convenient purchase locations.

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5. After making purchases, buyers evaluate products and make a note of their strengths and deficiencies. Advertising and personal selling can remind consumers that they made wise purchase choices.

D. Advertising Promotions Advertising is paid, nonpersonal communication used by an identified sponsor to inform an audience about a product.

1. Advertising Media. Advertising media are specific communication devices for carrying a seller’s message to potential customers; advertising media include newspapers, television, direct mail, radio, magazines, and outdoor advertising. The combination of media through which a company advertises is called its media mix. a. Television. Although TV is the most widely used and expensive medium, the brevity of TV ads makes it a poor medium for educating viewers. b. Direct Mail. Direct-mail advertisements allow a seller to select its audience and personalize its message. However, many people discard it as junk mail. c. Newspapers. Newspapers provide excellent local coverage. However, they are generally thrown out and don’t allow advertisers to target audiences well. d. Magazines. Magazines provide for a high level of market segmentation, allow attractive artwork, and have long lives. However, they must be submitted well in advance, and ads may not appear in the best spots. e. Radio. Radio ads are inexpensive and audiences are largely segmented. However, radio ads go by quickly and people tend to use the radio as background while doing other things. f. Internet. Although Internet advertising has great target marketing potential, consumers don’t want to wade through Web pages cluttered with distracting graphics and pop-ups. g. Outdoor. Outdoor advertising—billboards and so on—are inexpensive, face little competition for consumers’ attention, and provide high repeat exposure. However, they can present only limited information, and advertisers have little control over audiences. h. Other. A combination of other media, including catalogs, sidewalk handouts, skywriting, phone calls, and door-to-door communication, are also available.

2. Real-Time Ad Tracking. Advertisers always want better information about who looks at their ads and for how long. Accurate ad-watching behavior of shoppers in malls, theaters, and grocery stores is on the increase through the introduction of more advanced

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technology. Companies like Google have become experts at feeding back ad data to their advertisers.

KEY TEACHING TIPS •

Remind students of the elements of the promotional mix and reinforce that many factors determine how a marketer designs its promotional mix, with target audience being the most important.

•

Reinforce that promotion refers to techniques for communicating information about products; it is a part of the communication mix—the total message a company sends to consumers about its products.

•

Point out that when designing the promotional mix, marketers match the best promotional tools with where buyers currently are in the decision-making process.

QUICK QUESTIONS •

What elements make up the media mix?

•

What are some advantages and disadvantages of using newspapers, magazines, radio, Internet, and outdoor advertising?

Use In-Class Activity3: Up for Debate: What’s the Best Way to Reach Them?

Time Limit: 30 minutes HOMEWORK Advertising Media Now is a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. The assignment encourages students to think about the various media options used by marketers with well-known products by selecting a product and identifying as many media used in its promotion as they can.

At-Home Completion Time: 1 hour

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Learning Objective 6: Outline the tasks involved in personal selling and describe the various types of sales promotions.

Personal Selling In personal selling, a salesperson communicates one-to-one with potential customers to identify their needs and to line them up with the seller’s products. Personal selling requires a certain level of trust between buyer and seller, which must be established over time.

A. Personal Selling Situations Salespeople must consider the ways in which personal sales activities are affected by the differences between consumer and industrial products. Retail selling is selling a consumer product for the buyer’s personal or household use. Industrial selling is selling products to other businesses, either for the purpose of manufacturing or for resale.

B. Personal Selling Tasks In order processing, a salesperson receives an order and sees to its handling and delivery. Creative selling can help to persuade buyers when the benefits of a product are not entirely clear. A company may use missionary selling when its purpose is to promote itself and its products rather than simply to close a sale.

C. The Personal Selling Process Perhaps the most complex and challenging of these three sales tasks is creative selling.

The creative salesperson is responsible for starting and following through on most of the steps in the personal selling process: 1. Prospecting and qualifying. Prospecting is the process of identifying potential customers. In qualifying, prospects must be assessed to determine whether they have the authority to buy and the ability to pay.

2. Approaching. The approach refers to the first few minutes of a salesperson’s contact with a qualified prospect.

3. Presenting and demonstrating. Next, the salesperson makes a presentation, a full explanation of the product, its features, and its uses.

4. Handling objections. No matter what product is for sale, prospects will have some objections.

5. Closing. The most critical part of the selling process is the closing, in which the salesperson asks the prospect to buy the product.

6. Following up. Follow-up is a key activity, especially in relationship marketing.

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D. Sales Promotions Sales promotions are short-term promotional activities designed to stimulate consumer buying or cooperation from distributors, sales agents, or other members of the trade. Sales promotions are important because they increase the likelihood that buyers will try products.

The best known forms of sales promotion are coupons, premiums for free or reduce-priced items, point-of-sale (POS) displays, and trade shows.

E. Direct (or Interactive) Marketing Direct (or interactive) marketing is one-on-one nonpersonal selling that tries to get consumers to make purchases away from retail stores and, instead, to purchase from home, at work, or by using a mobile device while traveling.

F. Publicity and Public Relations Publicity is information about a company, a product, or an event transmitted by the general mass media to attract public attention. Public relations is company-influenced publicity that seeks to build good relations with the public and to deal with the effects of unfavorable events.

KEY TEACHING TIPS •

Personal selling is used to communicate one-on-one with potential customers to identify their needs and align them with the seller’s products.

•

Review the tasks involved in personal selling: order processing, creative selling, and missionary selling.

•

Reinforce that sales promotions include a number of short-term promotional activities designed to encourage consumer buying, industrial sales, or cooperation from distributors.

•

Make sure that students understand the difference between publicity and public relations, as these two concepts are often conflated

QUICK QUESTION What are some types of sales promotions?

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IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker Why Do They Charge More?

Activity Overview: This activity asks students to consider pricing strategies behind some well-known competing products.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask each group to come up with four sets of competing products or services; in most cases, students will select products that are similar, but carry a different brand name, such as Blue Bonnet Margarine versus Prairie Farms Margarine. (10 minutes) 2. Ask students to discuss the “average” price of each product and be able to explain the reasoning for one brand’s price being higher than the competing brand. (10 minutes) 3. Reassemble the class as a whole and ask for each group’s input. (10 minutes) Don’t Forget: Students will come up with a variety of reasons for differing products’ prices. Some will be more difficult to explain than others. For example, almost everyone knows that a one-night stay at the Holiday Inn Express is less costly than a stay at the Ritz-Carlton because the Ritz-Carlton offers more amenities. Price differences between Del Monte spinach and Jolly Green Giant spinach might be more difficult to explain.

Wrap-Up: Bring the activity to a close by reminding students of the role pricing plays in the marketing mix and the common types of pricing strategies and tactics seen in the marketplace.

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In-Class Activity 2: Up for Debate Getting a Stimulus Boost with Pricing and Promotion Activity Overview: This activity asks students to how firms are changing their distribution messages during economic downtimes.

Time Limit: 30 minutes What to Do: 1. Ask students to read the Managing in Turbulent Times feature on page 313 of the textbook, making a list of as many pros and cons of relying on a distributor as possible. (10 minutes) 2. Divide the class into small groups to discuss their pros and cons of price discounts, free shipping, and integrated promotion and distribution. Do the pros outweigh the cons? (10 minutes) 3. Reassemble the class to debate the pros and cons as a group. Do the pros outweigh the cons?

(10 minutes) Don’t Forget: Retailers are constantly looking for ways to get an edge in the market place. Remind students that retailers will use all of the 4 Ps (price, promotion, product, and place) to add value and try to get an edge in competitive markets.

Wrap-Up: Ask students to clip advertisement from newspaper or magazine, or print online advertisements that show how retailers are seeking to use pricing and promotion to boost demand. Get the students to bring them to the next class and vote on the one that is most innovative.

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In-Class Activity 3: Up for Debate What’s the Best Way to Reach Them?

Activity Overview: This activity asks students to think about different ways that a product can be promoted to one specific target market.

Time Limit: 30 minutes What to Do: 1. Divide the class into four-member groups and ask each group to consider marketing a solarpowered vacuum cleaner to working women with fast-paced, on-the-go lifestyles. In their discussions, groups should consider the following: (15 minutes) a. Which elements of the promotional mix should be utilized? b. What are the best ways/places to promote this product to this specific target market?

1. Reassemble the class and discuss each group’s promotion suggestions. (15 minutes) Don’t Forget: Specific promotional mix elements do a better job than others in reaching or attracting specific target markets.

Wrap-Up: Bring the activity to a close by reviewing the elements of the promotional mix and how each element may or may not be suited in this scenario.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1.

The channels of distribution are as follows: Channel 1 involves direct sales to consumers, without intermediaries; Channel 2 involves a retailer; Channel 3 involves both a retailer and a wholesaler; Channel 4 includes an agent or broker before the wholesalers and retailers.

(Learning Objective 1 – AACSB – application of knowledge)

2. Intensive Distribution means distributing through as many channels and channel members as possible (both wholesalers and retailers). With exclusive distribution, a manufacturer grants the exclusive right to distribute or sell a product to a limited number of wholesalers or retailers, usually in a given geographic area. Using selective distribution, a producer selects only wholesalers and retailers that will give a product special attention in sales effort, display and promotion advantage, and so forth.

(Learning Objective 1 – AACSB – application of knowledge) 3. The advantages of trucks include flexibility for any-distance distribution, fast service, and dependability. Air is the fastest mode of transportation for physical goods. Online transmission is a newer, faster, and the less expensive means of distribution than all other modes. Water is the least expensive mode, but also the slowest. Railroads can economically transport high-volume, heavy, bulky items, such as cars, steel, and coal. However, their delivery routes are limited by fixed, immovable rail tracks. Pipelines are slow and are used to transport liquids and gases. They are also inflexible, but for specialized products they provide economical and reliable delivery.

(Learning Objective 4 – AACSB – application of knowledge) 4. Newspapers provide excellent coverage, but have poor reproduction quality and are highly impermanent. Readership has decreased dramatically. Television provides wide geographic coverage and reaches a number of consumers but is expensive and tends to confuse viewers with many short commercials. Direct mail allows a marketer to select its audience and personalize its message but is expensive and often regarded as junk mail. Radio ads reach a large audience but are inexpensive, are over quickly, and may require repeat exposure to be effective. Magazines have relatively long shelf lives and benefit from pass-along readership, but ads must be prepared long in advance and can appear in unfavorable locations in the magazine. Outdoor ads benefit from high repeat exposure but can present only limited amounts of information. The Internet allows quick, highly targeted access to online subscribers, but many consumers may be annoyed at ads.

(Learning Objective 5– AACSB – application of knowledge) 5. The first step is prospecting and qualifying: the process of identifying potential customers and then prospects must be assessed to determine whether they have the authority to buy and the ability to pay. The second step is approaching. The approach refers to the first few minutes of a salesperson’s contact with a qualified prospect. Next, the salesperson makes a presentation, a full explanation of the product, its features, and its uses. The fourth step is handling objections. No matter what product is for sale, prospects will have some objections.

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The next step is closing. The most critical part of the selling process is the closing, in which the salesperson asks the prospect to buy the product. The final step is follow-up, a key activity, especially in relationship marketing.

(Learning Objective 6 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 6.

• • • •

Here are examples of typical products sold through nonstore retailing: Direct mail marketing: insurance and magazine subscriptions are best suited because consumers can review information and respond easily.

Mail order or catalog marketing: clothing and gifts are best suited because the products can be shown, described, and returned if necessary.

Telemarketing: telephone service and cable TV are best-suited because sales representatives can describe features and benefits and answer questions.

Direct selling: cosmetics and housewares are best suited because someone the consumer knows and trusts can demonstrate them.

(Learning Objective 3 – AACSB – application of knowledge, reflective thinking)

7. Retailers that feature broad product lines include department stores, which are arranged into specialized departments and handle a wide range of goods; supermarkets, which offer a wide selection at low prices; and, specialty stores, which are small stores that carry a line of related products.

Bargain retailers carry wide ranges of products and come in many forms: discount houses, which feature a large number of items at low prices; catalog showrooms, which allow customers to view displays, place orders, and wait briefly while clerks retrieve orders from warehouses; factory outlets, which are manufacturer-owned stores that avoid wholesalers and retailers by selling merchandise directly from factory to consumer; wholesale clubs, which offer large discounts on a wide range of brand-name merchandise to customers who pay annual membership fees.

(Learning Objective 3 – AACSB – application of knowledge, reflective thinking) 8. In determining campaign effectiveness, students should consider the intended target audience, the media, the budget, and the creative concept.

(Learning Objective 5 – AACSB – application of knowledge, reflective thinking) APPLICATION EXERCISES 9. As a member of a supply chain, the company’s marketing mix has to be consistent with its partners’ strategy. A company cannot make unilateral decisions without considering the other members of the supply chain. For example, if a member increases its prices what is the impact on the other members. Students should also discuss how the supply chain process needs to be an integrated process.

(Learning Objective 2, 3– AACSB – application of knowledge, reflective thinking)

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10. Students will probably find that TV and magazines are heavily used for nationally distributed products. In determining effectiveness, students should consider the target audience. Is the media mix reaching the target audience?

(Learning Objective 5 – AACSB – application of knowledge, reflective thinking) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE ASSIGNMENT 13 - 11 – 15 (Learning objectives 1, 4, 5, 6 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) In this exercise students continue to develop their marketing plan by adding an appropriate distribution and promotional plan to their marketing mix.

BUILDING YOUR BUSINESS SKILLS: GREETING START-UP DECISIONS (Learning objectives 5, 6 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) 16. There are many options for buyers who prefer personalized cards. Ready-made cards, however, are easily accessible and can be purchased at the last minute from numerous types of stores; this type of card may be preferred for the less creative buyer.

17. There may still be a stigma against such cards, especially since many people printing the cards will merely use traditional copy paper, which may give the effect of a “cheap” card.

18. Answers will vary. However, many students will recognize that receivers of direct mail can view it at their convenience, which may allow the direct mail to be especially effective in the long run. Personal selling requires the potential buyer’s attention at a given point in time; however, specific questions can be addressed immediately, and the potential buyer will have already developed a relationship with the company through the salesperson presenting.

19. Students’ comments will vary but most will admit that such competition will be possible to overcome if the start-up company can add a special type of artwork, design, humor, or some other catch to attract a specific niche.

EXERCISING YOUR ETHICS: THE CHAIN OF RESPONSIBILITY (Learning objective 4 - AACSB – Ethical understanding and reasoning, reflective thinking) 20. The responsibilities of each party in this situation are as follows: • Customer: To provide correct delivery information to the store.

• Store: To clearly communicate its delivery policies to consumers.

• Delivery firm: To make timely deliveries to the designated address and to clearly communicate its policies to the store.

21. From an ethical standpoint, the store manager’s action is right and wrong as follows: • Right: Since the store fulfilled its obligation to the customer, fiscal responsibility would suggest that the store manager should not refund the customer’s money.

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•

Wrong: Since the package was not delivered to the bride, good customer service would suggest that the store manager should refund the money.

22. Answers will vary, but students should recognize that customers typically broadcast a bad experience to many of their friends and colleagues, magnifying the impact of a dissatisfying experience.

TEAM EXERCISE: A BIG PUSH FOR PUBLICITY 13- 23 – 27.

(Learning objective 5, 6 - AACSB - interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) 23. The initial objectives of the campaign are to create awareness and interest for the new theme park. The campaign will definitely have to evolve. Immediately before the opening, the theme will have to create desire and action. Once the park is open, there will have to be a campaign to sustain continued desire and action.

24. Answers will vary but many students will focus on publicity, internet campaign, and other forms of promotion that create a buzz. Many students will also suggest direct mail and a TV campaign.

27. Most students will agree that the promotional mix will change over time once the theme park establishes a strong customer base There will probably be less of an emphasis on publicity and more of a focus on the rest of the promotional mix.

CASES: WITH ITS WORLDLY VIEW, NETFLIX WANTS AN ENTIRE GLOBE OF STREAMERS (Learning Objective 4, 5, 6 – AACSB – application of knowledge, reflective thinking) 28. The Netflix target markets include: the initial target group of teens and twenties but has now crossed over to the children’s market, and the older-than-40 demographic.

29. Intermediaries play a tremendous role in this channel. Netflix collaborated with consumer electronic firms to enable delivery of streaming and producers of video content to provide their product.

30. Obviously physical distribution and warehousing play key roles in their current distribution mix since the emphasis is on convenience and speed delivery. In the future, with the increase in video streaming and the phasing out of DVD by mail, the warehousing role will decline.

31. Answers will vary with many students focusing on the promotional objectives of: objective of increasing sales, communicating information about their new products, the added value and convenience of video streaming, and controlling their sales volume by adding original programming.

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32. Netflix promotional mix has included advertising, publicity, and has a lot of word-of-mouth through social media. Over time, it has appeared to shift away from traditional advertising to more online and direct interaction with current customers using data mining.

HOLLYWOOD’S NEW MARKETING CAMPAIGN: REVIVING CLASSIC MOVIES (Learning Objective 5, 6 – AACSB – application of knowledge, reflective thinking) 33. The advertising mix has a heavy emphasis on impulse buying using sales promotion devices including: special packaging, point-of-purchase displays, and premiums as well as using current movie trailers.

34. To increase sales and revenues. Results can obviously be measured by changes in sales and net profits.

35. Answers will vary with many students suggesting a TV campaign tied in with “classic” TV and movie channels.

36. The distribution channels include nonstore retailing (internet, TV sales) and traditional brick- and-mortar retailers. Answers will vary on changing the effectiveness.

37. The target markets focuses on two different demographics: older core movie fans and younger viewers with less disposable income. Again answers will vary on students’ perspective of the effectiveness.

BUSINESS PLAN PROJECT: PART 4 The business plan project for Business Essentials is divided into six parts, corresponding to the book’s six main parts. The fourth part of the project is found on the following three pages. It is now time to get students working on Part 4…

PART 4: BUSINESS PLAN PROJECT Assignment Overview: This part of the business plan asks students to think about marketing’s “Four Ps”—product, price, place (distribution), and promotion—and how they apply to their business. Students will list features and benefits as well as the points of difference for their product or service. After describing the product, the student must connect those described features and benefits to a targeted buyer. Once the targeted buyer has been named, students will describe advertising and promotional efforts to get the buyer’s attention.

Files to Provide Students: For this part of the project, students will be asked to complete Part 4: Principles of Marketing. If students have already started working on the business plan project, they should continue using the student template they began working on in Parts 1 to 3. A copy of the marketing template is available on the following page.

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Estimated At-Home Completion Time: If done well, this section will require a minimum of 3 to 5 hours. Instructor feedback will improve the quality of student responses, so you may wish to spend class time working on the plan.

Homework Deliverable from Students: The length of student responses in this part of the plan will vary greatly, as critical or creative thinkers will often begin to distinguish themselves. At a minimum, you should expect 3 to 5 pages in this part, with exceptional students writing as many as 8 pages to fully explain all aspects of their marketing program.

STUDENT BUSINESS PLAN PROJECT TEMPLATE PART 4: PRINCIPLES OF MARKETING TARGET MARKET Describe your target market in terms of age, education level, income, and other demographic variables.

Hint: Refer to Chapter 11 for more information on the aspects of target marketing and market segmentation that you may want to consider. Be as detailed as possible about who you think your customers will be.

PRODUCT FEATURES AND BENEFITS Describe the features and benefits of your product or service.

Hint: As you learned in Chapter 11, a product is a bundle of attributes—features and benefits.

What features does your product have—what does it look like, and what does it do? How will your product benefit the buyer?

PRODUCT DIFFERENTIATION How will you make your product stand out in the crowd?

Hint: There are many ways to stand out in the crowd, such as a unique product, outstanding service, or a great location. What makes your “great idea” special? Does it fill an unmet need in the marketplace? How will you differentiate your product to make sure that it succeeds?

PRICING What pricing strategy will you choose for your product, and what are the reasons for this strategy?

Hint: Refer to Chapter 12 for more information on pricing strategies and tactics. Since your business is new, so is the product. Therefore, you probably want to choose between price skimming and penetration pricing. Which will you choose, and why?

PLACE (DISTRIBUTION) ISSUES Where will customers find your product or service? (That is, what issues of the distribution mix should you consider?)

Hint: If your business will sell its product directly to consumers, what types of retail stores will sell your product? If your product will be sold to another business, which channel of distribution

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will you use? Refer to Chapter 12 for more information on aspects of distribution you may want to consider.

ADVERTISING How will you advertise to your target market? Why have you chosen these forms of advertisement?

Hint: Marketers use several different advertising media— specific communication devices for carrying a seller’s message to potential customers—each having its advantages and drawbacks.

Refer to Chapter 12 for a discussion of the types of advertising media you may wish to consider here.

PROMOTIONS What other methods of promotion will you use, and why?

Hint: There’s more to promotion than simple advertising. Other methods include personal selling, sales promotions, and publicity and public relations. Refer to the discussion of promotion in Chapter 12 for ideas on how to promote your product that go beyond just advertising.

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Chapter 14: Information Technology (IT) for Business Chapter Overview Information technology (IT) has had a tremendous impact on the business world in the last few years. Think of how much the Internet alone affects your life. Some people feel completely “out of touch” going just one day without it. We are connected to the remotest corners of the world.

Businesses have a variety of IT resources at their disposal, and information systems and how these systems are used play an integral role in businesses.

This chapter provides the latest details on business IT. It discusses the impacts IT has had on the business world and identifies the IT resources businesses have at their disposal. It also describes the role of information systems, the different types of information systems, and how businesses use such systems. Finally, it looks at the various threats and risks IT poses for businesses, as well as the ways in which businesses protect themselves from these threats and risks. Even if you are apprehensive about IT and its uses, this chapter will help you become more familiar with and comfortable with IT.

Learning Objectives 1. Discuss the impacts information technology has had on the business world.

2. Identify the IT resources businesses have at their disposal and how these resources are used.

3. Describe the role of information systems, the different types of information systems, and how businesses use such systems.

4. Identify the threats and risks information technology poses on businesses.

5. Describe the ways in which businesses protect themselves from the threats and risks information technology poses.

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LIST OF IN-CLASS ACTIVITIES: AUTHOR’S CHOICE Activity 1. Ice-Breaker: IT Devices

2. Small-Group Discussion: LaidOffCamp

3. Up for Debate: Is That Ethical?

Description Students discuss various ways in which technological devices allow the class as a whole to create, store, exchange, and use information.

Students examine how Americans communicate through e-mail and what people from other countries might observe about us as we continue to rely more on the Internet for communicating.

Students are divided into teams to discuss the ethical issues surfacing when an employer has the ability to access and track employees’ computer usage.

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Time Limit

20 min.

30 min.

30 min.

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CHAPTER OUTLINE Learning Objective 1: Discuss the impacts information technology has had on the business world.

IT Impacts Information technology (IT) includes the various appliances and devices for creating, storing, exchanging, and using information in diverse modes, including visual images, voice, multimedia, and business data. E-commerce is the use of the Internet and other electronic means for retailing and business-to-business transactions. Businesses are using IT to bolster productivity, improve operations and processes, create new opportunities, and communicate and work in ways not possible before.

A. Creating Portable Offices Technology built into various devices offers businesses powerful tools that save time and travel expenses.

B. Enabling Better Service by Coordinating Remote Deliveries Company activities may be geographically scattered, but remain coordinated through a networked system that also provides better service for customers.

C. Creating Leaner, More Efficient Organizations Networks and technology allow organizations to operate with fewer employees and simpler structures.

D. Enabling Increased Collaboration Collaboration software and other IT communication devices enable greater collaboration among internal units and with outside firms.

E. Enabling Global Exchange The global reach of IT is enabling business collaboration on a huge scale.

F. Improving Management Processes With databases, specialized software, and networks, instantaneous information is now accessible and useful to all levels of management.

G. Providing Flexibility for Customization IT networks and other IT advances create new manufacturing capabilities that enable businesses to offer customers greater variety and faster delivery cycles. Mass-customization allows manufacturers to produce in large volumes, with each unit featuring the unique options the customer prefers.

H. Providing New Business Opportunities IT is creating entirely new businesses where none existed before.

I. Improving the World and Our Lives

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Numerous businesses across various industries use IT to create improvements that enhance the standard of living.

KEY TEACHING TIPS •

Remind students that information technology (IT) includes the various devices for creating, storing, exchanging, and using information in diverse modes, including visual images, voice, multimedia, and business data.

•

Students need to keep the meaning of standardization separate from mass-customization, which allows companies to produce in large volumes and provide unique features and options for customers.

QUICK QUESTIONS •

How are portable offices bolstering productivity?

•

How has IT allowed marketers to provide better service?

•

How does IT allow firms to create leaner, more efficient organizations?

•

How has IT changed the nature of the management process within organizations?

Use In-Class Activity 1: Ice-Breaker: IT Devices Time Limit: 20 minutes

HOMEWORK The Impact of IT Now might be a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. This assignment asks students to think about how IT systems affect their daily lives, and whether their encounters with IT leave them at risk for identity theft.

At-Home Completion Time: 30 Minutes

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Learning Objective 2: Identify the IT resources businesses have at their disposal and how these resources are used.

IT Building Blocks: Business Resources Businesses have numerous IT resources at their disposal.

A. The Internet and Other Communication Resources The Internet is a gigantic system of interconnected computers; the World Wide Web is a standardized code for accessing information and transmitting data over the Internet.

1. Intranets. Intranets are private networks of internal Web sites linked throughout an organization that are accessible only to employees.

2. Extranets. Extranets allow outsiders limited access to a firm’s internal information network.

1. Electronic Conferencing. Electronic conferencing allows groups of people to communicate simultaneously from various locations via e-mail, phone, or video.

4. VSAT Satellite Communications. VSAT satellite communications have a transmitterreceiver that sits outdoors with a direct line-of-sight to a satellite; the hub sends signals to and receives signals from the satellite, exchanging voice, video, and data transmission.

B. Networks: System Architecture A computer network is a group of two or more computers linked together by some form of cabling or by wireless technology to share data or resources, such as a printer; a client-server network is a common type of network used in businesses in which the clients are usually the laptop or desktop computers being used, and the servers are any number of computers that provide services shared by users.

1. Wide Area Networks (WANs). Wide area networks (WANs) are computers linked over long distances (statewide or even nationwide) through telephone lines, microwave signals, or satellite communications.

2. Local Area Networks (LANs). In local area networks (LANs), computers are linked in a smaller area, such as all of a firm’s computers within a single building. The arrangement requires only one computer system with one database and one software system.

3. Wireless Networks. Wireless networks use airborne electronic signals to link network computers and devices. For example, the BlackBerry system consists of devices that send and receive transmissions on wireless wide area networks (WWANS) of more than 100 service providers.

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4. Wi-Fi. A Wi-Fi is a hotspot, or access point, for the Internet. Each hotspot is actually its own small network, called a wireless local area network (Wireless LAN or WLAN).

C. Hardware and Software Hardware includes the physical components, such as keyboards, monitors, system units, and printers; software includes the programs that tell the computer how to function.

KEY TEACHING TIP Make sure students understand the distinction between intranets (private networks accessible only to employees) and extranets (networks that allow outsiders limited access to a firm’s internal information).

QUICK QUESTIONS •

For what purposes might data conferencing be used? What about videoconferencing?

•

What are the clients and what are the servers in a client-server network?

•

What is the difference between a wide area network (WAN) and a local area network (LAN)?

•

What are some benefits of Wi-Fi?

•

When does data become information?

Use In-Class Activity 2: Small-Group Discussion: LaidOffCamp Time Limit: 30 minutes

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Learning Objective 3: Describe the role of information systems, the different types of information systems, and how businesses use such systems.

Information Systems: Harnessing the Competitive Power of IT An information system is a system that uses IT resources and enables managers to take data— raw facts and figures—and transform that data into information—the meaningful, useful interpretation of data. Information systems managers operate the systems used for gathering, organizing, and distributing information.

A. Leveraging Information Resources: Data Warehousing and Data Mining Data warehousing involves the collection, storage, and retrieval of data in electronic files.

1. Data Mining. Data mining is the application of electronic technologies for searching, sifting, and reorganizing pools of data to uncover useful information.

2. Information Linkages with Suppliers. Coordinated planning avoids excessive inventories, speeds up deliveries, and holds down costs throughout the supply chain.

B. Types of Information Systems Each user group and department in an organization may need a special information system.

1. Information Systems for Knowledge Workers. Knowledge information systems support knowledge workers by providing resources to create, store, use, and transmit new knowledge for useful applications. Computer-aided design (CAD) helps knowledge workers design products by simulating them and displaying them in three-dimensional graphics.

2. Information Systems for Managers. Each manager’s information activities and information system needs vary according to his or her functional area. a. Management Information Systems (MIS). Management information systems (MIS) support managers by providing reports, schedules, plans, and budgets that can then be used for making decisions. b. Decision Support Systems (DSS). Decision support systems (DSS) are interactive systems that create virtual business models and test them with different data to see how they respond.

KEY TEACHING TIPS •

Students often confuse this point: Data warehousing is the collection, storage, and retrieval of data in electronic files; data mining is the application of electronic technologies for searching, sifting, and reorganizing data to uncover useful information.

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•

Reinforce that an information system enables managers to collect, process, and transmit that information for use in decision making.

•

Make sure students understand that a management information system provides reports, schedules, plans, and budgets that managers use to make decisions.

QUICK QUESTIONS •

How do knowledge workers benefit from knowledge information systems?

•

What is the role of a decision support system (DSS)?

•

What are some advantages that radio frequency identification can provide to individual stores and to the supply chain as a whole?

Use In-Class Activity 3: Supplemental Case Study Discussion: The Tweet Smell of Success!

Time Limit: 30 minutes

HOMEWORK System Architecture Now might be a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment asks students to assess the impact of changes in IT on the higher education.

At-Home Completion Time: 1 hour

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Learning Objective 4: Identify the threats and risks information technology poses on businesses.

IT Risks and Threats IT has attracted abusers that are set on doing mischief, with severity ranging from mere nuisance to outright destruction.

A. Hackers Hackers are cybercriminals who gain unauthorized access to a computer or network, either to steal information, money, or property or to tamper with data.

B. Identity Theft Identity theft is the unauthorized stealing of personal information to get loans, credit cards, or other monetary benefits by impersonating the victim.

C. Intellectual Property Theft Intellectual property includes products of the minds—something produced by the intellect, with great expenditure of human effort, that has commercial value. Nearly every company faces the dilemma of protecting product plans, new inventions, industrial processes, and other intellectual property.

D. Computer Viruses, Worms, and Trojan Horses A computer virus exists in a file that attaches itself to a program and migrates from computer-to-computer as a shared program or as an e-mail attachment. Worms are a particular kind of virus that travels from computer to computer within networked computer systems, without needing you to open any software to spread the contaminated file. Unlike viruses, a Trojan horse does not replicate itself.

E. Spyware is unintentionally downloaded on a computer and crawls around to monitor the host’s computer activities. For example, Internet users open files that promise “free giveaways,” not suspecting that they are downloading spyware onto their systems.

F. Spam is junk e-mail sent to a mailing list or a newsgroup.

QUICK QUESTIONS • • •

Can hackers ever do good?

How can identity theft be avoided?

What types of damage might a worm and a Trojan horse do?

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Learning Objective 5: Describe the ways in which businesses protect themselves from the threats and risks information technology poses.

IT Protection Measures Businesses guard themselves against intrusion, identity theft, and viruses by using firewalls, special software, and encryption.

A. Preventing Unauthorized Access: Firewalls Firewalls are security systems with special software or hardware devices designed to keep computers safe from hackers. A firewall contains two components for filtering each incoming message: (1) the company’s security policy, which contains access rules; and (b) a router, which involves a “traffic switch” that determines on which network routes or paths to send each message after it is tested against the security policy.

B. Preventing Identity Theft The Fair and Accurate Credit Transactions Act (FACTA) strengthens identity-theft protections by specifying how organizations must destroy information, rather than simply dropping it in a dumpster.

C. Preventing Infectious Viruses: Anti-Virus Software Anti-virus software protects systems by searching incoming e-mail and data files for “signatures” of known viruses and virus-like characteristics.

D. Protecting Electronic Communications: Encryption Software An encryption system works by locking an e-mail message to a unique code number for each computer, so only that computer can open and read the message.

E. Avoiding Spam and Spyware Anti-spyware and spam filtering software on business systems helps employees avoid privacy invasion and improves worker productivity.

F. Ethical Concerns in IT It is apparent that IT developments and usage are progressing faster than society’s appreciation for the potential consequences, including new ethical concerns.

KEY TEACHING TIP Reinforce that an encryption system works by locking an e-mail message to a unique code number for each computer, so only that computer can open and read the message.

QUICK QUESTION What are a firewall’s two components for filtering incoming messages?

Use In-Class Activity 5: Up for Debate: Is That Ethical?

Time Limit: 30 minutes

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IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker IT Devices Activity Overview: This activity asks students to come up with a list of technological devices that reflect the many ways in which the class as a whole creates, stores, exchanges, and uses information.

Time Limit: 20 minutes What to Do: 1. Ask the class as a whole to brainstorm, coming up with a list of technological devices that they use in their personal lives, at work, or at school to create, store, exchange, and use information.

2. Ask the class to comment on these questions: a. Do students in the class as a whole use more or fewer devices than what you expected prior to brainstorming? b. In what way(s) do you see your individual use of these devices changing in the coming years? c. In what way(s) have these devices impacted your personal lives, such as at school, at the bank, while shopping, and so on?

Don’t Forget: Some people are more technologically savvy than others. Many students will say they take advantage of every gadget available, while others do not have Internet access at home.

Wrap-Up: Bring the activity to a close by reminding students that new technologies are always looming on the horizon and that no one can accurately predict how much IT will change and affect our lives in the future.

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In-Class Activity 2: Small-Group Discussion LaidOffCamp Activity Overview: This activity encourages students to think about how information technology can be used to develop new products and services even in difficult economic times.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask them to read the Entrepreneurship and New Ventures feature on page 342 of the textbook. (10 minutes) 2. Ask students to discuss the following questions within their small groups (10 minutes): a. What do you think about the idea of LaidOffCamp? If you were given the opportunity, would you invest in LaidOffCamp? b. Think of another product of service that information technology might make viable in a sown economy. What would you call the product or service? What would be its unique selling points?

3. Regroup the class as a whole and discuss each group’s conclusions. (10 minutes) Don’t Forget: Information technology is rapidly changing. As new technologies become available so do new possibilities. Encourage your students to keep their eyes on technology blogs to keep abreast of new developments.

Wrap-Up: Bring the activity to a close by reminding students of the vast differences in communication between and among various cultures.

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In-Class Activity 3: Up for Debate Is That Ethical?

Activity Overview: This activity asks students to discuss the ethical issues that may arise from an employer having the ability to access and track employees’ computer usage.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask them to consider this tidbit that a coworker overheard at the water cooler: “I guess it was as simple as that! Once Jeremy looked into everything Jason had been doing on the Internet, he asked Jason to hit the road. He was playing card games, placing personal stock market transactions, and sending e-mails to his friends and wife. I guess we all need to be more careful.” Ask each group to discuss whether firing an employee based on their Internet activities is ethical; groups should take notes on the pros and cons of such a company policy. (15 minutes) 2. Reassemble the class as a whole and discuss each group’s conclusion. (15 minutes) Don’t Forget: Many companies have such policies stated clearly in the employee handbook; on the other hand, some employers may use such tactics as an excuse to get rid of an employee.

Wrap-Up: Bring the debate to a close by reminding students that company policies stated in the employee handbook must be adhered to. However, one side of the argument is: “If you don’t want me to use the Internet, then don’t give it to me.” The other side of the argument is: “While working on company time, I should do what the employer wants.” Most group comments will fall somewhere between those two extremes.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1. Information is an asset. Like any other asset, information must be planned for, developed, and protected. (Learning Objective 1 – AACSB – application of knowledge) 2. It is easy, quick, and relatively low-cost, eliminating the need for expensive travel for faceto-face meetings. (Learning Objective 1 – AACSB – application of knowledge) 3. The cloud enhances user flexibility, especially for employees working remotely because users can access e-mails and data files from any online location, rather than from one particular location The cloud computing has become a cost saver for companies by eliminating the need for buying, installing, and maintaining in-house server computers, many of which have excessive unused storage capacity. The risks of cloud computing include: hacking and privacy issues. (Learning Objective 2 – AACSB – application of knowledge) 4. Hackers can cause serious damage: stealing company and customer information compromising company files and records. This can cause a company serious financial problems. (Learning Objective 4 – AACSB – application of knowledge) 5. Intellectual property is a product of the mind, something produced by the intellect, with great expenditure of human effort. Examples include new inventions, product plans, and manufacturing processes. (Learning Objective 4 – AACSB – application of knowledge)

QUESTIONS FOR ANALYSIS 6. Data warehousing involves the collection, storage, and retrieval of data in electronic files; data mining is the application of electronic technologies for searching, sifting, and reorganizing pools of data to uncover useful information. (Learning Objective 3 – AACSB – application of knowledge) 7. IT presents opportunities such as online banking and online investing, among other options.

(Learning Objective 1 – AACSB – application of knowledge) 8. Answers will vary, but students should recognize that information networks streamline and automate communications operations and allow firms to accomplish more with fewer resources. (Learning Objective 1 – AACSB – application of knowledge) APPLICATION EXERCISES 9. Answers will vary, but most students will mention their access to ATMs and their use of credit cards, often daily, in making consumer purchases. Identity theft can happen at any time, either during or after the sharing of personal information. (Learning Objective 2 – AACSB – application of knowledge, reflective thinking)

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10. Answers will vary, but many students will mention online classes and testing, applying and registering for college/classes online, and accessing their academic records online.

(Learning Objective 1, 2 – AACSB – application of knowledge)

BUILDING A BUSINESS: CONTINUING TEAM EXERCISE ASSIGNMENT 14-11-15 (Learning objectives 2, 3, 4, 5 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Students should develop a comprehensive IT plan that focuses on meeting customers’ needs, improves efficiencies, operations, and processes bolsters productivity, create new opportunities, and communicate and work. They should also address the various threats and risks it poses for their businesses, as well as the ways to protect themselves from threats and risks information technology might pose for their business.

BUILDING YOUR BUSINESS SKILLS: THE ART AND SCIENCE OF POINT-ANDCLICK RESEARCH (Learning objectives 1, 2- AACSB interpersonal relations and teamwork, analytical and, application of knowledge) 16. The “Help” function can help students save time by using the site’s specific features and capabilities to narrow the search.

17. Students should relate various ways in which advanced search pages allow them to improve, refine, and expand their searches.

18. The Web has made information more accessible, less expensive, and easier to find, but it has also increased the volume of information that managers must sift through to find what they need and to ensure that their information is reliable, accurate, objective, and timely.

EXERCISING YOUR ETHICS: TO READ OR NOT TO READ 14 - 19 – 21 (AACSB – Ethical understanding and reasoning, reflective thinking) 19. The ethical issues focus on the trust issues between employees and employer.

20. Answers will vary, but many students will recognize that companies do monitor employees’ activities to try to increase employee productivity but there is also the perspective of the trust issue from the employees’ perspective.

21. Answers will vary, but many students will suggest that their advice would depend on the situation and the employee needs to understand that work obviously comes first.

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TEAM EXERCISE: THIS GAME IS GETTING SERIOUS 14 -22 – 26 (AACSB – Ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking) This exercise should get students to think about some issues that they probably have not considered. Students often think that they can “modify” and disseminate products that they purchase. Since so many products, videos, games, etc. are “shared” online, they often forget that companies spent money developing these products and have intellectual property rights to said products. The students’ responses to the Action Steps will vary widely due to differences in perception.

CASES: ONLINE PIRATES FEAST ON ECONOMIC DOWNTURN 10- 27– 31 (Learning objectives 1, 2, 3, 4 - AACSB analytical and reflective thinking, application of knowledge) 27. The intruders were seeking passwords, personal financial data, credit card numbers, etc.

28. Most students are technically savvy and immediately identified the “scams”.

29. An open message may carry a virus, spyware, or worm that can capture personal information and permit identity theft.

30. Answers will vary but most students will probably mention firewalls and other anti-theft software.

31. Again, answers will vary depending on the IT devices used by students.

INFORMATION TECHNOLOGY FOR BETTER HEALTH CARE (Learning objectives 1, 2, 3, 4 - AACSB analytical and reflective thinking, application of knowledge) 32. IT developments that have impacted health care include devices that enhance patient care and operations, permitting more complicated surgeries, remote/virtual surgeries, and lower health care costs.

33. Healthcare customers are being affected by a myriad of IT developments including preventive care, surgery, recovery, and length of hospital care. Most of the developments are positive but there might be some negatives such as security issues.

34. The MIS system for the robotic system would need a decision support system designed specifically to serve the intricate nature of the surgery. The MIS system would need an internet and extranet, electronic conferencing, anti-virus software, encryption software, a firewall.

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35. Risks could include release of patient information, hackers disabling the surgical systems, viruses, and worms, spyware, and destruction of equipment. Most students will hire security experts to review the network security operations.

36. The IT system would need at the minimum anti-virus software, encryption software, a firewall to reduce the threat. Most students will way the costs versus the benefits of each protection measure.

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Chapter 15: The Role of Accountants and Accounting Information Chapter Overview Every organization relies on accounting information and financial statements in order to gauge business activity over periods of time. Accounting information can be thought of as a measuring stick of an organization’s performance in specific periods of time.

This chapter unfolds with a discussion of the role of accountants and an explanation of the types of accountants in the U.S. business system—public accountants, private accountants, management accountants, and forensic accountants. In addition, the chapter discusses the accounting equation as well as the three basic financial statements, showing how they reflect the activity and financial condition of a business. It also looks at the key standards and principles for reporting financial statements and describes how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business. Finally, the chapter ends with a discussion of the role of ethics in accounting—a subject that has received much press in recent years.

Learning Objectives 1. Explain the role of accountants and distinguish between the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.

2. Explain how the accounting equation is used.

3. Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.

4. Explain the key standards and principles for reporting financial statements.

5. Describe how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business.

6. Discuss the role of ethics in accounting.

7. Describe the purpose of the International Accounting Standards Board and explain why it exists.

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LIST OF IN-CLASS ACTIVITIES: AUTHOR’S CHOICE Activity 1. Ice-Breaker: Do You Use Accounting?

2. Class Discussion: Interpreting Financial Statements 3. Small-Group Discussion: Annual Reports 4. Class Discussion: Choose an Investment

Description Students think about ways in which they use accounting in their personal lives.

Students determine in which financial statement specific pieces of information are included.

Students review financial information from annual reports of real companies.

Students calculate financial ratios and interpret their results.

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Time Limit 20 min.

20 min.

45 min.

30 min.

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CHAPTER OUTLINE Learning Objective 1 Explain the role of accountants and distinguish between the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.

What Is Accounting and Who Uses Accounting Information?

Accounting is a comprehensive system for collecting, analyzing, and communicating financial information that is used to prepare financial statements and management reports. Bookkeeping is just one phase of accounting—the recording of transactions. Because businesses engage in thousands of transactions, ensuring consistent, dependable financial information is mandatory.

This is the job of the accounting information system (AIS)—an organized procedure for identifying, measuring, recording, and retaining financial information so that it can be used in accounting statements and management reports. Users of accounting information include business managers, employees and unions, investors and creditors, tax authorities, and government regulatory agencies.

Who Are Accountants and What Do They Do? The controller manages a firm’s accounting activities. As chief accounting officer, the controller ensures that the AIS provides the reports and statements needed for planning, controlling, decision making, and other management activities.

A. Financial versus Managerial Accounting 1. Financial Accounting. A firm’s financial accounting system is concerned with external information users—the firm’s external stakeholders: consumer groups, unions, stockholders, suppliers, creditors, and government agencies.

2. Managerial Accounting. Managerial (management) accounting serves internal users.

Managers at all levels need information to make departmental decisions, monitor projects, and plan future activities.

B. Certified Public Accountants (CPAs) Certified public accountants (CPAs) offer accounting services to the public. They are licensed by a state after passing an exam prepared by the American Institute of Certified Public Accountants (AICPA), which also provides technical support and discipline in matters of ethics.

1. The “Big Four” Public Accounting Firms. The “Big Four” Public Accounting Firms, Deloitte Touche Tohmatsu (U.S.) Ernst & Young (United Kingdom), PricewaterhouseCoopers, PwC (United Kingdom), KPMG (Netherlands) account for onehalf of the total revenue generated by accounting firms active in the United States.

2. CPA Services. Most CPA firms provide auditing services, tax services, and management services.

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a. Auditing. An audit examines a company’s AIS to determine whether financial reports reliably represent its operations; an audit must follow generally accepted accounting principles (GAAP), which are the guidelines governing the content and form of financial reports. b. Tax Services. Tax services include assistance not only with tax-return preparation, but also with tax planning. c. Management Advisory Services. Management advisory services range from personal financial planning to planning corporate mergers.

3. Noncertified Public Accountants. This category includes accountants who do not take the CPA exam, who are preparing for it, or who are waiting for state certification.

4. The CPA Vision Project. The CPA Vision Project is a profession-wide program that was established to assess the future of accounting; a prime reason for the project is the disturbing decline in the number of young people who have entered the profession in recent years. The CPA Vision Project identifies core competencies for accounting that will be necessary for the future CPA. C. Private Accountants and Management Accountants Private accountants are hired as salaried employees of a firm who perform day-to-day activities. Management accountants provide services to support managers in various activities. Many hold the certified management accountant (CMA) designation.

D. Forensic Accountants.

Forensic accountants may be called on for both investigative accounting and litigation support in crimes against companies, crimes by companies, and civil disagreements. Forensic accounting is the use of accounting for legal purposes.

1. Investigative Accounting. Investigative accounting involves the investigation of a trail of financial transactions behind a suspected crime.

2. Litigation Support. Forensic accountants assist in the application of accounting evidence for judicial proceedings by preparing and preserving evidence for judicial proceedings. a. Certified Fraud Examiners. The Certified Fraud Examiner (CFE) designation is administered by the Association of Certified Fraud Examiners; the CFE’s activities focus specifically on fraud-related issues.

E. Federal Restrictions on CPA Services and Financial Reporting: Sarbox The Sarbanes–Oxley Act (2002) was enacted to restore public trust in corporate accounting practices; Sarbox restricts the kinds of nonaudit services that CPAs can provide.

1. Sarbox Compliance Requirements. The CFO and CEO must pledge that the company’s finances are correct and must vouch for the methods and internal controls used to get those numbers; Sarbox covers numerous provisions related to financial reporting.

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KEY TEACHING TIPS • Remind students that accounting is a comprehensive system for collecting, analyzing, and communicating financial information, whereas bookkeeping is the recording of transactions.

•

Point out that the controller manages a firm’s accounting activities.

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Make sure students keep these two points separate: Financial accounting is concerned with external information users; managerial accounting serves internal users.

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Make sure students understand the role of a CPA, who offers accounting services to the public and who is licensed by a state after passing an exam.

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Reinforce that generally accepted accounting principles (GAAP) are accounting guidelines governing the content and form of financial reports.

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In contrast to what students learned about the CPA, they should remember that private accountants perform day-to-day activities; most are management accountants who support managers in the organization.

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Students often see the work of forensic accountants as being especially interesting. You may want to spend some time discussing these accountants to pique their interest.

QUICK QUESTIONS •

Who uses accounting information and for what do they use it?

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Outside of the company, who might have an interest in a company’s financial situation?

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What types of services do CPAs perform?

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What has occurred in the business environment that has prompted the need for forensic accountants and certified fraud examiners?

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The Sarbanes–Oxley Act of 2002 (Sarbox) is a critical piece of federal legislation enacted to restore public trust in corporate accounting practices. What are some of Sarbox’s provisions?

Use In-Class Activity 1: Ice-Breaker: Do You Use Accounting?

Time Limit: 20 minutes

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Learning Objective 2: Explain how the accounting equation is used.

The Accounting Equation Underlying all record-keeping procedures is the most basic tool of accounting—the accounting equation.

The accounting equation states that Assets – Liabilities = Owners’ Equity.

A. Assets and Liabilities An asset is any economic resource that is expected to benefit a firm or an individual who owns it; a liability is a debt that the firm owes to an outside organization.

B. Owners’ Equity Owners’ equity refers to the amount of money that owners would receive if they sold all assets and paid all debts.

KEY TEACHING TIPS •

Make sure that students understand the accounting equation: Assets – Liabilities = Owners’ Equity

•

An asset is any economic resource that is expected to benefit a firm that owns it; a liability is a debt that the firm owes. What are some examples of assets and liabilities found in organizations?

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Make sure students understand that owners’ equity is the money owners would receive if they sold all a company’s assets and paid all its liabilities.

QUICK QUESTION •

In what way(s) do businesses benefit from intangible assets?

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Learning Objective 3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.

Financial Statements Accountants summarize the results of a firm’s transactions and issue reports to help managers make informed decisions. Among the most important reports are financial statements, which fall into three broad categories—balance sheets, income statements, and statements of cash flows.

A. Balance Sheets Balance sheets display a firm’s financial condition at one point in time. They supply information about assets, liabilities, and owners’ equity.

1. Assets. An asset is any economic resource that a company owns and from which it expects to get some future benefit. a. Current Assets. Current assets include cash and assets that can be converted into cash within a year. The act of converting something into cash is called liquidating. Assets are normally listed in order of liquidity—the ease of converting them into cash. b. Fixed Assets. Fixed assets, including land, buildings, and equipment, have long-term use or value. Accountants use depreciation to spread the cost of an asset over the years of its useful life. c. Intangible Assets. Intangible assets have monetary value in the form of expected benefits. These usually include the cost of obtaining rights or privileges, such as patents, trademarks, copyrights, and franchise fees. Goodwill is the amount paid for an existing business beyond the value of its other assets.

2. Liabilities. Current liabilities are debts that must be paid within one year. Accounts payable are unpaid bills to suppliers for materials as well as wages and taxes that must be paid in the coming year. Long-term liabilities are debts that are not due for at least a year.

3. Owners’ Equity. Owners’ equity is broken down into paid-in capital and retained earnings. Paid-in capital is additional money invested in the firm by its owners. Retained earnings are net profits kept by a firm rather than paid out as dividend payments to stockholders.

B. Income Statements The income statement is sometimes called a profit-and-loss statement because its description of revenues and expenses results in a figure showing the firm’s annual profit or loss.

1. Revenues. Revenues are funds that flow into a business from the sale of goods or services.

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2. Cost of Revenues (Cost of Goods Sold). The cost of revenues section shows the costs of obtaining the revenues from other companies during the year. Cost of goods sold are costs of obtaining materials to make products sold during the year. a. Gross Profit. Gross Profit is calculated by subtracting the cost of revenues from revenues obtained by selling the firm’s products. b. Operating Expenses. Operating expenses are resources that must flow out of a company if it is to earn revenues.

3. Operating and Net Income. Operating income compares the gross profit from operations against operation expenses. Net income (net profit or net earnings) is calculated by subtracting income taxes from operating income.

C. Statements of Cash Flows Required of all firms whose stock is publicly traded, the statement of cash flow shows a company’s yearly cash receipts and cash payments. This statement shows cash flows from operating, investing, and financing activities.

D. The Budget: An Internal Financial Statement A budget is a detailed statement of estimated receipts and expenditures for a period of time in the future.

KEY TEACHING TIPS •

Reinforce that financial statements include the summaries of a firm’s transactions and help managers make informed decisions; financial statements include balance sheets, income statements, and statements of cash flows. Go over each of the financial statements carefully with students.

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Make sure that students understand the distinction between current assets and fixed assets and that they can provide examples of each.

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Make sure students understand the difference between current liabilities and long-term liabilities and that they can provide examples of each.

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Explain that owners’ equity can be broken down into paid-in capital and retained earnings, and explain each of those concepts.

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Reinforce that you can find the company’s revenues and expenses in the income statement (or profit-and-loss statement). Revenues – Expenses = Profit (or Loss). Also point out the main areas of the income statement: revenues, cost of revenues, and operating expenses.

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Reinforce that revenues are the funds that flow into a business from the sale of goods or services; the cost of revenues (or the cost of goods sold) are the costs of obtaining materials to make products sold during the year.

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Point out that a statement of cash flows describes yearly cash receipts and cash payments; it includes cash flows from operations, investing, and financing activities.

QUICK QUESTIONS •

What are some examples of operating expenses?

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Who might be interested in the information revealed in a statement of cash flows? Why?

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What might be included in a budget for a typical household in the United States?

HOMEWORK Using a Budget Now is a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. This assignment asks students to interview an accountant and ask how the firm uses budgets.

At-Home Completion Time: 1 hour

Use In-Class Activity 2: Class Discussion: Interpreting Financial Statements Time Limit: 20 minutes Use In-Class Activity 3: Small-Group Discussion: Annual Reports Time Limit: 45 minutes

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Learning Objective 4: Explain the key standards and principles for reporting financial statements.

Reporting Standards and Practices Spelled out in GAAP, these practices and principles cover a range of issues.

A. Revenue Recognition and Activity Timing Revenue recognition is the formal recording and reporting of revenues in financial statements, which takes place after the earnings cycle is completed.

B. Full Disclosure This indicates that financial statements should not include just numbers; they should include management’s interpretation and explanation of those numbers.

KEY TEACHING TIP Remind students that full disclosure requires that financial statements include both the “numbers” and management’s interpretations/explanations of those numbers.

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Learning Objective 5: Describe how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business.

Analyzing Financial Statements Financial statements provide data, which can reveal trends and be applied to various ratios.

A. Solvency Ratios: Borrower’s Ability to Re-Pay Debt Solvency ratios provide measures of the firm’s ability to meet its debt obligations.

1. The Current Ratio and Short-Term Solvency. Short-term solvency ratios measure a company’s liquidity and its ability to pay immediate debts. The most commonly used of these is the current ratio, which measures a company’s ability to meet current obligations out of current assets.

2. Long-Term Solvency. Long-term solvency is calculated by dividing debt—total liabilities—by owners’ equity; this ratio illustrates the extent to which a firm is financed through borrowed money. a. Leverage. Leverage refers to the ability to make otherwise unaffordable investments by borrowing funds.

B. Profitability Ratios: Earnings Power for Owners Profitability ratios are used for measuring potential earnings.

1. Earnings per Share. This ratio is calculated by dividing net income by the number of shares outstanding; this determines the size of the dividend that a firm can pay shareholders.

C. Activity Ratios: How Efficiently Is the Firm Using Its Resources?

Activity ratios reveal the efficiency with which firms have used resources; an example is when annual sales revenues can increase without an increase in operating costs.

KEY TEACHING TIPS •

Reinforce that the current ratio measures a company’s ability to meet current obligations out of current assets. The formula is Current Assets/Current Liabilities.

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Reinforce that long-term solvency indicates a company’s ability to repay debts in future years; the formula is Total Liabilities/Owners’ Equity.

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Point out earnings per share determines the size of the dividend a firm can pay shareholders; this can be determined using the formula Net Income/Share of Stock.

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QUICK QUESTIONS •

What do solvency ratios measure?

•

How can high debt be desirable for a company?

Use In-Class Activity 5: Class Discussion: Choose an Investment Time Limit: 30 minutes

HOMEWORK Interview a Manager Now is a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment asks students to interview the manager of a local retailer, wholesale business, or manufacturing firm about the role of ethics in that company’s accounting practices.

At-Home Completion Time: 1 hour

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Learning Objective 6: Discuss the role of ethics in accounting.

Bringing Ethics into the Accounting Equation A. Why Accounting Ethics?

The purpose of accounting ethics is to maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession.

1. AICPA’s Code of Professional Conduct. The code of professional conduct for public accountants in the United States is maintained and enforced by the AICPA; the following areas are included: responsibilities, the public interest, integrity, objectivity and independence, due care, and scope and nature of services.

2. Violation of Accounting Ethics and GAAP. The majority of recent accounting wrongdoing has related to the six ethics-related areas.

3. Ethics Means Doing the Right Thing. Ethics remains an area where one person who is willing to “do the right thing” can make a difference.

KEY TEACHING TIP It is critical that students recognize the purpose of ethics in accounting: to maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession

QUICK QUESTIONS •

What are the six ethics-related areas outlined by the AICPA in its Code of Professional Conduct?

•

What is the connection between the Sarbanes–Oxley Act of 2002 and the recent widespread violations of accounting ethics?

HOMEWORK Business Plan Now is a good time to assign the Part 5 of the business plan project. In this section, students consider their IT needs and costs and complete a balance sheet and income statement for their business.

At-Home Completion Time: 3 to 5 hours

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Learning Objective 7: Describe the purpose of the International Accounting Standards Board and explain why it exists.

A. International Accounting Standards Board Established in 2001 and housed at London, England, the International Accounting Standards Board (IASB) is an independent, nonprofit organization responsible for developing a set of global accounting standards, and for gaining the support and cooperation of the world’s various accounting organizations to implement those standards.

B. Why One Set of Global Practices?

Although more than 100 countries have adopted IASB’s accounting practices, nearly 40 others, including China, Canada, and the United States, continue to use their national GAAPs. Twenty-two U.S.-based global companies such as Google, Caterpillar, and Microsoft may prepare different financial reports using local accounting practices for each country in which they conduct business.

1. Example Areas Targeted for Aligning U.S. GAAP and IASB Among the many differences between the practices of U.S. GAAP and IASB—some reports identify more than 400 such discrepancies—the following examples illustrate some discrepancies and proposals for convergence toward universal standards in financial reporting. a. In valuing assets b. In revenue recognition c. In de-valuing of financial assets 2. Timetable for Implementation The U.S. Securities and Exchange Commission has targeted 2015 as the earliest date that U.S. companies will be required to use IASB procedures for financial reporting.

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IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker Do You Use Accounting?

Activity Overview: This activity asks students to think about the ways in which they use accounting in their personal lives.

Time Limit: 20 minutes What to Do: 1. Ask students to make a list of ways in which they use accounting in their personal lives. They might want to consider the following questions when making up their lists: (15 minutes) a. How do you keep track of what money is coming in? b. How do you keep track of what money is going out? c. How do you budget your money? d. How do you plan for unexpected expenditures? e. What types of “tools” do they use to keep track of their financial information? f. At later points in your life, do you think you will account for your money differently? If so, how?

2. Ask students to share any relevant information that might benefit other students in the class.

(5 minutes) Don’t Forget: Everyone has his or her own unique way of keeping track of their financial situation; some will be more effective than others.

Wrap Up: Remind students that we are all accountants to a certain degree. Bring the exercise to a close by briefly outlining accounting and previewing the types of accountants discussed in the chapter.

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In-Class Activity 2: Class Discussion Interpreting Financial Statements Activity Overview: This activity asks students to determine in which financial statement specific pieces of information are included.

Time Limit: 20 minutes What to Do: 1. In advance, make a list of revenues, expenses, assets, debts, etc.

2. Ask students to account for each item on a balance sheet or income statement as you reveal the item; for each item, ask, “Where would this go?” (20 minutes) Don’t Forget: Another alternative is to ask students to individually write down their answers and then discuss each item revealed and the rationale for including it in either the balance sheet or income statement.

Wrap-Up: Wrap up the activity by providing a brief overview of the accounting equation, followed by a brief overview of the roles of the financial statements.

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In-Class Activity 3: Small-Group Discussion Annual Reports Activity Overview: This activity gives students a chance to review actual financial information from annual reports of real companies.

Time Limit: 45 minutes What to Do: 1. In advance, ask students to bring a copy of a recent annual report to class. Make it clear that many companies post their annual reports online, so they can access the information they need on the Web. You may also want to bring a supply of annual reports in case students can’t get to them.

2. Divide students into groups of two and ask each group to review one of the annual reports. In particular, ask students to identify financial information that has been discussed in this chapter and discuss whether that information coincides with what has been presented in this chapter.

(30 minutes) 3. Reassemble the class as a whole and ask each group to reveal the financial status of their selected company. (15 minutes) Don’t Forget: Remind students to also pay attention to the opinion of each company’s auditing firm as revealed in the annual report.

Wrap-Up: Remind students of the use of the annual report, such as how potential investors in a corporation interpret such data prior to making a stock purchase.

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In-Class Activity 4: Class Discussion Choose an Investment Activity Overview: This activity asks students to calculate financial ratios and interpret the results.

Time Limit: 30 minutes What to Do: 1. Ahead of time, ask students to bring an annual report of a corporation of their choice to class.

2. Divide the class into groups of two, asking each group to calculate the following ratios/information based on information they find in the annual report (15 minutes): a. Current ratio b. Long-term solvency c. Earnings per share 3. Ask each group to discuss the following questions (15 minutes): a. What is the company’s ability to meet currency obligations out of current assets? b. Is the company likely to be able to repay debts in future years? c. What might be the size of the dividend that the firm can pay shareholders?

Don’t Forget: Information needed to calculate the above figures should be present in any financial statement.

You may want to bring a supply of annual reports in case students can’t get to them, or make it clear that many companies post their annual reports online so students can access the information they need on the Web. Wrap-Up: Bring the activity to a close by providing a brief overview of short- and long-term solvency, as well as what earnings per share indicate.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1. Business managers use accounting information to develop goals and plans, set budgets, and evaluate future prospects. Employees and unions use it to plan for and receive compensation and such benefits as health care, vacation time, and retirement pay. Investors and creditors use accounting information to estimate returns to stockholders, determine growth prospects, and decide whether a firm is a good credit risk. Tax authorities use it to plan for tax inflows, determine the tax liabilities of individuals and businesses, and ensure that correct amounts are paid on time. Government regulatory agencies rely on it to fulfill their duties toward the public. (Learning Objective 1 – AACSB – application of knowledge)

2. The three types of services performed by CPAs are auditing services, tax services, and management services. (Learning Objective 1 – AACSB – application of knowledge) 3. Financial accounting is concerned with external information users—the firm’s external stakeholders: consumer groups, unions, stockholders, suppliers, creditors, and government agencies. Managerial accounting serves internal users.

(Learning Objective 1 – AACSB – application of knowledge)

4. Forensic accountants may be called on—by law enforcement agencies, insurance companies, law firms, and business firms—for both investigative accounting and litigation support in crimes against companies, crimes by companies, and civil disagreements.

(Learning Objective 1 – AACSB – application of knowledge) 5. The balance sheet reflects a firm’s financial condition at one point in time by supplying detailed information about the firm’s assets, liabilities, and owners’ equity. The income statement reflects a firm’s profit or loss by comparing the firm’s revenues with its expenses.

The statement of cash flows describes a company’s yearly cash receipts and cash payments.

(Learning Objective 2 – AACSB – application of knowledge)

QUESTIONS FOR ANALYSIS 6. Balance sheets and statements of cash flow both provide a piece of the picture. Balance sheets reveal profitability and the relationship of assets to liabilities and owners’ equity for a given date; while statements of cash flows reveal the firm’s operations through analysis of cash flows. (Learning Objective 2, 3 – AACSB – application of knowledge, reflective thinking) 7. You should encourage students to carefully examine their current assets and liabilities, fixed assets, and long-term debt. Many students will have never completed a balance sheet and will

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be surprised by their net worth. Additionally, remind students that they should annually review their financial statements.

(Learning Objective 3 – AACSB – application of knowledge, reflective thinking)

8.

Answers will vary but students will probably note the large numbers of countries that have to agree, the impact, cost of implementation, tax laws, shareholder impact, etc.

(Learning Objective 2 – AACSB – application of knowledge, reflective thinking)

APPLICATION EXERCISES 9. Answers will vary, but students will probably recognize that firms sometimes develop budgets from scratch, but more often by using previous years’ data. Budgets usually provide control for company spending or resource allocation.

(Learning Objective 3 – AACSB – application of knowledge, reflective thinking) 10. Answers will vary, though most managers will attest that ethics are an extremely important consideration in their company’s accounting practices. Likely all those managers interviewed will mention their recipes for ensuring internal ethical practices.

(Learning Objective 6 – AACSB – application of knowledge, reflective thinking)

BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 15- 11- 15 (Learning objectives 1, 2, 3 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) In this assignment, the team will have the opportunity to see how they will use the three main financial statements, how choices impact their cash flow statement, understand the role financial data plays in creating a successful business, the role financial documents play in obtaining credit, and who will on the team will be responsible for creating and maintaining the necessary data.

BUILDING YOUR BUSINESS SKILLS: PUTTING THE BUZZ IN BILLING (Learning objectives 4, 5 - AACSB analytical and reflective thinking, application of knowledge) 16. An electronic system could eliminate much of the handling required by a paper system. It would also virtually eliminate postage and paper, and it would reduce human error.

17. Most businesses that you deal with would benefit from increased speed and accuracy, but those that provide goods and services that require manual processing would experience reduced demand for their products.

18. The high costs are short term, while savings from the elimination of paper, postage, handling, and error will accumulate over time. Large capital expenditures reflected in the long-term liabilities on the income statement will not affect the current ratio.

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19. Answers will vary, but students should note that they would likely receive at least a handful of complaints from each customer group during the transition process. Long-run business customers would be more likely than individual customers to convert completely to the new system.

EXERCISING YOUR ETHICS: GIVE AND TAKE WITH ACCOUNTING CLIENTS (Learning objective 6 - AACSB – Ethical understanding and reasoning, reflective thinking) 20. Katrina completed the work according to accepted accounting standards. The ethical issues is that she has maintain the accounting standards but by doing so, she will possibly lose a major client.

21. Aaron’s argument is that he is trying to reduce his tax bill and since the work was done towards the end of the year and the payment was possibly received in the current year, he does not see any problems with changing the dates and statements. Katrina’s position is that as a licensed professional prevents her from changing the financial statements.

22. Answers will vary, but most students will agree that Katrina completed the work correctly and that Aaron should not ask Katrina to change the returns. If Katrina explains the ethical requirements for CPAs, maybe Aaron will better understand her position.

TEAM EXERCISE: CONFIDENTIALLY YOURS 15- 23 - 27 AACSB – Ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking) This should be an interesting discussion since most students will focus on the company policy that does not restrict the Head Accountant from taking a position with a competitor. Many of the students will not perceive any ethical dilemma.

CASES: WALL STREET (Learning objective 1 - AACSB – Ethical understanding and reasoning, reflective thinking) 28. When choosing various fraud protection methods, costs and effectiveness would obviously be key factors.

29. If the article is correct that fraudulent activities increase during an economic downturn and fraudulent activity has become more sophisticated, then there are new opportunities for a CFE to probe electronic records and cash transfers.

30. A CFE would have more expertise in pursuing and finding the fraud.

31. The training should include: asset theft, review of financial statements, checking documentation, inventory review, cash accounts, etc.

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32. “The broad scope of fraud—its costs, who commits it and how, and how it is detected— “ might affect the decision to investigate a fraud case.

FUTURE DIRECTIONS FOR THE MODERN ACCOUNTANT (Learning objective 1, 6, 7 - AACSB – Ethical understanding and reasoning, reflective thinking) 33. This discussion applies to management accountants because of the internal focus and expectation of project management, consulting and evaluating strategic opportunities.

34. This article also applies to forensic accountants since they use accounting for legal purposes and this article discusses the additional competencies of “assessment of risks and threats”, etc. now required of the modern accountant.

35. A CPA services and Sarbox could potentially conflict since the rules prevent a CPA from designing a financial system as well as auditing said system.

36. A modern accountant will still continue to rely on record keeping to enter and track transactions and conduct ratio analysis to ascertain the financial health of companies.

37. Many students will argue that today’s reporting requirements and the broader role of the modern accountant’ places a greater emphasis on ethics and the possibility of potential conflict.

PART 5: BUSINESS PLAN PROJECT Managing Information Assignment Overview: The fifth part of the business plan project asks students to think about their business in terms of their business needs and costs. Specifically, students are asked to determine their IT needs and resources and are asked to complete a balance sheet and an income statement for their business.

Many students find this part of the plan especially challenging, and will have trouble estimating their costs. Remind them that the values they calculate in this part of the plan are estimates, and there is no surefire method for accurately measuring how a business may perform. You may want to spend some class time going over each question in this part of the plan and create a list of sources that students can use when calculating their costs.

Files to Provide Students: If you would like students to complete a balance sheet and an income statement for their businesses, a sample spreadsheet file is available for them to consult in the following pages. Full Business Plan templates are also available at www.mybizlab.com.

Part 5 Estimated At-Home Completion Time: If done well, this section will require a minimum of 3 to 5 hours. Instructor feedback is critical in this part of the plan, as most students will need some direction in gathering information that will help answer the questions related to costs.

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Homework Deliverable from Students: The length of this section should be somewhat consistent, although some variance can be expected. You should expect about 4 to 5 pages in this section.

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STUDENT BUSINESS PLAN PROJECT TEMPLATE PART 5: MANAGING INFORMATION IT RESOURCES What kind of IT resources will your business require?

Hint: Think about the employees in your business and what they will need in order to do their jobs. What computer hardware and software will they need? Will your business need a network and an Internet connection? What type of network? Refer to Chapter 13 for a discussion on IT resources you may want to consider.

CUSTOMER SERVICE How will you use information technology to keep track of your customers and potential customers?

Hint: Many businesses—even small businesses—use databases to keep track of their customers.

Will your business require a database? What about other information systems? Refer to Chapter 13 for more information on these topics.

COST OF DOING BUSINESS What are the costs of doing business? Equipment, supplies, salaries, rent, utilities, and insurance are just some of these expenses. Estimate what it will cost to do business for one year.

Hint: Insert the costs associated with doing business in the table below. The list below provides some hints as to where you can get this information. Note that these are just estimates—just try your best to include accurate costs for the expenses you think will be a part of doing business.

HINTS FOR EACH EXPENSE IN THE TABLE: Rent: Refer to the floor plan. How many square feet is your place of business? What is the “going rate” per square foot for office space in your community? A real estate agent or a local SBA representative (www.sba.gov) can also be helpful in answering this question.

Salaries: Refer to the organizational chart. How much will each employee earn? How many hours will each employee be needed on a weekly basis? Once you’ve determined the weekly cost, expand it to a monthly and a yearly cost.

Supplies: Refer to the floor plan. How much will all the computers, equipment, and furniture cost? What kinds of general office supplies will you need? Most prices for this information can be found on an office supply Web site, such as www.staples.com.

Advertising and Other Promotions: Refer to your marketing section. You have described how you wish to reach your customer—now you need to decide how much it will cost. If you are using television, contact the sales department at a local station. If you are using newspaper, contact their advertising department. Salespeople are usually happy to answer your questions.

Utilities: These amounts will vary, depending on your business and what utilities you will pay. If your business looks like an office, this cost may be similar to what a homeowner pays. However, if your business involves making a product, then the costs will be significant. An SBA

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representative can be a good resource.

Insurance: This value will be affected by the nature of the business. More equipment will usually mean higher insurance costs. Again, contact an SBA representative for feedback.

EXPECTED REVENUE How much will you charge for your product? How many products do you believe you can sell in one year (or how many customers do you think your business can attract)? Multiply the price you will charge by the number of products you hope to sell or the amount you hope each customer will spend. This will give you an estimate of your revenues for one year.

Hint: You will use the amounts you calculate in the costs and revenues questions in this part of the plan in the accounting statements in the next part, so be as realistic as you can.

INCOME STATEMENT AND BALANCE SHEET Create a balance sheet and an income statement (profit-and-loss statement) for your business.

This chapter has discussed income statements and balance sheets. This is a good opportunity to show students how to prepare a spreadsheet (see following pages) into which to put the financial information for an income statement and a balance sheet.

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Income Statement (Profit-and-Loss Statement) June

July

Aug.

Sept.

Oct.

Nov.

Dec.

……

YEARLY

Revenue (Sales) Category 1 Category 2 Total Revenue (Sales) Cost of Goods Sold Category 1 Category 2 Total Cost of Goods Sold Gross Profit Expenses Rent Expense Salary/Wage Expenses Supplies Expense Advertising Expense Utilities Expense Telephone/Internet Expense Insurance Expense Interest from Loans (if applicable) Other Expenses (specify) Total Expenses Net Profit

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Balance Sheet Assets Current Assets Cash Cash Value of Inventory Prepaid Expenses (insurance) Total Current Assets Fixed Assets Machinery and Equipment Furniture and Fixtures Real Estate/Buildings Total Fixed Assets Total Assets

Liabilities and Net Worth Current Liabilities Accounts Payable Taxes Payable Notes Payable (due within 12 months) Total Current Liabilities Long-Term Liabilities Bank Loans Payable (greater than 12 months) Less: Short-Term Portion Total Long-Term Liabilities Total Liabilities Owners’ Equity (Net Worth) Total Liabilities and Owners’ Equity

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ACTIVITIES ON MYBIZLAB - INSTRUCTOR TIPS BizSkills: OBM & Financial Statements Instructor Tips

Available at: mybizlab.com

Brief Synopsis/Objectives: In this BizSkill, students play the owner of a struggling restaurant. They’re asked to figure out ways to turn the restaurant around. They must weigh the pros and cons of opening books, and listen to various suggestions from others about the best ways to improve the numbers.

At the end of the BizSkill, students should be able to answer the following questions: How to Best Use This BizSkill: A great way to use this BizSkill is to assign it as homework before your first lecture on the chapter. Ask students to print out their feedback page, and then have them do the BizSkill again at the end of the week to see whether their scores have improved.

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Chapter 16: Understanding Money and the Role of Banking Chapter Overview Do you remember your first summer job? Whether it was babysitting, delivering papers, or mowing lawns, think of how long it took to save just a few dollars. And most of us learned just how valuable those few dollars were once they were spent on something. Money is discussed in every introductory business class, and it is the one topic with which we are all familiar.

This chapter presents the different forms that money takes in the nation’s money supply and discusses the different types of financial institutions that compose the U.S. financial system. It also looks at how financial institutions create money and describes the means by which they are regulated. The functions of the Federal Reserve System are discussed, as are the tools that it uses to control the money supply. Finally, the chapter identifies three important ways in which the money and banking system is changing and touches on some of the institutions and activities in international banking and finance.

Learning Objectives 1. Define money and identify the different forms that it takes in the nation’s money supply.

2. Describe the different kinds of financial institutions that compose the U.S. financial system and explain the services they offer.

3. Explain how financial institutions create money and describe the means by which they are regulated.

4. Discuss the functions of the Federal Reserve System and describe the tools that it uses to control the money supply.

5. Identify three important ways in which the money and banking system is changing.

6. Discuss some of the institutions and activities in international banking and finance.

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LIST OF IN-CLASS ACTIVITIES: AUTHOR’S CHOICE Activity 1. Ice-Breaker: How Much Would That Be in, Say, Chocolate Bars?

2. Up for Debate: Your Check Is Not in the Mail

Description Students consider the characteristics of money when making purchases using something other than “money.”

Students analyze the pros and cons of traditional check writing versus electronic payments.

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CHAPTER OUTLINE Learning Objective 1: Define money and identify the different forms that it takes in the nation’s money supply.

What Is Money?

A. The Characteristics of Money Money has four main characteristics: 1. Portability 2. Divisibility 3. Durability 4. Stability B. The Functions of Money Money serves three functions: 1. It is a medium of exchange. We use money to buy and sell things.

2. It is a store of value. Money can be saved and used for future purchases.

3. It is a measure of worth. All products can be valued in terms of money.

C. M-1: The Spendable Money Supply The value of money decreases when its supply is high; when the money supply is low, its value increases. A common measurement of the money supply is M-1, which counts only the most liquid forms of money, including currency (cash), checks, and checking accounts (demand deposits).

D. M-2: M-1 Plus the Convertible Money Supply M-2 includes everything in M-1 plus other forms of money that are not quite as liquid— items that are invested for the short term, but are easily converted to spendable forms. The major components of M-2 are M-1, time deposits, money market mutual funds, and savings accounts.

E. Credit Cards and Debit Cards: Plastic Money?

Credit cards, however, are not money and, accordingly, are not included in M-1 or M-2 when measuring the nation’s money supply KEY TEACHING TIPS •

Point out that just about any object that can serve as money is portable, divisible, durable, and stable.

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Explain each of the following characteristics of money: portability, divisibility, durability, and stability.

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Students often confuse the characteristics of money with the functions of money. At this point, a quick review of both may be helpful.

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•

Prior to the discussion of the M-1, M-2, it may be helpful to point out that the value of money depends on its supply—meaning how much is in circulation. For example, the value of money drops when supply is high.

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Students should keep M-2 separate from M-1. M-2 includes M-1 plus other forms of money that are not quite as liquid, such as time deposits, money market mutual funds, and savings accounts.

QUICK QUESTIONS •

How is it that checking accounts can be counted as part of M-1?

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Different cultures “put different spins” on monetary transactions. For example, money is exchanged with a good deal of respect, even down to the way it is handled, in Japan.

What are some other ways different cultures “put different spins” on money?

Use In-Class Activity 1: Ice-Breaker: How Much Would That Be in, Say, Chocolate Bars?

Time Limit: 30 minutes Use In-Class Activity 2: Up for Debate: Your Check Is Not in the Mail Time Limit: 20 minutes

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Learning Objective 2: Describe the different kinds of financial institutions that compose the U.S. financial system and explain the services they offer.

The U.S. Financial System A. Financial Institutions Financial institutions ease the flow of money from sectors with surpluses to those with deficits.

1. Commercial Banks. Commercial banks are companies that accept deposits that they use to make loans, earn profits, pay interest to depositors, and pay dividends to owners. a. Diversification and Mergers. In recent years, financial industry competitors have grown faster than commercial banks in the United States. In efforts to regain competitiveness, banks were merging at a record-setting pace in the 1990s, a trend that continues today. b. Commercial Interest Rates. Banks can set their own interest rates. Traditionally, the lowest rates were made available to the bank’s most creditworthy commercial customers. That rate is called the prime rate. Most commercial loans are set at markups over prime, like prime +1.

2. Savings Institutions. Savings institutions include mutual savings banks and savings and loan institutions. They are often called thrift institutions.

3. Savings and Loan Associations. Savings and loan associations (S&Ls) accept deposits, make loans, and are owned by investors.

4. Mutual Savings Banks. In mutual savings banks, all depositors are considered owners of the bank. All profits, therefore, are divided proportionately among depositors, who receive dividends.

5. Credit Unions. A credit union is a nonprofit, cooperative financial institution owned and run by its members. Its purpose is to promote thrift—careful management of one’s money or resources—and to provide members with a safe place to save and borrow at reasonable rates.

6. Nondeposit Institutions. A variety of other organizations take in money, provide interest or other services, and make loans. They are called nondeposit institutions because, unlike commercial banks, inflowing funds are intended for purposes other than earning interest for depositors. Four of the most important are pension funds, insurance companies, finance companies, and securities investment dealers (brokers).

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B. The Growth of Financial Services 1. Pension and Trust Services. Individual retirement accounts (IRAs) are pension funds that wage earners and their spouses can set up to supplement other retirement funds.

Banks receive funds and invest them as directed by customers and provide information on IRA investment alternatives. Many commercial banks offer trust services—the management of funds left “in the bank’s trust.”

2. International Services. The three main international services offered by banks are currency exchange, letters of credit, and banker’s acceptances. A letter of credit is a promise by the bank to pay a firm a certain amount, if specified conditions are met. A banker’s acceptance promises that the bank will pay a specified amount at a future date.

3. Financial Advice and Brokerage Services. Serving as financial advisors, banks help customers manage their money by recommending different investment opportunities and serving as a securities intermediary.

4. Electronic Funds Transfer. Electronic funds transfer (EFT) systems transfer many types of financial information over wire, cable, or microwave. a. Automated Teller Machines. Automated teller machines (ATMs) allow customers to withdraw money, make deposits, transfer funds, and check on account status.

KEY TEACHING TIPS •

Remind students that financial institutions include commercial banks, savings and loan associations, mutual savings banks, and credit unions.

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Make sure students understand the distinction between the traditional IRA, the Roth IRA, and the Educational IRA.

QUICK QUESTIONS •

What are ways in which financial institutions have diversified in recent years?

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What was the traditional purpose of a savings and loan association?

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Who are considered the owners of mutual savings banks and credit unions?

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How are nondeposit institutions different from commercial banks?

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When might a letter of credit be used? When might a banker’s acceptance be used?

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How do consumers benefit from EFT?

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Learning Objective 3: Explain how financial institutions create money and describe the means by which they are regulated.

Financial Institutions as Creators of Money Financial institutions create money by taking in deposits and making loans, which expands the money supply.

Regulation of the Banking System. Banks create money; therefore, the government regulates them via the Federal Reserve System and the Federal Deposit Insurance Corporation to ensure a sound financial system.

Federal Deposit Insurance Corporation (FDIC). The Federal Deposit Insurance Corporation (FDIC) insures deposits in member banks up to $100,000. However, in 2008 this was temporarily increased to $250,000 until 2013 to ensure public confidence in the banking system

KEY TEACHING TIPS •

Make sure students understand that the Federal Reserve System (the Fed) is the central bank of the United States; it is composed of a board of governors, 12 reserve banks, and thousands of member banks.

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Point out that some financial institutions don’t belong to the Federal Reserve System; however, they are still subject to the Fed’s regulations, pay deposit insurance premiums, and are covered by the FDIC.

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Learning Objective 4: Discuss the functions of the Federal Reserve System and describe the tools that it uses to control the money supply.

The Federal Reserve System The Federal Reserve System (the Fed) is the nation’s central bank.

A. The Structure of the Fed The Fed is comprised of a board of governors, a group of reserve banks, and member banks.

1. The Board of Governors. This group is comprised of seven members appointed by the president for 14-year terms; the board plays a major role in controlling the money supply through reserve requirements, discount rates, and open-market operations.

2. Reserve Banks. There are 12 banks in the Fed that hold deposits from and set the discount rate for commercial banks in their respective regions; reserve banks also largely contribute to the country’s check-clearing process.

3. Open Market Committee. The Federal Open Market Committee is responsible for formulating the Fed’s monetary policies to promote economic stability and growth by managing the nation’s money supply.

4. Member Banks. National banks and some state banks are members of the Fed; depositor accounts in member banks are protected by FDIC. 5. Other Depository Institutions. Although many state-chartered banks, credit unions, and S&Ls do not belong to the Fed, they are subject to its regulations, pay deposit insurance premiums, and are covered by the FDIC. B. The Functions of the Fed The Fed functions as the government’s bank and the banker’s bank and control the money supply.

1. The Government’s Bank. The Fed produces the nation’s currency and lends money to the government to finance the national deficit.

2. The Bankers’ Bank. Individual banks that need money can borrow from the Fed and pay interest on the loans. In addition, the Fed provides storage for commercial banks, which are required to keep funds on reserve at a Federal Reserve Bank.

3. Check Clearing. The Fed also clears checks. With electronic payments, however, the number of paper checks processed is falling, with fewer than 7 billion cleared by the Fed in 2012

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4. Controlling the Money Supply. The Fed is responsible for the conduct of U.S. monetary policy—the management of the nation’s economic growth by managing money supply and interest rates.

C. The Tools of the Fed In controlling the money supply, the Fed uses four main tools: reserve requirements, discount rate controls, open-market operations, and selective credit controls.

1. Reserve Requirements. The reserve requirement is the percentage of its deposits that a bank must hold, in cash or on deposit, with a Federal Reserve Bank. High reserve requirements reduce the money available to lend; low requirements allow the money supply to expand.

2. Interest Rate Controls. As the bankers’ bank, the Fed loans money to banks. The discount rate is the interest rate that the Fed charges on loans made to member banks.

An increased discount rate reduces the money supply; a low rate encourages borrowing and lending.

3. Open-Market Operations. Open-market operations refer to the Fed’s sale and purchase of securities (usually U.S. Treasury notes and bonds) in the open market, as directed by the open-market committee.

KEY TEACHING TIPS •

Reinforce that monetary policy is the management of the nation’s economic growth by managing money supply and interest rates; the Fed is responsible for monetary policy.

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Students often forget that selective credit controls allow the Fed to set special requirements for consumer stock purchases, as well as credit rules for other consumer purchases.

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Remind students that the discount rate is the interest rate charged by the Fed for loans made to banks.

QUICK QUESTIONS •

How does the Fed serve as the “government’s bank”?

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How does the Fed serve as the “bankers’ bank”?

What typically happens to demand for goods and services, and their prices, during inflationary times?

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How does increasing the reserve requirement help to reduce inflation?

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Remind students that the discount rate is the interest rate charged by the Fed for loans made to banks.

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How does the Fed control the nation’s money supply through open-market operations?

HOMEWORK Creating Money Now is a good time to assign Application Exercise 10 from the end-of-chapter materials of the textbook as homework (see page 408 of the text). This assignment asks students to trace the amount of money created by a banking system after five lending cycles based on hypothetical data.

At-Home Completion Time: 20 minutes HOMEWORK Interview a Manager Now is also a good time to assign Application Exercise 11 from the end-of-chapter materials of the textbook as homework (see page 408 of the text). This assignment asks students to interview the local manager of a bank and determine how requirements of the Bank Secrecy Act and the USA PATRIOT Act have affected the bank.

At-Home Completion Time: 1–2 hours

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Learning Objective 5: Identify two important ways in which the money and banking system is changing.

The Changing Money and Banking System B. Anti-crime and Anti-Terrorism Regulations The Bank Secrecy Act requires financial institutions to formulate methods, such as monitoring and keeping records of customer transactions, to deter funding of crimes.

USA PATRIOT Act and the Customer Identification Program (CIP). The USA PATRIOT Act requires that financial institutions obtain and verify four pieces of information for every customer: name, address, date of birth, and social security number.

A customer identification program (CIP) verifies identities, keeps records of customer activities and, for new customers, compares identities with government lists of terrorists.

C. The Impact of Electronic Technologies Investing in new technologies allows banks to improve their efficiency and customer service levels.

1. Automated Clearing House (ACH) Network. ACH is an electronic funds transfer system that provides interbank clearing of electronic payments for the nation’s financial institutions.

2. Check 21: Making the Paper Check Go Away. Check 21 allows banks to present a substitute check for payment instead of the original check.

3. Blink Credit Cards. This “contactless” payment system allows consumers to wave a card in front of the merchant’s terminal and be on his or her way.

4. Debit Cards. Debit cards allow the transfer of money between accounts and can be used to make retail purchases. In stores with point-of-sale (POS) terminals, customers insert cards that transmit information relevant to their purchases to terminals.

5. Smart Cards. Smart cards are plastic cards with an embedded computer chip that can be programmed with “electronic money.”

QUICK QUESTIONS •

How might check writers benefit from Check 21? How might financial institutions benefit from Check 21?

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Learning Objective 6: Discuss some of the institutions and activities in international banking and finance.

International Banking and Finance Electronic technologies permit nearly instantaneous financial transactions around the globe.

A. Currency Values and Exchange Rates One index for the value of the U.S. dollar, for example, is the average of its foreign exchange values against the currencies of a large group of major U.S. trading partners. The resulting exchange rate, the value of one currency compared to the value of another, reveals how much of one currency must be exchanged for another.

1. Strong Currency or Weak: Which Is Better? Most people would prefer a “strong” currency, right? But it depends on how it will be used.

2.

Bank Policies Influence Currency Values. In managing the money supply and interest rates, the Fed strongly influences the dollar’s strength against other currencies.

B. The International Payments Process International payments are simplified through the services provided by their local banks.

When money inflows and outflows remain equal for both countries, as a result of international transactions, money does not have to “flow” between the two countries. Within each bank, dollars spent by local importers affect dollars received by local exporters.

C. International Bank Structure Worldwide banking stability relies on a loose structure of agreements among individual countries.

1. The World Bank. The World Bank provides only a very limited scope of services, such as funding national improvements by making loans to build roads, schools, power plants, and hospitals.

2. The IMF. The International Monetary Fund (IMF) promotes the stability of exchange rates, provides temporary loans to member countries, encourages members to cooperate on international monetary issues, and encourages the development of a system for international payments.

QUICK QUESTION •

For what purposes has the International Monetary Fund been designed?

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IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker How Much Would That Be in, Say, Chocolate Bars?

Activity Overview: This exercise asks students to consider the characteristics of money when making purchases using something other than “money.”

Time Limit: 30 minutes What to Do: 1. Divide the class into groups of two.

2. Ask each group to consider making the following purchases: a. X number of cans of soda for X number of gallons of gasoline b. X number of hours of overtime for X number of extra vacation days per year c. X number of days without the use of a cell phone for X number of days use of a car 3. Ask each group member to interview his or her partner to determine just how many cans of soda he or she would be willing to “pay” for a gallon of gas; how many hours of overtime would be worth an extra one day of vacation from work; and how many days he or she would be willing to give up the use of a cell phone in order to have access to a car. (15 minutes) 4. Ask each group to discuss whether any “characteristics” of money are evident in these transactions. (5 minutes) 5. Reassemble to class and share some of the groups’ responses. (10 minutes) Don’t Forget: Students’ perceived values in each of the above transactions will vary greatly; for example, a student without a cell phone would not miss it much, etc.

Wrap Up: Bring the activity to a close by providing a brief overview of the characteristics of money, relating them to the previous transactions.

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In-Class Activity 2: Up for Debate Your Check Is Not in the Mail Activity Overview: This activity asks students to consider the advantages and disadvantages of replacing traditional check writing with electronic payments.

Time Limit: 20 minutes What to Do: 1. Ask students to work independently to make a list of pros and cons of using traditional check writing and a list of pros and cons of using debit cards. (10 minutes) 2. Bring the class together to discuss the pros and cons of each option. Which option does the class prefer? Why? (10 minutes) Don’t Forget: To come up with an overall class preference, you may want to take a vote. Note: Using debit cards might allow for an easier comparison, since many students are more likely to use debit cards than checks.

Wrap Up: Bring the debate to a close by highlighting some of the advantages and disadvantages mentioned for each option; remind students that check writing is expected to be completely replaced by electronic payments.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1. Money must be portable or light to carry. Money must be divisible, meaning that it can be divided into smaller parts—such as four quarters or ten dimes to equal one dollar. Money must also be durable and stable, giving it somewhat limited capability to fluctuate.

(Learning Objective 1 – AACSB – reflective thinking) 2. M-1 consists of currency, demand deposits, and other checkable deposits. M-2 includes M-1 as well as time deposits, money market mutual funds, savings deposits, and overnight transactions. (Learning Objective 1 – AACSB – reflective thinking) 3. Commercial banks use deposits to make loans and to earn profits. Savings and loan associations accept deposits and make loans primarily for home mortgages. Nondeposit institutions, including pension funds, insurance companies, finance companies, and securities investment dealers, take in money, provide interest, and/or make loans. (Learning Objective 3 – AACSB – reflective thinking) 4. The Fed is made up of a board of seven governors, twelve Reserve Banks, and member banks. (Learning Objective 4 – AACSB – reflective thinking) QUESTIONS FOR ANALYSIS 5.

Answers may vary, but students should indicate that credit cards are portable, divisible, durable, and stable and serve as a medium of exchange, a store of value, and a unit of account, even though they represent borrowed.

(Learning Objective 1 – AACSB – reflective thinking)

6. Answers will vary. This is a particularly good question to ask in light of the 2008 Government bail-out of the banking sector. (Learning Objective 5 – AACSB – reflective thinking) 7. Online banks can offer higher returns because they do not have the same fixed assets required by main street banks. They also have the opportunity to offshore significant portions of their processes, thus keeping costs to a minimum. The disadvantage is that it is not possible to meet a bank representative face-to-face to discuss issues of personal finance.

(Learning Objective 5 – AACSB – reflective thinking) 8. Cycle 1: $1,000.00

Cycle 1 $1,000 X 0.85 = $850.00 Cycle 2: $850.00 X 0.85 = $722.50 Cycle 3: $722.50 X 0.85 = $614.12 Cycle 4: $614.12 X 0.85 = $522.00 Cycle 5: $522.00 X 0.85 = $443.70 TOTAL = $3,152.32 (Learning objective 3 – AACSB – application of knowledge)

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APPLICATION EXERCISES 9. Currently there are 6.06 Chinese Yuan to $1. The current value would be 30,300 Chinese Yuan for $5,000. Over the last 5 years, the value of the dollar to the Yuan has declined approximately 12.5 % so in 5 years you would receive approximately 26,512 Yuan.

(Learning objective 6 – AACSB – application of knowledge) 10. Answers will vary, but most managers willing to discuss this topic will mention how the Bank Secrecy Act requires financial institutions to formulate methods to deter funding of crimes. The USA PATRIOT Act requires that bank know customers’ true identities.

(Learning objective 5 – AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE ASSIGNMENT 16- 11 – 15 (Learning objectives 4, 5 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) This exercise helps students focus on what they need to know to stay up to date on business news and keep track of how fiscal and monetary policy changes (including currency exchange rates, credit policies, etc.) and other external events might affect the company. The challenge is to make sense of what’s going on in the world and keep the company afloat.

BUILDING YOUR BUSINESS SKILLS: FOUR ECONOMISTS IN A ROOM (Learning objectives 4 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) 16. The Fed uses the discount rate to enhance or inhibit the economy to control inflation and resulting interest rates. It also determines a reserve requirement that reduces or expands the money supply. The Fed may also stipulate selective credit controls.

17. Answers will vary, but students should recognize that economics is part art and part science, and unforeseen events can disrupt the most careful analysis and predictions.

EXERCISING YOUR ETHICS: TELLING THE ETHICAL FROM THE STRICTLY LEGAL (Learning objective 2 - AACSB – Ethical understanding and reasoning, reflective thinking) 18. From an economic standpoint, the fees can be justified since the bank is offering a service to noncustomers, and should be compensated for the cost of that service plus a fair profit margin.

19. Answers will vary, but potential ethical issues revolve around the bank’s responsibility to the communities in which it operates. Questions might include: • Is it right to charge people exorbitant fees (from a percentage standpoint) to access their own money?

• What if no other ATMs were available in certain communities?

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20. Answers will vary, but students will likely point out that ATM fees are legal and that banks must make money in order to operate. On the other hand, some students will mention how officers in a bank may be concerned with the bank’s image in the community and industry as a result of being targeted by groups, such as the U.S. Public Interest Research Group.

TEAM EXERCISE: VIRTUAL BANKING: AN IDEA WHOSE TIME HAS COME?1621 – 25 (Learning objectives 4 - AACSB interpersonal relations and teamwork, ethical understanding and reasoning analytical and reflective thinking, application of knowledge) This could be a really interesting discussion. The students’ responses to the Action Steps will vary widely due to differences in perception. Many students will argue that a virtual bank will better serve customers and permit the bank to continue operations and employment for at least some employees. Other students will argue that a virtual bank will be attractive to younger customers but not appealing to the older generation and the majority of employees will lose their jobs.

CASES: A TALE OF TWO WORLDS IN BANKING16- 26– 29 (Learning objectives 1, 2, 3, 4 - AACSB analytical and reflective thinking, application of knowledge) CASES: GLOBAL TRADING PARTNER RESETS ITS ECONOMIC COMPASS

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Chapter 17: Managing Business Finances Chapter Outline Retirement! Now there’s something that most students do not think about, yet it is something that we all must strategically plan for. This chapter introduces us to the concept of the time value of money and the principle of compound growth that is central to our creation of wealth—wealth that we will need to fund our retirements!

The chapter introduces the student to the investment opportunities offered by mutual funds and exchange-traded funds. It describes the role of securities markets and identifies the major stock exchanges in the world. The chapter introduces students to the concept of the risk-return relationship and discusses the value of diversifying an investment portfolio. Finally, the chapter examines how a firm can raise funds through equity or debt financing.

Learning Objectives 1. Explain the concept of the time value of money and the principle of compound growth, and discuss the characteristics of common stock.

2. Identify reasons for investing and the investment opportunities offered by mutual funds and exchange-traded funds.

3. Describe the role of securities markets and identify the major stock exchanges and stock markets.

4. Describe the risk-return relationship and discuss the use of diversification and asset allocation for investments.

5. Describe the various ways that firms raise capital and identify the pros and cons of each method.

6. Identify the reasons a company might make an initial public offering of its stock, explain how stock value is determined, and discuss the significance of market capitalization.

7. Explain how securities markets are regulated.

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LIST OF IN-CLASS ACTIVITIES: AUTHOR’S CHOICE Activity 1. Ice-Breaker: What Should I Buy? 2. Up for Debate: What’s Wrong with a Little Inside Scoop?

Description Students make preliminary purchasing decisions about stocks based on what they already know about the companies and the stock market in general.

Students are divided into teams to debate the ethics of insider trading.

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Time Limit 30 min.

30 min.

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CHAPTER OUTLINE Learning Objective 1: Explain the concept of the time value of money and the principle of compound growth, and discuss the characteristics of common stock.

Maximizing Capital Growth Wise investment is the key to growing your money, especially if you are seeking to build capital to start your own business. A number of concepts come into play when we are searching for investment opportunities: A. The Time Value of Money The time value of money is a concept that recognizes that if we invest money, it makes more money over time through the addition of compound interest.

1. The Rule of 72 is a handy rule of thumb to estimate how long it will take to double an investment. You can find the number of years it will take to double an investment by dividing 72 by the annual interest rate of the investment (in percent). Thus, a 10 percent investment will take 7.2 years to double.

2. Making Better Use of Your Money. Each year, interest is added to our investments. If we continually reinvest the principal amount and the interest, the growth of our money will become larger each year.

B. Common Stock A stock is a portion of the ownership of a corporation. The company’s total ownership is divided into small parts, called shares, which can be bought and sold to determine how much of the company (how many shares of stock) is owned by each investor.

1. Common Stock. A share of common stock is the most basic form of ownership in a company. Individuals and other companies purchase a firm’s common stock in the hope that it will increase in value, provide dividend income, and enable shareholders to vote on major issues that are brought before the shareholders. a. Market value is the current share price in the stock market. b. Book value of common stock is stockholders’ equity divided by the number of outstanding shares.

2. Investment Traits of Common Stock. Growth prospects in various industries change from time-to-time. Blue chip stocks are stocks of well-established firms that consistently provide investors with secure income from dividend payouts.

3. Dividend. A dividend is a payment to shareholders, on a per-share basis, out of the company’s earnings

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KEY TEACHING TIPS •

Remind students that compound interest will either work for them or against them. It works for them when they invest, but against them when they borrow

•

Reinforce the point that a stock is a portion of the ownership of a corporation. Common stocks represent the most basic form of ownership in a company.

•

Common stocks are risky securities, but blue chip stocks are issued by the strongest, most financially sound firms that provide investors with steady income.

QUICK QUESTIONS •

What is meant by the time value of money?

•

What is common stock?

•

What is different about the market value and the book value of a share?

•

What is a dividend? Why do some investors receive dividends?

Use In-Class Activity 1: Ice-Breaker: What Should I Buy? Time Limit: 30 minutes Use In-Class Activity 2: Up for Debate: What’s Wrong with a Little Inside Scoop?

Time Limit: 30 minutes

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Learning Objective 2:

Identify reasons for investing and the investment opportunities offered by mutual funds and exchange-traded funds Mutual Funds Mutual funds are created by companies such as T. Rowe Price and Vanguard that pool cash investments from individuals and organizations to purchase a portfolio of stocks, bonds, and other securities. The portfolio is expected to increase in value.

A. Reasons for Investing Mutual funds are flexible in their investment goals. It is relatively easy to open a mutual fund account. The three most common objectives for opening a mutual fund account are: •

Stability and Safety. Funds stressing safety include money market mutual funds and other funds that preserve the fund holders’ capital and reliably pay current income.

2. Conservative Capital Growth. Preservation of capital and current income, alongside some capital appreciation, can be gained through balanced funds.

3. Aggressive Growth. Aggressive growth funds seek maximum long-term capital growth; they sacrifice current income and safety by investing in stocks of new and sometimes troubled companies, firms developing new products and technologies, and other high-risk securities.

B. Most Mutual Funds Don’t Match the Market Most, but not all, mutual funds are managed by “experts” who select the stocks, bonds, and securities in which the fund will invest. Some estimates indicate that up to 80 percent of mutual funds underperform a market’s average return. This has led to the development of passively managed or index funds to reduce the management costs of funds.

C. Exchange Traded Funds An exchange traded fund (EFT) is a bundle of stocks (or bonds) that are in an index that tracks the overall movement of a market. EFTs can be traded like a stock.

1. Advantages of EFTs. EFTs offer three advantages over mutual funds: a. They can be traded throughout the day like a stock. b. They have low operating costs. c. They do not require high initial investments.

KEY TEACHING TIPS •

Students often confuse mutual funds and exchange-traded funds. EFTs can be traded like a stock. Each share of the EFT rises and falls as the market process changes.

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•

Remind students that securities include stocks as well as bonds and mutual funds; they represent secured, financially valuable claims on the part of investors.

•

Reinforce that mutual funds are an attractive investment since a drop in the price of one or two stocks in the pool is likely to have little impact on the total value of the fund.

QUICK QUESTIONS •

What are mutual funds?

•

Why might an investor find mutual funds attractive?

•

What are the advantages of EFTs?

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Learning Objective 3: Describe the role of securities markets and identify the major stock exchanges and stock markets.

The Business of Trading Securities Stocks and bonds are referred to as securities because they represent secured claims on the part of investors. Shares of stock represent ownership, whereas bonds represent financial liability for money owed to bondholders by a company or the government. Stocks and bonds are sold in securities markets.

A. Primary and Secondary Securities Markets Newly issued stocks and bonds are bought and sold in primary securities markets. To bring a new security to market, the issuing firm must get approval from the Securities and Exchange Commission (SEC)—the government agency that regulates U.S. securities markets.

Investment Banks issue and resell new securities, as well as create the distribution networks for selling the securities. Investment banks provide three important services: 1. They advise companies on the timing and financial terms of new issues.

2. They underwrite (assume liability for) new securities, providing an issuing firm with 100 percent of the money (less commission and fees).

3. They create distribution networks to move new securities through groups of banks and brokers to individual investors.

B. Stock Exchanges A stock exchange is an organization of individuals that provides an institutional setting in which stock can be bought or sold. Exchange members purchase “seats” that allow them to make trades. Seats may be bought or sold.

1. The Trading Floor. Each exchange governs the places and times when trading occurs.

Trading is allowed only on the trading floor. Trading floors today are equipped with a vast array of electronic communication equipment to display buy and sell data. In addition, a variety of news services provide up-to-the-minute information relevant to the business world. Any change in world events may affect share prices.

2. The Major Exchanges and Markets. Among the stock exchanges that operate on trading floors in the United States, the New York Stock Exchange is the largest. It faces stiff competition from the NASDAQ, electronic trading, and large foreign exchanges such as in London and Tokyo. a. The New York Stock Exchange (NYSE). The NYSE is a hybrid market that utilizes both electronic transfers as well as a trading floor in New York. Many firms list their stocks regionally, as well as on one of the national exchanges.

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b. Global Stock Exchanges. The value of shares listed on foreign exchanges continues to grow major overseas stock exchanges are found in Brazil, Tokyo, London and Hong Kong. c. The NASDAQ. The NASDAQ is a telecommunications system that broadcasts trading information on an intranet to 350,000 terminals. NASDAQ is an electronics network that can replace trading floors of traditional exchanges. d. International Consolidation and Cross-Border Ownership. Analysts expect technological advances and regulatory factors to drive together the separate stock markets in various parts of the world. Stock markets that are not able to cope with voluminous electronic trades are likely to be forced out of business (or be taken over) as competitive pressures intensify.

C. Non-Exchange Trading: Electronic Communication Networks. ECNs are electronic systems that bring buyers and sellers together at specified prices. Their popularity has grown rapidly, primarily because they have made the transfer for shares easier and less costly.

D. Individual Investor Trading.

While many investors rely heavily on the advice they receive from brokers, more experience and well-informed investors often prefer to invest independently without outside guidance.

Regardless of experience, however, investors will use one of the following services to buy and sell stock or mutual funds.

1. Stock Brokers. Stock brokers receive and execute orders from non-exchange members and earn commissions as a result.

2. Discount Brokers. These brokers are fast and low-cost, providing no advice or sales consultations.

3 Full-Service Brokers. Consulting advice and financial planning are provided here.

4. Online Investing. This is possible via convenient access to the Internet; this is ideal for self-directed investors.

E. Tracking the Market Using Stock Indexes Investors have used stock indexes to track market performance for decades. Market indexes provide some summaries of overall market price trends.

Bull Markets. Bull markets are periods of rising stock prices in which investors are motivated to buy because they are confident of continuing rising prices. Bear Markets. Bear markets are periods of falling stock prices during which investors sell anticipating lower prices in the future.

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1. The Dow Jones. The Dow Jones Industrial Average (simply referred to as the Dow) is the oldest and most widely used index. It tracks the performance of the U.S. industrial sector by focusing on 30 blue-chip, large-cap companies. However, the Dow is limited because it considers only 30 companies.

2. The S&P 500.

The S&P 500 is a broader index that tracks 500 large-cap companies from a number of sectors including IT, industrials, financials, health care, consumer staples, and telecommunications.

3. The NASDAQ Composite.

Unlike the DOW and the S &P 500, the NASDAQ Composite includes all NASDAQ companies, totaling some 3,200 in its index.

4. The Russell 2000. The Russell 2000 is a specialized index that tracks the performance of the smallest U.S. companies based on their market capitalization.

5. Index-Matching EFTs. EFTs are available that track the performance of various indexes. For example, the Fidelity NASDAQ Composite Index Tracking Stock holds a portfolio of equities for tracking the NASDAQ Composite Index.

KEY TEACHING TIPS •

Remind students that a stock exchange is an organization of individuals formed to provide an institutional setting in which stock can be bought and sold.

•

Students may not know that each stock exchange regulates the places and times at which trading may occur; the trading floor is the physical location where trading takes place.

•

Make sure students understand the distinction between stock brokers, discount brokers, and full-service brokers.

QUICK QUESTIONS •

What is the role of an investment bank with regard to new issues of stock?

•

What type of investor is most likely to be attracted to online trading?

•

What type of investor would prefer the services of a full-service broker?

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•

Reinforce that the NASDAQ system gathers and executes orders on an intranet connecting more than 350,000 terminals worldwide; NASDAQ offers no trading floor.

•

What are some differences between the NYSE and NASDAQ?

•

What are the primary roles of the Securities and Exchange Commission?

HOMEWORK The Securities and Exchange Commission Now is a good time to assign Application Exercise 9 from the end-of-chapter materials in the textbook as homework. This assignment asks students go to www.sec.gov and research how a new security is approved by the Securities and Exchange Commission.

Home Completion Time: 30 minutes

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Learning Objective 4: Describe the risk–return relationship and discuss the use of diversification and asset allocation for investments.

The Risk–Return Relationship Each type of investment has a risk–return relationship, which reflects the notion that safer investments tend to offer lower returns, and riskier investments tend to offer higher returns.

A. Investment Dividends, Appreciation, and Total Return. Investors invest for different reasons. In evaluating a potential investment, investors examine returns from dividends, price appreciation, and total returns.

1. Dividends. The return from stock dividends is known as the current dividend yield. The return from a loan is known as an interest dividend yield. This figure is generated by dividing the yearly dollar amount of the dividend yield by the investment’s current market value. The dividend yield is expressed as a percentage.

2. Price Appreciation. Price appreciation is an increase in the dollar value (share price) of an investment.

3. Total Returns. Total returns are the sum of the dividend yield plus the stock’s price appreciation. It is calculated by the formula: Total Returns = (current dividend payment + capital gain) / original investment X 100 B. Fantasy Stock Markets Fantasy stock markets are all the rage for learning how securities markets work, for trying your hand at various investment strategies, and earning a fantasy fortune (or going broke!).

Internet-based games, including free ones such as Wall Street Survivor and How the Market Works, provide an investment experience that is educational, challenging, and entertaining.

C. Managing Risk with Diversification and Asset Allocation 1. Diversification. Through diversification, investors buy several kinds of investments rather than one kind; this strategy reduces investor risk by “not having all eggs in one basket.”

2. Asset Allocation. Asset allocation is the proportion of funds invested in each of the investment alternatives.

3. Performance Difference for Different Portfolios. A portfolio is the combined holdings of all financial investments of an individual or a company. These investments include stocks, bonds, mutual funds, and real estate. Investment portfolios have different objectives ranging from aggressive high growth portfolios to stable income/low volatility portfolios.

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KEY TEACHING TIP •

Reinforce that safer investments tend to offer lower returns; riskier investments tend to offer higher returns.

Use In-Class Activity 4: Supplemental Case Study Discussion: How Much Is That Violin in the Window?

Time Limit: 30 minutes HOMEWORK Researching Insider Trading Now might be a good time to assign Application Exercise 10 from the end-of-chapter materials in the textbook as homework. This assignment asks students to research a high profile insider trading case..

At Home Completion Time: 1 hour

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Learning Objective 5: Describe the various ways that firms raise capital and identify the pros and cons of each method.

Financing the Business Firm Although the business owner’s savings may be enough to get a firm up and running, businesses depend on sales revenue to survive. When current sales are insufficient to cover expenses, firms turn to other sources of funding. These typically begin with the owner’s personal savings, but often involve borrowing from banks, soliciting cash from private investors, or selling bonds to the public.

A. Secured Loans for Equipment Money to purchase new equipment often comes in the form of loans from commercial banks.

Collateral is offered by the firm to the lending institution in exchange for a secured loan’ 1. Principal and Interest Rates. The amount of money that is loaned and has to be repaid is called the principal. Borrowers will also pay interest, expressed in the form of an annual percentage rate (APR).

B. Working Capital and Unsecured Loans from Banks Firms need more than fixed assets; they also need current, liquid assets available to meet short-term operating expenses. The firm’s ability to meet these expenses is measured by its working capital. Working capital is calculated as follows: Working capital + Current assets – current liabilities When the firm has negative working capital, it may need to borrow money from a commercial bank in the form of an unsecured loan. With an unsecured loan, the borrower does not have to put up collateral.

C. Angel Investors and Venture Capital When a firm needs additional sources of funds to pay for growth, it often seeks out angel investors. An angel investor invests some money in the firm, typically expecting a sizable ownership in the company in return for the investment. Angel investors can help firms grow rapidly by providing venture capital.

D. Sale of Corporate Bonds Corporations can also raise funds by issuing corporate bonds. A corporate bond is an IOU guaranteeing the payment of interest during the life of the bond and the repayment of the principal when the bond matures (on a pre-set date).

1. Characteristics of Corporate Bonds. Each new bond has specific terms and conditions spelled out in the bond indenture. The conditions include the maturity date when the bond’s face value must be repaid. A bond does not give the lender any ownership in the borrowing firm.

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2. Default and Bondholder’s Claim. If the borrower fails to make a payment then the bond is said to be in default. The lender may request a court order to enforce the terms of the bond. This is known as a bondholder’s claim. If a firm cannot pay the lender, it may have to file for bankruptcy.

3. Risk Ratings. To aid investors, companies are rated on the likelihood that they will keep to the terms of the bond. A rating of AAA is the best rating. Lower ratings do not necessarily mean that the bond issue will not be successful, but the lower the rating the higher the interest rate charged is likely to be.

4. Risk Ratings. To aid investors in making purchase decisions, several services measure the default risk of bonds.

5. Flawed ratings misread recession risks. The financial crisis of 2008 has raised many questions about whether the credit rating agencies are serving any good purpose. The nation’s largest public pension fund, the California Public Employees Retirement Fund (Calpers) has filed a suit against the top three agencies—Moody’s, Standard & Poor’s and Fitch. Calpers’ officials relied on these credit ratings to make investments that toured sour. Furthermore, the collapse of highly rated institutions such as Lehman Brothers, Goldman Sachs, and Citigroup has again raised questions about the credit rating agencies.

Mortgage backed securities became a trillion dollar investment industry prior to the 2007 housing market boom. Financial institutions bundled home mortgages into packages and resold them as securities. These investments were given favorable risk ratings by credit rating agencies. Unbeknown to investors, some $3 trillion of mortgage backed securities contained subprime mortgages—high risk loans to applicants with bad credit, low income, and low down payments. When significant number of these mortgage holders defaulted in the housing market crash, investors were left with little or nothing for their investment, leading to a collapse of worldwide financial markets.

KEY TEACHING TIPS •

Students often confuse stocks and bonds. A stock represents ownership in a corporation.

A bond represents debt, an issuer’s promise to pay the buyer a certain amount of money by a specified future date.

•

Make sure that students understand the differences between government bonds, municipal bonds, and corporate bonds.

•

Point out that secured bonds are “backed” by company assets in case of default, whereas unsecured bonds—or debentures—pledge no property as security.

QUICK QUESTION

• What are some circumstances under which a firm might want to issue bond?

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Learning Objective 6: Identify the reasons a company might make an initial public offering of its stock, explain how stock value is determined, and discuss the significance of market capitalization.

Becoming a Public Corporation An Initial Public Offering (IPO) is a firm’s first sale of its stock to the public. Corporations consider various issues before deciding to take the firm public.

A. Going Public Means Selling Off Part of the Firm Private owners lose some control when shares are sold to the public. This is particularly seen if the stock price falls and another investor (a corporate raider) mounts a hostile takeover.

Corporations are vulnerable to hostile takeovers if their stock prices become undervalued and the firm has a large supply of cash in hand.

B. Stock Valuations Most investors look for long-term value in stocks, rather than their short- term price. In determining long-term value, investors typically examine the company’s financial health, its past history of results and future forecasts.

1. Why Shares Differ in Price. Share prices can differ substantially from one stock to another for various reasons. These include the supply and demand of the stock and the desire of corporations to have their shares sell within certain price ranges.

2. Comparing Prices of Different Stocks. When evaluating the price of Pepsi and Coca-Cola an investor would compare dividends, price earning ratios, and historical performance consistency over a period of several years, along with indicators of each firm’s prospects for the future.

C. Market Capitalization Market capitalization is the total value of the company’s outstanding shares. It is calculated by the current stock price multiplied by the number of outstanding stocks.

D. Choosing Equity versus Debt Capital Firms can meet their capital needs through equity or debt financing. These both have pros and cons.

1. Pros and Cons of Debt Financing: a. Long-term Loans. Long-term loans are attractive because the number of parties involved is limited, and there is no need for public disclosure to account for how the loan is being used. On the other hand, long-terms loans have the disadvantage that borrowers may not easily be able to find lenders and may face some restrictions as a condition for the loan. b. Corporate Bonds. The advantage of bonds is that they can raise large amounts of money when the company needs it. The disadvantage is that they can incur high administration cost and stiff interest payments.

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2. Pros and Cons of Equity Financing. Equity financing is sometimes a favorable option for companies. Equity financing includes issuing common stock or using the company’s retained earnings. Issuing new stock can be expensive when dividend payments need to be made. Using retained earnings for capital projects means that this money is not available for dividend payments; this may reduce the stock price and the total market capitalization.

QUICK QUESTIONS •

What is market capitalization?

•

When might a fall in market capitalization leave a company open to a hostile takeover?

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Learning Objective 7: Explain how securities markets are regulated.

A. The Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is the regulation and enforcement agency that oversees the markets’ activities, including the ways securities are issued. The SEC was created in 1934 to prevent the kinds of abuses that led to the stock market crash in 1929.

B. Regulations against Insider Trading The SEC also enforces laws against insider trading—the use of special knowledge about a firm for profit or gain. It is illegal, for example, for an employee of a firm to tell others about an anticipated event that may affect the value of the film stock.

QUICK QUESTIONS •

In light of the crash in 2009, do you think the SEC is doing a good job regulating financial markets?

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IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker: What Should I Buy? Activity Overview: This activity asks students to make preliminary purchasing decisions about stocks based on what they already know about the companies and the stock market in general.

Time Limit: 30 minutes What to Do: 1. Ask students to assume that they are being given $20,000 to invest in four company stocks, but that they must choose from the following companies: • McDonald’s Corporation • Microsoft • Corning • Chesapeake Energy • Marketing Technologies, Inc. • JDS Uniphase • Walmart • Amazon.com • Google 2. Divide the class into three-member groups so students can discuss these companies before making their investment decisions. As students make their decisions, ask them to write down their rationale for selecting the stocks they did as well as how much they invested in each one. (15 minutes) 3. Assemble the class as a whole to discuss their choices: (15 minutes) a. How did students select their stocks? b. How much did they know about the companies in which they invested? c. Did the discussion with other group members affect their decisions? d. What factors affected the allocation of the $20,000?

Don’t Forget: Some students will know more about investing than others.

Wrap-Up: Bring the activity to a close by discussing the importance of doing “homework” on a particular company before investing in it. Very few students (or potential investors) would know enough about any of the above companies to make a sound investment. Company reputation can mean a lot when an individual chooses to make an investment, but this type of investing is not always prudent.

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In-Class Activity 2: Up for Debate: What’s Wrong with a Little Inside Scoop?

Activity Overview: This activity asks students to debate the pros and cons and the key issues surrounding insider trading.

Time Limit: 30 minutes What to Do: 1. Divide the class into four-member groups and ask each group to make a list of the disadvantages of insider trading. Then ask each group to make a list of the advantages facing the market, brokers, and stockholders if insider trading were to be declared legal. Students can consider the following questions as conversation starters in their groups: (15 minutes) a. Would insider trading actually make the market more efficient? b. Who is really hurt in most cases of insider trading? c. Why is insider trading illegal?

2. Assemble the class as a whole and debate the pros and cons of insider trading. (15 minutes) Don’t Forget: In advance, consider giving students some time to research specific cases of insider trading as a supplement to this debate. The class can then discuss specific cases and the levels of perceived fairness in the results of each case.

Wrap-Up: Bring the debate to a close by outlining some of the major arguments presented in the debate.

Then, provide reasons for the illegal nature of insider trading.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1. The time value of money stems from the principle of compound growth. With each additional time period, interest payments accumulate and earn more interest, thus multiplying the earning capacity of the investment.

(Learning Objective 1 – AACSB – reflective thinking) 2. Mutual funds and EFTs offer an alternative to investing in individual stocks. Mutual funds pool cash and investments from individuals and organizations to purchase a portfolio of stocks, bonds and other securities. Unlike most mutual funds that are actively managed, EFTs are a bundle of stocks (or bonds) that are in an index that tracks the overall market performance. (Learning Objective 2 – AACSB – reflective thinking) 3. Corporate bonds have a number of characteristics. The bond indenture spells out the conditions of the bond. The maturity date is the bonds due date, the face (or par) value is the amount that has been borrowed and needs to be repaid at maturity.

(Learning Objective 5 – AACSB – reflective thinking) 4. The book value of a stock is determined by dividing the shareholders’ equity in the firm by the number of outstanding shares. The market value is the current price of the share in the stock market. Investors hope that the market value is above the book value.

(Learning Objective 6 – AACSB – reflective thinking) 5

In order to fund expansion, firms might use debt or equity financing. Debt financing is when a firm enters into a long term loan or issues a corporate bond. Equity financing is where the firm uses retained earnings or offers additional stock for sale.

(Learning Objective 5 – AACSB – reflective thinking)

QUESTIONS FOR ANALYSIS 6. Stock prices can vary enormously depending upon a number of factors, including the company’s recent performance, future expectations, changes in the company’s competition, inflation rates, and general economic expectations for the economy. Market price is only one factor to be considered in a stock purchase. Investors also look at the track record of the company. (Learning Objective 6 – AACSB – reflective thinking) 7. Answers will vary. Some students will favor EFTs because of their lower administration costs. Others will favor well-managed mutual funds because they may be in the 20 percent of mutual funds that do better than market performance. (Learning Objective 2 – AACSB – reflective thinking) 8. A business owner in need of capital can either opt for debt financing or equity financing.

Debt financing includes taking on long-term loans or issuing corporate bonds. The advantage of long-term loans is that there are relatively few parties involved, so they can be often

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quickly arranged. Bonds are slower to arrange, and can have high service interests rates depending upon the firm’s credit rating. If the firm opts for equity financing, it might issue new stock or use retained earnings. The advantage of bonds is that they can give the organization funds over a long period of time.

(Learning Objective 5 – AACSB – reflective thinking)

APPLICATION EXERCISES 9. When a corporation wants to offer a new security, it must file a registration statement with the SEC that contains the following information: the name and description of the corporation; a biography of directors and officers (President, CEO, CFO, etc.); the financial stakes of all insiders, directors, and officers and anyone holding more than 10 percent of the corporation’s securities; full and complete financial statements; the type of security for sale and how the money raised will be used; and disclosure of any previous legal proceedings that may impact the company. The SEC will review the registration to make sure there has been full disclosure and then allow the corporation to sell the security. The SEC Web site (www.sec.gov) shows that this is often a speedy process.

As an alternative to getting individual students to contact brokers, you might want to invite a broker to make a presentation to the class. Many brokers will enjoy this, and it gives students a great opportunity for Q&A with financial professionals.

(Learning objective 6 – AACSB – application of knowledge) 10. Student responses will vary but the Wall Street Journal would an excellent resource for students. (Learning objective 7 – AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 17 – 11- 15 (Learning objectives 5, 6 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Students should be encouraged to undertake a careful analysis of the pros and cons of debt and equity financing with an emphasis on a realistic analysis of the markets.

BUILDING YOUR BUSINESS SKILLS: MARKETS UPS AND DOWNS (Learning objectives 6 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) 16. Many factors, both internal and external, affect stock prices, such as the firm’s earnings, layoffs, labor problems, management issues, and mergers, as well as the state of the industry in general and any threats of political crisis, weather conditions, interest rate changes, and inflation and unemployment data and forecasts.

17. Answers will vary. Global corporations are often affected by numerous external factors, sometimes including factors that have little impact on our own domestic market. Some external factors, such as oil prices, can impact stock in the very long run. In some cases, however, a mere change in CEO can impact the price of a stock; and, this impact is likely to

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be shorter-lasting. Various actions from competitors—external factors—can be both longand short-lasting, depending on those actions.

18. Answers will vary, but students should acknowledge the difficulty of knowing all possible information about factors that affect stock price and judging accurately what kind of affect those factors will have.

EXERCISING YOUR ETHICS: ARE YOU ENDOWED WITH GOOD JUDGEMENT? (Learning objectives 2 - AACSB – Ethical understanding and reasoning, reflective thinking) 19. The choice might be different, since the ultimate goal of a business is to maximize profit, while the ultimate goal of a nonprofit organization is to provide a service efficiently.

20. The main ethical issues in this situation are how to best fulfill YDC’s responsibility to the students it serves, while most effectively stewarding the money entrusted to the organization through charitable donations.

21. Answers will vary. Given the purpose of the organization and the intrinsic value of the funds being invested, many students may opt to remain conservative in their investment strategies.

TEAM EXERCISE: PLAYING THE MARKET 17- 22- 25 (Learning objectives 2, 3, 4 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) This exercise should generate a lot of interest and discussion. Many students are very interested in investing and creating a portfolio but have little knowledge and exposure to financial markets.

This is an excellent opportunity to research various investments, analyze risk factors, and apply the chapter concepts.

CASES: INVESTING IN GREEN (Learning objectives 3 - AACSB – Ethical understanding and reasoning, reflective thinking) 26. Answers will vary depending on students’ perspectives. Many students will say “yes” since American companies operate overseas and international companies operate within the US borders, and greenhouse/carbon emissions are a worldwide problem not just a US or EU issue.

27. Again answers will vary with some students saying yes and suggesting the SEC, Justice Department, and/or the EPA regulate the ET market. Risks identified will include possibly higher carbon/greenhouse emissions and higher costs to consumers.

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28. Students answers should include the costs versus the benefits, the possibility of additional and costlier regulations, consumer reaction, publicity both positive and negative, and the impact on corporate profits.

29. Your investment decisions could be impacted both positively and negatively depending on whether a student is a “green investor”. If your only focus was financial, cap and trade buyers’ costs could possibly go up and decrease profits but sellers’ profits might increase. A “green investor” might choose to invest in a company perceived as being more environmentally sensitive.

30. Again, answers will vary but students should focus on costs and benefits when answering this question.

TIME TO GO? (Learning objectives 4, 5, 6 – AACSB analytical and reflective thinking, application of knowledge) 31. An investor would be motivated by the large return on investment should Gogo be able to penetrate the international market.

32. They would sell stock because they are already highly leveraged and probably would not have gotten preferable credit terms, additionally they do not have to pay interest to the stockholders.

33. They underwrote the IPO. 34 – 35. The answers will vary depending on when the student researches the stock.

BUSINESS PLAN PROJECT PART 6 Assignment Overview: The final part of the business plan project asks students to consider how they’ll finance their business as well as how to create an executive summary for their plan. Remind students that although the executive summary is the final step in the project, it should be placed at the beginning of their completed business plans. Encourage your students to be concise as they write the executive summary, as investors look at the summary before reading the details of the plan.

Because this is the final part of the plan, you will probably want to ask students to submit not just Part 6, but the entire plan at this point.

Files to Provide Students: For this part of the project, students will be asked to complete Part 6: Financial Issues.

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STUDENT BUSINESS PLAN PROJECT TEMPLATE PART 6: FINANCIAL ISSUES STARTUP COSTS How much money will you need to get your business started?

Hint: Refer back to Part 5 of the plan, where you analyzed the costs involved in running your business. Approximately, how much will you need to get your business started?

FINANCING How will you finance your business? For example, will you seek out a bank loan? Borrow from friends? Sell stocks or bonds initially or as your business grows?

Hint: Refer to Chapter 16 for information on securities, such as stocks and bonds. Refer also to Appendix I: Financial Risk and Risk Management and Chapter 3 for more information on sources of short-term and long-term funds.

EXECUTIVE SUMMARY Now, create an executive summary for your business plan. The executive summary should be brief—no more than two pages long—and should cover the following points: • • • • • • • •

The name of your business Where your business will be located The mission of your business The product or service you are selling Who your ideal customers are How your product or business will stand out in the crowd Who the owners of the business are and what experience they have An overview of the future prospects for your business and industry

Hint: At this point, you’ve already answered all these questions so what you need to do here is put the ideas together into a “snapshot” format. The executive summary is really a sales pitch— it’s the investor’s first impression of your idea. Therefore, as with all parts of the plan, write in a clear and professional way.

Once you have written the executive summary, copy it and paste it at the beginning of your business plan—as the very first element.

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APPENDIX I Risk Management APPENDIX OUTLINE A. Coping with Risk 1. Step 1: Identify Risks and Potential Losses 2. Step 2: Measure the Frequency and Severity of Losses and Their 3. Step 3: Evaluate Alternatives and Choose the Techniques That Will Best Handle the Losses 4. Step 4: Implement the Risk-Management Program 5. Step 5: Monitor Results B. Insurance as Risk Management 1. Insurable versus Uninsurable Risks a. Predictability b. Casualty c. Unconnectedness d. Verifiability 2. Special Forms of Insurance for Business a. Liability Insurance b. Property Insurance c. Business Interruption Insurance d. Key Person Insurance e. Business Continuation Agreements

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APPENDIX II The Legal Context of Business APPENDIX OUTLINE A. The U.S. Legal and Judicial Systems 1. Types of Law a. Common Law b. Statutory Law c. Regulatory Law d. Keeping an Eye on Business e. Trends in Deregulation and Regulation 2. The U.S. Judicial System a. The Court System B. Business Law 1. Contract Law 2. Tort Law 3. Property Law 4. Agency Law 5. Commercial Law 6. Bankruptcy Law C. The International Framework of Business Law

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APPENDIX III Managing Your Personal Finances APPENDIX OUTLINE A. Building Your Financial Plan 1. Assessing Your Current Financial Condition 2. Develop Your Financial Goals B. Making Better Use of the Time Value of Money 1. Planning for the Golden Years 2. Time Value as a Financial-Planning Tool C. Conserving Money by Controlling It 1. Credit Cards: Keys to Satisfaction or Financial Handcuffs?

2. Save Your Money: Lower Interest Rates and Faster Payments 3. Declining Asset Value: A Borrower’s Regret D. Financial Commitments of Home Ownership 1. How Much House Can You Afford?

E. Cashing Out from Tax Avoidance (Legally) 1. The IRA Tax Break F. Protecting Your Net Worth 1. Why Buy Life Insurance?

2. What Does Life Insurance Do? 3. How Much Should I Buy? 4. Why Consider Term Insurance?

5. How Much Does It Cost?

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APPENDIX IV Unions and Labor Management APPENDIX OUTLINE

A. Why Do Workers Unionize?

B. The Evolution of Unionism in the United States 1. Early Unions 2. The Emergence of the Major Unions a. American Federation of Labor b. Congress of Industrial Organizations c. The AFL-CIO C. Unionism Today Trends in Union Membership 1. Trends in Union-Management Relations 2. Trends in Bargaining Perspectives 3. The Future of Unions 4. Contemporary Union Structure 5. Locals

D. Laws Governing Labor-Management Relations 1. The Major Laws a. Norris-LaGuardia Act b. National Labor Relations (Wagner) Act c. Fair Labors Standards Act d. Taft-Hartley Act E. How Unions Are Organized and Certified F. Collective Bargaining 1. Reaching Agreement on Contract Terms 2. Contract Issues 3. When Bargaining Fails 4. Administering a Labor Agreement

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The Business Plan Project

Why Do the Business Plan?

If you take a poll of your class it is likely that a good number of students are interested in starting their own business at some point in their careers. By guiding them through the business planning process you will be helping students to develop skills that will be very helpful during the initial stages of their new ventures.

Table of Contents: Business Plan Sample syllabus ………………………………………………………….pp. 2–3 Student FAQs for the Business Plan Project…………………………………………….....pp. 4 Student Business Plan Project Template: Part 1…………………………………………pp. 5–6 Student Business Plan Project Template: Part 2…………………………………………pp. 7–8 Student Business Plan Project Template: Part 3……………………………………......pp. 9–10 Student Business Plan Project Template: Part 4………………………………………pp. 11–12 Student Business Plan Project Template: Part 5………………………………………pp. 13–16 Student Business Plan Project Template: Part 6…………………………………………..p. 17 Sample Business Plan: The Friendly Café II……………………………………….....pp. 18–34 With the exception of the sample business plan (pages 18–34), the other sections have been also included in the relevant chapters of the instructor materials to reduce preparation time for instructors.

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SAMPLE SYLLABUS BUSINESS PLAN PROJECT OUTLINE PART 1

THE CONTEMPORARY BUSINESS ENVIRONMENT

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

Suggested 12-week quarter due date: End of week four Suggested 16-week semester due date: End of week five PART 2

THE BUSINESS OF MANAGING

This part of the business plan asks students to think about goals of their business, some internal and external factors the affecting the business, as well as the organizational structure of the business. As part of the assignment, students will perform a basic SWOT analysis for their business and create an organizational chart to show the framework of the business. Students will also explain the role of each employee, and how each relates to the others. Finally, students are asked to examine various factors relating to operating their business.

Suggested 12-week quarter due date: End of week six Suggested 16 week semester due date: End of week seven PART 3

PEOPLE IN ORGANIZATIONS

This part of the business plan asks students to think about their employees, the jobs they will be performing, and the ways in which they can lead and motivate them. Students take the different job titles they created in the organizational chart in Part 2 and give thought to the skills that employees will need to bring to the job before they begin. They also consider the training they’ll need to provide employees after they are hired, as well as how they’ll compensate their employees. Part 3 of the business plan also asks students to consider how they’ll lead employees and keep them happy and motivated.

Suggested 12-week quarter: End of week seven Suggested 16-week semester due date: End of week eight PART 4 PRINCIPLES OF MARKETING: BUILDING RELATIONSHPS WITH CUSOMERS FOR COMPETITIVE ADVANTAGE This part of the business plan asks students to think about marketing’s “Four Ps”—product, price, place (distribution), and promotion—and how they apply to their business. Students will list features and benefits as well as the points of difference for their product or service. After describing the product, the student must connect those described features and benefits to a targeted buyer. Once the targeted buyer has been named, students will describe advertising and

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promotional efforts to get the buyer’s attention.

Suggested 12-week quarter due date: End of week nine Suggested 16-week semester due date: End of week ten PART 5

MANAGING INFORMATION FOR BETTER BUSINESS DEICISONS

This part of the business plan asks students to think about their business in terms of IT needs and costs. Students are also asked to complete a balance sheet and income statement for their businesses.

Suggested 12-week quarter due date: End of week ten Suggested 16-week semester due date: End of week twelve PART 6

FINANCIAL SYSTEM AND ISSUES IN FINANCIAL MANAGEMENT

This part of the business plan asks students to consider how they’ll finance their business as well as create an executive summary for their plan.

Suggested 12-week quarter due date: End of week eleven Suggested 16-week semester due date: End of week fourteen

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

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

2. What should my business plan look like?

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

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

Note that your plan does not have to look exactly like the sample, but you need to show good organizational skills. Note that each of the six parts of the business plan project is fully explained in your textbook. These assignment instructions fall at the end of Chapters 4, 7, 10, 12, 14, and 16.

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

Your instructor will give you instructions as to how he or she would like you to submit each part of the plan. You will most likely be given a chance to make improvements to your plan throughout the grading period. Note that you will be using the same student template file to complete the entire plan. Therefore, after completing each part of the plan, you need to save the file on a disk or to your hard drive.

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

Your instructor will provide feedback to you about your plan. Students who successfully complete the plan have these two qualities in common: 1. They do not procrastinate. A well-written business plan cannot be written overnight, as they require a good deal of thought and creativity.

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

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

It depends on the business that you will be starting. A good explanation normally requires between 12 to15 pages. This sounds like a lot, but most sections will average 2 to 3 pages.

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

Hint: When you think of the name of your business, make sure it captures the spirit of the business you’re creating. Note to students: Once you have inserted your answer, delete the question and the tip provided here and leave just the heads so your business plan will look more professional.

DESCRIPTION OF BUSINESS What will your business do?

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

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

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

IDEAL CUSTOMER Briefly describe your ideal customer. What are they like in terms of age, income level, and so on?

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

OUR ADVANTAGES Why will customers choose to buy from your business, instead of your competition?

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

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

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

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

Hint: To help you consider issues of social responsibility, refer to the discussion of social responsibility in Chapter 2. What steps can you take to be a good citizen in the community?

Consider also how you may need to be socially responsible toward your customers and, if applicable, investors, employees, and suppliers.

GLOBAL ISSUES Do you think that you’ll sell your product in another country? If so, what countries would you choose, and why? What challenges will you face?

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

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STUDENT BUSINESS PLAN PROJECT TEMPLATE PART 2: THE BUSINESS OF MANAGING

MISSION STATEMENT Provide a brief mission statement for your business Hint: Refer to the discussion of mission statements in Chapter 5. Be sure to include the name of your business, how you will stand out from your competition, and why a customer will buy from you.

BUSINESS GOALS Consider the goals for your business. What are three of your business goals for the first year? What are two intermediate to long-term goals?

Hint: Refer to the discussion of goal setting in Chapter 5. Be as specific and realistic as possible with the goals you set. For example, if you plan on selling a service, how many customers do you want by the end of the first year, and how much do you want each customer to spend? If you plan on selling a good, how many do you hope to sell?

SWOT ANALYSIS Perform a basic SWOT analysis for your business, listing its main strengths, weaknesses, opportunities, and threats.

Hint: We explained previously what factors you should consider in your basic SWOT analysis.

Look around at your world, talk to classmates, or talk to your instructor for other ideas in performing your SWOT analysis.

Strengths Weaknesses Opportunities Threats MANAGEMENT Who will manage the business?

Hint: Refer to the discussion of managers in Chapter 5. Think about how many levels of management as well as what kinds of managers your business needs.

ORGANIZATION CHART Show how the “team” fits together by creating a simple organizational chart for your business. Make sure your organizational chart indicates who will work for each manager as well as each person’s job title.

Hint: Most businesses start off quite small. However, as you create your organizational chart, consider what your business will look like in the future. What different tasks are involved in the business? Who will each person report to in the organizational structure? Refer to the discussion of organizational structure in Chapter 6 for information to get you started.

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FLOOR PLAN Create a floor plan of the business. What does it look like when you walk through the door?

Hint: When sketching your floor plan, consider where equipment, supplies, and furniture will be located. Ask your instructor how he or she would like you to submit the floor plan for your business.

RAW MATERIALS AND SUPPLIES Explain what types of raw materials and supplies you will need to run your business. How will you produce your good or service? What equipment do you need? What hours will you operate?

Hint: Refer to the discussion of operations in Chapter 7 for information to get you started.

QUALITY ASSURANCE What steps will you take to ensure that the quality of the product or service stays at a high level? Who will be responsible for maintaining the quality of the product or service (or both)?

Hint: Refer to the discussion of quality improvement and Total Quality Management in Chapter 7 for information to get you started.

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STUDENT BUSINESS PLAN PROJECT TEMPLATE PART 3: PEOPLE IN ORGANIZATIONS

CORPORATE CULTURE What do you see as the “corporate culture” of your business? What types of employee behaviors, such as organizational citizenship, will you expect?

Hint: Will your business demand a casual environment or a more professional environment?

Refer to the discussion on employee behavior in Chapter 8 for information on organizational citizenship and other employee behaviors.

LEADERSHIP PHILOSOPHY What is your philosophy on leadership? How will you manage your employees day-today?

Hint: Refer to the discussion on leadership in Chapter 9 to help you formulate your thoughts.

JOB DESCRIPTIONS Looking back at your organizational chart in Part 2, briefly create a job description for each team member.

Hint: As you learned in Chapter 10, a job description lists the duties and responsibilities of a job; its working conditions; and the tools, materials, equipment, and information used to perform it. Imagine your business on a typical day. Who is working and what are each person’s responsibilities? (Note that if your business is very large, you should ask your instructor how many positions he or she would like you to create job descriptions for.)

JOB SPECIFICATIONS Next, create a job specification for each job, listing the skills, credentials, and qualifications needed to perform the job effectively.

Hint: As you write your job specifications, consider what you would write if you were making an ad for the position. What would the new employee need to bring to the job in order to qualify for the position?

Insert Job Title #1: Insert Needed Skills/Credentials/Qualification for Job: Insert Job Title #2: Insert Needed Skills/Credentials/Qualification for Job: Insert Job Title #3:

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Insert Needed Skills/Credentials/Qualification for Job: TRAINING EMPLOYEES What sort of training, if any, will your employees need once they are hired? How will you provide this training?

Hint: Refer to the discussion of training in Chapter 10. Will you offer your employees on-the-job training? Off-the-job training? Vestibule training?

COMPENSATION A major factor in retaining skilled workers is a company’s compensation system—the total package of rewards that it offers employees in return for their labor. Part of this compensation system includes wages/salaries. What wages or salaries will you offer for each job? Why did you decide on that pay rate?

Hint: Refer to Chapter 10 for more information on forms of compensation. You may also want to check out sites like www.salary.com, which includes a salary wizard you can use to determine how much people with different job titles are making in your area and across the United States.

INCENTIVES As you learned in Chapter 10, incentive programs are special programs designed to motivate high performance. What incentives will you use to motivate your workforce?

Hint: Be creative and look beyond a simple answer, such as giving pay increases. Ask yourself, who are my employees and what is important to them? Refer to Chapter 10 for more information on the types of incentives you may want to consider.

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STUDENT BUSINESS PLAN PROJECT TEMPLATE PART 4: PRINCIPLES OF MARKETING

TARGET MARKET Describe your target market in terms of age, education level, income, and other demographic variables.

Hint: Refer to Chapter 11 for more information on the aspects of target marketing and market segmentation that you may want to consider. Be as detailed as possible about who you think your customers will be.

PRODUCT FEATURES AND BENEFITS Describe the features and benefits of your product or service.

Hint: As you learned in Chapter 11, a product is a bundle of attributes—features and benefits.

What features does your product have—what does it look like, and what does it do? How will your product benefit the buyer?

PRODUCT DIFFERENTIATION How will you make your product stand out in the crowd?

Hint: There are many ways to stand out in the crowd, such as a unique product, outstanding service, or a great location. What makes your “great idea” special? Does it fill an unmet need in the marketplace? How will you differentiate your product to make sure that it succeeds?

PRICING What pricing strategy will you choose for your product, and what are the reasons for this strategy?

Hint: Refer to Chapter 12 for more information on pricing strategies and tactics. Since your business is new, so is the product. Therefore, you probably want to choose between price skimming and penetration pricing. Which will you choose, and why?

PLACE (DISTRIBUTION) ISSUES Where will customers find your product or service? (That is, what issues of the distribution mix should you consider?)

Hint: If your business will sell its product directly to consumers, what types of retail stores will sell your product? If your product will be sold to another business, which channel of distribution will you use? Refer to Chapter 12 for more information on aspects of distribution you may want to consider.

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ADVERTISING How will you advertise to your target market? Why have you chosen these forms of advertisement?

Hint: Marketers use several different advertising media—specific communication devices for carrying a seller’s message to potential customers—each having its advantages and drawbacks.

Refer to Chapter 12 for a discussion of the types of advertising media you may wish to consider here.

PROMOTIONS What other methods of promotion will you use, and why?

Hint: There’s more to promotion than simple advertising. Other methods include personal selling, sales promotions, and publicity and public relations. Refer to the discussion of promotion in Chapter 12 for ideas on how to promote your product that go beyond just advertising.

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STUDENT BUSINESS PLAN PROJECT TEMPLATE PART 5: MANAGING INFORMATION

IT RESOURCES What kind of IT resources will your business require?

Hint: Think about the employees in your business and what they will need in order to do their jobs. What computer hardware and software will they need? Will your business need a network and an Internet connection? What type of network? Refer to Chapter 13 for a discussion on IT resources you may want to consider.

CUSTOMER SERVICE How will you use information technology to keep track of your customers and potential customers?

Hint: Many businesses—even small businesses—use databases to keep track of their customers.

Will your business require a database? What about other information systems? Refer to Chapter 13 for more information on these topics.

COST OF DOING BUSINESS What are the costs of doing business? Equipment, supplies, salaries, rent, utilities, and insurance are just some of these expenses. Estimate what it will cost to do business for one year.

Hint: Insert the costs associated with doing business in the table below. The list below provides some hints as to where you can get this information. Note that these are just estimates—just try your best to include accurate costs for the expenses you think will be a part of doing business.

Hints for each expense in the table: • • • •

•

Rent: Refer to the floor plan. How many square feet is your place of business? What is the “going rate” per square foot for office space in your community? A real estate agent or a local SBA representative (www.sba.gov) can also be helpful in answering this question.

Salaries: Refer to the organizational chart. How much will each employee earn? How many hours will each employee be needed on a weekly basis? Once you’ve determined the weekly cost, expand it to a monthly and a yearly cost.

Supplies: Refer to the floor plan. How much will all the computers, equipment, and furniture cost? What kinds of general office supplies will you need? Most prices for this information can be found on an office supply Web site, such as www.staples.com.

Advertising and Other Promotions: Refer to your marketing section. You have described how you wish to reach your customer—now you need to decide how much it will cost. If you are using television, contact the sales department at a local station. If you are using newspaper, contact their advertising department. Salespeople are usually happy to answer your questions.

Utilities: These amounts will vary, depending on your business and what utilities you will pay. If your business looks like an office, this cost may be similar to what a homeowner pays.

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•

However, if your business involves making a product, then the costs will be significant. An SBA representative can be a good resource.

Insurance: This value will be affected by the nature of the business. More equipment will usually mean higher insurance costs. Again, contact an SBA representative for feedback.

EXPECTED REVENUE How much will you charge for your product? How many products do you believe you can sell in one year (or how many customers do you think your business can attract)? Multiply the price you will charge by the number of products you hope to sell or the amount you hope each customer will spend. This will give you an estimate of your revenues for one year.

Hint: You will use the amounts you calculate in the costs and revenues questions in this part of the plan in the accounting statements in the next part, so be as realistic as you can.

INCOME STATEMENT AND BALANCE SHEET Create a balance sheet and an income statement (profit-and-loss statement) for your business.

Hint: You will have two options for creating these reports. The first option is to use the Microsoft Word versions that are found within this “Business Plan Student Template” (which follow).

The second option is to use the specific templates created for each statement in Microsoft Excel.

If you make adjustments, these calculations will be performed automatically for you.

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Income Statement (Profit-and-Loss Statement) June

July

Aug.

Sept.

Oct.

Nov.

Dec.

……

YEARLY

Revenue (Sales) Category 1 Category 2 Total Revenue (Sales) Cost of Goods Sold Category 1 Category 2 Total Cost of Goods Sold Gross Profit Expenses Rent Expense Salary/Wage Expenses Supplies Expense Advertising Expense Utilities Expense Telephone/Internet Expense Insurance Expense Interest from Loans (if applicable) Other Expenses (specify) Total Expenses Net Profit

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Balance Sheet Assets Current Assets Cash Cash Value of Inventory Prepaid Expenses (insurance) Total Current Assets Fixed Assets Machinery and Equipment Furniture and Fixtures Real Estate/Buildings Total Fixed Assets Total Assets Liabilities and Net Worth Current Liabilities Accounts Payable Taxes Payable Notes Payable (due within 12 months) Total Current Liabilities Long-Term Liabilities Bank Loans Payable (greater than 12 months) Less: Short-Term Portion Total Long-Term Liabilities Total Liabilities Owners’ Equity (Net Worth) Total Liabilities and Owners’ Equity ..

16

STUDENT BUSINESS PLAN PROJECT TEMPLATE PART 6: FINANCIAL ISSUES STARTUP COSTS How much money will you need to get your business started?

Hint: Refer back to Part 5 of the plan, where you analyzed the costs involved in running your business. Approximately, how much will you need to get your business started?

FINANCING How will you finance your business? For example, will you seek out a bank loan?

Borrow from friends? Sell stocks or bonds initially or as your business grows?

Hint: Refer to Chapter 16 for information on securities, such as stocks and bonds. Refer also to Appendix I: Financial Risk and Risk Management and Chapter 3 for more information on sources of short-term and long-term funds.

EXECUTIVE SUMMARY Now, create an executive summary for your business plan. The executive summary should be brief—no more than two pages long—and should cover the following points: • • • • • • • •

The name of your business Where your business will be located The mission of your business The product or service you are selling Who your ideal customers are How your product or business will stand out in the crowd Who the owners of the business are and what experience they have An overview of the future prospects for your business and industry

Hint: At this point, you’ve already answered all these questions so what you need to do here is put the ideas together into a “snapshot” format. The executive summary is really a sales pitch— it’s the investor’s first impression of your idea. Therefore, as with all parts of the plan, write in a clear and professional way.

Once you have written the executive summary, copy it and paste it at the beginning of your business plan—as the very first element.

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SAMPLE BUSINESS PLAN THE FRIENDLY CAFÉ II Executive Summary The Friendly Café II will be located in the town of Mt. Vernon, a city of approximately 12,000 people. The café will offer a nostalgic atmosphere for people of all ages. We will serve a large variety of home-cooked meals and desserts.

The mission of The Friendly Café II is to provide a quality product at a quality price served by quality people. We will demonstrate our devotion to the community through customer service and community relations.

Our ideal customers are many. Some of them will be middle-class families with young children.

These are people who earn a modest income. Our prices and convenience are reasons to visit our café. Our other ideal customers will be retirees. These are folks who may drop in for lunch or an early dinner. Some retirees have a good income from their retirements, but some may be on a fixed income.

Customers will visit us for several reasons. First is the quality of the food at an affordable price.

People want to believe that they are getting a good deal. We are dedicated to serving hot, delicious meals at a fair price.

Our café is also part of the local history. The original Friendly Café was owned by my greatgrandfather and was open from the 1940s until the late 1960s. We plan to rent the old building that housed the original café. Visitors will remember the original café and be curious to see the new version. We will have pictures from the old café on the walls, which will take diners on a trip down memory lane.

Our business will be a partnership. My family members and I will run the café together. We are a close family, and we work well together. Financially, we could not open the café without each other.

Each partner will serve as a manager in the café. My mother will be the floor manager, my aunt will be the grill manager, and I will handle the accounting for the café.

Our business will thrive for a number of reasons. First, the city of Mt. Vernon has a stable population, with a number of healthy industries. Second, the local population is somewhat older than the national average. We believe that this segment of the population longs for “days gone by.” Our nostalgic theme will appeal to this particular segment of the population.

Our skills and knowledge in food service, combined with our connections to the community, will make this business a sound investment.

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PART 1 THE CONTEMPORARY BUSINESS ENVIRONMENT Business Name The Friendly Café II Description of Business The Friendly Café II will be located in the small town of Mt. Vernon, where I grew up. The café will offer a nostalgic atmosphere for people of all ages and will serve a large variety of homecooked meals and desserts.

Form of Business Ownership The business will be a partnership, meaning that my family members and I will run the café together. Each partner will also serve as a manager and has special skills that they can bring to the business. My mother will be the floor manager. She has work experience in this area, and she knows how to organize floor space and is good with customers. My aunt has worked at a number of restaurants in the grill area and will, therefore, serve as grill manager. She will handle orders and manage all backroom employees. These two managers can substitute for one another so that they both do not have to be in the café every day. Finally, I will handle the accounting responsibilities for the café. I am currently completing my degree in accounting, and I will also have two clerks that will help me keep all accounts up-to-date and accurate.

Ideal Customer Our ideal customers are many. Some will be middle-class families with young children. These customers will visit our café for its reasonable prices and convenience. Our other ideal customers will be retirees who may drop in for lunch or an early dinner. We will have special promotions focused on each of these two groups that will be discussed later.

Our Advantages Customers will visit us for several reasons. First is the quality of the food and the affordable price. People want to believe that they are getting a good deal. We are dedicated to serving hot, delicious meals at a fair price.

Our café is also part of the local history. The original Friendly Café was owned by my greatgrandfather and was open from the 1940s until the late 1960s. We plan to rent the old building that housed the original café. Visitors will remember the original café and be curious to see the new version. We will have pictures from the old café on the walls, which will take diners on a trip down memory lane.

Ethical Issues Most restaurants deal with suppliers. We will be no different. Many restaurants must make a choice between buying higher-priced produce and supplies or buying lower-priced produce and supplies. The ethical issue facing The Friendly Café II, therefore, is the choice between buying quality products and earning a little less money, or buying lower-quality products and perhaps earning a higher profit.

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SWOT Analysis for The Friendly Café II

In the long run, we believe that a higher-quality product will lead to higher profits because our customers will notice the difference and come back for more.

We also believe we must behave ethically to our employees, treating them fairly at all times.

Social Responsibility Our business is in a small town. My family grew up in this town so we feel an obligation to “give back” to the community. Our family owns a farm so we all feel a strong bond with animals.

Because of this, we are actively involved with the local humane society. And because our business is selling food, we believe that the best way to connect our business with our hometown is to provide free, hot meals to a local charity during the holiday season.

Global Issues The business will be a local one so at this point in time, we do not foresee there being any global issues we will need to address.

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PART 2 THE BUSINESS OF MANAGING Mission Statement The mission of The Friendly Café II is to provide a quality product at a quality price served by quality people. We will demonstrate our devotion to the community through customer service and community relations

Organizational Chart for The Friendly Café lI

Business Goals First Year Goals: 1. To break even 2. To build a strong customer base 3. To minimize employee turnover Intermediate to Long-Term Goals: 1. To earn net profits of $25,000 within five years 2. To open a second restaurant in a neighboring community within five years See SWOT analysis chart above.

Management There is one level of management in the restaurant, with three different types of managers as follows: • Floor Manager • Grill Manager • Accounting Manager (all managers are also co-owners).

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Organizational Chart The organizational chart, see below, for The Friendly Café II is quite simple given that it contains, see below, only one level of management. As the business grows, further levels of management and more employees may be added.

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Floor Plan for The Friendly Café lI

Floor Plan Because we are planning on occupying the space that was previously used for the original Friendly Café, we will be keeping the basic layout of the café intact, see exhibit above. The café will include a counter area for those who wish to sit facing the kitchen, as well as a number of booths and tables to fit different-sized parties.

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Raw Materials and Supplies If we are able to lease the space used by the original Friendly Café, we will use the existing tables and chairs. These may be in need of slight repair, but are in good condition at present.

They carry the nostalgic look and feel we are striving for so we prefer not to replace them.

The café will also need the following initial inventory: 2 Cash registers @ $225 each........................................ $450 Squirrel POS system......................................................1,500 3 Microwave ovens @ $150 each ................................... 450 Deep Fryer......................................................................2,500 Refrigeration Unit .........................................................2,000 Freezer ...........................................................................4,000 Dishwashing Unit ..........................................................2,000

(100) Small Glasses @ $1.00 each....................................100 (100) Large Glasses @ $1.25 each....................................125 (100 sets) Plates, Bowls, Mugs @ $10.00 each .............1,000 (100 sets) Silverware @ $12 per set...............................1,200 Total.............................................................................$15,325 Most of our food products will be made fresh in the store so we do not plan to carry much in the way of food inventory. We will stock some canned sauces, but most food will be shipped fresh.

Our inventories will not be affected by change in seasons or holidays. We plan to be open from 6 A.M. to 10 P.M., Monday through Saturday, and 8 A.M. to 6 P.M. on Sunday.

Quality Assurance All employees will have some responsibility to ensure quality, but we believe quality begins with the management team. The floor manager will be responsible for the appearance of the café and the performance of the servers and hosts. The floor manager is responsible for pleasing the customer. The grill manager will ensure that quality food is purchased from distributors and prepared for customers. The entire management team will work to ensure that our café is synonymous with quality.

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PART 3 PEOPLE IN ORGANIZATIONS Corporate Culture Our culture is reflected in our mission statement. We want excellence in every part of our restaurant, and every employee must understand how to achieve this standard once they have completed their training. Every employee must have a commitment to pleasing the customer, both in the quality of the food and in the overall experience they will have once they are inside the store.

Our employees will be encouraged to improve the quality of the restaurant through their own suggestions and input.

We are also committed to improving our community through participation in events that make our hometown a better place to live.

Leadership Philosophy We believe that a participative approach will work well with our family-oriented business.

Because each family member will have an equal stake in the restaurant, each family member (manager) will have an equal input into the operation of the store. Each manger will have an area of specialty, which will allow them to have control over their assigned functional area. We will also encourage input from our employees, inviting them to participate in some of the decision making.

Job Descriptions The job descriptions at the Friendly Café II will be as follows: Floor Manager: The floor manager will be responsible for the “front end” of the café. This includes the staffing and training of servers and hosts. The floor manager will also be involved with customer relations. The floor manager will also help coordinate and work with those in the grill area to ensure customer satisfaction. Finally, the floor manager will be responsible for ordering any new non-kitchen inventory that the café needs, including new tables, chairs, dishes, and so on.

Grill Manager: The grill manager will be responsible for the “back end” of the café. This includes the staffing and training of cooks and dishwashers. The grill manager will also be involved with customer relations in overseeing that all the food served is of high quality. The grill manager will also work with the floor manager to help coordinate with those on the floor to ensure customer satisfaction. Finally, the grill manager will be responsible for ordering any foodrelated and cooking-related inventory that the café needs, including produce, cooking equipment, and so on.

Accounting Manager: The accounting manager will be responsible for the financial side of the business and for the hiring and training of accounting clerks. Most importantly, the accounting manager will be responsible for interacting with suppliers and managing the accounts payable that the business incurs and all other matters relating to taxes and finances.

Servers/Hosts: The servers/hosts will be responsible for serving food to customers and

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25

responding to their needs. This includes keeping their sections of the café clean and orderly and bussing dishes back to the grill area for cleaning. They will also be responsible for “side work,” such as rolling silverware and refilling the condiments on their tables. These employees will spend most of their time serving meals, but some of their time will be spent as hosts, greeting and seating customers.

Cooks: These employees will be responsible for meal preparation. They will have to “prep” everything needed for business on any given day. This includes mixing salads, estimating the amount of different foods needed for the given day, and making desserts. The closing cook will also be responsible for cleaning the kitchen so that the café will be ready for the next day’s business.

Dishwashers: The dishwashers will be responsible for washing all dishes and placing them in the correct racks. If the café is busy, they will help servers bus the tables. Dishwashers will also be responsible for cleaning the restrooms each morning and for taking out the trash at closing time. Finally, dishwashers will help the closing cook prep the back of the restaurant for the next day. This “prep” includes washing/scrubbing floors and cleaning all the food preparation tabletops.

Accounts Payable Clerks: The clerks will assist the accounting manager in recording and organizing the accounts payable that the café will assume during the course of business.

Job Specifications The job specifications for the three managers at The Friendly Café II will be as follows: Job Title: Floor Manager Needed Skills/Credentials/Qualification for Job: The floor manager must have strong human relations skills. These skills will be needed to deal with customers and employees. The floor manager must be energetic and willing to work long hours on his or her feet. The floor manager will be responsible for training servers and hosts. To be a successful floor manager, one must have at least two years of work experience in management, preferably in restaurant management.

Job Title: Grill Manager Needed Skills/Credentials/Qualification for Job: The grill manager must have strong human relations skills. These skills will be needed to deal with customers and employees. The grill manager must be energetic and willing to work long hours on his or her feet. The grill manager will be responsible for training cooks and dishwashers. To be a successful grill manager, one must have at least two years of work experience as a restaurant cook.

Job Title: Accounting Manager Needed Skills/Credentials/Qualification for Job: The accounting manager will need good human relations skills. These skills will be needed to deal with the clerks and with the café’s creditors. The accounting manager will also be responsible for training the accounts payable clerks. This position will require a degree in accounting or a minimum of two years of work experience in accounts payable or receivable.

Training Employees Our employees will have a variety of skills that they will bring to the workplace. However, it will sometimes be necessary to train new employees so they can be successful at work. Most of

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the training will focus on performing the specific tasks needed to do each job efficiently. The managers of each area will be responsible for seeing that the training program is completed but may assign team members to lead that training. In many cases, the new hire will simply “shadow” the training employee for a few days to get an idea of how to do the job.

Compensation Each of the managers will earn $22,500 per year as salary. The food service industry does not tend to pay high salaries. Because the managers are also the owners, they will hope to earn more beyond their salary from the profits of the café. Compensation for all in-store personnel will begin at $8.00 per hour, with pay increases scheduled every 120 days. These increases will be connected to performance reviews. By having reviews three times per year, we hope to create greater incentive for our team members. Compensation for the accounts payable clerks will begin at $8.50 per hour. Because the clerks will need a higher level of skill and training, their compensation will be a bit higher.

Incentives We know that pay alone does not create incentive with our workers. The thrill of a pay raise does not last long. First and foremost, we want to offer a fun workplace to our employees, and we want them to feel like extended members of our family. We will be loyal and fair to good employees and offer them benefits. We would also like to build relationships with other local businesses to exchange rewards for each business’s employees. Our community has florists, golf courses, salons, and a number of other small businesses. We believe that by trading with these businesses, each employer can benefit, and the employees will also benefit.

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PART 4 PRINCIPLES OF MARKETING Target Market Our café will have two markets: The first target market is the seniors in our community. Many of these have retired with a comfortable pension from the local industries. They do not necessarily have a high education level since it was not needed in that time. Retirees will tend to have a good deal of discretionary income and also time to socialize in the morning and lunchtime hours.

The second target market is middle-class families with younger children. These families will be looking for a well-cooked dinner after work. They will likely have a higher education level than the retirees, but will have a modest income. Dining out is probably a once-a-week event for these families.

Product Features and Benefits The Friendly Café II is a small café that will serve a variety of home-cooked meals in a nostalgic atmosphere. It is a place where friends can gather over a cup of coffee, or a family can sit down for a well-cooked meal. We will strive to serve the best meals in a happy and familiar place.

Product Differentiation People have a lot of choices when it comes to dining out. We know that we have to offer a product that stands out from the competition. We will have two major differences from our local competitors. The first is the quality of the food. Without good meals, nothing else will matter.

Diners will place the highest importance on the meal itself and so will we. By providing good meals at reasonable prices, word-of-mouth advertising will take care of itself. However, the food is only part of the dining experience. Our nostalgia theme will connect well with the local population. Our community is small and tightly-knit. Our older citizens grew up with the original Friendly Café, and they have happy memories of the local diner. We hope that our décor will help to build a bond with the older members of our community and create a new one with younger members.

Pricing Our pricing strategy is fairly simple. Because our target markets are seniors (who remember how much things used to cost) and young families, we will focus on keeping prices low. The food will be simple, home-cooked meals. The pricing will reflect the simplicity of the café. We will also offer coupons to encourage visits by customers who are price conscious.

Place (Distribution) Issues Our family (and our business) is connected to this small community and offers a family-oriented setting and a connection to history and nostalgia. The small-town setting allows us to emphasize our strengths, and we foresee no distribution issues. In the future, we hope to expand into other communities like ours.

Advertising ..

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Because we have two target markets, we will have two advertising approaches. For the seniors market, we will advertise in the local newspaper and in the retirement center in our town. These advertisements will include coupons for discounts on our morning and afternoon menus.

Coupons will also allow us to track the success of the advertising. We will also attempt to advertise on local radio stations that feature news and talk. These are stations that have a strong senior listening audience.

To get the attention of the middle-class family market, we will hang door flyers that feature our menus in the two local housing subdivisions. Many young families in our community live in these subdivisions. The flyers will also contain coupons, which will allow us to track the success of the advertising.

We will also be listed in the local phone book and will have a small site on the Internet.

These ideas are fairly inexpensive ways to get our message out to our target markets.

Promotion Because we have two main target markets, we will have two types of promotions. For the senior market, we will have 2-for-1 priced coffee on weekday mornings. Coffee is not a great expense, but can be a great draw into the café for other items in the morning. We will also offer breakfast specials Monday through Wednesday since these are the days with the least amount of customer traffic.

For the young family market, we will have a “Kids Eat Free” special on Monday nights. Again, the goal is to get the family into the café on a slow night.

We will also have promotions during the fall, when our community has a street festival. This festival attracts visitors from outside our community. These promotions will build attention (and word-of-mouth) from those who live in nearby towns.

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PART 5 MANAGING INFORMATION IT Resources We plan to use technology to create a small Web site about the café and to help us keep track of our customers. Specifically, we believe that we can use the coupons we offer to measure the success of our advertising and to create a database of customers. We will ask customers who use coupons to fill in their name and address when redeeming the coupon. We will then create an address list to make customers aware of special promotions for our preferred customers.

Customer Service Like any good restaurant, our café will be customer centered. We believe that customer satisfaction begins with a well-trained staff. First and foremost, as members of the community ourselves, we will keep in close contact with our customers, getting to know them and their families and finding out what they are looking for in an eating establishment.

Our managers will also be dedicated to a strong employee training program to ensure that our focus on customers is part of every job. Our “front-end” staff will “shadow” train for at least three days before they are allowed to work on their own. It is not enough to simply know how to take an order; employees must also understand policies and procedures that are unique to our café. The training for cooks will take approximately ten days. The time spent with the cooks is longer because we aim to ensure the quality standards of the variety of dishes they will prepare.

We will also keep a suggestion box at the front of the store to be used for customer feedback. We will encourage customers to submit ideas by rewarding them for their suggestions. Their incentive will be free appetizers, free drinks, and so on. We hope to use their input to improve our café.

Cost of Doing Business

Expenses Rent Salaries and Wages Supplies Advertising and Other Promotions Utilities: Heat, Electricity, etc.

Telephone and Internet Insurance Total

Expected Monthly Cost

Expected Yearly Cost

$500

$6,000

10,000 167

120,000 2,000

167

2,000

500

6,000

100

1,200

333 $11,767

4,000 $141,200

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Expected Revenue We believe that we can average 100 customers per day. However, the café will experience different traffic for each day of the week and during different times of the year. We believe that the average meal ticket will be approximately $5.00 per customer. This number will also vary, depending on the time of day that the customer enters the café. This will provide our café with revenues of $500 per day. We plan to be closed on Christmas. This will lead to yearly revenues of approximately $182,000 per year.

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PART 6 FINANCIAL ISSUES 12-Month Income Statement (Profit-and-Loss Statement) The Friendly Café II (amounts in dollars) 2012 Jun11

Jul11

Aug11

Sep11

Oct11

Nov11

Dec11

Jan11

Feb11

YEARLY

Revenue (Sales) Food Sales Category 2 Total Revenue (Sales) Cost of Goods Sold Food Purchases Category 2 Total Cost of Goods Sold Gross Profit

15,166 15,166 15,166 15,166 15,166 15,166 15,166 15,166 15,166 182,000 15,166 15,166 15,166 15,166 15,166 15,166 15,166 15,166 15,166 182,000

3,333

3,333

3,333

3,333

3,333

3,333

3,333

3,333

3,333

39,996

3,333

3,333

3,333

3,333

3,333

3,333

3,333

3,333

3,333

39,996

11,833 11,833 11,833 11,833 11,833 11,833 11,833 11,833 11,833 142,004

Expenses Rent Expense 500 500 500 500 500 500 500 500 500 6,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 120,000 Salary/Wage Expense Supplies Expense 167 167 167 167 167 167 167 167 167 2,004 167 167 167 167 167 167 167 167 167 2,004 Advertising Expense Utilities Expense 500 500 500 500 500 500 500 500 500 6,000 100 100 100 100 100 100 100 100 100 1,200 Telephone/Internet Expense 333 333 333 333 333 333 333 333 333 3,996 Insurance Expense Interest from Loans Other Expenses (specify) Total Expenses Net Profit

0

0

0

0

0

0

0

0

0

0

11,767 11,767 11,767 11,767 11,767 11,767 11,767 11,767 11,767 141,204 66

66

66

..

66

66

66

66

66

66

800

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Balance Sheet Assets Current Assets Cash Inventory Prepaid Expenses (insurance) Total Current Assets

$25,000 3,000 4,000 $32,000

Fixed Assets Machinery and Equipment Furniture and Fixtures Real Estate/Buildings Total Fixed Assets

$12,900 8,000 0 $20,900

Total Assets

$52,900

Liabilities and Owners’ Equity Current Liabilities Accounts Payable Taxes Payable Notes Payable (due within 12 months) Total Current Liabilities Long-Term Liabilities Bank Loans Payable (greater than 12 months) Less: Short-term Portion Total Long-term Liabilities

$3,000 6,000 0 $9,000

$0 0 $0

Total Liabilities

$9,000

Owners’ Equity (Net Worth)

$43,900

Total Liabilities and Owners’ Equity

$52,900

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Start-up Costs Our balance sheet shows total assets of $52,900. By subtracting the $25,000 that our three managers will invest, we will require start-up costs of $27,900.

Financing The three managers will put a total of $25,000 into the startup of this business. The remaining $27,900 is the amount that we are requesting for bank financing.

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