Business in Action, 9th Edition Courtland L Bovee Solution Manuals

Instructor's Resource Manual for Business in Action Revised by Maureen Steddin

Business in Action Ninth Edition

Courtland L. Bovee John V. Thill

Bovee/Thill, Business in Action 9/e Instructor’s Manual

Chapter 1 DEVELOPING A BUSINESS MINDSET Chapter Overview An introduction to business course offers something to everyone, from students who are still deciding whether business is the right major for them to workers who already have practical experience in the business world. This chapter introduces some fundamental concepts of business, including the definitions of business, major types of business, as well as the positive and negative impact of business in society. It also addresses the multiple environments in which businesses exist and operate. It identifies the main functional areas of business and explores various careers in the business world and the key success factors of such careers. Finally, it discusses the seven components of professionalism.

Chapter Outline I.

Understanding What Businesses Do A. A business is a profit-seeking organization that provides goods and services designed to satisfy customers’ needs 1. A company’s business model is an outline of how the business intends to generate revenue (money received through the sale of goods and services) 2. If revenue exceeds expenses, the business makes a profit B. Businesses add value for customers by transforming lower-value inputs into higher-value inputs 1. Businesses seek a competitive advantage that makes its products more appealing than those of its competitors 2. Businesses make decisions involving some risk in anticipation of receiving future rewards C. The driving force behind most businesses is the prospect of earning profits and building assets. Not-for-profit (nonprofit) organizations such as charities, museums, and most universities do not have a profit motive. Four helpful ways to categorize businesses are: 1. Product types and ranges 2. Company size 3. Geographic reach 4. Ownership

II. Making the Leap from Buyer to Seller A. A business mindset considers decisions to be made and problems to be overcome before companies can deliver goods/services that satisfy customers’ needs B. Businesses contribute to society through: 1. Offering valuable goods and services 2. Providing employment

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 3. Paying taxes 4. Contributing to national growth, stability, and security C. Businesses can have negative effects on society such as: 1. Generating pollution and creating waste 2. Creating health and safety risks 3. Disrupting communities 4. Causing financial instability III. Recognizing the Multiple Environments of Business A. The social environment consists of trends and forces in society at large, such as population trends 1. A company is responsible to its stakeholders (all those groups affected by its activities) B. The technological environment is comprised of forces resulting from the practical application of science to innovations, products, and processes C. The economic environment encompasses conditions and forces that: 1. Affect the cost and availability of goods, services, and labor 2. Shape the behavior of buyers and sellers 3. Gig economy: portion of the economy composed of people who work as independent contractors on a series of short-term projects or tasks D. The legal and regulatory environment is comprised of laws and regulations at local, state, national, and international levels E. The market environment is composed of three important groups: 1. A company’s target customers 2. Buying influences that shape those customers’ behaviors 3. A company’s competitors Barriers to entry are resources or capabilities a company must have before it can start competing in a given market.

IV. Identifying the Major Functional Areas in a Business Enterprise A. Research and development (R&D) is the functional area responsible for conception and design of products B. Manufacturing, production, and/or operations—the functional area charged with producing the goods and/or services of the company. It includes functions such as purchasing, logistics, and facilities management C. Marketing, sales, distribution, and customer support—customer-related functions that provide customers with the right product at the right price and place and then make sure customers have needed support and information.

The advent of social media has put buyers on more equal footing with sellers D. Finance and accounting—responsible for all aspects of a firm’s finances, including financial planning, monitoring, and reporting E. Human resources—responsible for the recruitment, hiring, development, and support of employees F. Business services—other services performed by in-house staff, external firms, or a combination of the two in areas such as law, banking, and real estate V. Exploring Careers in Business A. Operations Manager/Operations Management: management of the people and processes involved in creating goods and services

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Bovee/Thill, Business in Action 9/e Instructor’s Manual B. Human Resources Specialist: HR specialists and managers plan and direct personnel-related activities, including recruiting, training and development, compensation and benefits, employee and labor relations, and health and safety C. Information Technology (IT) Manager/IT: the functional area of business as well as systems responsible for gathering, processing, and distributing information where needed throughout an organization D. Marketing Specialist: a wide range of career opportunities in the interrelated tasks of identifying and understanding market opportunities and shaping the product, pricing, and communication strategies needed to pursue those opportunities E. Sales Professional: professionals responsible for building relationships with customers and helping them make purchase decisions F. Accountant: accounting professionals need to have an affinity for numbers, analytical minds, and attention to detail G. Financial Manager: financial managers perform a variety of leadership and strategic functions; unlike accounting tasks, for which there is a long tradition of outsourcing, the work of financial managers is generally kept in-house VI. Achieving Professionalism A. Professionalism is the quality of performing at a high level and conducting oneself with purpose and pride B. Professionalism encompasses seven traits: 1. Striving to excel 2. Being dependable and accountable 3. Being a team player 4. Communicating effectively 5. Demonstrating etiquette: the expected norms of behavior in any particular situation 6. Communicating effectively: a. Listen actively b. Provide practical information c. Give facts rather than vague impressions d. Don’t present opinions as facts e. Present information in a concise, efficient manner f. Clarify expectations and responsibilities g. Offer compelling, persuasive arguments and recommendations 7. Making ethical decisions VII.Thriving in the Digital Enterprise: Disruptive Technologies and Digital Transformation A. A digital enterprise is any company that uses digital systems as one of the foundations of its value-creation processes, regardless of what industry it is in or what product it makes B. Disruptive innovation: development so fundamentally different and far reaching that it can create new professions, companies, or even entire industries while damaging or destroying others C. Digital transformation: process of reimagining a company’s business model and operations to become a digital enterprise 1. Big data 2. Internet of Things 3. Cloud computing .

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 4. Social media 5. Mobile apps 6. AI 7. Robotics 8. Robotic process automation VIII.Developing Skills for Your Career A. Communication B. Critical thinking C. Collaboration D. Knowledge application and analysis E. Business ethics and social responsibility F. Information technology skills G. Data literacy

Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class with real-time diagnostics. Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it. For more information on using Learning Catalytics in your course, contact your Pearson Representative.

Classroom Activities Break-out group discussion: Why are you taking the course?

Goal: Ask students to name the top three reasons as why they are taking this course in an effort to introduce students to each other and to better understand their background and motivations.

Time Limit: 15 minutes.

Details: 1. Break students into groups of five. (2 minutes) 2. Ask each group to come up with the top three reasons as why students are taking this introduction to business course, for example, business majors deciding whether business is the right major for them, non-business majors seeking business knowledge, and workers looking for a theoretical foundation for their practical business experience. Ask each group to finalize their top three reasons from notes and then elect group representatives/speakers. Use votes and tally if necessary. (10 minutes) 3. Ask representatives/speakers from each group to present their results to the whole class, either verbally or written (on the blackboard). (3 minutes) Summary: Instructor summarizes the top reasons that are common across groups, describes the various student segments, and reassures them that the course has something to offer everyone.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual

In-class activity: Career track options Goal: Ask students to vote on the seven types of career track options outlined in the section “Exploring Careers in Business” to determine which option is the most popular for the class as a whole. Have students discuss the pros and cons of the various options in order for them to understand that each option has its own advantages and disadvantages.

Time Limit: 10 minutes.

Details: 1. On the blackboard, list the seven types of career track options as outlined in the section “Exploring Careers in Business” and assign a number (1 to 7) to each of the options.

2. Have students vote which option they are most interested in pursuing as a professional career by raising their hands. Make it clear before the vote that each student can only vote once. Then go through the career track options on the list from 1 to 7 and have students raise their hands when their favorite option is mentioned. Tally up the votes for each option.

3. Rank the seven options in order of popularity. Pick the most popular option first and ask students to name one or two pros and cons for that option. For instance, possible pros of the career option “Finance and Accounting” are “higher pay” and “more job security” and possible cons are “math-heavy” and “boring.” Help students understand that even the most popular career options have disadvantages.

4. If time allows, pick the next most popular career track option(s) and brainstorm more pros and cons.

End-of-Chapter Chapter 1: Behind the Scenes An Unexpected Turn Launches an Innovative New Company Critical Thinking Questions 1.1 Rana el Kaliouby refers to herself as the “chief evangelist” for Affectiva.

What do you think this means in a business context, and how important is this activity for a CEO? Being the “chief evangelist” in a business likely means passionately promoting the company’s mission and products, both to internal and external stakeholders.

This could have a profound effect on creating a motivated, effective workforce, and cultivating demand from clients/consumers. (LO: 1, AACSB: Information technology) 1.2 How does Affectiva add value in the markets where it does business?

Affectiva adds value by creating AI that can recognize human emotion. It can help businesses determine if the billions of dollars of advertising they use each year are triggering the emotional responses in consumers that they are designed

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Bovee/Thill, Business in Action 9/e Instructor’s Manual to elicit. It can also monitor driver attention and emotion levels in self-driving cars. (LO: 1, AACSB: Information technology) 1.3 How might the social environment influence Affectiva’s growth in the future?

Students’ responses will vary, but possible answers might include a rise in the demand of automated products like self-driving cars and an increase in the population of people who have difficulty noticing and interpreting social cues.

(LO: 3, AACSB: Information technology)

Learn More Online Students’ responses will depend, in large part, on the material currently posted on the website, as well as their personal experiences and opinions. (LO: 5, AACSB: Information technology)

Test Your Knowledge Questions for Review 1.4 What is a business model?

A business model is a clear, simple outline of how the business intends to generate revenue. (LO: 1) 1.5 What is moral hazard?

If individuals and companies believe they can pursue rewards without facing the risks that should be attached to those pursuits, they are more likely to engage in irresponsible and even unethical behavior—a situation known as moral hazard.

(LO: 1, AACSB: Ethical understanding and reasoning) 1.6 What are four ways that business can benefit society?

Business can benefit society by offering valuable goods and services, providing employment, paying taxes, and contributing to national growth, stability, and security. (LO: 2) 1.7 What are four potential ways that business activity can cause harm?

Business activity can cause harm by generating pollution and waste, creating health and safety risks, disrupting communities, and causing financial instability.

(LO: 2) 1.8 What is meant by the economic environment?

The economic environment involves the conditions and forces that affect the cost and availability of goods, services, and labor and thereby shapes the behavior of buyers and sellers. (LO: 3) 1.9 Do all companies have an R&D function? Explain your answer.

No. Many companies simply resell products that other firms make or continue to make the same goods or perform the same services year after year. (LO: 4) 1.10 How does the role of a financial manager different from the role of an accountant?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual A financial manager is responsible for planning, while an accountant is responsible for monitoring and reporting. (LO: 5) 1.11 What is professionalism?

Professionalism is the quality of performing at a high level and conducting oneself with purpose and pride. True professionals exhibit seven distinct traits: striving to excel, being dependable and accountable, being a team player, communicating effectively, demonstrating a sense of etiquette, making ethical decisions, and maintaining a positive outlook. (LO: 6) 1.12 What is a digital enterprise?

Digital enterprise is any company that uses digital systems as one of the foundations of its value-creation processes, regardless of what industry it is in or what product it makes. (LO: 7, AACSB: Information technology) 1.13 What is disruptive innovation?

Disruptive innovation is development so fundamentally different and far reaching that it can create new professions, companies, or even entire industries while damaging or destroying others (LO: 7, AACSB: Information technology)

Questions for Analysis 1.14 Would you consider a job offer from a company if the company’s recruiters have trouble describing the firm’s business model? Why or why not?

Responses will vary based on students’ opinions and experiences. Many may feel that without a clearly stated outline of how a business intends to generate revenue, the job offer might be too risky. On the other hand, some may feel that the nature of disruptive innovation may make it hard to articulate the business model at the outset, though the company has much potential upside. (LO: 4) 1.15 Does a downturn in the economy hurt all companies equally? Provide several examples to support your answers.

No. For instance, the latest recession has hurt luxury department stores (e.g. Saks Fifth Avenue, Neiman Marcus) significantly more than discount retailers such as Walmart or Target. In a downturn economy, necessity goods such as food and medicine tend not to suffer as much of a decrease in sales compared to discretionary spending items such as spa or massage services. (LO: 3, AACSB: Analytical thinking)

1.16 Ethical considerations. Is managing a business in ways that reflect society’s core values always ethical? Explain your answer.

Students’ answers may vary according to their personal opinions, but their answers may reflect some of the following concerns:  There are ethical dilemmas or situations in which a business must choose among conflicting but arguably valid options.  Each of these options may reflect core values of various segments of society.  Nevertheless, a choice needs to be made, which means the chosen option may reflect the core values of certain segments of society but still be

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Bovee/Thill, Business in Action 9/e Instructor’s Manual considered as ethically unsound by other segments of society. (LO: 6, AACSB: Ethical understanding and reasoning) 1.17 How can business knowledge and skills help social entrepreneurs reach their goals?

Social entrepreneurs, people who apply entrepreneurial strategies to enable largescale social change, use business concepts as well. For example, such entrepreneurs will need to use HR skills in order to manage the people that will be involved in working toward their goals. They will also need to obtain financing so finance and accounting skills will be necessary. Technology is essential to almost every facet of life these days and would be vital in organizing information and resources, as well as using online presence and social media to promote the cause. (LO: 2, AACSB: Analytical thinking) 1.18 Why is it so difficult to predict whether an innovation might disrupt an industry and when it could happen?

It is difficult because in many cases, multiples other forces from the technological, economic, social, and legal regulatory environments need to converge before an innovation has a major impact. It is difficult to predict when the disruption will happen because many promising technologies can take years to have an impact. (LO: 7, AACSB: Information technology)

Questions for Application 1.19 How will you be able to apply your experience as a consumer of educational services to the challenges you’ll face in your career after graduation?

Students’ answers will vary but may reflect some of the following key points:  As a consumer of educational services, a student has likely learned a great deal about such services in the context of business offerings, thus leaning a lot about business principles.  For instance, a student understands the impact of good or poor customer service related to educational services and thus understands the needs and wants of customers and how such needs and wants may best be met by businesses and other organizations.  Such understanding of businesses and customers can be transferable to postgraduation careers and can help a student deal with challenges that exist in such careers. (LO: 2, AACSB: Reflective thinking) 1.20 If you were planning to launch an AI-related company like Affectiva, which elements of the social environment should you be aware of?

Students’ responses will vary but possible answers might include a rise in the demand of automated products like self-driving cars and an increase in the population of people who have difficulty noticing and interpreting social cues.

(LO: 3, AACSB: Information technology) 1.21 What are some of the ways a company in the health-care industry could improve its long-term planning by studying population trends?

Students’ answers will vary but may include the following:  Studying population trends will help the health care industry in gauging future demand for medical and healthcare services.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 

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For example, one major population trend is that the baby boomers are reaching retirement age. That translates to increasing demand for both pharmaceutical drugs and medical services that will serve the aging baby boomer generation, for example, drugs and treatment for diseases that are prevalent for elders such as heart disease and cancer.

The healthcare industry may also choose to focus on preventative care such as educating baby boomers on nutrition and exercise and provide corresponding goods and services. (LO: 3, AACSB: Diverse and multicultural work environments)

1.22 Identify three ways in which the principles of professionalism described in this chapter can make you a more successful student.

Students’ answers may vary; however, some possible ideas are as follows:  “Striving to excel” inspires students to be the best they can be academically and in extracurricular activities.  “Being a team player” helps students do well in team class projects that are becoming increasingly popular in colleges and universities.  “Communicating effectively” enables students to excel in class discussions, presentations, and written assignments. (LO: 6, AACSB: Reflective thinking) 1.23 What are some of the ways a locally owned retail store could become a digital enterprise?

Students’ answers will vary but may include some of the following: a digital cashier system, a digital payment system, a digital inventory system, a digital ordering system so customers can order items in advance and pick them up at the shop, digital loyalty programs that engage customer and drive repeat business, and social media advertising. (LO: 7, AACSB: Information technology)

Expand Your Knowledge Discovering Career Opportunities Your college’s career center offers numerous resources to help you launch your career. Imagine that you write a blog for students at your college and you want to introduce them to the center’s services. Write a blog post of 300 to 400 words, summarizing what the center can do for students.

Students’ blog content will vary but it may involve resume and cover letter writing, interviewing preparation, and inviting firms to recruit on campus. (LO: 2, AACSB: Written and oral communication)

Intelligent Business Technology: Text Mining Text mining, a type of data analytics, uses natural language processing to extract meaning from textual sources. For instance, companies can use it for social listening to identify themes (such as prevailing customer sentiment or threats to a company’s reputation) hidden in mountains of written information, from Twitter and Facebook posts to customer emails and surveys.

Research one current business application of text mining and write a oneparagraph summary of how companies are using it and how it helps them compete or satisfy customers more effectively.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Students’ email messages will vary depending upon the business application they select. (LO: 3, AACSB: Information technology)

Practice Your Skills Resolving Ethical Dilemmas Imagine that you have a great idea for a new product and you’d like to start a company to produce and sell it. It’s unlike anything on the market now, so you are not entirely sure how well it will sell. You haven’t done any formal marketing research yet, but most of the people who’ve tried the prototype seemed interested in it. Plus, an executive with years of experience in this market has already signed on as an investor and will consider joining the company if you can line up enough other investors to get things rolling.

You know several other people who occasionally invest in start-ups, and you plan to pitch the idea to them. What are your responsibilities to them in terms of risk? After all, they could lose all the money they invest with you, for a variety of reasons—the product might not sell as well as you hope, another company could get something similar to market sooner, the economy could tank and dry up disposable income, and so on.

In a brief report, identify some general steps you could take to reduce the risk for investors and how you would communicate the risk to them when you pitch the idea.

Students’ answers will vary but might include some of the following points: including a business model could help potential investors make an informed decision about the risk involved in the enterprise; conveying any competitive advantage their venture might have could help investors assess the risk/reward; extensive research of the field in which the product will operate, as well as any competitors in the field, would be helpful toward assessing risk as well. (LO: 1, AACSB: Written and oral communication)

Sharpening Your Communication Skills Select a local service business where you have been a customer. How does that business try to gain a competitive advantage in the marketplace? Write a brief summary describing whether the company competes on speed, quality, price, innovation, service, or a combination of these attributes. Be prepared to present your analysis to your classmates.

Students’ answers will vary depending on the service they investigate. Whatever they choose to investigate, they are likely to notice one major area of competition. Help students see the ways in which competition takes place on several levels at the same time, and ask them to consider how these areas work together to give the company a competitive advantage over others. (LO: 1, AACSB: Written and oral communication)

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Building Your Team Skills In teams assigned by your instructor, each member will first identify one career path (such as marketing or accounting) that he or she might like to pursue after graduation and share that choice with the rest of the team. Each team member will then research the others’ career options to find at least one significant factor, positive or negative, that could affect someone entering that career. For example, if there are four people on your team, you will research the three careers identified by your three teammates. After the research is complete, convene an in-person or online meeting to give each member of the team an informal career counseling session based on the research findings.

Students’ answers will vary depending on the careers they research. (LO: 5, AACSB: Analytical thinking)

Developing Your Research Skills Gaining a competitive advantage in today’s marketplace is critical to a company’s success. Research any company that sounds interesting to you and identify the steps it has taken to create competitive advantages for individual products or the company as a whole.

1.24 What goods or services does the company manufacture or sell?

Students’ answers may vary depending upon selection of company. (LO: 1) 1.25 How does the company set its goods or services apart from those of its competitors? Does the company compete on price, quality, service, innovation, or some other attribute?

Students’ answers may vary depending upon selection of company. (LO: 1) 1.26 How do the company’s customer communication efforts convey those competitive advantages?

Students’ answers may vary depending upon selection of company. (LO: 1, AACSB: Written and oral communication)

Assisted-graded Questions 1.27 If individual accountability is an essential element of professionalism, why is it also important to be an effective team player? Explain your answer.

Professionals know that they are contributors to a larger cause, that it’s not all about them. Just as in athletics and other team efforts, being a team player in business is something of a balancing act. On the one hand, you need to pay enough attention to your own efforts and skills to make sure you’re pulling your own weight. On the other hand, you need to pay attention to the overall team effort to make sure the team succeeds. Remember that if the team fails, you fail, too. If each member of the team is personally accountable, then the team as a whole will function more smoothly and productively. (LO: 6, AACSB: Interpersonal relations and teamwork) 1.28 Do laws and regulations always restrict or impede the efforts of business professionals, or can they actually help businesses? Explain your answer.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Laws and regulations do not always restrict or impede the efforts of businesses.

For instance, intellectual property right laws such as those governing copyrights, patents, and trademarks help protect businesses from firms and individuals who may infringe on such rights.

(LO: 3)

CHECKPOINTS LEARNING OBJECTIVE 1: Explain the concept of adding value in a business, and identify four useful ways to categorize businesses.

Critical thinking: (1) What inputs does a musical group use to create its outputs?

Students’ responses may vary but the following addresses some possible answers.

The inputs for a musical group may include labor (musicians), capital (financial resources for the group), equipment (musical instruments), information (musical knowledge), and creativity.

(2) Can not-for-profit organizations benefit from practices used by for-profit companies? Why or why not?

Yes. Many of the business principles and practices utilized by for-profit companies, such as those in the business functional areas of marketing, finance, management, technology, and human resources can also be used by not-for-profit organizations.

It’s your business: (1) Think back to the last product you purchased; how did the companies involved in its creation and sale add value in a way that benefited you personally?

Students’ responses will vary depending upon the different products they last purchased and corresponding firms that manufactured such products.

(2) Can you see yourself working for a not-for-profit organization after you graduate?

Why or why not?

Students’ responses will vary depending on personal interests.

LEARNING OBJECTIVE 2: List three steps you can take to help make the leap from consumer to business professional.

Critical thinking: (1) How can consumer experiences help a business professional excel on the job?

Consumer experiences allow one to know a great deal about businesses, including aspects such as the quality of products or customer services, which will in turn help one excel on the job as a business professional.

(2) If organized businesses didn’t exist and the economy were composed of individual craftspeople, would the result be more or less pollution? Explain your answer.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual There wouldn’t necessarily be less pollution because organized businesses that operate under the principles of sustainable development might conceivably produce less pollution than craftspeople that use a lot more energy or employ practices that hurt the environment.

It’s your business: (1) How might you contribute to society as a business professional?

Students’ responses will vary depending on personal experiences and opinions.

(2) What is your view of business at this point in your life? Negative? Positive? A mixture of both? What experiences have shaped your view?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Discuss the five major environments in which every business operates.

Critical thinking: (1) Is it wise for cities and states to compete with each other to be more business friendly, specifically with regard to lower tax rates on businesses? Why or why not?

It may not be wise for such competition to get out of control because each competing state will hurt from low tax revenues.

(2) Even though it never sells directly to consumers, does a company such as Boeing need to pay attention to population trends? Why or why not?

Yes, even a company such as Boeing needs to pay attention to population trends because consumers account for a large proportion of the airline passengers and any trends affecting them will affect airlines, which ultimately will affect Boeing.

It’s your business: 1) How has technology made your educational experience in college different from your experience in high school?

Students’ responses will vary depending on personal experiences.

(2) In what ways are you a market influencer? Do your buying choices and recommendations affect the decisions of other consumers?

Students’ responses will vary depending on personal experiences.

LEARNING OBJECTIVE 4: Explain the purpose of the six major functional areas in a business enterprise.

Critical thinking: (1) Do companies that deliver services rather than creating tangible goods ever need to engage in research and development? Why or why not?

Yes. Even though services are intangible, service companies still engage in research and development to create new services or add new features for existing services to better serve their customers and attract new customers.

(2) Why is good customer support essential to the success of marketing and sales activities?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual A good support is essential to the success of marketing sales because customer support goes to work after the sale, making sure customers have the support and information they need, it improves customer satisfaction. Such efforts are important in developing repeat customers and building customer loyalty.

It’s your business: (1) Think of a strongly positive or strongly negative experience you’ve had with a product or company. What feedback would you like to give the company, and to which functional area would you direct your feedback?

Students’ responses will vary depending on personal experiences and opinions.

(2) Have you already chosen the functional area where you want to work after graduation? If so, what led you to that choice?

Students’ responses will vary depending on personal experiences.

LEARNING OBJECTIVE 5: Summarize seven of the most important business professions.

Critical thinking: (1) Why are communication skills essential in all seven of the functional areas discussed in this section?

Communication skills are essential because all seven functional areas require communications with various stakeholders of businesses, including customer, employees, investors, suppliers, and the community in which businesses exist.

(2) Why would financial managers be in a good position to rise up the company ladder?

Financial managers are in a good position to rise up the company ladder because the work of the financial managers is generally kept in-house. In addition, the work of a financial manager touches every part of the company.

It’s your business: (1) Which of these seven general career areas appeals to you the most? Why? Students’ responses will vary depending on personal opinions.

(2) If you eventually plan to start your own company but want to gain experience working in a corporation first, which of these career paths would you choose? Why? Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 6: Identify six components of professionalism.

Critical thinking: (1) How much loyalty do employees owe to their employers? Explain your answer.

Students’ responses will vary depending on personal experiences and opinions but points to consider include the employers’ perspective; that is, many employers consider their employees disposable and may lay them off when the companies experience a bad financial quarter.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual (2) Would it be unethical to maintain a positive public persona if you have private doubts about the path your company is pursuing? Why or why not?

Students’ responses will vary depending on personal experiences and opinions.

It’s your business: (1) In what ways do you exhibit professionalism as a student?

Students’ responses will vary depending on personal experiences and opinions.

(2) You can see plenty of examples of unprofessional business behavior in the news media and in your own consumer and employee experiences. Why should you bother being professional yourself?

Students’ responses will vary depending on personal experiences and opinions.

LEARNING OBJECTIVE 7: Describe the concepts of disruptive innovation and digital transformation.

Critical thinking: (1) Consider a local coffee shop or café that doesn’t sell anything digital. Can it still become a digital enterprise? Explain your answer.

A coffee shop could become a digital enterprise by incorporating some of the following: a digital cashier system, a digital payment system, a digital ordering system so customers can order items in advance and pick them up at the shop, digital loyalty programs that engage customer and drive repeat business, and social media advertising.

(2) How many of the technologies and services you routinely use in your daily life were once disruptive innovations?

Students’ responses will vary depending on personal experiences but examples to consider include mobile phones, handheld computers, streaming video, and mobile payment apps.

It’s your business: (1) If you don’t have that much interest in technology and are instead intrigued by finance, sales, or some other aspect of business, how can you still thrive in a digital enterprise?

Students’ responses will vary depending on personal interests and experiences.

(2) Would you consider going to work for a company that is betting its future on a potentially disruptive innovation that hasn’t yet taken hold in the marketplace? Why or why not?

Students’ responses will vary depending on personal experiences and opinions.

LEARNING OBJECTIVE 8: Identify seven essential business skills that you will have the opportunity to develop during this course.

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Chapter 2 ECONOMICS, MONEY, AND BANKING Chapter Overview This chapter introduces economics from a business professional’s perspective, including the interaction of supply and demand and the macro view of the economy.

The second half explores money, banking, and the digital revolution known as fintech.

Chapter Outline I.

What Is This Thing Called the Economy?

A. The economy is the sum total of all the economic activity within a given region B. Economics is the study of how a society uses its scarce resources to produce and distribute goods and services 1. Microeconomics is the study of economic behavior among consumers, businesses, and industries that collectively determine the quantity of goods and services demanded and supplied at different prices 2. Macroeconomics is the study of a country’s larger economic issues, such as competition, government policies, and how an economy maintains and allocates its scarce resources C. Each society must decide how to use its economic resources or factors of production 1. Natural resources—things that are useful in their natural state (land, forests, minerals, and water) 2. Human resources—people and their individual talents and capacities 3. Capital—money, computers, machines, tools, and buildings 4. Entrepreneurship—the spirit of innovation, the initiative, and the willingness to take on risks involved in creating/operating a business 5. Knowledge—the collective intelligence of an organization. Knowledge workers are employees whose primary contribution is the acquisition and application of business knowledge C. Scarcity—a condition of any productive resource that has finite supply 1. Scarcity creates competition for resources 2. Scarcity forces consumers, companies, and governments to make tradeoffs a. Opportunity cost is the value of the most attractive option not selected when making a trade-off D. Economic indicators are statistics such as interest rates, unemployment rates, housing data, and industrial productivity 1. Leading indicators (such as housing starts and durable-goods orders) suggest changes that may happen to the economy in the future 2. Lagging indicators (such as the unemployment rate) provide confirmation that something has happened in the past

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 3. Housing starts are a leading indicator showing where several industries are headed; when housing starts drop, the construction industry contracts, and the effect ripples through other sectors of the economy 4. A rise in durable-goods orders, another key leading indicator, is a positive indicator that business spending is turning around E. Price indexes offer a way to monitor inflation or deflation 1. The consumer price index (CPI) measures rate of inflation by comparing change in prices of a representative “basket” of consumer goods and services 2. The producer price index (PPI) is a statistical measure of price trends at the producer and wholesaler levels F. The gross domestic product (GDP) is the value of all the final goods and services produced by businesses located within a nation’s borders 1. GDP has largely replaced the measure GNP (gross national product).

GNP considers who is responsible for production; GDP considers where it occurs II. Economic Systems A. An economic system is the basic set of rules for allocating a society’s resources to satisfy its citizens’ needs 1. Planned system—governments largely control allocation of resources; also called a command system or a command-and-control system a. Often equated with socialism, which involves collective ownership of the means of production 2. Free-market system—individuals and companies decide what products to produce, how to produce them, to whom to sell them, and at what price a. Referred to as capitalism or private enterprise—private parties own/operate the majority of businesses and competition, supply, and demand determine goods/services produced b. No economy is without limited intervention by government, creating a mixed economy or mixed capitalism 3. Governments change structure of economy in two ways: a. Nationalizing—assuming ownership of selected companies or industries b. Privatizing—allowing private businesses to perform services once performed by the government B. There is considerable debate over the key roles that governments play in the economy 1. Regulation—relying more on laws and policies than on markets forces to govern economic activity 2. Deregulation—removing regulations to allow the market to prevent excesses and correct itself over time C. The government plays a role in the economy in four major areas: 1. Protecting stakeholders through numerous regulatory agencies 2. Fostering competition through prevention of monopolies a. Antitrust legislation b. Merger and acquisition approval 3. Stabilizing and stimulating the economy through use of monetary policy and fiscal policy

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Bovee/Thill, Business in Action 9/e Instructor’s Manual a. Monetary policy involves adjusting the nation’s money supply by increasing or decreasing interest rates. It is administered by the Federal Reserve Board b. Fiscal policy involves changes in the government’s revenues (taxation) and expenditures 4. Encouraging innovation and economic development III. The Forces of Demand and Supply A. Demand—buyers’ willingness and ability to purchase products at various price points 1. The demand curve shows the relationship between price and demand— as price decreases, demand increases (i.e., more people are willing to buy) B. Supply—the quantities of a good/service that producers will provide on a particular date at various prices 1. The supply curve shows the relationship between supply and demand— as price increases, the quantity that sellers are willing to supply increases C. Demand and supply curves intersect at equilibrium price—the point at which quantity supplied equals quantity demanded IV. The Macro View: Understanding How an Economy Operates A. Competition is rivalry among businesses for the same customers.

B. There are different degrees of competition 1. Pure competition—the market situation in which there are so many buyers and sellers that no single buyer or seller can individually influence market price 2. Monopoly—the market situation in which one company dominates the market and can control prices 3. Monopolistic competition—the market situation in which there are many sellers who differentiate their products from those of competitors in at least some small way 4. Oligopoly—the market situation in which a very small number of suppliers, sometimes only two, provide a particular good or service C. Economic activity changes in response to factors such as investment patterns, shifts in consumer attitudes, world events, and basic economic forces—called economic fluctuation or business cycles 1. Economic expansion—when the economy is growing and consumers are spending more money 2. Economic contraction—when spending declines, employment drops, and the economy slows down a. A recession is two consecutive quarters of decline in gross domestic product b. A deep and prolonged recession can be considered a depression, a catastrophic collapse of financial markets D. Unemployment rate—the percentage of labor force currently without employment 1. Four types of unemployment—frictional, structural, cyclical, and seasonal E. Inflation—the steady rise in the average prices of goods and services throughout the economy 1. Deflation is the sustained fall in average prices

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V. The Money’s Role in Business A. Money is anything generally accepted as a means of paying for goods and services. It has four functions: 1. Medium of exchange—a tool for simplifying buyer/seller transactions 2. Unit of accounting—a measure of value 3. Temporary store of value—a way of accumulating wealth until it is needed 4. Standard of deferred payment—it can be used to represent debt obligations B. The practical value of money stems from two key properties: liquidity and trust 1. Money is the most liquid asset because it can be exchanged easily and often instantly for something else of value 2. Currency is accepted because of the trust that it represents real economic value C. The U.S. dollar and other modern currencies are called fiat money, issued and maintained through government fiat or proclamation 1. A new wave of alternative money is cryptocurrency, digital tokens that rely on cryptography for security (e.g., Bitcoin). It has the potential to influence business and economics in the following ways: a. An alternative to fiat currency b. A disruptive force in global economics and politics c. A speculative investment d. A driver of potentially disruptive technologies D. The money supply is the amount of money in circulation at any given time within an economy. It can be measured in several ways: 1. M1 consists of cash held by the public and money deposited in a variety of checking accounts: spendable now 2. M2 is broader, encompassing M1 plus savings accounts, balances in retail money-market funds, CDs, and spendable fairly soon VI. Banking Institutions and Services A. The Federal Reserve System (the Fed) is the central banking system of the U.S. and is responsible for regulating banks and implementing monetary policy. Tools to manage money supply are: 1. Two key interest rates: a. Federal funds rate—the interest rate that member banks charge each other to borrow money overnight from the funds they keep in the Federal Reserve accounts. Not set directly but “nudged” through buying/selling treasury bond, bills, and notes; adjusting reserve requirements; and lending through the discount window b. Discount rate—the rate that member banks pay when they borrow money from the Fed. A change in it generally changes banks’ prime rate, the rate it charges its best loan customers B. Other government banking agencies and institutions include: 1. Federal Deposit Insurance Corporation (FDIC)—federal agency responsible for protecting money in customer accounts and managing the transition of assets when a bank fails

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 2. NCUA—The National Credit Union Administration (NCUA) provides regulatory supervision and account protection for credit unions 3. Fannie Mae and Freddie Mac—two quasi-public companies operating under the close supervision of the federal government, with a mandate to make mortgage funding more available to low- and moderate-income home buyers. They don’t extend loans themselves but rather purchase and guarantee loans made by other lends in the secondary mortgage market.

C. Investment banks offer a variety of investing and advisory services to organizational customers, including corporations, other financial institutions, pension funds, and governments. They provide some combination of these services:  Facilitating mergers, acquisitions, sales, and spin-offs of companies  Underwriting initial public offerings  Managing and advising on investments  Raising capital on behalf of corporate or government clients  Advising on and facilitating complex financial transactions  Investing in or lending money to companies  Providing risk management advice  “Making markets” for clients D. Commercial banks are financial institutions that accept deposits, offer various types of checking and savings accounts, and provide loans. Five major types are as follows: 1. Retail banks provide financial services to consumers 2. Merchant banks offer financial services to businesses 3. Thrift banks offer deposit accounts and focus on offering home mortgage loans 4. Credit unions are not-for-profit, member-owned cooperatives that offer deposit accounts and lending services to consumers and small business 5. Private banking is a range of banking services for wealthy individuals and families E. Other financial services: 1. Independent mortgage companies originate mortgages using their own funds 2. Mortgage brokers initiate loans on behalf of a mortgage lender in exchange for a fee 3. Finance companies are nonbank institutions that lend money to consumers and businesses 4. Credit rating agencies are companies that offer opinions about the creditworthiness of borrowers and of specific investments F. For all the benefits banking provides, its role in the economy hasn’t been without harm or controversy. Financial firms of all types and sizes played a central role in triggering the Great Recession of 2007–2009.

1. The too-big-to-fail dilemma a. The banking industry has consolidated dramatically in recent years; the largest banks hold a staggering proportion of the country’s cash accounts b. Calling a bank “too big to fail” doesn’t mean a bank can’t fail because it is too big; it means a bank’s role in the economy is so big that regulators will take special action to make sure it doesn’t fail

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 2. The boundaries of commercial banking and investment banking a. Starting in the 1980s, waves of deregulation reshaped the banking and financial services industry; in the opinions of some, this helped create the conditions that led to the Great Recession b. Debate continues about whether the Glass-Steagall wall should be reinstated to prevent the risks posed by colossal, multifaceted financial firms VII.

Thriving in the Digital Enterprise: Fintech A. Fintech—technologies with the potential to improve or disrupt financial services. Involves a variety of technologies, including: 1. Artificial intelligence (AI) 2. Cloud computing 3. Mobile apps, with both customer-facing and back-office technologies B. Five major areas are seeing benefits from new fintech, including making financial services more inclusive 1. Crowdfunding and peer-to-peer lending bypass intermediaries in the conventional banking system 2. Highly automated fintech brokerages like Robinhood and Stash give more people access to the stock market and other investment opportunities by making it possible to invest smaller amounts than with traditional brokerages C. Improving efficiency of financial activities 1. A group of fintech activities lower the costs, delays, and complexity of traditional banking activities 2. TransferWise lowers the costs and fees associated with international money transfers D. Strengthening security of financial systems, for example, with automated AIbased threat intelligence E. Improving the customer experience in financial services 1. Popular fintech apps include mobile banking apps, peer-to-peer cash transfer apps like Venmo and Zelle, and financial planning services like Mint 2. Neobanks provide banking services entirely through mobile and digital channels F. Enhancing financial decision-making with robo advisers that aim to improve investors’ returns by removing emotions-driven decision-making and automating time-consuming manual tasks

Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class with real-time diagnostics. Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it. For more information on using Learning Catalytics in your course, contact your Pearson Representative.

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Classroom Activities Break-out group discussion: Capitalism versus Socialism Goal: Ask students to discuss the pros and cons of both capitalism and socialism and to come away with the understanding that each system has its own benefits and shortcomings.

Time Limit: 15 minutes.

Details: 1. Break students into groups of five. (2 minutes) 2. Ask each group to come up with the top pros and cons of capitalism or socialism. Sample list items include capitalism’s efficient self-adjusting market mechanism via “demand versus supply”, encouragement of hard work and entrepreneurship, lower taxes, higher income disparity, and generally poorer records in the public sector such as education, healthcare and social welfare, and socialism’s generally better records in education, healthcare and social welfare, lower income disparity, higher taxes and less incentive for hard work, and entrepreneurship. Use examples of countries and regions to illustrate such differences, for example, U.S. and Hong Kong for capitalism, and France and Canada for socialism. (10 minutes) 3. Ask representatives/speakers from each group to present their results to the whole class, either verbally or written (on the blackboard). (3 minutes) Summary: Instructor summarizes the top pros and cons for both capitalism and socialism and concludes that the best system tends to be a mixed system that incorporates the beneficial elements of both systems.

In-class activity: GDP versus GNP Goal: Help students differentiate between Gross Domestic Product (GDP) and Gross National Product (GNP).

Time Limit: 10 minutes.

Details: 1. Draw a table with three columns and four rows on the blackboard with the following column headings respectively: “Scenarios,” “Which Country’s GDP,” and “Which Country’s GNP.” 2. Lists the following three scenarios under the column heading “Scenarios.” a. An American banker working in London b. A Chinese factory worker in a Coca-Cola bottling plant in Shanghai c. An Australian volunteer in South Africa 3. Ask students to pair up and recreate the content of the blackboard in their notebooks. They then need to populate the rest of the table by listing the names of countries under the two column headings corresponding to GDP and GNP. 4. Make it clear to students that the main difference between GDP and GNP is that GDP considers where the production occurs and GNP considers who is

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Bovee/Thill, Business in Action 9/e Instructor’s Manual responsible for the production. For instance, in Scenario A, the goods and services produced by an American banker in London should be classified as the GDP of United Kingdom (UK) and the GNP of United States (US).

Hint: GNP excludes the value of production from foreign-owned businesses within a nation’s boundaries (Scenario B). Volunteering is not a component of GDP or GNP (Scenario C).

End-of-Chapter Behind the Scenes Responding to the Digital Invaders at JPMorgan Chase Critical Thinking Questions 2-1.

If JPMorgan Chase is doing well serving its current customer segments, why would it bother with the added effort of targeting lower-income clients?

Populations who are underserved by current banking services are key targets of neobanks, with their low costs and low entry barriers. Working to gather intelligence about a market segment that it historically hasn’t been active in allows JPMorgan Chase to potentially develop relationship with a new population of customers. (LO: 7, AACSB: Analytical thinking)

2-2.

Would it make sense for the company to market its most basic banking services under a different brand name to avoid diluting its higher-end JPMorgan brand? Why or why not?

While a company could choose to offer their most basic banking services under a different name to avoid diluting its higher-end brand, doing so would not take advantage of the name recognition and positive reputation that the company has.

This could result in it getting a smaller share of customers in the market for these no frills banking services than if it used its actual name. (LO: 7, AACSB: Analytical thinking)

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Which of its various kinds of competition identified in the chapter does JPMorgan Chase engage in? Explain your answer.

JPMorgan Chase engages in monopolistic competition. There are numerous providers of both traditional banking services like theirs, as well as many small, new fintech innovators with the potential to disrupt banking as it is currently.

(LO: 7, AACSB: Analytical thinking)

Learn More Online Students’ responses will depend, in large part, on the material currently posted on the website. (LO: 7, AACSB: Analytical thinking)

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Test Your Knowledge Questions for Review 2-4. What are the five primary factors of production?

The five primary factors of production are natural resources, human resources, capital, entrepreneurship, and knowledge. (LO: 1) 2-5. Why is the economic concept of scarcity a crucial concept for businesspeople to understand?

The economic concept of scarcity is a crucial concept for businesspeople to understand because scarcity creates competition for resources and forces tradeoffs on the part of every participant in the economy. First, businesses and industries compete with each other for the resources they need, including materials, employees, and customers. Second, given this universal scarcity of resources, businesses are constantly forced to make trade-offs, such as deciding how much money to spend on advertising a new product versus how much to spend on the materials used to make it, or deciding how many employees to have in sales versus customer support. (LO: 1) 2-6.

Does the United States have a purely free-market economy or a mixed economy? Explain your answer.

The U.S. has a mixed economy. For example, government bodies intervene in the U.S. economy in a variety of ways, such as by influencing allocations of resources through tax incentives, prohibiting or restricting the sale of certain goods and services, setting limits on how products can be produced (to minimize pollution, for example), or setting price controls. Moreover, although free-market capitalism remains the foundation of the U.S. economy, some important elements of the U.S. economy are socialized and have been for many years. Public schools, much of the transportation infrastructure, various local and regional utilities, and several major health-care programs all fit the economic definition of socialism. (LO: 2)

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What is the difference between monetary policy and fiscal policy?

Monetary policy is government policy and actions taken by the Federal Reserve Board to regulate the nation’s money supply. Fiscal policy is the use of government revenue collection and spending to influence the business cycle.

(LO: 2)

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What are the Fed’s three objectives in conducting monetary policy?

The three objectives are maximizing employment, keeping prices stable, and keeping inflation under control. (LO: 6)

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Why might a government agency seek to block a merger or acquisition?

To preserve competition, a government agency may stipulate requirements companies must meet to gain approval of a proposed merger or acquisition. If the governmental agency thinks a proposed merger or acquisition might restrain competition, it may deny approval altogether. (LO: 2, AACSB: Ethical understanding and reasoning)

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2-10. What does it mean when a bank is labeled “too big to fail”?

When a bank is labeled “too big to fail” it means that the bank’s presence in the economy is so big that regulators will take special action to make sure it doesn’t fail. (LO: 6)

Questions for Analysis 2-11.

Why do governments intervene in the free-market system?

Governments intervene in free-market systems to influence prices and wages or to change the way resources are allocated. This practice of limited intervention is called mixed capitalism, which is the economic system of the United States.

Under mixed capitalism, the pursuit of private gain is regarded as a worthwhile goal that ultimately benefits society as a whole. (LO: 2) 2-12. How do countries know if their economic systems are working?

Economic indicators are statistics such as interest rates, unemployment rates, housing data, GNP, GDP, and CPI. A country’s professional economists sort and interpret these data to monitor and measure the country’s economic performance and predict its future performance. (LO: 1) 2-13. To what degree are fluctuations in the business cycle predictable?

Fluctuations are rarely predictable. (LO: 4) 2-14. Is it beneficial for the country as a whole for individual U.S. states to compete with one another to attract companies? (Offering tax breaks in exchange for building new facilities is a common tactic states use to attract commercial investment, for example.)

It may not be wise for such competition to get out of control because each competing state will hurt from low tax revenues. (LO: 2, AACSB: Analytical thinking) 2-15. If risk is a part of doing business, why should the Fed be concerned with systemic risk?

Systemic risk is risk that extends beyond any single bank or other company. The Fed seeks to minimize it to main the stability of the financial system. (LO: 6) 2-16. Why would the U.S. government consider reinstituting the “wall” between investment banking and commercial banking?

The government could consider reinstituting the “wall” between investment banking and commercial banking to reduce the size and scope of the largest financial institutions. Some observers feel that the waves of deregulation that allowed these companies to become so big helped create the environment that triggered the Great Recessions. (LO: 6, AACSB: Analytical thinking) 2-17. What are the benefits of a fintech company’s ability to bypass traditional intermediaries in a financial system?

Crowdfunding and peer-to-peer lending services allow customers who would not be served by traditional banking institutions to store or borrow money to do so.

This not only allows some who would not qualify for loans with traditional banks to borrow money but also the process is often much faster and less expensive

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Bovee/Thill, Business in Action 9/e Instructor’s Manual than conventional loan applications. Other fintech platforms like Robinhood and Stash give more people access to the stock market and other investment opportunities by making it possible to invest smallest amounts than is possible with traditional stock brokerages. (LO: 7, AACSB: Information technology) 2-18. If a particular fintech company is likely to disrupt any aspect of the country’s financial system, should the government take steps to prevent it from doing so? Why or why not?

The government should not prevent fintech companies from disrupting aspects of the financial system, unless the end result of this disruption would be a destabilization of the overall economy. (LO: 7, AACSB: Information technology) 2-19. Ethical Considerations: The risk of failure is an inherent part of free enterprise. Does society have an obligation to come to the aid of entrepreneurs who try but fail? Why or why not?

Students’ answers will vary but may reflect some of the following concerns:  Entrepreneurs willing to face risks of failure are a vital force in capitalist economies.  Such entrepreneurs will be rewarded handsomely when they become successful.

Many such entrepreneurs are involved in multiple ventures and may use earnings from successful ventures to fund, develop, or improve ventures that are less successful. (LO: 6, AACSB: Ethical understanding and reasoning)

Questions for Application 2-20. How might government and education leaders work with business to minimize structural unemployment?

Government and education leaders might work with businesses to provide educational opportunities and training programs that would best match workers’ skills with the current needs of employers in an effort to minimize structural unemployment. (LO: 4, AACSB: Analytical thinking) 2-21. How would a decrease in Social Security benefits to retired persons affect the economy?

First it would lower government spending and perhaps reduce the national debt.

While many might see this as an economic boost, all things being equal, a decrease in government spending would also reduce the amount of money in the economy. For example, because of the circular flow, the elderly would have less money to spend so businesses that cater to the needs of the elderly might be hurt and the employees of those businesses might lose their jobs and so on. In order for the economy to stay balanced, the decrease in money spent by the government on Social Security would have to be substituted by an infusion of money into the economy from another source. However, the multiplier effect of that change would have to be analyzed. (LO: 1, AACSB: Analytical thinking) 2-22.

If you wanted to increase demand for your restaurant but are unable to lower prices or increase advertising, what steps might you take?

Applying the law of demand versus supply, you may want to relocate your restaurant to a neighborhood/area where there are not as many other restaurants, that is, where there is less supply. There will be less competition and you may

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Bovee/Thill, Business in Action 9/e Instructor’s Manual even be able to raise your price slightly without driving customers away. (LO: 3, AACSB: Analytical thinking) 2-23.Concept Integration. What effect might the technological environment, discussed on page 11 in Chapter 1, have on the equilibrium point in a given market?

Students’ answers may vary; however, the following provides a possible scenario:  Technological advances may help reduce the cost of producing goods and services and therefore increasing the supply for a given market at every price, thus moving the equilibrium point as well. (LO: 3, AACSB: Information technology)

Expand Your Knowledge Discovering Career Opportunities Thinking about a career in economics? Find out what economists do by reviewing the Occupational Outlook Handbook in your library or online at www.bls.gov/ooh. This is an authoritative resource for information about all kinds of occupations. Search for “economists” and then answer these questions: 2-24.

Briefly describe what economists do and their typical working conditions.

Economists study the production and distribution of resources, goods, and services by collecting and analyzing data, researching trends, and evaluating economic issues. Economists typically research and analyze economic issues, conduct surveys and collect data, analyze data using mathematical models and statistical techniques, and prepare reports, tables, and charts that present research results. They also interpret and forecast market trends, advise businesses, governments, and individuals on economic topics, design policies or make recommendations for solving economic problems, and write articles for publication in academic journals and other media sources.

Economists apply economic analysis to issues within a variety of fields, such as education, health, development, and the environment. Some economists study the cost of products, healthcare, or energy. Others examine employment levels, business cycles, or exchange rates. Still, others analyze the effect of taxes, inflation, or interest rates.

Economists held about 21,300 jobs in 2016. Economists typically work independently in an office. However, many economists collaborate with other economists and statisticians, sometimes working on teams. Most economists work full time during regular business hours, but occasionally they work overtime to meet deadlines. (LO: 1)

2-25.

What is the job outlook for economists? What is the average salary for starting economists?

Employment of economists is projected to grow 6 percent from 2016 to 2026, about as fast as the average for all occupations. Job prospects should be best for those with a master’s degree or Ph.D., strong analytical skills, and experience

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Bovee/Thill, Business in Action 9/e Instructor’s Manual using statistical analysis software.

Businesses and organizations across many industries use economic analysis and quantitative methods to analyze and forecast business, sales, and other economic trends. Demand for economists should come from the increasing complexity of the global economy, additional financial regulations, and a more competitive business environment.

The median annual wage for economists was $102,490 in 2017. The median wage is the wage at which half the workers in an occupation earned more than the amount and half earned less. (LO: 1, AACSB: Ethical understanding and reasoning)

2-26. What training and qualifications are required for a career as an economist? Are the qualifications different for jobs in the private sector as opposed to those in the government?

A master’s degree or Ph.D. is required for most economist jobs. Positions in business, research, or international organizations often require a combination of graduate education and work experience.

Students can pursue an advanced degree in economics with a bachelor’s degree in a number of fields, but a strong background in math is essential. A Ph.D. in economics may require several years of study after earning a bachelor’s degree, including completion of detailed research in a specialty field.

Candidates with a bachelor’s degree qualify for some entry-level economist positions, including jobs with the federal government. An advanced degree is sometimes required for advancement to higher-level positions. (LO: 1)

Intelligent Business Technology: Robo Advisers Research the techniques used to create robo advisers (often spelled robo advisors). In a brief report, explain how these fintech tools work and how they can promise to help ordinary investors make better financial decisions without the cost of a professional financial adviser.

Students’ answers will vary but should touch on the following points: assessing each client’s risk tolerance, resources, and objectives; removing emotion-driven decisionmaking; and automating tasks that are time-consuming to do manually. (LO: 7, Information technology)

Practice Your Skills Resolving Ethical Dilemmas Assume you’re launching a robo adviser automated investment service for young adults in which you offer three portfolio models with varying levels of risk and potential reward: low risk/low reward, medium risk/medium reward, and high risk/high reward. However, these are only models, and the past performance of various investment approaches is no guarantee of future results. Even the low-risk

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Bovee/Thill, Business in Action 9/e Instructor’s Manual portfolio could encounter steep losses if the stock market goes into a long-term decline. Conversely, there is no guarantee that the high-risk portfolio will yield high returns. In a brief memo, explain how you would present the three portfolios to your potential customers.

Students’ answers will vary but should make clear the aims of each account while making clear that past performance is no guarantee of future results. They should also touch on the following points regarding robo advisers:  aim to improve investor returns by removing emotion-driven decisionmaking  save time and money by automating tasks that are time-consuming to do manually  automatically rebalance portfolios over time  automatically sell investments that have declined in value and use the loss as a tax write-off, allowing the ability to buy back into market.

(LO: 7, Information technology)

Sharpening Your Communication Skills Identify any mobile app that falls within the realm of fintech. Identify its target market, basic features, and user benefits that set it apart in the marketplace.

Assume that you write a blog on personal finance for young adults and use the information you found about this app to write a 100- to 200-word overview of the product.

Students’ answers will vary based on the mobile app that students choose, but the overview must include target market, standard features, and user benefits that distinguish it from other apps in the marketplace. (LO: 7, AACSB: Written and oral communication skills)

Building Your Team Skills Economic indicators help businesses and governments determine where the economy is headed. As part of a team assigned by your instructor, analyze the following newspaper headlines for clues to the direction of the U.S. economy:     

“Housing Starts Lowest in Months” “Fed Lowers Discount Rate and Interest Rates Tumble” “Retail Sales Up 4 Percent Over Last Month” “Business Debt Down from Last Year” More Manufacturers Showing Interest in Upgrading Production Equipment”  “Local Economy Sinks as Area Unemployment Rate Climbs to 9.2 Percent”  “Computer Networking Firm Reports 30-Day Backlog in Installing Business Systems” Is each item good news or bad news for the economy? Why? What does each news item mean for large and small businesses? Report your team’s findings to the class. Did all the teams come to the same conclusions about each headline?

Why or why not? With your team, discuss how these different perspectives might influence the way you interpret economic news in the future. (LO: 6, AACSB: Analytical thinking)

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Housing Starts Lowest in Months This indicates that consumers are not very confident about the future, so they are “staying put” rather than building new houses.

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Fed Lowers Discount Rate and Interest Rates Tumble This headline indicates that aggregate demand is slow. In order to boost the economy and encourage firms to invest more, the Fed lowers the discount rate and other interest rates that follow.

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Retail Sales Up 4 Percent Over Last Month Increase in sales indicates a healthy economy with employment rates rising and rising consumer confidence as a result. Some inflationary pressure may result.

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Business Debt Down from Last Year This indicates that business owners are less confident and less willing to take on debt.

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More Manufacturers Showing Interest in Upgrading Production Equipment This headline indicates that businesses are replacing labor with machines.

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Local Economy Sinks as Area Unemployment Rate Climbs to 9.2 Percent This indicates that high unemployment rate often contributes to lower consumer spending, resulting in a shrinking local economy.

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Computer Networking Firm Reports 30-Day Backlog in Installing Business Systems This indicates growth in the economy, as businesses are growing.

Developing Your Research Skills Some career paths have higher unemployment risks during the ups and downs of economic fluctuations. Research three business careers that should be relatively “recession proof” in the coming years, meaning that employment is unlikely to drop dramatically (or may even increase) during a recession. Summarize your findings in a one-page report.

Students’ answers may vary but three likely such careers are healthcare, education, and green technology. (LO: 4, AACSB: Analytical thinking)

Assisted-graded Questions 2.21 When the needs of various stakeholders conflict, how should legislators and regulators approach these dilemmas?

Businesses have many stakeholders, including colleagues, employees, supervisors, investors, customers, suppliers, and society at large. While serving one or more of these stakeholders, a business may sometimes neglect, or at least be accused of neglecting, the interests of other stakeholders in the process. In an

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Bovee/Thill, Business in Action 9/e Instructor’s Manual attempt to balance the interests of stakeholders and protect those who might be adversely affected by business, the U.S. federal government has established numerous regulatory agencies, and state and local governments have additional agencies. They develop and promote standards, regulate and oversee industries, and enforce laws and regulations. When the needs of various stakeholders conflict, legislators and regulators should approach the dilemma with an eye to the big picture and the overall economy. (LO: 4, AACSB: Analytical thinking) 2.22 How might the word “free” affect public and political discussions of freemarket systems?

There is much debate about how “free” the free market should be. In a broader view, this argument springs from profound philosophical differences over the role government should play in society as a whole. More narrowly, even professional economists don’t always agree on what role the government should play in the economy. Much of the debate is framed as the argument between regulation versus deregulation. (LO: 5, AACSB: Ethical understanding and reasoning)

CHECKPOINTS LEARNING OBJECTIVE 1: Define economics, explain why scarcity is central to economic decision making, and identify major ways of measuring economic activity.

Critical thinking: (1) Why is entrepreneurship considered a factor of production?

Entrepreneurship is considered a factor of production because it is finite, just like the other four factors of production, in that not everyone has the spirit of innovation, the initiative, and the willingness to take the risks involved in creating and operating businesses. Like the other four factors, entrepreneurship can also be used to satisfy society’s needs.

(2) Why is GDP considered a more accurate measure of a country’s economic health than GNP? GDP is considered a more accurate measure since it includes goods and services produced within a country’s borders and enables a nation to evaluate its economic policies and to compare its current performance with prior periods or with the performance of other nations.

It’s your business: (1) Did you consider opportunity cost when you chose the college or university you are currently attending?

Students’ responses will vary depending on personal experiences.

(2) What trade-offs did you make in order to read this chapter at this exact moment in your life? (Think about the decisions you made to get to a point in your life where you’re taking a business course.)

Students’ responses will vary depending on personal experiences.

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LEARNING OBJECTIVE 2: Define economic system, and explain the government’s role in a free-market economy.

Critical thinking: (1) Why are no economies truly free, in the sense of having no controls or restrictions?

Economies are not truly free because in all economies, local, state, national, and even international governments intervene in the economy to various degrees to accomplish goals that leaders deem socially or economically desirable. These interventions include taxation and price controls.

(2) What are some possible risks of privatizing basic services such as the transportation infrastructure?

Some possible risks include that the private entities that are in control of transportation infrastructure could sacrifice infrastructure quality and safety to minimize costs and maximize profits. They may also be entities controlled by foreign governments that may not be friendly towards the U.S. or even become hostile both politically and militarily.

It’s your business: (1) What is your emotional reaction to the terms capitalism and socialism? Explain why you feel the way you do.

Students’ responses will vary depending on personal opinions.

(2) Would you rather pay lower taxes and accept the fact that you need to pay for many services such as health care and education or pay higher taxes with the assurance that the government will provide many basic services for you? Why? Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Explain the interaction between demand and supply.

Critical thinking: (1) How does the interaction between demand and supply keep a market in balance, at least approximately and temporarily?

The interaction between demand and supply keeps a market in balance through the equilibrium point.

(2) If the prices of complementary products for a given product go up, what effect is this increase likely to have on demand for that product?

This increase will likely reduce the demand for that product.

It’s your business: (1) Are there any products or brands you are so loyal to that you will purchase them at almost any price? Will you accept less-expensive substitutes?

Students’ responses will vary depending on personal opinions.

(2) Have you ever purchased something simply because it was on sale? Why or why not?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Students’ responses will vary depending on personal experiences.

LEARNING OBJECTIVE 4: Identify four macroeconomic issues that are essential to understanding the behavior of the economy.

Critical thinking: (1) Are colleges and universities an example of pure competition or monopolistic competition? Why? They are monopolistic competition since they offer products that can be distinguished from competing products in at least some small way, such as strengths in certain majors or facilities.

(2) Are monopolies always harmful to consumers? Why or why not?

Not necessarily. There are some government sanctioned monopolies such as utilities and the U.S. Postal Service which are not really harmful to consumers.

It’s your business: (1) What state of the business cycle is the economy currently in? Is this influencing your career plans?

Students’ responses will vary depending on personal experiences and opinions.

(2) Have you ever been unemployed (at a time when you were actively looking for work)? Which of the four categories of unemployment would you have fallen under?

Students’ responses will vary depending on personal experiences and opinions.

LEARNING OBJECTIVE 5: List the four financial functions of money, and define two key measures of the money supply.

Critical thinking: (1) What might happen if people lose trust in their currency?

The practical value of money stems from two key properties: liquidity and trust. The only reason people accept money as payment, essentially just pieces of paper with ink splashed on it, is because they trust that the bill being handed over represents a certain amount of real economic value. If that trust were lost, people could refuse to accept currency as payment and grind the economy to a halt.

(2) Why couldn’t you buy your groceries using an amount of gold of equal value to the cost of the items you want to purchase?

At one point in U.S. history, the value of that paper rectangle would’ve been tied to the price of gold and you could exchange your bills for a specific amount of gold, but the value of money is no longer linked to gold. Instead, there is basically a mutual agreement that the bill represents a certain amount of exchangeable value, so the grocery store can take your money and use it to pay its bills, and so on through the entire economy.

It’s your business: (1) What actions have you had to take in your own life to overcome liquidity problems?

Students’ responses will vary depending on personal experiences.

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(2) Did those actions negatively affect your financial health later on? Explain your answer.

Students’ responses will vary depending on personal experiences.

LEARNING OBJECTIVE 6: Explain the role of the Federal Reserve System, list the major types of banking institutions, and summarize banking’s role in the economy.

Critical thinking: (1) Why would a company’s financial managers want to pay attention to the federal funds rate?

Financial managers would want to pay attention to the federal funds rate because it is a fundamental driver of economic behavior, influencing short- and long-term interest rates, foreign exchange rates, and inflation.

(2) Rather than promising to support any too-big-to-fail banks, could the federal government instead simply warn everyone that doing business with one of these firms is risky? Why or why not?

If the federal government simply warned people that doing business with a too-bigto-fail bank is risky, people wouldn’t necessarily hear or heed this warning.

It’s your business: (1) If you are hoping to get a loan to expand your business, will you welcome the news that the Fed is raising the discount rate? Why or why not?

A business owner in need of a loan would not be happy about the Fed raising the discount rate. Raising the discount rate discourages loans and therefore tightens the money supply; lowering it encourages lending and expands the money supply.

(2) Would you put any of your life savings into cryptocurrency? Why or why not?

Students’ responses will vary depending on personal experiences and opinions.

LEARNING OBJECTIVE 7: Define fintech, and discuss five ways that financial institutions are innovating with digital technology.

Critical thinking: (1) If a substantial portion of the public has been underserved by conventional banks, as many in fintech assert, why shouldn’t the Fed or other regulatory bodies step in and require banks to serve these customers?

Forcing banks to serve these customers at a financial loss could destabilize the economy as a whole.

(2) What questions should anyone ask before moving personal funds from a conventional bank to a neobank?

Before moving funds to a neobank, customers should ask whether the neobank is FDIC (or otherwise) insured, what fees may apply, what services are provided, and what transactions are possible

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It’s your business: (1) Do you use a mobile banking app now? If so, what are its advantages and disadvantages compared to doing your banking in person at a physical bank branch?

Students’ responses will vary depending on personal experiences and opinions.

(2) Would you be comfortable leaving your retirement portfolio in the hands of a robo adviser? Why or why not?

Students’ responses will vary depending on personal experiences and opinions.

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Chapter 3 THE GLOBAL MARKETPLACE Chapter Overview Today’s business world consists of nations and economies that are becoming increasingly connected and interdependent. This chapter examines the theories and practices of international businesses and how they are affected by economic, social, cultural, political, and legal differences among nations. It also introduces major regional trading blocs and worldwide trading organizations and discusses five main forms of international business activity. The current state of AI-assisted translation and its value to international business are discussed.

Chapter Outline I.

Fundamentals of International Trade A. Economic globalization is the increasing integration and interdependence of national economies around the world B. Reasons why countries and companies trade internationally: 1. Focusing on relative strengths (comparative advantage)—countries should focus on areas where they can produce more efficiently and trade for goods/services they cannot produce as economically 2. Expanding markets 3. Pursuing economies of scale—savings from buying parts and materials, manufacturing, or marketing in large quantities 4. Acquiring materials, goods, and services 5. Keeping up with customers 6. Keeping up with competitors who compete on a global scale C. How international trade is measured 1. Balance of trade is the total value of a nation’s exports less the total value of its imports over a specified period of time a. A trade surplus results if exports exceed imports b. A trade deficit results if imports exceed exports 2. Balance of payments is the sum of all payments one nation receives from other nations less the sum of all payments it makes to other nations over a specified period of time D. The foreign exchange rate is the rate at which the money of one currency is traded for another

II. Conflicts in International Trade A. Trade that takes place without governmental interferences is known as free trade B. Protectionism encompasses government policies aimed at shielding a country’s industries from foreign competition. Strategies include: 1. Tariffs—taxes, surcharges, or duties levied against imported goods

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 2. Import quotas limit the amount of particular goods that countries allow to be imported during a given year 3. Embargoes—a complete ban on import or export of certain products or on all trade with certain countries 4. Restrictive import standards—establishing regulations that make it difficult or expensive for companies to import goods 5. Export subsidies—providing financial assistance to domestic producers to allow them to lower their prices in order to compete more effectively in the world market 6. Anti-dumping measures—regulations and sanctions against foreign companies that attempt to sell large quantities of a product at a price lower than the home-country price (dumping) 7. Sanctions—politically motivated embargoes that revoke a company’s normal trade relations status C. Discussions of free trade should consider these five ideas: 1. Conflict among nations 2. Conflict within nations 3. Asymmetrical wins and losses 4. Short-term effects versus long-term effects 5. The broader business environment III. International Trade Organizations A. Organizations facilitating international trade 1. World Trade Organization (WTO)—established to negotiate, implement, and monitor international trade procedures and mediate trade disputes among its member countries 2. International Monetary Fund (IMF)—monitors global financial developments, provides technical advice and training, and provides short-term loans 3. World Bank—group of five financial institutions with goal of eradicating most extreme levels of poverty around the world; addresses poverty, health, and education in developing countries B. Trading blocs—Also known as common markets, these regional organizations remove barriers to trade among their members and establish uniform barriers to trade with nonmember nations 1. North American Free Trade Agreement (NAFTA)—comprised of the United States, Mexico, and Canada 2. European Union (EU)—comprised of more than two dozen countries; viewed as a whole, the EU is the world’s largest economy 3. Asia-Pacific Economic Cooperation (APEC)—comprised of 21 countries working to liberalize trade in the Pacific Rim IV. The Global Business Environment A. Cultural differences—culture is a shared system of symbols, beliefs, attitudes, values, expectations, and norms for behavior 1. Businesspeople dealing with other cultures should avoid: a. Stereotyping—assigning a wide range of generalized attributes, often superficial or even false, to an individual based on his/her membership in a particular culture or social group b. Ethnocentrism—judging all other groups according to the standards, behaviors, and customs of one’s own group

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Bovee/Thill, Business in Action 9/e Instructor’s Manual c. Cultural pluralism—the practice of accepting multiple cultures on their own terms 1. Avoid assumptions 2. Avoid judgments 3. Acknowledge distinctions 2. Businesspeople should also be well-versed in the political issues, cultural factors, and the economic environment of the country in which they plan to do business.

B. Legal differences 1. The legal systems in the U.S. and the United Kingdom are based on common law, in which tradition, custom, and judicial interpretation play important roles 2. The legal system in other nations (i.e., France and Germany) is based on civil law, in which legal parameters are specified in detailed legal codes 3. Another legal system in countries such as Iran and Pakistan is based on theocratic law, which is based on religious principles 4. A tax haven is a country whose favorable banking law and low tax rates give companies the opportunity to shield some of their income from higher tax rates at home or in other countries they do business 5. U.S. companies are bound by the Foreign Corrupt Practices Act (FCPA), which outlaws bribery in other countries V. Forms of International Business Activity A. Importing and exporting 1. Importing is purchasing goods or services from another country and bringing them into one’s own country 2. Exporting is the selling and shipping of goods or services to another country B. International licensing—agreements to produce and market another company’s product in exchange for a royalty or fee C. International franchising—selling the right to use a business system, including brand names, business processes, trade secrets, and other assets D. International strategic alliances and joint ventures 1. Strategic alliances are long-term partnerships between two or more companies to jointly develop, produce, or sell products 2. Joint ventures are the joining of two or more firms to create a new business entity that is legally separate and distinct from its parents E. Foreign direct investment (FDI)—the investment of money by foreign companies in domestic business enterprises 1. Countries that establish a physical presence in multiple countries through FDI are known as multinational corporations (MNCs) VI. Strategic Approaches to International Markets A. Organizational strategies for international expansion include 1. A multidomestic strategy, a decentralized approach in which a company creates highly independent operating units in each new country 2. A global strategy, a centralized approach in which headquarters in the home country makes all major decisions 3. A transnational strategy, a hybrid approach that attempts to reap the benefits of international scale while being responsive to local market dynamics

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Bovee/Thill, Business in Action 9/e Instructor’s Manual B. Functional strategies for international expansion—companies face multiple decisions in pursuing international markets: 1. Products—should products be standardized (selling the same product in all markets) or customized (different products in different markets) 2. Customer support—whether or not to offer local support 3. Promotion—the degree to which promotional messages should be customized for each country 4. Pricing—making sure the costs of doing business internationally can be covered, while still offering products at competitive prices 5. Staffing—the decision to hire local managers or relocate managers from the home country VII.

Thriving in the Digital Enterprise: AI-Assisted Translation A. A long-standing goal of artificial intelligence is machine translation, that is, automated translation B. Text translation—translating written text 1. Translation features of web browsers 2. Mobile apps that translate text as it is typed in C. Real-time voice translation—translating spoken language in real time 1. Carry on a conversation 2. Participate in a presentation

Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class with real-time diagnostics. Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it. For more information on using Learning Catalytics in your course, contact your Pearson Representative.

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Classroom Activities Break-out group discussion: Pros and cons of globalization Goal: Asks students to think out loud about the benefits and pitfalls of globalization in a group setting and discuss them in class in a debate-team format.

Time Limit: 20 minutes.

Details: 1. Break students into groups of five. (2 minutes) 2. Ask half of the groups to come up with three to four major benefits of globalization, for example, home country firms’ access to new market/new customers, lower costs of labor and materials in host countries, host country consumers’ access to new products and services, and new job opportunities in host countries; ask the other half of the groups to come up with major pitfalls of globalization, for example, the potential loss of jobs in home countries, sweatshop conditions in host countries, increasingly homogenized markets and products around the world, and host countries’ loss of cultural identities. Elect a group leader/facilitator and a notetaker in each group. Ask each group to finalize their viewpoints from notes and then elect group representatives/speakers. (10 minutes) 3. Ask representatives/speakers from two opposing teams to debate each other in front of the whole class, using ideas generated in prior group discussions.

One group will address the benefits of globalization, while the other will counter with pitfalls of globalization. The teams may go back and forth, attacking each other’s viewpoints and rationales. (8 minutes) Summary: Instructor summarizes the major benefits and pitfalls of globalization presented by students (add/delete when appropriate) and emphasizes that globalization is not all good or bad—it is a “double-edged” sword.

Group exercise: Web research “EU versus NAFTA” In a computer lab, divide students into groups of four or five and have them conduct research on the Web to discover which trading bloc (EU vs. NAFTA) represents the highest collective GDP (Gross Domestic Product) figures of member nations. Is it the EU or NAFTA? Time Limit: 20 minutes.

End-of-Chapter Behind the Scenes Airbnb Succeeds with Global Vision but Local Touch Critical Thinking Questions 3-1. Would licensing the Airbnb business system to other companies have been a

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Bovee/Thill, Business in Action 9/e Instructor’s Manual better way to establish the brand in various countries. Why or why not?

It would not likely have been better to license the system to other countries because the network effect is crucial to its success, that is, the larger the network of hosts and guests, the more valuable the system is to everyone. (LO: 5, AACSB: Diverse and multicultural work environments) 3-2. Should Airbnb consider changing its name to something more locally meaningful in each country? Why or why not?

Students’ answers will vary. Some may feel that having a locally meaningful name will enable consumers to better understand the nature of the service and seek to use it. Others may feel that it is more valuable to use the same name to capitalize on its name recognition and reputation. (LO: 4, AACSB: Diverse and multicultural work environments) 3-3. Why does the sense of community as a strategic theme work better for Airbnb than it would for a ride-sharing company such as Uber or Lyft?

One of Airbnb’s values has long been a sense of community for hosts and guests.

The more people who belong to the community, the more valuable it is for each member. This theme makes more sense for Airbnb than for a ride-sharing service because transportation is a more utilitarian concept. As long as it is safe, affordable, and convenient, there is not much sense of distinction among different rides/drivers. The nature of differentiation is more significant in the context of a vacation rental or home, where the choices are more distinctive and the ambience is more important. (LO: 6, AACSB: Analytical thinking)

Learn More Online Visit www.airbnb.com and peruse some of the lodging available in three countries that interest you as a traveler. Do you find any significant difference in the way the rooms, homes, or experiences are presented? Do the listings make you more interested in visiting these places? How does this compare to searching for hotel rooms in the same locations?

Students’ responses will depend, in large part, on the countries selected and the listings currently posted on the website. (LO: 4, AACSB: Information technology)

Test Your Knowledge Questions for Review 3-4.

What is economic globalization?

Economic globalization is the increasing integration and interdependence of national economies around the world. (LO: 1)

3-5. What is the balance of trade, and how is it related to the balance of payments?

The balance of trade is determined by the relationship between the value of a country’s imports and the value of its exports. It is not as broad as the balance of payments, which measures the total flow of money into a country minus the flow

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Bovee/Thill, Business in Action 9/e Instructor’s Manual of money out of the country over a period of time. The balance of payments includes not only the balance of trade but also payments of foreign aid by governments and direct investment in assets. (LO: 1, AACSB: Diverse and multicultural work environments) 3-6.

What is a floating exchange rate?

A floating exchange rate is a system of foreign currency exchange whereby currency values fluctuate in response to the forces of global supply and demand.

(LO: 1, AACSB: Diverse and multicultural work environments)

3-7.

How can protectionist moves create conflict within a country?

Trade policy decisions can simultaneously help one segment and hurt another.

Protectionist measures to save domestic jobs often come at a high cost to consumers. (LO: 2, AACSB: Diverse and multicultural work environments)

3-8.

What is a floating exchange rate?

A floating exchange rate is a system of foreign currency exchange whereby currency values fluctuate in response to the forces of global supply and demand.

(LO: 1)

3-9.

What is a trading bloc?

Trading blocs, or common markets, are regional organizations that promote trade among member nations. (LO: 3)

3-10.

Why are tax havens controversial?

Tax havens are controversial because critics charge that being able to move funds around the world to minimize taxes give multinational companies an unfair advantage over local competitors and allows them to avoid the shared responsibility of supporting infrastructure, education, and other public resources.

(LO: 4, AACSB: Analytical thinking) 3-11.

What two fundamental product strategies do companies choose between when selling their products in the global marketplace?

A company must decide whether to standardize the product, selling the same product everywhere in the world, or to customize the product to accommodate the lifestyles and habits of local target markets. Keep in mind that the degree of customization can vary. A company may change only the product’s name or packaging, or it can modify the product’s components, size, and functions.

Understanding a country’s culture and regulations helps a company make these important choices. (LO: 6, AACSB: Diverse and multicultural work environments)

Questions for Analysis 3-12. Why would a company choose to work through intermediaries when selling products in a foreign country?

By using intermediaries to sell products to a foreign market, a company can avoid some of the many problems that can occur when selling products in a foreign country. A company can avoid barriers to trade, one of the main obstacles to trading in a foreign market. There are many barriers to trade in place to protect countries from being overwhelmed by foreign imports. These can include tariffs, quotas, or embargoes. Other barriers may include laws, restrictive import

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Bovee/Thill, Business in Action 9/e Instructor’s Manual standards, or domestic subsidies. Also, by using intermediaries, the company can avoid fluctuations in currency exchange and governments. By using certain types of intermediaries, a company can also avoid exorbitant shipping costs. By using intermediaries, a company may stand to gain less profit but also guarantees itself fewer risks. (LO: 5, AACSB: Diverse and multicultural work environments) 3-13. How do companies benefit from forming international joint ventures and strategic alliances?

A strategic alliance is a long-term partnership between two or more companies aimed at helping establish a competitive advantage in the marketplace.

Companies share ideas, resources, and technology. By sharing their resources (especially technology), both companies become more competitive, enabling them to take on larger companies who have more resources than either company alone. A joint venture is a partnership in which two or more firms join together to create a new business entity that is legally separate and distinct from its parents.

In some countries, foreign companies are prohibited from owning facilities outright or from investing in local business, so establishing a joint venture with a local partner may be the only way to do business in that country. In this way, companies share investment costs, risks, management, and profits. Again, by sharing responsibilities, these companies can increase their competitiveness in the global marketplace by pooling resources. No one company takes the risk upon itself and doubles its resources. This is especially important in an era of multinational corporations. (LO: 5, AACSB: Diverse and multicultural work environments) 3-14. What types of situations might prompt the U.S. government to implement protectionist measures?

The U.S. government might implement protectionist measures for several reasons, including (1) shielding developing or struggling industries from foreign competition, (2) bending to pressure to protect U.S. jobs, (3) retaliating against the protectionist actions of other countries, and (4) protecting the health and safety of American citizens. (LO: 2, AACSB: Diverse and multicultural work environments) 3-15. How do tariffs and quotas protect a country’s own industries?

Tariffs include taxes, surcharges, or duties levied against imported goods. Tariffs raise the cost of foreign goods, giving domestic products a price advantage.

Quotas limit the amount of particular goods that countries can import during a year. Limits can be set on quantities (such as bushels) or value (such as dollar value). Quotas protect a country's industry by allowing only a certain amount of imports to enter the country at a given time. In this way, consumers can only spend a limited amount on imported goods and must spend the rest on their own country’s industry. (LO: 2, AACSB: Diverse and multicultural work environments) 3-16. Why is the transnational strategy considered a hybrid of the multidomestic and global strategies?

It is considered a hybrid because it attempts to reap the benefit of international scale while being responsive to local market dynamics. Basically, “think globally, act locally.” (LO: 6, AACSB: Diverse and multicultural work environments)

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3-17. How might social media and popular culture affect a company’s functional strategies for international expansion, particularly regarding products and promotion?

Social media and popular culture might affect a company’s decision regarding whether to standardize their products or customize them to each local market.

Advertising, public relations, and other promotional efforts also present the dilemma of standardization versus customization. In addition to language differences, companies need to consider nonverbal symbols, including the significance of colors and hand gestures, as well as cultural differences. (LO: 6, AACSB: Diverse and multicultural work environments) 3-18. What is machine translation?

Machine translation, or automated translation, involves text translation and realtime voice translation. (LO: 7, AACSB: Information technology) 3-19. Ethical Considerations. Is it unethical for a U.S. company to choose export markets specifically for their less-stringent consumer protection standards? Why or why not?

Answers will vary depending on students’ opinions. Possible considerations include asking the following questions first: (1) Is the action legal? (2) Is there strong competitive pressure to do so? Would not doing so make the company less successful in relative to competitors? (3) Do consumers in such export markets have any legal recourse if they were injured by the products in question? (LO: 1, Ethical understanding and reasoning)

Questions for Application 3-20. Suppose you own a small company that manufactures baseball equipment. You are aware that Russia is a large market, and you are considering exporting your products there. However, you know you need to learn more about Russian culture before making contact with potential business partners. What steps could you take to improve your cultural awareness?

Education and an open mind are the best ways to prepare yourself for doing business with people from another culture. Books and websites offer advice on traveling to and working in specific countries. It is also helpful to sample newspapers, magazines, and even the music and movies of another country.

Learn everything you can about the culture’s history, religions, politics, and customs—especially its business customs. Successful international businesses learn as much as they can about political issues, cultural factors, and the economic environment before investing time and money in new markets. (LO: 4, AACSB: Diverse and multicultural work environments) 3-21. How has your current employer or any previous employer been affected by globalization? For instance, does your company compete with lower-cost imports? (If you don’t have any work experience, ask a friend or family member.)

Students’ answer will vary depending on personal experience. Possible scenarios include employers’ effort to seek new customers by entering foreign countries or their effort to cut costs by outsourcing to countries with lower material and/or labor costs. (LO: 1, AACSB: Diverse and multicultural work environments)

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3-22. Would a major shopping mall developer with experience all across Europe be a good strategic alliance partner for your fast-food chain’s first overseas expansion effort? Why or why not?

Students’ answers may vary depending on opinion but they may include the following considerations: (A) Will the fast food chain’s first overseas expansion effort be in Europe? (B) Is there a good fit between the fast food chain and the types of businesses that are typically located in the shopping malls developed by the said developers? (C) What are the specific laws and regulations governing foreign businesses in such European countries? Are there any tax advantages for joint ventures or wholly owned subsidiaries compared to strategic alliances? (LO: 5, AACSB: Diverse and multicultural work environments) 3-23. Concept Integration. You just received notice that a large shipment of manufacturing supplies that one of your factories in another country has been waiting for has been stuck in customs for two weeks. A local business associate tells you that you are expected to give customs agents some “incentive money” to see that everything clears easily. How will you handle this situation? Evaluate the ethical merits of your decision by considering the approaches listed in Exhibit 4.4 on page 100.

Students’ answers will vary but should show evidence of answering the key ethical questions that will be developed in chapter 4. (LO: 4, Ethical understanding and reasoning)

Expand Your Knowledge Discovering Career Opportunities If global business interests you, consider working for a U.S. government agency that supports or regulates international trade. Search the USAJobs website at www.usajobs.gov for an opening in international trade administration, such as an international trade specialist. Study the job description and answer the following questions: 3-24. On the basis of this description, what education and skills (personal and professional) would you need to succeed in this job?

Students’ answers will vary depending on their opinions. (LO: 2, AACSB: Diverse and multicultural work environments) 3-25. How well does this job description fit your qualifications and interests?

Students’ answers will vary depending on their opinions and their own personal qualifications and interests. (LO: 2, AACSB: Diverse and multicultural work environments) 3-26. How important would interpersonal skills be in this position? Why? Students’ answers will vary depending on their opinions. (LO: 2, AACSB: Diverse and multicultural work environments)

Intelligent Business Technology: Automated Translation .

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Bovee/Thill, Business in Action 9/e Instructor’s Manual The automated translation capabilities discussed on pages 82–84 give business professionals a valuable tool for communicating with global reach. However, the tools are still not 100 percent accurate, nor do they really understand meaning in the same ways that human translators do.

Research the current state of automated translation and write a one- or twoparagraph summary of its accuracy and dependability as a business communication tool, along with your advice to business professionals who want to use these tools.

Students’ answers will vary depending upon the research that is selected as well as the student’s opinions regarding the use of these tools. (LO: 7, AACSB: Information technology)

Practice Your Skills Resolving Ethical Dilemmas You’re excited by the possibility of expanding your company internationally and you have engaged the services of a consultant to help guide you into some promising new markets. While discussing the difficulty of getting government approval to sell your products in one particular country, the consultant advised you to be prepared to “spend a little cash to make things happen—be ready to wine and dine’em.”

Download A Resource Guide to the U.S. Foreign Corrupt Practices Act from www.justice.gove/criminal-fraud/fcpa-guidance and read the section titled “Gifts, Travel, Entertainment, and Other Things of Value,” including the hypothetical examples. Compile a list of steps you could take that would be permissible under the FCPA.

Students’ answers will vary depending upon the research that is selected as well as the student’s opinions regarding the use of these tools. (LO: 4, AACSB: Ethical understanding and reasoning)

Sharpening Your Communication Skills Languages never translate on a word-for-word basis. When doing business in the global marketplace, choose words that communicate a single idea clearly. Avoid using slang or idioms (words that can have meanings far different from their individual components when translated literally). For example, if a U.S. executive tells an Egyptian executive that a change in plans “really threw us a curve ball,” chances are that communication will fail.

Team up with two other students and list 10 examples of slang (in your own language) that would probably be misinterpreted or misunderstood during a business conversation with someone from another culture. Next to each example, suggest other words you might use to convey the same message. Make sure the alternatives mean exactly the same as the original slang or idiom.

Compare your list with those of your classmates.

Students’ answers will vary, but the point of this exercise is to emphasize the number of idioms Americans use daily. Check students’ alternative messages to be sure the meaning is as clear as possible. It may even be useful for students to trade lists and

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Bovee/Thill, Business in Action 9/e Instructor’s Manual critique each other’s language. They may be surprised at how slippery the English language really is. (LO: 4, AACSB: Diverse and multicultural work environments)

Building Your Team Skills With a team assigned by your instructor, research four violations of the FCPA that resulted in fines of $100 million or more. (Note that although this chapter focused on the antibribery provisions in the FCPA, the act also includes provisions that prohibit “off the books” accounting in order to ensure financial reporting transparency.) What common threads can you find in each of these four cases? What advice would you give to international dealmakers to help them avoid the fates of these companies?

Students’ answers will vary depending upon the violations that are identified and researched. (LO: 4, AACSB: Diverse and multicultural work environments)

Developing Your Research Skills Companies involved in international trade have to watch the foreign exchange rates of the countries in which they do business. Use your research skills to locate and analyze information about the value of the Japanese yen relative to the U.S. dollar.

As you complete this exercise, make a note of the sources and search strategies you used.

3-27. How many Japanese yen does one U.S. dollar buy right now?

Answers will vary depending on when students check exchange rates. (LO: 1, AACSB: Diverse and multicultural work environments) 3-28. Investigate the foreign exchange rate for the yen against the dollar over the past month. Is the dollar growing stronger (buying more yen) or growing weaker (buying fewer yen)?

Answers will vary; however, students should recognize that currency exchange rates are constantly fluctuating, which creates instability in international business. (LO: 1, AACSB: Diverse and multicultural work environments) 3-29. If you were a U.S. exporter selling to Japan, how would a stronger dollar be likely to affect demand for your products? How would a weaker dollar be likely to affect demand?

A stronger dollar might affect the selling price of American goods sold in Japan, creating higher prices and lowering demand. A weaker dollar might heighten demand for American goods whose selling price should drop along with the exchange rate. However, if the dollar is too weak, it could negatively affect our economy as well as all economies pegged to the dollar and those attempting to compete with the United States in terms of price. Therefore, too strong of a dollar can be negative in the international market, while too weak of a dollar is also detrimental to the overall trade. (LO: 1, AACSB: Diverse and multicultural work environments)

Assisted-graded Questions 3-30. How does free trade create situations in which companies can pit the workers of one country against the workers of another?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Free trade is credited with lifting millions out of poverty around the world, but gains in one place often come at the expense of loses elsewhere. Companies could dangle the prospect of a new factory and many jobs to the country whose workers will work for the lowest wage. Workers could undercut each other, as well as their own best interests, by accepting a low wage that does not support a decent standard of living. (LO: 2, AACSB: Diverse and multicultural work environments) 3-31. Should the U.S. government promote trade policies that benefit some companies or industries while potentially harming others? Why or why not?

Answers will vary depending on personal opinion. (LO: 2, AACSB: Diverse and multicultural work environments)

CHECKPOINTS

Answ

LEARNING OBJECTIVE 1: Explain why nations trade, and describe how international trade is measured.

Critical thinking: (1) Would it be wise for an advertising agency to open offices in Europe and Asia to service a single multinational client? Why or why not?

It would be wise if the costs of opening such offices are lower than the revenues that single multinational client can bring in.

(2) If IBM invests $40 million in a joint venture in China, would that amount be counted in the U.S. balance of trade or the balance of payments?

That amount should be included in the balance of payments since that’s where investments belong.

It’s your business: (1) In the last major purchase you made, did you take into consideration whether the product was made in the United States or another country?

Students’ responses will vary depending on personal experiences.

(2) Does country of origin matter to you when you shop?

Students’ responses will vary depending on personal experiences or opinions.

LEARNING OBJECTIVE 2: Discuss the nature of conflicts in global business, including free trade and government interventions in international trade.

Critical thinking: (1) What would happen to U.S. workers if all international trade suddenly became free, in the sense of there being no government intervention anywhere in the world?

They may find themselves in a vulnerable position since they have been protected from competition for too long. The domestic industry they are in can fail to develop and become strong enough to compete efficiently.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual (2) What would be the effect on U.S. consumers?

The effect on U.S. consumers is likely to be positive as free trade usually reduces prices of goods and services.

It’s your business: (1) Would you be willing to pay more for your clothes in order to keep more apparel manufacturing in the United States? Why or why not?

Students’ responses will vary depending on personal opinions.

(2) Do you or would you consider purchasing “fair trade” products, for which prices are set high enough to ensure a living wage for everyone involved in their production, even though these higher prices can make them less competitive in world markets?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Identify the major organizations that facilitate international trade and the major trading blocs around the world.

Critical thinking: (1) Why do trade disputes sometimes take years to resolve?

Trade disputes sometimes take years to resolve because they typically require complicated negotiations that take a great deal of time to work through.

(2) If a country currently benefits from high tariffs on imports, why might it consider joining a trading bloc that requires it to lower or eliminate those tariffs?

A country might consider joining a trading bloc because by doing so its products will enjoy no-tariff status within the trading bloc. In addition, that country along with other trading bloc members can still erect trading barriers against all nonmember countries.

It’s your business: (1) Can you identify any ways in which your life as an employee or a consumer has been affected by U.S. membership in trading blocs such as NAFTA and APEC? Students’ responses will vary depending on personal experiences.

2) How can you confirm that the effect was caused by trading bloc membership?

Students’ responses will vary depending on personal experiences or opinions.

LEARNING OBJECTIVE 4: Discuss the importance of understanding cultural and legal differences in the global business environment.

Critical thinking: (1) What steps could you take to help someone from another country adapt to U.S. business culture?

Such steps include educating the person about U.S. customs, enlightening him/her about differences in body language, and showing how respect is communicated in the U.S. culture.

(2) How can you convey respect for another person’s culture even if you don’t agree with it or even understand it?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Learning about another culture is a way to show respect. You can specifically learn about the particular ways respect is communicated in that culture, including gestures, eye contact, social custom, and other actions.

It’s your business: (1) When you encounter someone whose native language is different from yours, what steps do you take to make sure communication is successful?

Students’ responses will vary depending on personal experiences.

(2) How does another person’s “foreignness” influence your perceptions of his or her abilities?

Students’ responses will vary depending on personal experiences.

LEARNING OBJECTIVE 5: Define the major forms of international business activity.

Critical thinking: (1) Can a company successfully export to other countries without having staff and facilities in those countries? Why or why not?

Yes a company can successfully export to other countries without having staff and facilities in those countries because they may use foreign distributors in other countries.

(2) Why would a company decide on foreign direct investment, even though it is more expensive and riskier than other options?

A company might decide on foreign direct investment, despite the fact that it is more expensive and riskier than other options, because it typically affords a company greater control.

It’s your business: (1) What connotations does the word “imported” have for you?

Students’ responses will vary depending on personal opinions.

(2) On what do you base your reaction?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 6: Discuss the strategic choices that must be considered before entering international markets.

Critical thinking: (1) If a multidomestic approach gives local managers the most flexibility for responding to local market conditions, why wouldn’t every international company use this strategy?

Multidomestic approach is not applicable in all cases because in some cases, a global strategy or transnational strategy is more appropriate when there is convergence of consumer preferences and tastes for certain products, such as the iPod. (2) How might the choice of overall organizational strategy affect a company’s staffing plans in each country?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual The overall organizational strategy, for example, centralized versus decentralized might affect a company’s staffing plans in each country. For instance, a centralized organizational strategy will likely translate to staffing each country with managers from the home country.

It’s your business: (1) How does Apple’s “Designed in California” product label influence your perceptions of product quality?

Students’ responses will vary depending on personal opinions.

(1) Do you think it helps counter negative public opinion about U.S. companies that manufacture products in other countries as a way to reduce labor costs? Why or why not?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 7: Describe the current state of AI-assisted translation and its value to international business.

Critical thinking: (1) Do you think real-time translation, even if it gets close to the quality of human translators, will ever eliminate the need to learn other languages in order to communicate effectively with diverse, global audiences? Why or why not?

Students’ responses will vary based on personal experiences and opinions. Answers will likely cite the fact that the need will not be totally eliminated because of the nuances of communication that technology cannot understand.

(2) Would it be worth the effort to learn at least a few basic words and phrases in the language of a foreign business partner if the other party speaks your language? Why or why not?

Students’ responses will vary based on personal experiences and opinions, but many will likely state that it would be worth it if only as a show of consideration and respect to the foreign business partner.

It’s your business: (1) Have you ever translated a website, email message, or other document using automated translation? Were the results satisfactory, and were you able to confirm the quality of the translation?

Students’ responses will vary depending on personal experiences and opinions.

(1) Find a partner who speaks another language and try one of these translation apps or services in a live conversation. How would you characterize the translation quality and the experience overall?

Students’ responses will vary depending on personal experiences and opinions.

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Chapter 4 BUSINESS ETHICS AND CORPORATE SOCIAL RESPONSIBILITY Chapter Overview This chapter presents topics related to ethics and social responsibility in the modern business world. It defines business ethics and corporate social responsibility (CSR) and the multitude of factors that influence both. It then differentiates the different perspectives on CSR. It also it discusses businesses’ role to increase social responsibility, including their responsibility toward the natural environment, consumers, and employees. In particular, it defines the increasingly important concept of “sustainable development.” Finally, it addresses ethical concerns associated with artificial intelligence.

Chapter Outline I.

Ethics in Contemporary Business A. Ethics are principles and standards of moral behavior that are accepted as right versus wrong. These involve: 1. Competing fairly and honestly 2. Communicating truthfully 3. Not causing harm to others, including putting personal interests above the needs of other stakeholders B. Forces that promote unethical behavior include: 1. Management pressure and corporate culture 2. Millions of phony bank accounts: Wells Fargo 3. Falsified pollution data: Volkswagen 4. A willful blindness to harm 5. Opioid crisis 6. Destructive downside of social media a. Twitter: online abuse including death threats b. Facebook: “fake news” during 2016 presidential election 7. A sense of impunity C. Strategies for supporting ethical behavior include: 1. Start from the top 2. Define expectations and set an example 3. Craft a code of ethics—a written statement setting forth the principles that guide an organization’s decisions, with visible consequences 4. Train and support employees 5. Practice transparency—the degree to which affected parties can observe relevant aspects of transactions or decisions 6. Provide feedback channels: whistle-blowing—the disclosure by a company insider of information that exposes illegal or unethical behavior by others within the organization D. Guidelines for making ethical decisions

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 1. An ethical lapse is a situation in which an individual or group makes a decision that is morally wrong, illegal, or unethical 2. An ethical dilemma is a situation in which more than one side of an issue can be supported with valid arguments 3. Decision makers must also be aware of possible conflicts of interest, situations in which competing loyalties can lead to ethical lapses II. Corporate Social Responsibility A. Corporate social responsibility (CSR) is the concept that business has obligations to society beyond the pursuit of profits B. Business and society need each other, and each needs the other to be healthy and successful C. Companies that engage in CSR activities can choose between two courses of action: 1. General philanthropic CSR—Philanthropy involves the donation of money, time goods or services to charitable, humanitarian, or educational institutions 2. Strategic CSR—Social contributions that are directly aligned with a company’s overall business strategy III. Perspectives on Corporate Social Responsibility A. Approaches to CSR can be categorized into four perspectives: 1. Minimalist CSR—The only social responsibility of the business is to pay taxes and obey the law 2. Defensive CSR—The business takes positive steps to address a particular issue because it has been embarrassed by negative publicity or pressured by activists and/or nongovernmental organizations (NGOs) a. Nongovernmental organizations (NGOs) are nonprofit groups that provide charitable services or promote causes 3. Cynical CSR—A company accused of irresponsible behavior promotes itself as being socially responsible without making substantial improvements in business. This includes: a. Greenwashing—publicity efforts that present a company as being environmentally friendly when its actions speak otherwise 4. Proactive CSR—A company takes socially responsible actions on its own initiative rather than in response to pressure or publicity a. Purpose-driven business—a company that aspires to accomplish more than just making money for owners and investors B. Although there is no “correct” answer to how socially responsible a company should be, a two-tiered approach to CSR can be both practical and ethical 1. At the first tier, companies take responsibility for the consequences of their actions and limit the negative impact of their operations (“do no harm”) 2. At the second tier, companies can choose to help society in ways that investors, managers, and employees deem appropriate IV. CSR: The Natural Environment A. Environmentalism involves concerns over pollution and resource depletion B. Environmentalists versus business leaders 1. The creation, delivery, use, and disposal of products that society values virtually always generate pollution and consume natural resources

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 2. The availability of clean air, clean water, and healthy soil affects everyone 3. Many of these issues require tough trade-offs and decision-making in the face of uncertainty C. Efforts to minimize resource depletion and pollution are part of an effort known as sustainability or sustainable development—operating a business in a manner that minimizes pollution and resource depletion V. CSR: Consumers A. Consumerism is a movement that pressures businesses to consider consumer needs and interests B. Consumerism prompted the passage of the Consumer Bill of Rights, which established four fundamental consumer rights and the responsibility of business to respect them: 1. The right to buy safe products and buy them safely a. This includes safety standards established by the Consumer Product Safety Commission (CPSC) and other federal and state agencies 2. The right to be informed 3. The right to choose which products to buy 4. The right to be heard C. The right to digital security 1. Companies that collect personal information from customers have an ethical obligation to keep that information secure and prevent identity theft, in which criminals steal personal information and use it fraudulently VI. CSR: Employees A. Over the past several decades, businesses have changed their recruiting, training, and promotion practices as well as their corporate values and behaviors B. The Civil Rights Act of 1964 established the Equal Employment Opportunity Commission to address job discrimination (denial of opportunities to individuals on the basis of characteristics that have no bearing on their ability to perform in a job) 1. Affirmative action programs are activities undertaken by businesses to recruit and promote members of groups whose economic progress had been hindered through legal barriers or established practices C. The Americans with Disabilities Act (ADA) guarantees equal opportunities in housing, transportation, education, employment, and other areas for those with disabilities D. The Occupational Safety and Health Act established mandatory standards for safety and health and established the Occupational Safety and Health Administration (OSHA) to enforce them VII.

Thriving in the Digital Enterprise: The Ethics of Artificial Intelligence A. The power that enables AI to be a positive source can also let it become a negative force. Two issues of concern are as follows: B. Human biases embedded in AI systems—if an algorithm or data reflects human biases, the AI system likely will exhibit these biases 1. Facial recognition systems 2. Language processing

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Bovee/Thill, Business in Action 9/e Instructor’s Manual C. Lack of transparency and accountability—the inability of AI creators to understand why the systems make some of the decisions they do D. The efforts to make AI a force for good 1. ensuring the integrity of safety-critical AI in health care and transportation 2. making AI fair, transparent, and accountable 3. minimizing the disruptive effect of AI on the workforce 4. maximizing the social benefit of AI Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class with real-time diagnostics. Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it. For more information on using Learning Catalytics in your course, contact your Pearson Representative.

Classroom Activities Break-out group discussion: Ethical versus Legal.

Goal: Help students better understand the difference between “ethical” and “legal” by coming up with real-life examples in a group setting.

Time Limit: 15 minutes.

Details: 1. Break students into groups of five. (2 minutes) 2. Ask each group to come up with at least one example that represents each of the following four situations: ethical and legal, ethical but illegal, unethical but legal, and unethical and illegal. Sample examples include the following: giving employees cash bonuses for exceeding sales targets, stealing food to help family members survive, employ child labor in countries where it’s legal to do so, and engage in insider trading. (10 minutes) 3. Ask representatives/speakers from each group to present their results to the whole class, either verbally or written (on the blackboard). (3 minutes) Summary: Instructor summarizes the differences between ethical and legal, noting that ethical standards may vary from person to person and that legal standards may vary from country to country.

End-of-Chapter Behind the Scenes Unilever Has A Plan for Sustainable Business, But Will Investors Have the Patience?

Critical Thinking Questions .

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 4-1. Not all consumers care about the social and environmental goals that Unilever embraces; is it a mistake for the company to align itself so visibly with these goals? Why or why not?

Students’ responses will vary. More and more consumers and workers are embracing the principles of sustainability, so the audience for these products is growing. Unilever’s “sustainable living” brands are responsible for 60 percent of the company’s growth, so it appears to be payingoff. Consumers that don’t care about the company’s social and environmental goals might not seek out these products specifically but wouldn’t necessarily be put off by them either. (LO: 4) 4-2. How does helping small farmers in developing countries benefit Unilever?

Helping small farmers switch to sustainable growing practices ensures that the company will get the raw materials it needs and that they are raised in ways that that adhere to the company’s philosophy and mission. (LO: 2) 4-3. Why wouldn’t Unilver just donate a portion of its profits to societal and environmental causes, rather than integrating them within the company’s operations?

Strategic CSR involves social contributions that are directly aligned with a company’s overall business strategy. Through CSR, Unilver helps itself and society at the same time. (LO: 2)

Learn More Online Visit www.unilver.com and explore the Sustainable Living section. What measures of progress does the company now list? How does this information influence your perceptions as a consumer of Unilever and its products? Would you consider going to work for Unilever after reading this information? (LO: 2) Students’ responses will vary depending upon what information is on the website at the time it is accessed, as well as individual experiences and opinions.

Test Your Knowledge Questions for Review 4-4.

How does ethics differ from corporate social responsibility?

Ethics are the principles and standards of moral behavior that are accepted by society while corporate social responsibility (CSR) is the notion that business has obligations to society beyond the pursuit of profits. The former includes moral principles and standards for both individuals and organizations (such as businesses), while the latter focuses more on the moral imperatives of businesses.

(LO: 1 and 2, AACSB: Ethical understanding and reasoning)

4-5.

What is a conflict of interest?

A conflict of interest exists when choosing a course of action will benefit one person’s interests at the expense of another's or when an individual chooses a course of action that advances his or her personal interests over those of his or her employer. For example, a lawyer would find himself or herself in a conflict of interest situation if he or she represented both the plaintiff and defendant in a lawsuit. Similarly, independent auditors could be in a conflict of interest if their firm also served as the client’s consultants. (LO: 1, AACSB: Ethical understanding and reasoning)

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4-6.

What is the difference between defensive and proactive CSR? With defensive CSR, the business takes positive steps to address a particular issue because it has been embarrassed by negative publicity or pressured by activists and/or nongovernmental organizations. With proactive CSR, a company takes socially responsible actions on its own initiative rather than in response to pressure or publicity. (LO: 3, AACSB: Ethical understanding and reasoning)

4-7.

What is a purpose-driven business?

A purpose-driven business is a company that aspires to accomplish more than just making money for owners and investors. (LO: 4, Ethical understanding and reasoning)

4-8.

How are businesses responding to the environmental issues facing society?

Environmental issues exemplify the difficulty that businesses encounter when they try to reconcile conflicting interests: Society needs as little pollution as possible from businesses. But producing quality products to satisfy customers’ wants can cause pollution to some degree. Business executives try to strike a balance by making environmental management a formal part of their business strategy—along with quality, profits, safety, and other daily business operations.

(LO: 4, AACSB: Ethical understanding and reasoning)

4-9.

What is identity theft, and what responsibility do businesses have to prevent it?

With identity theft, a criminal steals personal information and uses it to take out loans, request government documents, get expensive medical procedures, and commit other types of fraud. Companies that collect personal information such as credit card and social security numbers have an ethical obligation to keep this information safe and secure. (LO: 5, AACSB: Ethical understanding and reasoning)

4-10. What are two major ethical concerns involving AI? Two major concerns are embedded biases and a lack of transparency and accountability. (LO: 7, Ethical understanding and reasoning)

Questions for Analysis 4-11. Why can’t legal considerations resolve every ethical question?

Even though legal considerations will resolve some ethical questions, you’ll often have to rely on your own judgment and principles. When trying to decide the most ethical course of action, you might apply the Golden Rule: Do unto others as you would have them do unto you. Or you might examine your motives: If your intent is honest, the decision is ethical, even though it may be factually or technically incorrect; however, if your intent is to mislead or manipulate, your decision is unethical, regardless of whether it is factually or technically correct. (LO: 1, AACSB: Ethical understanding and reasoning)

4-12. How do individuals employ philosophical principles in making ethical business decisions?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual To make the “right” choice, each person must think through the consequences of his or her actions. Ethical decisions can be divided into two general types: ethical dilemmas and ethical lapses. An ethical dilemma is a situation in which one must choose between two conflicting but arguably valid sides. The second type of decision is an ethical lapse, in which an individual makes a decision that is clearly wrong, such as divulging trade secrets to a competitor. Determining what’s right in any given situation can be difficult. One approach is to measure each act against certain absolute standards. In the United States, these standards are often grounded in religious teachings, such as “Do not lie” and “Do not steal.” Another place to look for ethical guidance is the law. (LO: 1, AACSB: Ethical understanding and reasoning) 4-13. In what sense does proactive CSR move beyond the usual concept of CSR? With proactive CSR, company leaders believe they have responsibilities beyond making a profit, and they back up their beliefs and proclamations with actions taken on their own initiative. In a sense, this is moving beyond CSR, because it involves leaders and their employees asking, “How can we be a force for good?” and not just, “How can we avoid being bad?” (LO: 3, Ethical understanding and reasoning) 4-14.

Why is it important for a company to balance its social responsibility efforts with its need to generate profits?

For years, many companies believed that the only role of a company was to make money and social problems were the concern of the state. It was believed that socially responsible companies could not be profitable. But supporters of social responsibility now argue that a company has both an obligation to society beyond the pursuit of profits and that companies can be both socially responsible and profitable. In fact, being a socially responsible company can help improve profits and being profitable can help companies stick to their social mission. (LO: 2, AACSB: Ethical understanding and reasoning)

4-15.

Why are more business leaders speaking out on public and social issues than in the past?

Being a purpose-driven business used to be something of a fringe idea, but it has rapidly become mainstream. More and more company leaders believe that they have responsibilities beyond making a profit, and they back up their belief and proclamations with actions taken on their own initiative. (LO: 3, AACSB: Ethical understanding and reasoning)

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Why is it important for a company to balance its social responsibility efforts with its need to generate profits?

For years, many companies believed that the only role of a company was to make money and social problems were the concern of the state. It was believed that socially responsible companies could not be profitable. But supporters of social responsibility now argue that a company has both an obligation to society beyond the pursuit of profits and that companies can be both socially responsible and profitable. In fact, being a socially responsible company can help improve profits and being profitable can help companies stick to their social mission. (LO: 2, AACSB: Ethical understanding and reasoning)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 4-17. Ethical Considerations. Is it ethical for companies to benefit from their efforts to practice corporate social responsibility? Why or why not? How can anyone be sure that CSR efforts aren’t just public relations ploys?

Students’ answers will vary depending on personal opinion. (LO: 2, AACSB: Ethical understanding and reasoning) 4-18. What effects have social media had on CSR? Social media makes it easier for consumer voices to be heard. People with likeminded interests—or complaints—who live half way around the world can find each other and join together to petition companies to behave in a more responsible manner. It also makes it easier for companies to engage in dialogues with customers, responding to claims and complaints in a specific manner. Social media has also made it easier for news to spread and travel, farther and faster. If someone takes a video of a company violating a safety practice, for example, it can be up on YouTube in minutes and viewed by untold numbers of people around the world. (LO: 3, AACSB: Information technology) 4-19. Would it be ethical for U.S. consumers to boycott products made in exploitive, low-wage overseas factories if the employees in those factories are grateful to have their jobs? Why or why not?

Students’ answers will vary depending on personal opinion. Answers may include the idea that doing so is necessary to put an end to the exploitive conditions such workers face. On the other hand, some may feel that boycotting is worse, as it can take away work and wages desperately needed by those employees. (LO: 1, AACSB: Ethical understanding and reasoning) 4-20. Why is lack of transparency a concern in AI? A lack of transparency is especially troubling for law enforcement, medicine, and hiring. How can the AI’s decisions be questioned if it can’t even explain how it reached a decision?

(LO: 7, AACSB: Ethical understanding and reasoning)

Questions for Application 4-21.Based on what you’ve learned about CSR, what effect will CSR considerations have on your job search?

While students’ responses may vary, the following will address some possible answers. CSR considerations may propel students to seek out employers that have reputations of being more ethical and socially responsible than the average firms. For instance, they may actively pursue firms that are environmentally friendly or “green,” firms that adopt fair labor practices and do not outsource to “sweatshops” in third-world countries, and firms that do their best to protect the safety and well-beings of their customers. (LO: 2, AACSB: Ethical understanding and reasoning) 4-22.

Concept Integration. Chapter 2 identified knowledge workers as a key economic resource of the 21st century. If an employee leaves a company to work for a competitor, what types of knowledge would be ethical for the employee to share with the new employer and what types would be unethical to share?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Any knowledge that is in the public domain is ethical to share; any knowledge that is in the private domain of the previous company should not be shared. (LO: 1, AACSB: Ethical understanding and reasoning) 4-23.Concept Integration. Is it ethical for state and city governments to entice businesses to relocate their operations to that state or city by offering them special tax breaks that are not extended to other businesses operating in that area?

You might consider asking yourself a series of questions:  Is the action legal? (Does it break any laws?) Is there a written state law on the situation? Does the policy spell out the penalty for breaking the law?  Is it balanced? (Is it applied to all concerned?) Is it now balanced if other businesses do not obtain the same special tax breaks?  Can you live with it? (Does it make you feel good about yourself?)

Would you feel good about pretending that you didn’t know about the situation?  Is it feasible? (Will it actually work in the real world?) Is there a special situation that requires the special tax break?

Students’ answers may vary. The action is unethical by governments but widely practiced. (LO: 1, AACSB: Ethical understanding and reasoning)

Expand Your Knowledge Discovering Career Opportunities Businesses, government agencies, and not-for-profit organizations offer numerous career opportunities related to ethics and social responsibility. How can you learn more about these careers?

Search the Occupational Outlook Handbook at www.bls.gov/ooh for “occupational health and safety specialists and technicians,” jobs concerned with a company’s responsibility toward its employees. What are the duties and qualifications of the jobs you have identified? Are the salaries and future outlooks attractive for all of these jobs?

Students’ answers will vary depending on the job they have selected. (LO: 3, AACSB: Ethical understanding and reasoning) Select one job from the Handbook and search blogs, websites, and other sources to learn more about it. Try to find real-life information about the daily activities of people in this job. Can you find any information about ethical dilemmas or other conflicts in the duties of this position? What role do you think people in this position play within their respective organizations?

Students’ answers will vary depending on the job they have selected. (LO: 3, AACSB: Ethical understanding and reasoning) What skills, educational background, and work experience do you think employers are seeking in applicants for the specific job you are researching?

What keywords do you think employers would search for when reviewing résumés submitted for this position?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Students’ answers will vary depending on the job they have selected. (LO: 3, AACSB: Ethical understanding and reasoning)

Intelligent Business Technology: Assistive Technologies The term assistive technologies covers a broad range of devices and systems that help people with disabilities perform activities that might otherwise be difficult or impossible. These include technologies that help people communicate orally and visually, interact with computers and other equipment, and enjoy greater mobility, along with myriad other specific functions.

Assistive technologies create a vital link for thousands of employees with disabilities, giving them the opportunity to pursue a greater range of career paths and giving employers access to a broader base of talent. Also, the economy and society benefit when everyone who can make a contribution is able to, and assistive technologies will be an important part of the solution.

Research some of the technologies now on the market. Choose one assistive technology that interests you, and in a brief email to your instructor, explain how this technology can help companies support employees or customers with disabilities.

Students’ answers will vary depending on the specific search engine/online research tool used and the specific technology picked. (LO: 6, AACSB: Ethical understanding and reasoning)

Practice Your Skills Resolving Ethical Dilemmas Assume your work at a bicycle store that sells a full range of bikes, from no-frills starter models to high-end road and trail bikes that cost thousands of dollars, along with every cycling accessory imaginable. Your boss pushes you to upsell and crosssell every customer in order to maximize the store’s revenue.

You want to contribute to the store’s success in every way you can, but you also have a strong code of honor when it comes to selling. How can you support your boss’s demands in an ethical way?

Students’ answers will vary but should touch upon the idea that selling aggressively is ethical if buyers are not knowingly deceived or intimidated, that all communication is truthful, and that no harm is caused. (LO: 1, AACSB: Ethical understanding and reasoning)

Sharpening Your Communication Skills Your employer makes a grand show of promoting strong ethics, with regular classes, posters in the hallways, a telephone hotline, and more. However, as the economy has slowed down over the past few months, you’ve noticed that company managers aren’t always practicing what they preach.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual They’re cutting corners on product quality and squeezing suppliers by not paying bills on time. They even launched a frivolous lawsuit against an upstart competitor that will do little more than drain the new firm of funds and delay its entry into the market. This isn’t the same company you were once so proud to work for. Write a brief email message to your immediate supervisor requesting a meeting to discuss your concerns.

Students’ email messages will vary but will involve elements of ethical and CSR principles discussed in the chapter. (LO: 1, AACSB: Ethical understanding and reasoning)

Building Your Team Skills Every organization can benefit from having a code of ethics to guide decisionmaking. But whom should a code of ethics protect, and what should it cover? In this exercise, you and your team are going to draft a code of ethics for your college or university.

Start by thinking about who will be protected by this code of ethics. What stakeholders should the school consider when making decisions? What negative effects might decisions have on these stakeholders? Then think about the kinds of situations you want your school’s code of ethics to cover. One example might be employment decisions; another might be disclosure of confidential student information.

Next, draft your school’s code of ethics. Start by identifying general principles and then providing specific guidelines. Write a general introduction explaining the purpose of the code and who is being protected. Next, write a positive statement to guide ethical decisions in each situation you identified earlier in this exercise. Your statement about promotion decisions, for example, might read: “School officials will encourage equal access to job promotions for all qualified candidates, with every applicant receiving fair consideration.”

Compare your code of ethics with the codes drafted by your classmates. Did all the codes seek to protect the same stakeholders? What differences and similarities do you see in the statements guiding ethical decisions?

Students’ answers will vary. (LO: 1, AACSB: Ethical understanding and reasoning)

Developing Your Research Skills Articles on corporate ethics and social responsibility regularly appear in business journals and newspapers. Find one or more articles discussing one of the following ethics or social responsibility challenges faced by a business:  Environmental issues, such as pollution, acid rain, and hazardous-waste disposal  Employee or consumer safety measures  Consumer information or education  Employment discrimination or diversity initiatives  Investment ethics  Industrial spying and theft of trade secrets  Fraud, bribery, and overcharging  Company codes of ethics

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What is the nature of the ethical challenge or social responsibility issue presented in the article? Does the article report any wrongdoing by a company or agency official? Was the action illegal, unethical, or questionable? What course of action would you recommend the company or agency take to correct or improve matters now?

Students’ answers will vary depending on the articles they choose to review. (LO: 1, AACSB: Ethical understanding and reasoning) Which stakeholder groups were affected? What lasting effects will be felt by the company and these stakeholders?

Students’ answers will vary depending on the articles they choose to review. (LO: 1, AACSB: Ethical understanding and reasoning)

Assisted-graded Questions 4-24. What steps could a bookstore take to engage in strategic CSR? Students’ responses will vary but the following are some possible answers.

Strategic CSRs involve investing in areas that benefit both the company and some segment of society. A bookstore may organize “sustainable development” seminars and workshops by inviting authors who have written books on such topics. By organizing such seminars and workshops, the bookstore is benefiting the society by educating its customers on sustainable development and encouraging environmentally friendly consumer behaviors. It also benefits the bookstore itself by increasing the sales of “sustainable development” books as well as books in general as customers may browse the store and purchase other books while attending the seminars or workshops (LO: 2, Ethical understanding and reasoning) 4-25.

Why would a company want to make it easy for its own employees to engage in whistle-blowing, even if doing so could subject the firm to legal penalties?

Smart companies make sure employees have a way to express concerns internally so that issues can be brought to management’s attention and resolved quickly. Otherwise, employees may be forced to take their concerns public through the news media, government regulators, or the social media. (LO: 1, Ethical understanding and reasoning)

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CHECKPOINTS LEARNING OBJECTIVE 1: Discuss what it means to practice good business ethics, and highlight the forces that can influence ethical decision-making.

Critical thinking: (1) If you go to work tomorrow morning and your boss asks you to do something you consider unethical, what factors will you take into consideration before responding?

Students’ responses will vary depending on personal opinions but points to consider include: make sure you frame the situation accurately and take into all relevant issues and identify all parties who might be affected by your decision; consider the rights of everyone involved; be as objective as possible; don’t assume that other people think the way you do; and watch out for conflicts of interest.

(2) How can you balance the business need to inspire employees to compete aggressively with the moral need to avoid competing unethically?

Students’ responses will again vary depending on personal opinions but students need to show that they know where the line is between ethical and unethical.

It’s your business: (1) In your current job (or any previous job you’ve held), in what ways does your employer contribute to society?

Students’ responses will vary depending on personal experiences.

(2) Have you ever encountered an ethical dilemma in your work? If so, how did you resolve it?

Students’ responses will vary depending on personal experiences.

LEARNING OBJECTIVE 2: Define corporate social responsibility (CSR), and explain the difference between philanthropy and strategic CSR. Critical thinking: (1) Given that “society” is not an organized entity, how can society decide what the responsibilities of business are in a CSR context?

One framework to use is the stakeholder model. In a CSR context, society can decide that the responsibility of business is to balance the needs of various stakeholders, including customers, employees, suppliers, investors, and society in general.

(2) Is philanthropy morally superior to strategic CSR? Why or why not?

Not really. They are both morally sound.

It’s your business: (1) How do a company’s philanthropic or CSR efforts influence your purchasing behavior?

Students’ responses will vary depending on personal experiences.

(2) Is it ethical for companies to invest in your college or university in exchange for publicity? Why or why not?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Distinguish among the four perspectives on corporate social responsibility.

Critical thinking: (1) Do you agree that giving companies tax breaks for charitable contributions distorts public spending by indirectly giving companies and activists control over how tax revenues are spent? Why or why not?

Students’ responses will vary depending on personal opinions.

(2) If Company A takes a cynical approach to CSR and Company B takes a proactive approach, but they make identical contributions to society, is one company “better” than the other? Why or why not?

Students’ responses will vary depending on personal experiences or opinions.

It’s your business: (1) Have you ever suspected a company of engaging in greenwashing or other disingenuous CSR activities? How would you prove or disprove such a suspicion?

Students’ responses will vary depending on personal experiences or opinions.

(2) If you were the head of a small company and wanted to give back to society in some way, how would you select which organizations or causes to support?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 4: Discuss the role of business in protecting the natural environment, and define sustainable development.

Critical thinking: (1) Should all industries be required to meet the same levels of pollution control?

Why or why not?

Students’ responses will vary depending on personal opinions but points to consider include the fact that not all industries pollute the same amount or severity (in terms of toxicity of pollutants).

(2) What do stakeholders of the present owe to stakeholders of the future?

Sustainable development is defined by the UN as development that “meets the needs of the present without compromising the ability of future generations to meet their own needs.”

It’s your business: (1) In what ways could your employer (or your college, if you’re not currently working) take steps to reduce resource depletion?

Students’ responses will vary depending on personal opinions.

(2) How did you dispose of the last electronic product you stopped using?

Students’ responses will vary depending on personal experiences.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual LEARNING OBJECTIVE 5: Identify five fundamental consumer rights and the responsibility of business to respect them.

Critical thinking: (1) Is there a point at which responsibility for product safety shifts from the seller to the buyer? Explain your answer.

Students’ responses will vary depending on personal opinions but points to consider include that existing product liability laws in the U.S. put most of the responsibilities on producers, distributors, and retailers.

(2) If providing full information about products raises prices, should businesses still be required to do so? Why or why not?

Students’ responses will vary depending on personal opinions.

It’s your business: (1) How do social media influence your behavior as a consumer?

Students’ responses will vary depending on personal experiences.

(2) Have you ever lodged a complaint with a business? If so, what was the outcome?

Students’ responses will vary depending on personal experiences.

LEARNING OBJECTIVE 6: Explain the responsibilities businesses have toward their employees.

Critical thinking: (1) Does affirmative action seem like a fair approach? Why or why not?

Students’ responses will vary depending on personal opinions.

(2) Should employees automatically get paid more to work in hazardous jobs? Why or why not?

Students’ responses will vary depending on personal opinions.

It’s your business: (1) Have you ever experienced or observed discrimination on the job? If so, how did you handle the situation?

Students’ responses will vary depending on personal experiences.

(2) Has this chapter changed your perspective about the relationship between business and society? Why or why not?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 7: Explain two categories of ethical concerns with artificial intelligence.

Critical thinking: (1) What are the dangers of having so much AI talent concentrated in so few companies?

Having AI concentrated in so few companies could potentially lead to embedded biases. As African-American AI researcher Joy Buolamwini stated, “You can’t have

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Bovee/Thill, Business in Action 9/e Instructor’s Manual ethical AI that’s not inclusive. And whoever is creating the technology is setting the standard.”

(2) Should companies use AI systems if they can’t entirely explain how the systems make decisions?

This lack of insight has troubling implications for law enforcement, medicine, and hiring. How can the AI’s decisions be questioned if it can’t even explain how it reached a decision?

It’s your business: (1) Would you ever refuse to go through the interviewing process with a company if you knew you would be evaluated at some point by an AI system? Why or why not?

Students’ responses will vary depending on personal experiences and opinions.

(2) If your employer announced it was instituting AI-assisted performance evaluation, what are some of the questions you might want to ask your superiors?

Students’ responses will vary depending on personal experiences and opinions, but concerns might include whether any human biases have been programmed into the AI and whether all the AI’s decisions were understood by its creators.

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Chapter 5 FORMS OF OWNERSHIP Chapter Overview One of the most fundamental decisions in starting a business is selecting a form of business ownership. This chapter examines the three most common forms of business ownership, namely, sole proprietorship, partnership, and corporation, and explores the pros and cons of such forms of ownership. It introduces newer hybrid forms of business ownership such as Limited Liability Companies (LLCs). It also discusses the ever common phenomena of mergers, acquisitions, and strategic alliances.

Chapter Outline I.

Sole Proprietorships A. A sole proprietorship is a business owned by one person B. Operating as a sole proprietorship offers the following advantages: 1. Simplicity—It is easy to establish and requires less paperwork than other structures 2. Single layer of taxation—Profit is treated as the owner’s personal income and is taxed accordingly 3. Privacy—There are no reports to be filed beyond tax returns and certain government reports 4. Flexibility and control—The sole proprietor can make decisions without input from shareholders or partners 5. Fewer limitations on personal income—The sole proprietor can keep all after-tax profits 6. Personal satisfaction C. Operating as a sole proprietorship also has several disadvantages: 1. Financial liability—Sole proprietors have unlimited liability and are personally responsible for damages or debts incurred by the business 2. Demands on the owner in terms of time, stress, and decision-making 3. Limited managerial perspective 4. Resource limitations 5. No employee benefits for the owner 6. Finite life span

II. Partnerships A. A partnership is an unincorporated business owned by two or more persons B. There are different types of partnerships: 1. General partnership—In a general partnership, all partners have joint authority to make decisions for the firm and have unlimited liability for the firm’s financial obligations 2. Limited partnership—In a limited partnership, one or more persons act as general partners and have unlimited liability for the firm’s financial a. Remaining owners are limited partners who have limited liability— the maximum amount for which they are liable is the amount of the investment

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 3. Master limited partnership (MLP)—A MLP is a partnership that is allowed to raise money by selling units of ownership to the general public 4. Limited liability partnership (LLP)—An LLP is a partnership in which each partner has unlimited liability only for his/her own actions and at least some degree of limited liability for the partnership as a whole C. Advantages of a partnership include: 1. Simplicity—It is easy to establish, although written partnership agreements are recommended 2. Single layer of taxation—Profits are split among partners and treated as personal income on each partner’s tax return (i.e., pass-through taxation) 3. More resources—Partners can combine their financial resources to start up and operate the business 4. Cost sharing 5. Broader skill and experience base—Partners can pool their experience 6. Longevity—New partners can be drawn into the business to replace those who die or retire D. Disadvantages of a partnership include: 1. Unlimited liability—All owners in a general partnership and the general partners in a limited partnership have unlimited liability for the obligations of the firm 2. Potential for conflict 3. Expansion, succession, and termination issues—Partners must agree how to handle bringing in new partners, selling partnership shares, or terminating partners E. Partnership agreements can maximize the advantages and minimize the disadvantages by formalizing details such as investment and profit-sharing percentages, management responsibilities, decision-making, and disputeresolution procedures III. Corporations A. A corporation is a legal entity, distinct from any individual persons, that has the power to own property and conduct business B. A corporation is owned by shareholders (investors who purchase shares of stock) 1. The stock of a private corporation (or closely held corporation) is owned by only a few individuals and is not made available for purchase by the public 2. The stock of a public corporation is sold to anyone who has the means to buy it C. Advantages of a corporation include: 1. Ability to raise capital—A corporation can raise funds by selling shares of stock to outside investors 2. Liquidity—Investors can easily convert their stock into cash by selling it in the open market 3. Longevity—Shareholders can sell or bequeath their shares to others 4. Limited liability—A corporation’s shareholders face only limited liability; their maximum potential loss cannot exceed the amount they invested D. Disadvantages of corporations include:

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 1. Cost and complexity—It is more expensive and complicated to form than other business structures 2. Reporting requirements—Government agencies require publicly traded companies to publish financial reports 3. Managerial demands—Managers must deal with shareholders, financial analysts, and the media in addition to conducting business operations 4. Possible loss of control—Outside investors can gain seats on the board of directors and exert influence on management 5. Double taxation—A corporation pays income tax on its profits and individual shareholders and then pay income tax on their share of the company’s profits received as dividends 6. Short-term orientation of the stock market—There is constant pressure to show earnings growth to meet investor expectations E. Special types of corporations 1. S corporations—A structure that combines the capital-raising options and limited liability of a corporation with the federal taxation advantages of a partnership 2. Limited liability company (LLC)—A structure that combines limited liability with the pass-through taxation benefits of a partnership 3. Benefit corporation—A profit-seeking corporation whose charter specifies a social or environmental goal that the company must pursue in addition to profit IV. Corporate Governance A. Corporate governance in a broad sense describes all the policies, procedures, relationships, and systems to oversee the successful and legal operation of the enterprise; in a narrow sense, it refers to the responsibilities and performance of the board of directors B. Three groups play key roles in corporate governance: shareholders, the board of directors, and corporate officers C. Shareholders 1. Holders of common stock elect the board of directors 2. Owners of common stock also have voting rights and are invited to an annual meeting a. Shareholders who cannot attend can vote by proxy, which authorizes management to vote on their behalf 3. Shareholder activism involves activities taken by shareholders (either individually or in groups) to influence executive decision-making in areas ranging from strategic planning to social responsibility D. Board of Directors—The board of directors is responsible for selecting corporate officers, guiding corporate affairs, reviewing long-term plans, making major strategic decisions, and overseeing financial performance.

Board-related issues include: 1. Composition—Identifying the types of people who should be on the board 2. Education—Board members are expected to have a grasp of a wide variety of business issues 3. Liability—Should directors be held legally and financially liable for corporate misdeeds?

4. Independent board chairs (two people serving as Chairman of the Board and CEO versus one person holding both roles)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 5. Recruiting challenges E. Corporate Officers—The top executives hired by the board of directors who run the company 1. The highest ranking officer is the chief executive officer (CEO) 2. Other officers include the chief financial officer (CFO), chief information officer (CIO), chief technology officer (CTO), and chief operating officer (COO) V. Mergers and Acquisitions A. Businesses can combine permanently through mergers or acquisitions 1. A merger is an action taken by two companies to combine as a single entity 2. An acquisition is an action taken by one company to buy a controlling interest in the voting stock of another company a. A hostile takeover is the acquisition of another company against the wishes of management; the buyer tries to convince enough shareholders to go against management and vote to sell. Hostile takeovers can be launched in two ways: i. A tender offer ii. A proxy fight b. A leveraged buyout (LBO) is acquisition of a company’s publicly traded stock, using borrowed funds with the intent of using some of the acquired assets to pay back the loans used to acquire the company B. Advantages of mergers and acquisitions 1. Increasing buying power as a result of larger size 2. Increasing revenue by cross-selling products to each other’s customers 3. Increasing market share 4. Gaining access to new expertise, systems, and teams of employees C. Disadvantages of mergers and acquisitions 1. Reaching agreement on how the merger will be financed 2. Determining who will be in charge upon completion of the merger or acquisition 3. Blending of product lines, branding strategies, advertising, and sales efforts 4. Incompatible information systems 5. Layoffs, transfers, and changes in job titles and work assignments 6. Incompatible organizational cultures D. Merger and acquisition defenses—Corporate boards and executives have devised strategies to defense themselves against unwanted takeovers, including: 1. A poison pill defense, in which the targeted company takes an action that makes it less valuable to the potential raider 2. A white knight tactic, in which a third company is invited to acquire a company that is in danger of being acquired in a hostile takeover VI. Strategic Alliances and Joint Ventures A. Strategic alliances are long-term partnerships between companies to jointly develop, produce, or sell products B. A joint venture is a separate legal entity established by two or more companies to pursue shared business objectives

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VII.

Thriving in the Digital Enterprise: Big Data and Analytics A. Big data is the term for the massive data sets that companies collect and analyze to find important trends and insights. It is defined by the three Vs: 1. Volume 2. Velocity 3. Variety B. Analytics are the computing tools and techniques used to analyze big data 1. Data mining: finding patterns in numerical data 2. Text mining: extracting meaning from text files 3. Predictive analytics: identifying the most likely outcomes of a decision or scenario

Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class with real-time diagnostics. Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it. For more information on using Learning Catalytics in your course, contact your Pearson Representative.

Classroom Activities In-class activity: What is the best form of business ownership?

Goal: Ask students to compare the various forms of business ownership using the two major criteria of taxation and liability to determine which form of business ownership has the most advantages.

Time Limit: 10 minutes.

Details: 1. Draw a table with five rows and three columns on the blackboard. Label the columns by filling the three cells in the top rows with “Forms of Business Ownership,” “Taxation,” and “Liability” respectively. Then fill the four cells under “Forms of Business Ownership” with four of the forms: Sole Proprietorship, Partnership, Corporation, and Limited Liability Companies (LLCs).

2. Ask students to pair up and recreate the content of the blackboard on their notebooks and subsequently populate the rest of the table. Suggested answers include “single” or “double” for “Taxation” and “limited” or “unlimited” for “Liability.”

3. Ask students to evaluate the four forms of business ownership using the content of the finished table. (Hint: Limited Liability Companies (LLCs) have best of both worlds: single taxation and limited liability.)

Forms of Business Ownership

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Taxation

Liability

Bovee/Thill, Business in Action 9/e Instructor’s Manual Sole Proprietorship Partnership Corporation Limited Liability Companies

End-of-Chapter Behind the Scenes Saba Buys Its Way into the Performance Management Market Questions for Critical Thinking 5-1. As part of this acquisition, the board chair of Halogen became the board chair of Saba. How might Saba executives feel about acquiring a company but then, in essence, reporting to someone from the company they had purchased?

Students’ responses will vary. It is likely that Saba executives would have some ambivalence about reporting to someone form a company they had purchased.

There may also be tension related to different values, management styles, communication practices, workplace atmosphere, and approaches to managing the changes required to implement the merger. (LO: 5, AACSB: Analytical thinking) 5-2. Assuming that most of the Halogen team stays in what was the company’s home in Ottawa, what effect might this have on day-to-day operations, given that Saba’s headquarters are in California? How might the company overcome any limitations of distance?

Students’ responses will vary. If most of the Halogen team stays in Ottawa while Saba’s HQ are in California, the companies may not fuse together as quickly or seamlessly. There may also be logistical challenges, though many of these could be solved with the use of technology to facilitate communication (email, IM, virtual meetings, etc.).(LO: 5, AACSB: Analytical thinking) 5-3. Human resources software can become a fundamental part of a company’s central nervous system, tracking everything from hiring decision to employee reviews to payroll. In an acquisition like Saba’s purchase of Halogen, what steps should the companies take to assure their existing customers that the acquisition won’t disrupt their daily operations?

Students’ responses will vary. They need to be careful that while they are sorting out their issues, customers don’t feel neglected. They should proactively reassure customers that their attention will not be diverted from their number one responsibility: keeping those customers happy. Having an FAQ addressing questions that have been asked often or are likely to come up could be an easy first line of assurance. (LO: 5, AACSB: Analytical thinking)

Learn More Online Visit www.saba.com and explore the Solutions, Industries, and Customers sections of the website. Read a few of the latest posts in the Saba blog. How well

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Bovee/Thill, Business in Action 9/e Instructor’s Manual does the company present itself to potential customers? Are its marketing messages clear and compelling? Would you be interested in working for Saba after reading this material?

Students’ responses will depend, in large part, on the material currently posted on the website. (LO: 5, AACSB: Analytical thinking)

Test Your Knowledge Questions for Review 5-4.

What are the three basic forms of business ownership?

The three basic forms are sole proprietorships, partnerships, and corporations.

(LO: 1–3) 5-5.

How does unlimited liability put a business owner at risk?

Unlimited liability implies that any legal damages or debts incurred by the business are the owner’s personal responsibility. If the owner is not covered by appropriate insurance and runs into serious financial or legal difficulty, such as getting sued for an accident that happened on the premises, she could lose not only the business but also everything she owns, including her house, her car, and her personal investments. (LO: 1-2) 5-6.

What is the difference between a general and a limited partnership?

A general partnership is owned by general partners who are equally liable for the business’s debts. A limited partnership is owned by at least one general partner who runs the business, and limited partners are passive investors and are generally liable for no more than the amount of their investment. (LO: 2) 5-7.

What is a closely held corporation, and why do some companies choose this form of ownership?

Closely held corporations, also known as private or closed corporations, do not sell stock to the general public. By withholding their stock from public sale, the owners retain complete control over their operations and protect their businesses from unwelcome takeover attempts. (LO: 3, AACSB: Reflective thinking)

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What is a benefit corporation?

A benefit corporation is a profit-seeking corporation whose charter also requires it to pursue a stated social or environmental goal. (LO: 3, AACSB: Reflective thinking) 5-9.

What is the role of a company’s board of directors?

Representing the shareholders, the board of directors is responsible for guiding corporate affairs and selecting corporate officers. Increasingly, boards are becoming involved in corporate strategy, management succession, evaluation of executives, and other crucial issues. To accomplish this, many companies seek outside directors who own large shares in the company. Evidence shows that companies with directors who own large shares and take active roles usually outperform companies with more passive boards. (LO: 4, AACSB: Reflective thinking)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 5-10. What is a poison pill defense?

With a poison pill defense, a targeted company invokes some move that makes it less valuable to potential raider, with the hope of discouraging the takeover. (LO: 3) 5-11. What is a big data?

Big data is the term for the massive data sets that companies collect and analyze to find important trends and insights. (LO: 7)

Questions for Analysis 5-12. Why is it advisable for partners to enter into a formal partnership arrangement?

A formal partnership arrangement spells out the partners’ rights and responsibilities and also defines what will happen if one of the partners dies.

Without the safeguards provided by such arrangements, partners leave themselves open to conflicts and legal difficulties down the road. To further protect the company’s interests, many partnerships also require their partners to sign covenants that make it difficult for them to join a competitor should they leave.

(LO: 2, AACSB: Reflective thinking) 5-13. To what extent do shareholders control the activities of a corporation?

The shareholders are owners of a corporation so, in theory, they are the ultimate governing body of the organization. However, in practice, they have very little control over the day-to-day activities of the firm—these activities rest with the management. Shareholders are able to influence the firm by electing directors.

However, unless an individual owns a large number of common shares, or unless the corporation allows cumulative voting, no single shareholder carries much influence in an election. (LO: 4, AACSB: Reflective thinking) 5-14. How might a company benefit from having a diverse board of directors that includes representatives of several industries, countries, cultures, and demographic groups?

A diverse board of directors can bring unique and global perspectives to the company, which can lead to new products, new market opportunities, improved performance, and better overall business strategies. (LO: 4, AACSB: Diverse and multicultural working environments) 5-15. Why might two companies choose to form a strategic alliance rather than pursue a merger or an acquisition?

Two companies might choose to form a strategic alliance rather than pursue a merger or acquisition because the former allows the companies to maintain their own individual identity and culture. According to recent studies, underestimating the power of culture clash was the major factor in most failed mergers. In many mergers, the acquiring companies impose their values and systems on the acquired companies without any regard to what had been working well there previously. In addition, mergers can create immense burdens of high-risk corporate debt, can divert investment from productive assets, and can distract managers’ attention from day-to-day operations. (LO: 5 and 6, AACSB: Reflective thinking)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 5-16. Why might a board of directors decide to work with activist investors rather than against them?

Shareholder activism has become an increasingly visible factor in corporate governance. Many firms are now active in ESG—environmental, social, and governance issues. As more firms turn away from the minimalist perspective on CSR, many executives say it is time to replace the shareholder-centric model with a more comprehensive and sustainable view of corporate governance. (LO: 3, AACSB: Reflective thinking) 5-17. Ethical considerations. Are hostile takeovers ethical? Why or why not?

Students’ answers may vary depending on their opinions. When exploring the question of whether such actions are unethical, students might benefit from going back to the discussions in Chapter 4. (LO: 3, AACSB: Reflective thinking) 5-18. Ethical considerations. Are poison pill defenses ethical? If a potential acquirer buys company stock legally, thereby becoming a part-owner of the company, should management be allowed to entrench itself against the wishes of this owner? Explain your answer.

Students’ answers may vary depending on their opinions. When exploring the question of whether such actions are unethical, students might benefit from going back to the discussions in Chapter 4. (LO: 5, AACSB: Ethical understanding and reasoning) 5-19. What kinds of competitive advantages could big data and analytics give a firm?

Big data and associated analytics capabilities are at the core of the digital transformation concept discussed in Chapter 1, and together they can be used to find answers across the business enterprise. Examples include analyzing sales patterns, finding potential customers, troubleshooting product and process failures, analyzing financial risks, allocating investments, detecting fraudulent transactions, maximizing crop yields, minimizing energy usage, finding customer dissatisfaction points, optimizing workforces, and predicting equipment failures before they occur. (LO: 7, AACSB: Information technology)

Questions for Application 5-20. Suppose you and some friends want to start a business to take tourists on wilderness backpacking expeditions. None of you has much extra money, so your plan is to start small. However, if you are successful, you would like to expand into other types of outdoor tours and perhaps even open up branches in other locations. What form of ownership should your new enterprise take, and why?

Because there are multiple owners, a sole proprietorship is out of the question.

Because of the potential danger inherent to wilderness expeditions, a partnership could expose the owners to too much financial risk (i.e., a client might sue for injuries sustained on an expedition). Due to the limited financial resources of all of the owners, and the fact that all will probably be leading expeditions, a limited partnership is not a viable option either. If the owners didn’t anticipate remaining in the business for a long time, a limited liability company might be the best option, as it would allow them to pay taxes as though they were partners while limiting their liability to their investment in the company. However, because the owners have goals to expand the company, the best form of ownership would be a

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Bovee/Thill, Business in Action 9/e Instructor’s Manual corporation. This will limit their liability and enable them to raise expansion capital by selling shares. Depending on their personal income tax rate, their anticipated need for capital to finance growth, and the expected future earnings of their company, the owners may want to establish a corporation. (LO: 1–3, AACSB: Analytical thinking) 5-21. Do you own or have you ever considered owning stock? If so, what steps have you taken to ensure that company management has shareholders’ interests in mind?

Students’ answers will vary depending on personal experience. (LO: 4, AACSB: Reflective thinking) 5-22. Visit Coca-Cola’s corporate website www.coca-colacompany.com and find the company’s Corporate Governance guidelines. Assume that you’re going to start a company that you plan to incorporate. Identify at least five principles of good governance that you could use to guide the board of your new corporation.

Students’ responses will depend, in large part, on the material currently posted on the website. (LO: 4, AACSB: Reflective thinking) 5-23. Concept Integration. You’ve developed considerable expertise in setting up new manufacturing plants, and now you’d like to strike out on your own as a consultant who advises other companies. However, you recognize that manufacturing activity tends to expand and contract at various times during the business cycle (see Chapter 2). Do you think a single-consultant sole proprietorship or a small corporation with half-dozen or more consultants would be better able to ride out tough times at the bottom of a business cycle?

It makes more sense to start a small corporation rather than a single-consultant sole proprietorship as the former allows more flexibility through various business cycles. (LO: 1 & 3, AACSB: Reflective thinking)

Expand Your Knowledge Discovering Career Opportunities Are you best suited to working as a sole proprietor, as a partner in a business, or as an employee or manager within a corporation? For this exercise, select three businesses with which you are familiar: one run by a single person, such as a web design consultant or a local landscaping firm; one run by two or three partners, such as a small accounting firm; and one that operates as a corporation, such as Target or Walmart.

Write down what you think you would like about being the sole proprietor, one of the partners, the corporate manager, or an employee in the businesses you have selected. For example, would you like having full responsibility for the sole proprietorship? Would like being able to consult with other partners in the partnership before making decisions? Would you settle for less autonomy to get the benefits of being a corporate employee?

Students’ answers will vary. (LO: 1–3, AACSB: Reflective thinking)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Now write down what you might dislike about each form of business. For example, would you dislike the risk of bearing all legal responsibility in a sole proprietorship? Would you dislike having to talk with your partners before spending the partnership’s money? Would you dislike having to write reports for top managers and shareholders of the corporation?

Students’ answers will vary. (LO: 1–3, AACSB: Reflective thinking) Weigh the pluses and minuses you have identified in this exercise. In comparison, which form of business most appeals to you?

Students’ answers will vary. (LO: 1–3, AACSB: Reflective thinking)

Intelligent Business Technology Data mining techniques are used in a wide variety of business functions. Research one current application in finance, marketing, network security, manufacturing, or any other area. Identify how it can help a company reduce costs, lower operational risks, enhance customer satisfaction, or otherwise improve competitiveness. In a brief email report, describe the application and its business benefits.

The email message will vary depending on which application students pick. (LO: 1 and 3, AACSB: Information technology)

Practice Your Skills Resolving Ethical Dilemmas You were flattered when two of your peers in the industry asked you to join them in a new business consulting partnership. They have admired the work you’ve done developing marketing strategies and new-product launches. You feel quite comfortable doing this work, but you know that consulting is not the same as being a corporate employee. The core of the work is the same, but consultants often need to function as salespeople too—particularly in a start-up firm, where everyone will be expected to bring in new clients. You are much less confident in your ability to perform in this role.

You expressed your reservations in a meeting with the two potential partners, but they told you not to worry about it that you’ll pick it up as you go. However, you have a sense that you’re not cut out to handle sales. On the other hand, the promise of doing the strategy work you love for a variety of clients is immensely appealing. Should you accept the partnership offer or not? Explain your answer, making up any details you need in order to craft a realistic scenario.

Students’ responses will vary widely depending on their particular interests, experiences, and opinions. (LO: 2, AACSB: Diverse and multicultural work environments)

Sharpening Your Communication Skills You have just been informed that your employer is going to merge with a firm in Germany. Using online or library sources, find information on German business culture and customs and prepare a short report that would help your U.S. work colleagues work effectively with your new German colleagues.

Students’ reports will vary widely depending on their particular interests. (LO: 5, AACSB: Diverse and multicultural work environments)

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Building Your Team Skills Imagine that the president of your college or university has just announced plans to retire. Your team, playing the role of the school’s board of directors, must decide how to choose a new president to fill this vacancy next semester.

First, generate a list of the qualities and qualifications you think the school should seek in a new president. What background and experience would prepare someone for this key position? What personal characteristics should the new president have? What questions would you ask to find out how each candidate measures up against the list of credentials you have prepared?

Now list all the stakeholders that your team, as directors, must consider before deciding on a replacement for the retiring president. Among these stakeholders, whose opinions do you think are most important? Whose are least important?

Who will be directly and indirectly affected by the choice of a new president?

Among these stakeholders, which should be represented as participants in the decision-making process?

Select a spokesperson to deliver a brief presentation to the class, summarizing your team’s ideas and the reasoning behind your suggestions. After all the teams have completed their presentations, discuss the differences and similarities among credentials proposed by all the teams for evaluating candidates for the presidency. Then compare the teams’ conclusions about stakeholders. Do all teams agree on which stakeholders should participate in the decision-making process? Lead a classroom discussion on a board’s responsibility to its stakeholders.

Presentations will vary. (LO: 4, AACSB: Application of knowledge)

Developing Your Research Skills Review recent issues of business newspapers or periodicals (print or online editions) to find an article or series of articles illustrating one of the following business developments: merger, acquisition, hostile takeover, or leveraged buyout.

Explain in your own words what steps or events led to this development.

Answers will vary depending on the articles selected. (LO: 5, AACSB: Reflective thinking) What results do you expect this development to have on (a) the company, (b) consumers, and (c) the industry the company is part of? Write down your answers, along with today’s date.

Answers will vary depending on the articles selected. (LO: 5, AACSB: Analytical thinking) Follow your story in the business news over the next month (or longer, as your instructor requests). What problems, opportunities, or other results are reported? Were these developments anticipated at the time of the initial story, or did they seem to catch industry analysts by surprise? How well did your answers to the previous question predict the results?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Answers will vary depending on the articles selected. (LO: 5, AACSB: Reflective thinking)

Assisted-graded Questions 5-24. Why are leveraged buyouts considered risky?

A leveraged buyout (LBO) occurs when someone purchases a company’s publicly traded stock primarily by using borrowed funds, sometimes using the target company’s assets as collateral for these loans. The debt is expected to be repaid with funds generated by the company’s operations and, often, by the sale of some of its assets. An LBO is an aggressive move and can be quite risky if the buyer takes on so much debt that repayment demands deplete the cash the company has for operations and growth. (LO: 5, AACSB: Ethical understanding and reasoning) 5-25. Is it ethical for special-interest groups to engage in shareholder activism?

Explain your answer.

Answers will vary depending on students’ opinions. Discussions will likely include the idea that shareholders, as owners of the business, have the right to make their voices and concerns heard. However, others may feel that this activism is undermining the ability of corporate boards to do their work effectively. (LO: 4, AACSB: Ethical understanding and reasoning)

CHECKPOINTS LEARNING OBJECTIVE 1: Define sole proprietorship, and explain the six advantages and six disadvantages of this ownership model.

Critical thinking: (1) How many sole proprietors do you know? Do they seem satisfied with the choice of working for themselves? Why or why not?

Students’ responses will vary depending on personal experiences.

(2) Would you ever consider going into business as a sole proprietor? Why or why not?

Students’ responses will vary depending on personal opinions but points to consider include tax implications, liability, lifetime of the company, and access to financing.

It’s your business: (1) In your everyday consumer interactions, would you rather do business with a sole proprietorship or a corporation? Why? Students’ responses will vary depending on personal opinions.

(2) What would be the potential advantages and disadvantages from a consumer’s point of view?

Students’ responses will vary depending on personal experiences or opinions but points to consider include (1) how personalized service is and (2) how likely it is that the firm will stay in business.

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LEARNING OBJECTIVE 2: Define partnership, and explain the six advantages and three disadvantages of this ownership model.

Critical thinking: (1) Would you prefer going into a business with a seasoned professional you don’t know well or with someone you know, like, and trust but who doesn’t have a lot of business experience? Why? Students’ responses will vary depending on personal opinions.

(2) What are the three most important qualifications you would look for in a potential business partner?

Students’ responses will vary depending on personal opinions but points to consider include track record in a partnership, personality, teamwork abilities, etc.

It’s your business: (1) Would you consider entering into a business partnership with your best friend?

Why or why not?

Students’ responses will vary depending on personal opinions.

(2) Now turn the question around: Would your best friend consider having you as a business partner?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Define corporation, and explain the four advantages and six disadvantages of this ownership model.

Critical thinking: (1) Why is the LLC structure recommended for most small companies that aren’t sole proprietorships?

LLC structure is recommended because it has the dual advantages of single taxation and limited liability.

(2) How can the demands of the stock market affect managerial decision-making?

Demands of the stock market tend to force mangers to focus more on short-term financial results (i.e., quarterly) rather than implementation of long-term strategy.

It’s your business: Assume you own stock in a large, publicly traded corporation that is hiring a new CEO. All other things being equal, who would be a better choice: a brilliant strategic thinker who is a weak communicator with poor “people skills” or a gifted public speaker and motivator who is competent but perhaps not brilliant when it comes to strategy? Explain your answer.

Students’ responses will vary depending on personal opinions.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual LEARNING OBJECTIVE 4: Explain the concept of corporate governance, and identify the three groups responsible for ensuring good governance.

Critical thinking: (1) Why are some shareholder activists pressuring corporations to increase the number of board seats held by women and minorities?

The corporations are pressured because they want to ensure that adequate attention is paid to issues that affect stakeholders who have been historically underrepresented on corporate boards, including women and minorities.

(2) Why do so many corporations now divide board chair and CEO responsibilities between two people?

The division happens because corporations hold the belief that keeping the board chair independent of the CEO position will help minimize conflicts of interest since the board is supposed to oversee the top management of the firm, including the CEO. It’s your business: Should the qualifications of the board of directors play a role in your decision of whether to buy the stock of a particular corporation? Why or why not?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 5: Identify the potential advantages of pursuing mergers and acquisitions as a growth strategy, along with the potential difficulties and risks.

Critical thinking: (1) If you were on the board of directors at a company and the CEO proposed a merger with a top competitor, what types of questions would you want answered before you give your approval?

Some key questions that need to be answered include: (1) How similar or different are the corporate cultures of the two firms? (2) Are there synergies between the core competencies of the two firms? (3) Will regulators likely approve the merger?

(2) If a CEO has the opportunity to merge with or acquire another company and is reasonably certain that the transaction will benefit shareholders, is the CEO obligated to pursue the deal? Why or why not?

Students’ responses will vary depending on personal opinions but the ethical thing for the CEO to do is to at least share such merger benefits with the board and the management of the firm.

It’s your business: (1) Have you (or someone you know) ever experienced a merger or acquisition as an employee? Was your job (or the job of the person you know) affected?

Students’ responses will vary depending on personal experiences.

(2) Have you ever experienced a merger or acquisition as a customer? Did customer service suffer during the transition of ownership?

Students’ responses will vary depending on personal experiences.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual LEARNING OBJECTIVE 6: Define strategic alliance and joint venture, and explain why companies would choose these options over a merger or acquisition.

Critical thinking: Why are an increasing number of companies now considering joint ventures rather than mergers and acquisitions?

Joint ventures have been increasingly popular because they can potentially help firms achieve synergy without disrupting the original firms to the extent that mergers and acquisitions do.

It’s your business: Assume you’ve worked for years to build up a strong and independent company; would you be comfortable sharing power with another company in a strategic alliance or joint venture? Why or why not?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 7: Explain how companies can use big data and analytics to create value and find competitive advantages.

Critical thinking: Why might a company want to know that some production machinery is about to fail before it actually fails?

Knowing this would allow them to affect the maintenance or repairs necessary to avoid the breakdown, and the ensuring complications if this is possible. At the very least, it would allow them to come up with a contingency plan so that production could carry on as smoothly as possible despite the issue.

It’s your business: As a consumer, could you remove yourself as a data source—that is, could you stop transmitting the data that businesses gather to analyze your behavioral patterns?

Explain your answer.

Students’ responses will vary depending on personal experiences.

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Chapter 6 ENTREPRENEURSHIP AND SMALLBUSINESS OWNERSHIP Chapter Overview This chapter covers the increasingly popular topics of entrepreneurship and small business management. It defines a small business and identifies main causes of small business failure. It also discusses common characteristics of successful entrepreneurs and provides various resources for would-be entrepreneurs, including how to write a business plan and where to obtain financing. The importance of machine learning and deep learning to contemporary business is discussed.

Chapter Outline I.

The Big World of Small Business A. A small business is an independently owned and operated company that employs fewer than 500 people and is not dominant in its field B. The roles of small business in the U.S. economy include: 1. Providing jobs 2. Introducing new products 3. Meeting the needs of larger organizations 4. Injecting money into the economy 5. Taking risks that larger companies avoid 6. Providing specialized goods and services 7. Providing economic opportunities for a diverse range of people C. There are different types of small businesses 1. Lifestyle businesses are built around the personal and financial needs of an individual or family; these businesses will likely remain small 2. High-growth ventures are small because they are young but have plans to expand rapidly D. Differ from large companies in several ways: 1. Narrow focus 2. Limited resources 3. More freedom to innovate more quickly

II. The Entrepreneurial Spirit A. The entrepreneurial spirit is the positive, forward-thinking desire to create profitable, sustainable business enterprises B. People start their own businesses for a variety of reasons, including wanting more control over their futures, being tired of working for others, and being unable to find employment C. Qualities shared by successful entrepreneurs include curiosity, adaptability, self-discipline, an ability to learn from mistakes and risk-taking, a passion for work, and a perspective that doesn’t measure success in strictly financial terms

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Bovee/Thill, Business in Action 9/e Instructor’s Manual D. Intrapreneurship designates entrepreneurial efforts within a larger organization III. The Start-Up Phase: Planning and Launching a New Business A. There are three options to starting a business: 1. Creating a new, independent business 2. Buying an existing independent business 3. Buying into a franchise system B. Launching a new business requires a business plan—a document that summarizes the proposed business venture, goals, and plan for achieving those goals. The business plan should typically include: 1. Summary 2. Mission and objectives 3. Company overview 4. Products or services 5. Management and key personnel 6. Target market 7. Marketing strategy 8. Design and development plans 9. Operations plan 10. Start-up schedule 11. Major risk factors 12. Financial projections and requirements 13. Exit strategy C. Two popular alternatives to conventional business plans are high-level overviews known as the Business Model Canvas and the Lean Canvas IV. The Growth Phase: Nurturing and Sustaining a Young Business A. Many new businesses fail each year for a variety of reasons B. Pivoting—adjusting a firm’s business model when a better opportunity presents itself C. Advice and support is available from a wide variety of sources, including: 1. Government agencies and not-for-profit organizations, such as the Small Business Administration (SBA), Minority Business Development Agency, the Service Corps of Retired Executives (SCORE), colleges and universities, and the U.S. Chamber of Commerce 2. Banks, credit card companies, and software companies 3. Mentors and advisory boards a. An advisory board is a team of people with subject-area expertise or vital contacts who help a business owner review plans and decisions 4. Print and online media, podcasts, blogs written by business owners and investors, as well as websites for business magazines 5. Networks and support groups 6. Business incubators—facilities that house small businesses and provide support service during the company’s early growth phase 7. Business accelerators work with existing companies with the primary goal of making them more attractive to investors V. Financing Options for Small Businesses A. Small businesses have a variety of resources available to them in financing their ventures

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Bovee/Thill, Business in Action 9/e Instructor’s Manual B. The first infusion of capital in a business is called seed money C. Private financing is a broad term encompassing every source of funding except selling stocks and bonds and includes: 1. Banks and microlenders a. A microlender is an organization that lends smaller amounts of money to business owners who may not otherwise qualify for conventional bank loans 2. Venture capitalists (VCs) provide money to finance new businesses or turnarounds in exchange for a portion of ownership, with the objective of reselling the business at a profit 3. Angel investors are private individuals who invest money in start-ups usually earlier in a business’s life and in smaller amounts than venture capitalists 4. Personal credit cards and personal lines of credit 5. Small business Administration assistance D. Going public, in which a company offers shares of ownership to the public 1. The first time a company offers its stock for sale is known as an initial public offering (IPO) or “going public” E. Crowdfunding—combines elements of public and private financing 1. Kickstarter and such sites focus on individual projects or charitable endeavors 2. Crowdfunder, Indiegogo, and other such sites help business owners raise money to launch or expand companies VI. The Franchise Alternative A. An entrepreneur who does not want to start an independent business can buy a franchise, in which she/he buys the right to use a company’s trade name and sell its goods or services in a specific territory 1. The franchisor is the parent company that licenses elements of its business systems 2. The franchisee is the small business owner who contracts to sell the goods and services in exchange for an initial start-up fee and royalties based on sales volume B. There are two basic types of franchises: 1. Business-format franchise 2. Product-distribution franchise C. Money side of franchising 1. Initial franchising costs 2. Ongoing franchise costs D. Franchising has advantages and disadvantages, and it is important to carefully research a franchising opportunity VII.

Thriving in the Digital Enterprise: Machine Learning and Deep Learning A. Machine learning—the general capability of computers to learn B. Deep learning—a specific type of machine learning that uses layers of neural networks to attack problems at multiple levels C. Applications are exploding in the business world: 1. Self-driving cars 2. Automated image recognition on social media and manufacturing production lines 3. Real-time translation

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Virtual assistants on mobile devices Automated medical diagnosis Sentiment analysis Malware and intrusion threat analysis Automated investing systems Movie recommendations

Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class with real-time diagnostics. Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it. For more information on using Learning Catalytics in your course, contact your Pearson Representative.

Classroom Activities Break-out group discussion: Picking the winning business idea Goal: Ask students to evaluate various business ideas for a start-up using several key criteria.

Time Limit: 15 minutes.

Details: 1. Break students into groups of four or five. (2 minutes) 2. Ask each group to come up with four or five business ideas for a start-up.

Coach the group to evaluate and score each idea using several important criteria listed in the following table. Ask them to assign a weight to each criterion if necessary and to add up all the scores and pick a winner with the highest total score. (10 minutes) 3. Ask representatives/speakers from each group to present their results to the whole class, either verbally or written (on the blackboard). (3 minutes) Business Ideas

Profit Potential

Degree of Risk Involved

Amount of Work Required

Availability of Market Research Data

Total Score

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End-of-Chapter Behind the Scenes Alyza Bohbot Finds a New Purpose in Her Purpose-Driven Business Critical Thinking Questions

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 6-1. Some companies have been criticized for gendering products such as tools and toys in an attempt to appeal to girls and women. The phrase “pink it and shrink it” is sometimes used to describe what critics see as meaningless and cynical attempts to make products feminine. Alyza Bohbot enthusiastically and unapologetically branded City Girl Coffee in a feminine style. Why does this approach work so well for City Girl Coffee?

City Girl Coffee’s approach is not simply a marketing ploy to make women buy a product they might otherwise have little interest in. It is an authentic effort to recognize and support the efforts of women in the growing, harvesting, and distribution of coffee. (LO: 2, AACSB: Reflective thinking) 6-2. What are the business risks of Bohbot’s product-sourcing and branding strategies?

Finding beans grown by female farmers takes more time and effort, and it also increases the risk of supply shortages. (LO: 2, AACSB: Reflective thinking) 6-3. Aside from the socially conscious element of sourcing coffee from womenowned farms, what are the marketing advantages of Bohbot’s business model and branding strategy?

Students’ responses will vary but may touch on the ideas that such a strong point of view may resonate strongly with consumers and differentiate them so significantly from competitors that they will go out of their way to procure the product. The approach could also have other applications, supporting womenbacked businesses in other fields. (LO: 2, AACSB: Reflective thinking)

Learn More Online Visit www.citygirlcoffee.com and explore the About and Buy Coffee sections.

How does the design and content compare with other online commerce sites you visit frequently? If you drink coffee, does the website’s presentation make you inclined to purchase from City Girl Coffee?

Students’ responses will vary based on their personal experiences and opinions and the material currently posted on the website. (LO: 2, AACSB: Reflective thinking)

Test Your Knowledge Questions for Review 6-4.

What are three essential functions of a business plan?

First, it guides the company operations and outlines a strategy for turning an idea into reality. Second, it helps persuade lenders and investors to finance your business. Third, it can provide a reality check in case an idea just isn’t feasible.

(LO: 3)

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What is intrapreneurship?

Intrapreneurs are people with the innovative, future-oriented spirit of entrepreneurship who remain within existing organizations, approaching their work with the imagination and drive typical of entrepreneurs. (LO: 2)

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How do lean business plans differ from conventional business plans?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Lean business plans are not as lengthy or in-depth as conventional business plans. They are essentially one-page business plans that present only the essential ideas that make up an intended business model. (LO: 3) 6-7.

What are the advantages of buying a business rather than starting one from scratch?

When you buy a business, you generally purchase an established customer base, functioning business systems, a proven product or service, and a known location.

You don’t have to go through the painful period of building a reputation, establishing a clientele, finding suppliers, and hiring and training employees.

(LO: 3)

6-8. What are the advantages and disadvantages of owning a franchise?

A franchisee has the advantages of wide name recognition, mass advertising, financial help, training, and support, but owning a franchise involves considerable start-up expense, monthly royalty payments to the franchisor, and constraints on the franchisee’s independence. (LO: 6) 6-9. What are the key reasons for most small-business failures?

Some key reasons are management incompetence, lack of industry experience, and inadequate financing. (LO: 4) 6-10. How do business incubators and business accelerators differ?

Business incubators help an entrepreneurial team develop an idea into a workable business model and establish a company framework for commercializing products. Most incubators are not-for-profit organizations focused on creating jobs to spur local economic development. Business accelerators work with existing companies with the primary goal of making them more attractive to investors. They usually take a small ownership share in the company in exchange for their services, and most provide a small amount of seed money to help the company through this stage. In contrast to the openended time frames of incubators, accelerators usually have a predefined development process that takes only a few months, and companies are expected to be “investor-ready” at the end of the program. (LO: 4) 6-11. How does venture capital investing differ from angel investing?

Venture capitalists are investment specialists who raise pools of capital from large private and institutional sources to finance ventures that have high growth potential and need large amounts of capital. Angel investors are private individuals who put their own money into start-ups. Angel investors are willing to invest smaller amounts than VCs and often stay involved with the company for a longer time. Angel investing tends to have a more local focus than venture capitalism. (LO: 5) What is deep learning?

Deep learning is a type of machine learning that uses layers of neural networks to attack problems at multiple levels. (LO: 7, AACSB: Information technology)

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Questions for Analysis 6-13. Why is the entrepreneurial spirit vital to the health of the national economy?

The entrepreneurial spirit is vital to the health of the national economy because entrepreneurial ventures inject a considerable amount of money into the economy and provide much needed jobs, particularly in a recession. They introduce new products and supply the needs of larger organizations. They provide specialized goods and services and compete with larger firms to keep prices low and quality high. (LO: 1, AACSB: Reflective thinking) 6-14. Could writing a conventional business plan ever cause more harm than good? Explain your answer?

Be aware that not all start-up veterans and investors believe in the value of a conventional business plan, at least in a company’s early stages. Reasons for the skepticism include the amount of time and energy required to research and write a plan, the reluctance of many target readers to read such lengthy documents, the uncertainty of whether a new product or company idea will even work, and the difficulty of correctly anticipating all the circumstances and obstacles that a young company will encounter. Particularly for companies that are developing new products or new business models before they can launch, some experts recommend that entrepreneurs devote most of their energy to getting a working product or service model in front of potential customers as quickly as possible so they can verify and fine-tune it before proceeding to extensive business planning.

Two popular alternatives to conventional business plans are high-level overviews known as the Business Model Canvas and the Lean Canvas. They are essentially one-page business plans that present only the essential ideas that make up an intended business model. (LO: 3, AACSB: Reflective thinking) Is pivoting a sign of failure for a young company or not?

Pivoting is not a sign of failure; it is a sign of flexibility. Smart entrepreneurs monitor the market and adapt if necessary to be more successful. Twitter, Pinterest, and PayPal are a few of the well-known companies that pivoted their way to success. (LO: 4, AACSB: Analytical thinking)

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6-16. What factors should you consider before selecting financing alternatives for a new business?

The process begins by assessing the firm’s financing needs and determining whether funds are needed for the short or the long term. You must also assess the cost of obtaining financing, and you must weigh the advantages and disadvantages of financing through debt or equity, taking into consideration the firm’s special needs and circumstances. (LO: 5) Ethical Considerations. You’re thinking about starting your own chain of upscale, drive-through espresso stands. You have several ideal sites in mind, and you’ve analyzed the industry and all the important statistics.

You have financial backing, and you really understand the coffee market.

In fact, you’ve become a regular at a competitor’s operation for over a month. The owner thinks you’re his best customer. He even wants to name a sandwich creation after you. But you’re not there because you love the espresso. No, you’re actually spying. You’re learning everything you can

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Bovee/Thill, Business in Action 9/e Instructor’s Manual about the competition so you can outsmart them. Is this behavior ethical?

Explain your answer.

Student’s answers will vary. To lead them back to the chapter objectives, the instructor might want to ask them what they’ve learned from this and how they would apply it to their future business careers. (LO: 2, AACSB: Ethical understanding and reasoning)

Questions for Application 6-18. Briefly describe an incident in your life in which you failed to achieve a

goal you set for yourself. What did you learn from this experience? How could you apply this lesson to a future experience as an entrepreneur?

Students’ answers will vary. (LO: 2, AACSB: Reflective thinking) 6-19. Based on your total life experience up to the point—as a student, consumer, employee, parent, and any other role you’ve played—what sort of business would you be best at running? Why? Students’ responses may vary but should relate to total life experiences up to now. (LO: 2, AACSB: Reflective thinking) 6-20. You have a great idea for a new product, but you’re not sure how to

design it or create a company to commercialize it. Would you be a good candidate for a business accelerator? Why or why not?

No, you would not. A business accelerator work with existing companies, trying to make them more attractive to investors. (LO: 4, AACSB: Application of knowledge) 6-21. You love building and fine-tuning business systems in order to figure out

the best ways to create and deliver products, solve customer problems, and so on. After 10 years in a corporate job, you’re ready to apply this passion to your own company. You’re intrigued by the systematic approaches the world’s most successful franchising operations use to multiply their market reach. Would buying a franchise be a good choice for you? Why or why not?

Answers will vary. A franchise offers the advantage of coming with an established business system. However, the owner has limited freedom and flexibility, with most franchise requiring a rigid adherence to company policies and processes. (LO: 6) 6-22.

Concept Integration. Entrepreneurs are one of the five factors of production discussed in Chapter 2 (page 31). Review that material and explain why entrepreneurs are an important factor for economic success.

Through the five factors of production—natural resources, human resources, capital, entrepreneurs, and knowledge—business can create profit. Entrepreneurs are an important factor for success because it is through them (and through intrapreneurs) that innovation occurs. Moreover, a weakness in capital can be counterbalanced by one of the strengths of entrepreneurs—their ingenuity. (LO: 1, AACSB: Reflective thinking)

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Concept Integration. Pick a local small business or franchise that you visit frequently and discuss whether that business competes on price, speed, innovation, convenience, quality, or any combination of those factors. Be sure to provide some examples.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Students’ answers will vary depending on the small business or franchise they pick. The question can serve the chapter’s goals in several ways. By examining a “real-life” small business, the student can start applying some of the concepts discussed in the chapter, including the issues covered in a business plan, the ways entrepreneurs can get into small businesses for themselves, and the things they should know before starting. Recognizing how a small business competes can emphasize the vital role of small businesses in the economy. (LO: 6, AACSB: Application of knowledge)

Expand Your Knowledge Discovering Career Opportunities Would you like to own and operate your own business? Whether you plan to start a new business from scratch or buy an existing business or a franchise, you need certain qualities to be successful. Start your journey to entrepreneurship by reviewing this chapter’s section on entrepreneurs.

Which of the entrepreneurial characteristics mentioned in the chapter describe you? Which of these characteristics can you develop more fully in advance of running your own business?

Students’ answer will vary but should be drawn from the characteristics discussed in the chapter: diligence, enthusiasm, persistence, and sociability; eagerness to learn new skills; tolerance for uncertainty; and willingness to work hard and to take risks. Through work for big companies and other small businesses, many of these qualities can be developed prior to running a business of one’s own. (LO: 2, AACSB: Reflective thinking) With these insights in hand, think about your personal, professional, and academic networks. Assume that you want to start a business right now, before you graduate. Is there anybody you already know who could offer you sound advice? What sort of guidance would this person be able to offer? If you don’t know anyone, what steps could you take to meet a mentor or counselor?

Students’ answers will vary depending on personal experience. (LO: 4, AACSB: Reflective thinking)

Intelligent Business Technology Research a current business application of deep learning and write a oneparagraph summary of how companies are using it and how it helps them compete or satisfy customers more effectively.

Students’ responses will vary depending on the business application they choose.

(LO: 7, AACSB: Information technology)

Practice Your Skills

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Resolving Ethical Dilemmas One of an entrepreneur’s greatest gifts is the ability to see into the future, to see where things are heading, whether it’s good or bad. Assume you lead a start-up that is in the meal-delivery business: Your team delivers ready-to-eat meals from local restaurants. Sales have been modest so far, enough to keep the company going but nothing spectacular. You are starting to think the company might do better by pivoting into the meal kit arena, where it would deliver ready-to-cook meals instead.

These subscription-based services might be able to get around the biggest problem you have now: unpredictable demand from customers who use the service occasionally but may not use it for weeks at a time.

Here’s the catch: A pivot like this would force a major change in your business model. Rather than maintaining relationships with restaurants, for example, you would have to develop relationships with farmers and food wholesalers. And here’s the dilemma: You will need a couple of months to study the market and see how companies such as Plated and Blue Apron succeed in it. If you do decide to pivot, it will probably mean shaking up the team, with at least a few people losing their jobs.

Should you tell your employees you are considering this pivot now, but won’t have an answer for two months, or wait until you’ve completed your investigation? Explain your answer.

Students’ answers will vary. Some may feel that you should tell employees now so they have time to adjust to the change and look for new jobs. Others may believe that you should not tell employees until you are sure the pivot is a go, so as not to worry them unnecessarily and potentially lose employees who choose to find other employment. (LO: 4, AACSB: Analytical thinking)

Sharpening Your Communication Skills Effective communication begins with identifying your primary audience and adapting your message to your audience’s needs. This is true even for business plans. One of the primary reasons for writing a business plan is to obtain financing. With that in mind, what do you think are the most important things investors will want to know? How can you convince them that the information you are providing is accurate? What should you assume investors know about your specific business or industry?

Students’ answers should include discussion of these key issues: (a) deciding what information is most important to convey, (b) convincing the audience that the information provided is accurate, and (c) determining what the audience already knows. a. Because its chief purpose is to obtain financing, the plan’s primary audience will be investors. Hence, the business plan’s most important task is to address the audience’s principal concerns: What will be the return on our investment? How will the business accomplish this? b. By clearly demonstrating that each point in the plan is backed by meticulous research, sound reasoning, and expert support, the plan can convince the audience that its information is accurate.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual c. Assumptions about the plan’s audience should be based on the same sort of careful research that has gone into formulating each of its components. The business plan writer should learn as much as possible about the audience itself before assuming anything about what that audience does or does not know. (LO: 3, AACSB: Written and oral communication)

Building Your Team Skills The questions shown in Exhibit 6.6 cover major legal issues you should explore before investing money in a franchise. However, there are many more questions you should ask in the process of deciding whether to buy a particular franchise.

With your team, browse the franchise listings at www.entrepreneur.com/business-opportunties to find an interesting opportunity. Read the information on this site and then explore the franchising section of the chosen company’s website for more information. Next generate a list of at least 10 questions an interested buyer should ask about this potential business opportunity.

Choose a spokesperson to present your team’s ideas to the class. After all the teams have reported, hold a class discussion to analyze the lists of questions generated by all the teams. Which questions were on most teams’ lists? Why do you think those questions are so important? Can your class think of any additional questions that were not on any team’s list but seem important?

Students’ answers will vary. (LO: 6, AACSB: Analytical thinking)

Developing Your Research Skills Find three or four articles that describe problems faced by small businesses in the United States and then answer the following questions.

What problem or opportunity does each article present? Is it an issue faced by many businesses, or is it specific to one industry or region?

Students’ answers will vary depending on the articles chosen. (LO: 2, AACSB: Reflective thinking) What could a potential small-business owner learn about the risks and rewards of business ownership from reading these articles?

Students’ answers will vary depending on the articles chosen. (LO: 2, AACSB: Reflective thinking) How might these articles affect someone who is thinking about starting a small business?

Students’ answers will vary depending on the articles chosen. (LO: 2, AACSB: Reflective thinking)

Assisted-graded Questions 6-24. Given the risks involved in starting any company, should an aspiring entrepreneur investigate all possible failure scenarios and develop action plans to avoid these potential outcomes? Explain your answer.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Students’ answers will vary depending on personal opinions. Responses will likely include the fact that start-up veterans and investors cite the difficulty of correctly anticipating all the circumstances and obstacles that a young company will encounter. Particularly for companies that are developing new products or new business models before they can launch, some experts recommend that entrepreneurs devote most of their energy to getting a working product or service model in front of potential customers as quickly as possible so they can verify and fine-tune it before proceeding to extensive business planning. (LO: 3, AACSB: Reflective thinking) 6-25. Is “I don’t like having a boss tell me what to do” a good reason to start your own company? Explain your answer.

Wanting control over one’s destiny and independence in the workplace is a characteristic of successful entrepreneurs. But this feeling alone is not enough to be successful. Entrepreneurs who have achieved success also are driven by a passion to succeed, relate well with different personalities, have a talent for inspiring others, are willing to work hard for sustained periods of time and are willing to make sacrifices in other areas of their lives. (LO: 2, AACSB: Reflective thinking)

CHECKPOINTS LEARNING OBJECTIVE 1: Highlight the contributions small businesses make to the U.S. economy.

Critical thinking: (1) Why do you think many companies grow more risk-averse as they grow larger?

Many companies grow more risk-averse because larger companies tend to have a lot more to lose in the case that they fail, that is, more assets, more investments, and more employees.

(2) If they wanted to, could large businesses take the place of small businesses in the U.S. economy? For instance, could someone build a nationwide landscaping company? Why or why not?

There are certain aspects of small businesses that are difficult if not impossible to replicate for large businesses. For instance, personalized service and customer intimacy are competitive advantages of small businesses that large businesses are trying to imitate but seldom succeed.

It’s your business: If you can’t land the right job soon after graduation, would you consider starting a business? Why or why not?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 2: List the most common reasons people start their own companies, and identify the common traits of successful entrepreneurs.

Critical thinking:

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Bovee/Thill, Business in Action 9/e Instructor’s Manual (1) Would someone who excels at independent entrepreneurship automatically excel at an intrapreneurial effort? Why or why not?

Not necessarily because an intrapreneur needs to work within a large company and not all entrepreneurs are comfortable with that. They enjoy the freedom of working in a small firm and might not excel within a large company either.

(2) Does the inability or unwillingness to work within the constraints of a typical corporation mean someone is naturally suited to entrepreneurship? Why or why not?

No. Inability or unwillingness to work with the constraints of a typical corporation does not automatically translate to the ability to take risks and start a successful business.

It’s your business: (1) If you had to start a business right now and generate profit as quickly as possible, what kind of business would you start? Explain your answer.

Students’ responses will vary depending on personal opinions.

(2) How would you describe your level of entrepreneurial spirit?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Explain the importance of planning a new business, and outline the key elements in a business plan.

Critical thinking: (1) Why is it important to identify critical risks and problems in a business plan?

It is important to identify critical risks and problems in a business plan because such critical risks and problems are important for investors to consider when deciding whether to back a firm or not. It’s the ethical thing to do.

(2) Many experts suggest that you write the business plan yourself, rather than hiring a consultant to write it for you. Why is this a good idea?

This is a good idea because a business plan is also a good document for strategically planning and operating the business and therefore needs to reflect the business owners’ own vision and ideas.

It’s your business: (1) Think of several of the most innovative or unusual products you currently own or have recently used (don’t forget about services as well). Were these products created by small companies or large ones?

Students’ responses will vary depending on personal experiences.

(2) Optimism and perseverance are two of the most important qualities for entrepreneurs. On a scale of 1 (lowest) to 10 (highest), how would you rate yourself on these two qualities? How would your best friend rate you?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 4: Identify the major causes of business failures, explain what pivoting means, and identify sources of advice and support for business owners.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Critical thinking: (1) Why would a state or local government invest taxpayer dollars in a business incubator?

Government invest taxpayer dollars in a business incubator because such investments can bring big payoffs for the state or local municipality, including the prospects of higher tax revenues, more jobs, and general improvement in the local economy.

(2) Can you think of any risks of getting advice from other entrepreneurs?

Students’ responses will vary depending on personal opinions but points to consider include whether other entrepreneurs have expertise in the industry or business you are in and whether their risk preference is similar to yours.

It’s your business: (1) Have you ever shopped at a store or eaten in a restaurant and said to yourself, “This place isn’t going to make it?” What factors caused you to reach that conclusion?

Students’ responses will vary depending on personal experiences.

(2) Does your college have an entrepreneur program or participate in a business incubator? If you wanted to start a business, how might such services help you?

Students’ responses will vary depending on personal experiences or opinions.

LEARNING OBJECTIVE 5: Discuss the principal sources of funding for small businesses.

Critical thinking: (1) Would a profitable small business with only moderate growth potential be a good candidate for venture capitalist funding? Why or why not?

No. Venture capital firms are typically only interested in funding firms with high growth potentials.

(2) Why would angel investors help finance companies privately, rather than buying shares of publicly traded companies?

Angel investors help finance companies privately because by helping privately finance companies at an early stage (pre-IPOs), angel investors can typically reap higher investment returns rather than buying shares of a firms’ stock.

It’s your business: (1) Would you be willing to take on credit card debt in order to start a company? Why or why not?

Students’ responses will vary depending on personal opinions.

(2) What would it take to convince you to invest in or contribute to a crowdsourced start-up?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 6: Explain the advantages and disadvantages of franchising.

Critical thinking:

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Bovee/Thill, Business in Action 9/e Instructor’s Manual (1) Why might a business owner with a successful concept decide to sell franchises rather than expanding the company under his or her own control?

A successful owner decides to sell a franchise rather than expanding it because a franchise can expand more quickly by using funds from franchisees (those who buy into the franchise for a fee). It also allows the business owner to collect royalty fees from franchisees, and potentially contributions to an advertising fund.

(2) Why might someone with strong entrepreneurial spirit be dissatisfied with franchise ownership?

People with strong entrepreneurial spirit are dissatisfied with franchise ownership because franchises tend to be regional or national and are typically large organizations, which are not usually a good fit with the entrepreneurial spirit.

It’s your business: (1) Are you a good candidate for owning and operating a franchise? Why or not?

Students’ responses will vary depending on personal opinions.

(2) Think about a small-business idea you’ve had or one of the small businesses you patronize frequently. Could this business be expanded into a national or international chain? Why or why not?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 7: Define machine learning and deep learning, and describe their importance to contemporary business.

Critical thinking: If you were asked to invest in or take a job in a company that claims to be innovating in the deep learning arena, what steps could you take to separate the hype from the business reality?

Deep learning has a lot of hype surrounding it and not all the applications discussed will become mainstream. However, there are already many proven applications and much ongoing research and development. Looking into these proven applications could be useful, as could looking at the business environment and demand related to these and other projects in development.

It’s your business: Would you be comfortable using a deep learning system in your job if you or the people who created it can’t explain how it worked? Why or why not?

Students’ responses will vary depending on personal opinions.

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Chapter 7 MANAGEMENT ROLES, FUNCTIONS, AND SKILLS Chapter Overview This chapter introduces the important business functional area of management. It defines the four basic management functions, namely, planning, organizing, leading and controlling. It discusses the strategic planning process, and differentiates among top, middle, and first-line management. It also describes leadership style and organizational culture, and addresses the four steps in the control cycle. It explains the four important types of managerial skills. Lastly, it discusses the potential of cognitive automation in management decision-making.

Chapter Outline I.

The Roles of Management A. Management is the process of planning, organizing, leading, and controlling to meet organizational goals B. Managerial roles are the behavioral patterns and activities involved in carrying out the functions of management, and include thee major categories: 1. Interpersonal roles—providing leadership to employees, building relationships, and acting as a liaison both inside and outside the company 2. Informational roles—gathering information from sources both inside and outside the organization and disseminating information to employees, other managers, and other stakeholders 3. Decisional roles—making both routine and nonroutine decisions that affect the organization II. The Planning Function A. Planning involves establishing objectives and goals for an organization and determining the best ways to accomplish them B. Strategic plans establish the actions and resource allocation required to accomplish the company’s long-range strategic goals and encompasses six steps: 1. Defining the company’s purpose and values a. The mission statement is a brief statement of why the organization exists and what it aims to accomplish for customers, investors, and other stakeholders b. Some companies use vision statement as a synonym for mission statement, while other companies use a vision statement to define an ideal future they wish to create c. The values statement identifies the principles that guide the company’s decisions and behaviors

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 2. The company must also have a clear assessment of its strengths and weaknesses relative to the opportunities and threats it faces. This is accomplished through a SWOT analysis a. Strengths are positive internal factors that contribute to the company’s success b. Weaknesses are negative internal factors that inhibit the company’s success c. Opportunities are positive situations that represent the possibility of generating new revenue d. Threats are negative forces that could inhibit a firm’s ability to achieve its objectives 3. Managers need to develop quantitative and qualitative forecasts that predict what will occur, when it will occur, and how it will affect the business 4. In order to understand the company’s competitors, it should also perform a SWOT analysis on each of its major competitors 5. The company then needs to establish goals and objectives a. A goal is a broad, long-range target or aim b. An objective is a specific, short-range target or aim c. Goals should be SMART—specific, measurable, attainable, relevant, and time limited 6. Once the strategic goals and objectives have been established, management needs to develop action plans to reach them III. The Organizing Function A. Organizing is the process of arranging resources to carry out an organization’s plans B. There are three levels of management in a typical corporate hierarchy, known as the management pyramid. The levels of management are: 1. Top managers are those at the highest level of the organization. They are responsible for setting strategic goals and take overall responsibility for an organization 2. Middle managers develop plans to implement the goals of top managers and coordinate the work of first-line managers 3. First-line managers (also known as supervisory managers) are at the lowest level of the management hierarchy. They supervise the work of nonmanagerial (operational) employees and implement the plans set at higher management levels IV. The Leading Function A. Leading is the process of guiding and motivating people to work toward organizational goals B. Effective leaders possess a balance of three types of intelligence: 1. Cognitive intelligence—reasoning, problem solving, memorization, and other rational skills 2. Emotional intelligence—a person’s awareness of and ability to manage his or her own emotions 3. Social intelligence—an ability to understand the dynamics of social situations and the emotions of other people C. There are three basic leadership styles or types:

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 1. Autocratic leaders control the decision making process in their organizations and restrict the decision-making freedom of subordinates 2. Democratic leaders delegate authority and involve employees in decision-making. This style is often called participative management 3. Laissez-faire leaders leave most decisions up to employees, particularly those concerning day-to-day matters and emphasize employee empowerment—granting decision-making and problem-solving authorities to employees so they can act first without obtaining approval from management D. Managers must also assume responsibility for education and encouragement.

This can take two forms: 1. Coaching involves helping employees reach their highest potential by meeting with them, discussing problems that hinder their ability to work effectively, and offering suggestions and encouragement 2. Mentoring is a process in which experienced managers guide lessexperienced managers by serving as role models D. Managing change: 1. Identify everything that needs to change 2. Identify the forces acting for and against a change 3. Choose the approach best suited to the situation E. Establishing a productive organizational culture—the set of shared values and norms that support the management system and guide management and employee behavior V. The Controlling Function A. Controlling is the management function of measuring progress against goals and objectives and correcting deviations if results are not as expected.

B. The control cycle is a four-step process: 1. The first step is establishing standards (the criteria against which performance will be measured). a. One common approach to setting standards is benchmarking, in which a company’s key performance attributes are compared with industry leaders b. One of the most important performance variables is quality—a measure of how closely a product conforms to predetermined standards and customer expectations 2. The second step of the control cycle involves assessing performance using both quantitative and qualitative performance measures a. A balanced scorecard monitors performance from multiple perspectives, the growth and development of employees, and intellectual property 3. The third step is comparing performance with established standards 4. In the fourth step, managers need to take corrective action to improve performance C. Managers must also plan how the company can respond to possible events, including crisis management—establishing procedures and systems for minimizing harm that might result from unusually threatening situations 1. A crisis management plan should contain both contingency plans and communication plans

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Bovee/Thill, Business in Action 9/e Instructor’s Manual VI. Essential Management Skills A. Managers should possess four types of skills to be effective in the organization 1. Interpersonal skills—the ability to understand other people and interact with them effectively 2. Technical skills—the knowledge and ability to perform the tasks required in a particular job. This category includes administrative skills, which are the technical skills in information gathering, data analysis, planning, and organizing 3. Conceptual skills—the ability to visualize organizations, systems, markets, and solutions both as complete entities and as interrelated pieces of a whole 4. Decision-making skills—the ability to define problems and opportunities, identify and develop options, analyze the options, select the best option, implement the decision, and monitor the results VII.

Thriving in the Digital Enterprise: Cognitive Automation A. Decision making is difficult for a variety of reasons: 1. Too much or too little data 2. Conditions in marketplace change faster than a decision can be implemented 3. Humans are susceptible to perceptual blind spots, logical fallacies, and emotional biases B. Cognitive automation is AI technology that aims to help professionals and managers with complex questions that present some of the most daunting decision scenarios. Some examples of its current use are: 1. Assembling teams by matching people who are most likely to work together productively on projects 2. Matching individuals with project assignments based on their history of performance 3. Analyzing financial contracts 4. Assessing staff and management performance 5. Identifying sales prospects who are most likely to respond positively to a sales call and gathering the optimum set of information that salespeople need to interact with each potential customer

Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class with real-time diagnostics. Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it. For more information on using Learning Catalytics in your course, contact your Pearson Representative.

Classroom Activities Break-out group discussion: Three leadership styles Goal: Ask students to discuss the advantages and disadvantages of each of the three leadership styles and when each style is most effective.

Time Limit: 15 minutes.

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Details: 1. Break students into groups of four or five. (2 minutes) 2. Ask each group to come up with some pros and cons of each of the three leadership styles, namely, autocratic, democratic, and laissez-faire. Then ask students to summarize when each style is the most effective. (Hint: For instance, even though it generally has a bad reputation, autocratic leadership is most effective in helping a company stave off collapse.) (10 minutes) 3. Ask representatives/speakers from each group to present their results to the whole class, either verbally or written (on the blackboard). (3 minutes)

End-of-Chapter Behind the Scenes Lisa Su Pulls Off the Impossible at AMD Critical Thinking Questions 7-1. Why might managers and executives fail to react more quickly when their companies begin to stumble?

Answers will vary. Conditions in the marketplace may change more quickly than managers can make and implement a change. (LO: 7, AACSB: Reflective thinking) 7-2. What does a new CEO like Su have at stake when launching an ambitious turnaround?

The survival of the company was at stake as AMD was struggling to pay the interest on its debt after years of successive losses. Su had the future of the company and the livelihoods of all individuals it employed at stake. (LO: 1, AACSB: Application of knowledge) 7-3. What sort of internal resistance might Su have encountered when she proposed her turnaround plan?

Answers will vary. Change presents a major leadership challenge for one simple reason: Many people don’t like it, or at least they don’t like being told they need to change. Moreover, even when change is clearly necessary and beneficial, it can be stressful and disruptive while the change is taking place and even long after as people settle into new behaviors. (LO: 4, AACSB: Reflective thinking)

Learn More Online Visit AMD’s website at www.amd.com. Which new products is the company currently highlighting? Which customer segments does it appear to be targeting with these products? If you’re a gamer, look through the information the company offers the gaming community. How do these outreach efforts help a company like AMD increase sales?

Students’ answers will vary. (LO: 4, AACSB: Reflective thinking)

Test Your Knowledge

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Questions for Review 7-4.

What is management? Why is it so important?

Management is planning, organizing, leading, and controlling resources (land, labor, and capital) to meet an organization’s goals. It is critical and universally necessary in organizations because it is the force that holds the resources together and sets all activity in motion. (LO: 1) 7-5.

What are the four elements of SWOT analysis?

Identifying a firm’s strengths, weaknesses, opportunities, and threats are the elements of a SWOT analysis. (LO: 2) 7-6.

What is forecasting, and how is it related to the planning function?

Forecasting is an attempt by managers to make educated assumptions about future trends and events so that their business is not adversely affected by these external changes. This helps managers to fill in gaps in the information they use to carry out the planning function. (LO: 2) 7-7.

What is the goal of crisis management?

The goal of crisis management is to keep the company functioning smoothly both during and after a crisis such as a product failure, a fight for company control, an environmental accident, or a natural disaster. Successful crisis management requires comprehensive contingency plans and excellent communication with all affected by the crisis. (LO: 5) 7-8.

How does leadership differ from management?

Leadership is the inspirational, visionary, and emotional side of guiding an organization, while management is the rational, intellectual, and practical side of it. (LO: 4) 7-9.

How do autocratic, democratic, and laissez-faire leadership styles differ?

Autocratic leaders control the decision-making process in their organizations, often reserving the right to make all major decisions by themselves and restricting the decision-making freedom of subordinates. In contrast, democratic leaders delegate authority and involve employees in decision making. Even though their approach can lead to slower decisions, soliciting input from people familiar with particular situations or issues can result in better decisions. Laissez-faire leaders take the role of consultants, encouraging employees’ ideas and offering insights or opinions when asked, and they emphasize employee empowerment, giving employees the power to make decisions that apply to their specific aspects of work. (LO: 4) 7-10. Why are interpersonal skills important to managers at all levels?

Interpersonal skills are important to managers at all levels because management’s job is to get things done through people. Encouraging employees to work together toward common goals, interacting with employees and other managers, negotiating with partners and suppliers, developing employee trust and loyalty, and fostering innovation all require interpersonal skills. (LO: 1) 7-11.

What is cognitive automation?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Cognitive automation is AI technology that aims to help professionals and managers with complex questions that present some of the most daunting decision scenarios. (LO: 7, AACSB: Information technology)

Questions for Analysis 7-12. Why is cognitive intelligence alone insufficient for effective leadership?

Cognitive intelligence is alone insufficient because effective leadership also requires two additional types of intelligence, namely, emotional intelligence and social intelligence. In fact, various studies suggest that in leadership (and life in general), emotional and social intelligence play a far greater role in success than purely cognitive intelligence. (LO: 4, AACSB: Reflective thinking) 7-13. Is it safe for mangers to proceed with strategic planning if they haven’t done a thorough SWOT analysis or similar assessment? Why or why not?

Before establishing long-term goals, a company needs to have a clear assessment of its strengths and weaknesses relative to the opportunities and threats it faces.

(LO: 2, AACSB: Information technology) 7-14. Who provides the leadership in a self-managed team or other organizational unit without an appointed manager? Explain your answer.

Both management and leadership involve the use of power, but management involves position power (because it stems from the individual’s position in the organization), whereas leadership involves personal power (which stems from a person’s own unique attributes, such as expertise or charisma). So in a selfmanaged team or unit without an appointed manager, the leadership could come from members within the unit who possess natural leadership skills. Alternately, leadership could come from higher-up the chain, in the form of inspiration from managers above who guide and motivate people to work toward organizational goals. (LO: 4) 7-15. If leaders can’t identify all the crises that a company might encounter, does it make sense to engage in crisis planning? Why or why not?

Yes, it makes sense to engage in crisis planning even if leaders can’t identify all the crises that might be encountered. Mangers can plan how the company should respond to each type of possible event, even though not every specific crisis can be envisioned. Contingency plans help managers make important decisions in a limited time frame and communication plans help them reach affected parties quickly and forestall rumors and false information. (LO: 5) 7-16. Is laissez-faire leadership equivalent to essentially no leadership at all?

Why or why not?

Laissez-faire is not equivalent to no leadership at all. Laissez faire leaders take the role of supporters and consultants, encouraging employees’ ideas and offering insights or opinions when asked. (LO: 4, AACSB: Analytical thinking) 7-17. What might managers need to “unlearn” as they move up the corporate hierarchy?

As managers rise through an organization’s hierarchy, they may need to deemphasize skills that helped them in lower-level jobs and develop different skills. For example, staying closely involved with any project details is often a

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Bovee/Thill, Business in Action 9/e Instructor’s Manual plus for first-line supervisors, but it can lead to serious performance issues for higher-level managers who should be spending time on more strategic issues.

(LO: 6) 7-18. Why are coaching and mentoring effective leadership techniques?

Coaching encourages employees to become more personally involved—and committed—to their work. Although coaching may take more time than other methods, it seeks to empower employees so that they may learn to overcome problems, as well as reach their highest potential. Mentoring benefits both the employee and the mentor. While the employee learns from the mentor’s advice and insights, the mentor gains personal satisfaction as well as an additional network contact. (LO: 4, AACSB: Reflective thinking) 7-19. Ethical considerations. Apart from meeting the company’s future talent needs, do managers have a personal ethical obligation to help their employees develop and advance in their careers? Explain your answer.

Answers will vary based on personal opinions and experience. Answers may touch on the idea that everyone begins as a new employee who can really benefit the guidance of a mentor. If an individual receives that nurturing early in one’s career, it feels right to pay it back by providing that same guidance for another new employee, when the individual is older and more experienced. (LO: 4, AACSB: Ethical understanding and reasoning)

Questions for Application 7-20. Which would be more difficult to forecast 10 years from now: the number of 60-year-olds or their average disposable income? Why? It would be easier to forecast the number of 60-year-old residents because you could rely on demographic data such as census reports and make certain assumptions about the population based on historic data. Disposable income would be more difficult to determine because it depends on a variety of factors: inflation, the current tax code, the state of the economy, etc. (LO: 2, AACSB: Application of knowledge) 7-21. You’re the youngest person in your department, and you just got promoted to department manager? What steps could you take to make sure all your employees have confidence in your management and leadership?

Students’ answers will vary. However, their answers should show an understanding that leaders generally possess a balance of three kinds of intelligence: cognitive, emotional, and social. Demonstrating that one possesses these types of intelligence would help establish one’s leadership within the department. Additionally all the managerial roles that leaders must play can be grouped into three categories: interpersonal, informational, and decisional.

Demonstrating the possession of the skills required to fulfill each of these roles would also help establish one’s position within the department. (LO: 1, 4, AACSB: Application of knowledge) 7-22. Concept Integration. How do mission, vision, and values relate to the notion of a purpose-driven business discussed in Chapter 4?

To achieve any level of strategic clarity, planners first need to agree on why the company exists—its purpose—and how it will conduct itself as it pursues its goals—its values. A purpose-driven business is a company that aspires to

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Bovee/Thill, Business in Action 9/e Instructor’s Manual accomplish more than just making money for its owners and investors. What it seeks to aspire would be reflected in its mission, vision, and values. (LO: 2, AACSB: Analytical thinking) 7-23. Concept Integration. What is the principal difference between a business plan (as discussed in Chapter 6) and a strategic plan?

A business plan plays a principal role in the creation of a new business and its primary audience consists of potential investors. A strategic plan, on the other hand, is typically developed by a company’s board of directors and key managers, and is a tool for achieving strategic goals over a two- to-five-year period. (LO: 2, AACSB: Reflective thinking)

Expand Your Knowledge Discovering Career Opportunities If you become a manager, how much of your day will be spent performing each of the four basic functions of management? This is your opportunity to find out.

Arrange to shadow a manager (such as a department head, a store manager, or a shift supervisor) for a few hours. As you observe, categorize the manager’s activities in terms of the four management functions and note how much time each activity takes.

If observation is not possible, interview a manager in order to complete this exercise.

7-24. How much of the manager’s time is spent on each of the four management functions? Is this the allocation you expected?

Answers will vary depending on the manager selected. (LO: 2–4, AACSB: Reflective thinking) 7-25. Ask whether this is a typical workday for this manager. If it isn’t, what does the manager usually do differently? During a typical day, does this manager tend to spend most of the time on one particular function?

Answers will vary depending on the manager selected. (LO: 2–4) 7-26. Of the four management functions, which does the manager believe is most important for good organizational performance? Do you agree?

Answers will vary depending on the manager selected. (LO: 2–4, AACSB: Reflective thinking)

Intelligent Business Technology: Cognitive Automation Research one of the available cognitive automation solutions now on the market.

Look for one that emphasizes managerial decision support, rather than more taskfocused robotic process automation. (Note that cognitive automation might be offered as one capability within a system that is called something else.) Identify the major benefits and risks of using this tool and summarize them in a short report or post for your class blog.

Students’ responses will vary depending on the solutions they end up choosing. (LO: 7, AACSB: Information technology)

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Practice Your Skills Sharpening Your Communication Skills Potential customers frequently visit your production facility before making purchase decisions. You and the people who report to you in the sales department have received extensive training in etiquette issues because you deal with high-profile clients. However, the rest of the workforce has not received such training, and you worry that someone might inadvertently say or do something that would offend one of these potential customers. In a two-paragraph email message, explain to the general manager why you think anyone who might come in contact with customers should receive basic etiquette training.

Students’ email messages will vary. (LO: 1, AACSB: Written and oral communication)

Building Your Team Skills With a team of fellow students, perform a SWOT analysis for your college or university, from the perspective of recruiting new students. Identify as many significant strengths and weaknesses as you can think of, being as objective as possible. Next, identify any important opportunities and threats you can find, such as demographic shifts or changes in government funding. Summarize your findings in a chart modeled after Exhibit 7.2. Finally, evaluate your college’s website and other promotional materials if available according to how well they present the school’s strengths to prospective students.

Students’ SWOT analyses will vary depending on the colleges and universities they attend; however, they will need to follow the SWOT analysis framework on page 151. (LO: 2, AACSB: Application of knowledge)

Developing Your Research Skills Find two articles in business journals or newspapers (print or online editions) that profile two senior managers who lead a business organization.

7-27. What experience, skills, and business background do the two leaders have? Do you see any striking similarities or differences in their backgrounds?

Students’ answers will vary depending on the articles selected. (LO: 1, AACSB: Reflective thinking) 7-28. What kinds of business challenges have these two leaders faced? What actions did they take to deal with those challenges? Did they establish any long-term goals or objectives for their company? Did the articles mention a new change initiative?

Students’ answers will vary depending on the articles selected. (LO: 2)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 7-29. Describe the leadership strengths of these two people as they are presented in the articles you selected. Is either leader known as a team builder? Long-term strategist? Shrewd negotiator? What are each leader’s greatest areas of strength?

Students’ answers will vary depending on the articles selected. (LO: 4, AACSB: Reflective thinking)

Assisted-graded Questions 7-30. How does the quality of business management affect society as a whole?

Students’ answers will vary but will likely touch on the fact that, given the effect that managerial decisions and behaviors have on employees, customers, investors, and other stakeholders, it’s no exaggeration to say that management is one of the most vital professions in the contemporary economy. Managers who effectively and ethically guide their companies contribute greatly to our standard of living and our economic security. By the same measure, managers who fail, through poor planning, misguided decisions, or questionable ethics, can create havoc that extends far beyond the walls of their own companies. In other words, management is one of the most important functions in society, not just within the sphere of business. (LO: 1, AACSB: Reflective thinking) 7-31. How will your experiences as an employee affect the leadership style you adopt when you become a manager?

Students’ answers will vary. They will likely touch on and describe the three types of leadership styles: autocratic, democratic, and laissez-faire. Those who had good experiences with a particular style of leadership as an employee might choose to emulate that when they are in a managerial role. On the other hand, those who reacted negatively to a particular style of leadership might opt to shun that style and try another. (LO: 4, AACSB: Reflective thinking)

CHECKPOINTS LEARNING OBJECTIVE 1: Explain the importance of management, and identify the three vital management roles.

Critical thinking: (1) How are social media changing the nature of the manager’s information role?

Social media such as blogs and wikis for both internal and external communications allow information to flow in both directions (between managers and employees) rather than one direction. Social media also allow more people to participate and communicate in a more immediate and less formal way. The smart use of social media is helping managers to learn more from employees and customers and communicate back to these and other stakeholder groups more effectively.

(2) Would managers get more respect from employees if they “rolled up their sleeves” and pitched in with the daily work more often? Why or why not?

Not necessarily. The most important part of a manager’s job is to delegate responsibilities and motivate others to do their jobs, rather than to actually do the jobs of the employees.

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It’s your business: (1) Review the process you went through to choose the college you are currently attending. What lessons from your experience could someone apply to managerial decision-making?

Students’ responses will vary depending on personal experiences.

(2) Do you believe you have the right personality for management? If not, what areas would you work on?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 2: Describe the planning function, and outline the strategic planning process.

Critical thinking: (1) Would Boeing and Old Navy develop strategic plans over the same time horizon?

Why or why not?

Boeing and Old Navy would for the most part develop strategic plans over the same time horizon. Companies in different industries tend to apply the same long-range horizon when it comes to strategic planning, with such horizons typically ranging from two to five years.

(2) How does the mission statement guide the planning process?

Defining a clear purpose gives a company focus. It defines the scope of the company’s activities and its priorities in serving its target customers. It also eliminates activities the company could pursue, that would give it a distinctly different strategic focus.

It’s your business: (1) What is your personal mission or vision statement for your career and your life?

Have you ever thought about your future in this way?

Students’ responses will vary depending on personal opinions and experiences.

(2) Consider a career path that you might pursue upon graduation and perform a quick SWOT analysis. What are some of your internal strengths and weaknesses and external opportunities and threats?

Students’ responses will vary depending on personal experiences or opinions.

LEARNING OBJECTIVE 3: Describe the organizing function, and differentiate among top, middle, and first-line management.

Critical thinking: (1) Why might a manager need to deemphasize skills honed in previous positions as he or she rises through the organizational hierarchy?

Managers may need to deemphasize skills honed in previous positions because as the manager rises through the organizational hierarchy, skills that were important to his/her job success may no longer be as important. For instance, functional area skills are not as important for a top manager as they are for a first-line manager.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual (2) Would top managers or first-line managers typically have more or less of the information they’d like to have for the decisions they need to make? Why? Top managers tend to have more information at the higher level, that is, overall corporate level information, while first-line managers tend to have more information at the ground level, that is, in the trenches, at the department level.

It’s your business: (1) Based on your experience leading teams or supervising people at work, how would you rate your performance as a manager?

Students’ responses will vary depending on personal experiences or opinions.

(2) If you were suddenly promoted to manage the department you’ve been working in, would you change your “work” personality? Why or why not?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 4: Describe the leading function, leadership style, and organizational culture.

Critical thinking: (1) Are management and leadership the same thing? If not, why not?

No they are not the same. Management is the rational, intellectual, and practical side of guiding an organization, while leadership is the inspirational, visionary, and emotional side.

(2) Can a single individual be an autocratic, a democratic, and a laissez-faire leader?

Why or why not?

Yes a single individual can have all leadership styles because an effective leader often adapts his/her leadership style to match the requirements of the particular situation. A normally democratic leader may adopt an autocratic style in a crisis situation such as implementing staff reductions or layoffs.

It’s your business: (1) What is your natural inclination in terms of the three basic leadership styles— autocratic, democratic, or laissez-faire? Think about times in school, at work, or in social situations in which you played a leadership role. How did you lead?

Students’ responses will vary depending on personal experiences or opinions.

(2) Does leadership experience in school activities such as student government and athletics help prepare you for business leadership? Why or why not?

Students’ responses will vary depending on personal experiences or opinions.

LEARNING OBJECTIVE 5: Describe the controlling function, and explain the four steps in the control cycle.

Critical thinking: (1) Why is it important to meet the needs of internal customers?

It is important to meet the needs of internal customers because various internal customers need to work as a team and support each other in ways that are best for the company.

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(2) Is lowering performance standards in response to a failure to meet those standards necessarily a sign of “giving up”? Why or why not?

Not necessarily. It is possible that performance standards were set at too high level and need to be adjusted.

It’s your business: (1) Do you benchmark your performance in any aspect of your personal or academic life? If yes, does it help you improve? If not, can you identify some aspects that could potentially benefit from benchmarking?

Students’ responses will vary depending on personal experiences or opinions.

(2) Think back over any crises you’ve faced in your life. How well did you respond?

What would you do differently in a future crisis?

Students’ responses will vary depending on personal experiences or opinions.

LEARNING OBJECTIVE 6: Identify and explain four important types of managerial skills.

Critical thinking: (1) Why is trust a vital aspect of a manager’s interpersonal skills?

Trust is a vital aspect of a manager because without trust, the communications from a manager will not be well-received by the employee, thus hampering the effectiveness of such communications.

(2) What are the risks of poorly defining problems or opportunities before making decisions?

Without proper definition of problems or opportunities, managers may be using the wrong information and arrive at the wrong decisions.

It’s your business: (1) Would you succeed as a manager if you started a company right out of college, without having gained any experience as an employee in another company? Why or why not?

Students’ responses will vary depending on personal opinions.

(2) How would you rate your conceptual skills? Does “seeing the big picture” come easily to you? If not, how might you improve in this area?

Students’ responses will vary depending on personal experiences or opinions.

LEARNING OBJECTIVE 7: Discuss the potential of cognitive automation in management decision-making.

Critical thinking: (1) If cognitive automation takes over the decision-making roles of management, what will be left for managers to do?

Managers will still be left with the tasks associated with their interpersonal roles and their informational roles.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual (2) If a cognitive automation system makes a poor decision, who should take the blame—the people who made it or the people who used it?

Students’ responses will vary depending on personal experiences and opinions.

It’s your business: As a manager or business owner, would you let an AI system overrule you when it comes to choosing which employees to hire? Why or why not?

Students’ responses will vary depending on personal experiences and opinions.

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Chapter 8 ORGANIZATION AND TEAMWORK Chapter Overview This chapter covers the important topics of organizational structure and teamwork. It first discusses how different types of businesses are organized in order to best achieve their goals. It then highlights the pros and cons of working in teams, what constitutes effective teams, and how to resolve team conflicts. It discusses managing unstructured organizations. Finally, it describes the use of taskbots and robotic procession automation in contemporary business.

Chapter Outline I.

Designing an Effective Organization Structure A. A company’s organization structure is the framework that enables managers to divide responsibilities, ensure employee accountability, and distribute decision-making authority 1. To design the organization’s structure, managers use an organization chart, a visual representation of how employees and tasks are grouped and where lines of communication and authority flow B. Designing the most effective structure for the organization involves: 1. Determining which functions need to be done in-house and which functions can be outsourced a. A company’s core competencies are those activities that the company considers central and vital to its business 2. Identifying job responsibilities and determining the most appropriate level of work specialization—the degree to which organizational tasks are broken down into separate jobs 3. Defining the chain of command—the lines of authority that connect the various groups and levels within the organization. Two basic types are as follows: a. Line organization—a system that establishes a clear line of authority flowing from the top down b. Line-and-staff organization—a system that has a clear chain of command but also includes functional groups of people who provide advice and specialized services 4. Establishing the span of management—the number of people under one’s manager’s control; this is also called the span of control a. In a flat organization, there are fewer levels of management but each manager is responsible for more employees b. In a tall organization, there are more layers of management, with each manager responsible for fewer people 5. Determining decision-making authority a. Centralization is the concentration of decision-making authority at the top levels of the organization

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Bovee/Thill, Business in Action 9/e Instructor’s Manual b. Decentralization is the delegation of decision-making authority to employees in lower level positions in the organization 6. The goal of many companies today is establishing an agile organization, one in which company structure, policies, and capabilities allow employees to respond quickly to customer needs and changes in the business environment II. Organizing the Workforce A. The arrangement of activities into logical groups that are then clustered into larger departments and units to form the total organization is known as departmentalization B. Departmentalization typically occurs in one of the four ways: functional, divisional, matrix, or network 1. A functional structure groups employees according to their similar skills, resource use, and expertise, that is, research and development, marketing and sales, and human resources 2. A divisional structure groups departments according to similarities in product, process, customer, or geography. Each division encompasses all the major functional resources (research and design, manufacturing, finance, and marketing) required to achieve its goals 3. A matrix structure is one in which employees are assigned to both a functional group and a project team, thus using functional and divisional patterns simultaneously 4. A network structure is one in which individual companies are connected electronically to perform selected tasks for a small headquarters organization III. Organizing in Teams A. A team is a unit of two or more people who work together to achieve a shared goal B. There are several types of teams: 1. A problem-solving team is assembled to find ways to improve quality, efficiency, and/or the work environment and disbands after presenting or implementing the solution 2. A self-managed team is one in which members are responsible for an entire process or operation and requires minimal supervision 3. A functional team is one whose members come from a single functional department. The structure typically follows the formal chain of command 4. A cross-functional team draws together employees from different functional areas. It can take on several roles, including: a. A task force, which is formed to work on a specific activity within a specified period of time b. A committee that may be a permanent part of the organization and deals with regularly recurring tasks 5. A virtual team uses communication technology to bring together geographically distant employees C. Social networking and virtual communities are redefining teamwork and team communication by facilitating communication and erasing the constraints of geographic and organizational boundaries 1. Companies may use social networking technologies to form virtual communities or communities of practice

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IV. Ensuring Team Productivity A. The use of teams within an organization has several advantages, including: 1. More information and knowledge 2. Learning opportunities 3. Boldness 4. Accountability 5. Trust building 6. A broader range of viewpoints 7. Buy-in for solutions the team creates 8. Improved performance 9. A sense of community in good times and bad B. The use of teams within an organization also has several disadvantages, including: 1. Cost and inefficiency 2. Groupthink—uniformity of thought that occurs when peer pressure causes individual team members to withhold contrary or unpopular opinions 3. Hidden agendas 4. Overload C. The size of the team and the types of individuals on a team are also vital to its success D. Other factors contributing to the success and effectiveness of the team include: 1. A shared sense of purpose 2. A clear and challenging goal 3. A belief in the team’s efforts 4. A well-balanced mix of people 5. Open and honest communication 6. Putting the team first V. Fostering Teamwork A. Teams typically go through five stages of development, as follows: 1. Forming—a period of orientation in which members get to know each other and what is expected of them 2. Storming—the period in which conflicts may arise as team members jockey for position or form coalitions 3. Norming—the period in which harmony develops and the team takes on a cohesive personality with clear behavioral norms, informal standards of conduct that guide team behavior 4. Performing—the stage in which members are committed to team goals and the team focuses on task accomplishment 5. Adjourning—the stage after task completion in which issues are wrapped up and the team is dissolved B. Teams may also experience conflict 1. Conflict can be constructive or destructive 2. Conflict arises for a variety of reasons, including competing for resources, disagreement over responsibilities, poor communication, withholding information, differences in values, power struggles, and differing goals

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 3. Conflict can be resolved through proactive attention, communication, openness, research, flexibility, fair play, and alliance VI. Managing an Unstructured Organization A. An unstructured organization is a virtual and networked organization that lacks a conventional structure but instead assembles talent as needed from the open market.

B. The advantages of an unstructured organization include: 1. Increased agility. It can assemble, disassemble, and reconfigure as needed 2. Lower fixed costs and more flexible capacity management 3. Access to otherwise unreachable talent because companies can “rent” top experts in a field as needed 4. Benefits of competition because independent contractors compete with other contractors and must perform or risk not getting more assignments 5. Performance-based evaluation 6. Freedom and flexibility for workers who can pick and choose projects and clients 7. Access to jobs that may otherwise be unattainable C. Potential disadvantages of an unstructured organization include: 1. Complexity and control because workers report to multiple bosses in multiple companies 2. Uncertainty 3. Loss of meaning and connection 4. Diminished loyalty—workers are often competing vendors, not longterm employees 5. Career development—independent contractors are responsible for developing their own careers, rather than following a designated career path 6. Management succession 7. Accountability and liability VII.

Thriving in the Digital Enterprise: Taskbots and Robotic Process Automation A. Bots can be divided into two general categories: 1. Chatbots like Apple’s Siri and Amazon’s Alexa primarily engage in conversation 2. Taskbots primarily handle tasks like scheduling, data collection, document distribution, etc., allowing teams more time to focus on higher-level work B. Taskbots are a key feature in robotic process automation (RPA), a software capability that does for knowledge work what robots do for manufacturing and other physical processes 1. RPA targets the high-volume “paperwork aspects” of business 2. Unlike cognitive automation, which involves sophisticated AI capabilities, RPA is a rules-based method of automation

Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class with real-time diagnostics. Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it. For more information on using Learning Catalytics in your course, contact your Pearson Representative.

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Classroom Activities In-class activity: Tall versus Flat Organization.

Goal: Help students better understand the differences between tall and flat organizations.

Time Limit: 10 minutes.

Details: 1. Create a list on one side of the blackboard, including the names of different companies such as Ford Motors, Google, Citi Group, Genentech, Microsoft, Intuit, Netflix, Walmart, etc.

2. Draw two columns on the other side of the blackboard, one labeled “Tall Organization” and the other labeled “Flat Organization.”

3. Ask students to pair up and recreate the content of the blackboard on their notebooks and subsequently assign all of the line items into the correct columns.

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End-of-Chapter Behind the Scenes Smashing the Hierarchy at Zappos Critical Thinking Questions 8-1.

A wealthy individual such as Hsieh and a Zappos employee just getting by on his or her hourly wage are likely to have profoundly different views about work and the meaning of a job. Does someone in Hsieh’s position have an ethical responsibility to protect his employees’ livelihoods even if they don’t agree with his management philosophy—particularly if that philosophy changed after some people uprooted their families to join the company? Why or why not?

Answers will vary. It is worth noting that while Hsieh has an obligation to individual employees, he also has an obligation to the success of the organization as a whole. Also worth noting is that Zappos did offer a generous severance package to employees who disliked the new management philosophy enough to leave the company. (LO: 6, AACSB: Ethical reasoning and understanding) 8-2.

What effect would a culture of self-management be likely to have on any company’s recruiting efforts? How would it influence the type and quality of candidates who apply?

Answers will vary. Recruiting efforts would likely be impacted by such a nontraditional approach. Some candidates might avoid the company, thinking the atmosphere would be too chaotic and not offer them a path to promotion and advancement. Some candidates might assume that self-management would mean a less strict environment where employees could do as they liked. (LO: 6, AACSB: Analytical thinking) 8-3.

How important is a public ranking such as Fortune’s 100 Best Companies to Work For? Explain your answer?

Answers will vary. Ranking high on a list like that makes a company attractive to potential employees, helping attract the best talent. However, potential employees seriously interested in the company would be able to get more detailed feedback from employees at Glassdoor and Indeed. They would be able to see some strong positive and negatives assessments, and the employees most likely to thrive in the environment would pursue employment at the company, while those averse to it would not. (LO: 6, AACSB: Analytic thinking)

Learn More Online Visit www.zappos.com/about and explore the sections “Beyond the Box” and “Zappos Insights” and then visit the careers section at jobs.jobvite.com/zappos. What impression do you get of the company’s work culture? Do you find any mention of Holacracy or self-management? Would the culture appeal to you as an employee?

Why or why not?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Students’ responses will depend on the material currently posted on the website, as well as their personal experiences and opinions. (LO: 6, AACSB: Reflective thinking)

Test Your Knowledge Questions for Review 8-4. What is a core competency?

Core competencies are those activities at which a company excels and that give it the potential to create competitive advantages. (LO: 1) 8-5. What is an agile organization?

An agile organization is a company whose structure, policies, and capabilities allow employees to respond quickly to customer needs and changes in the business environment and to bring the best mix of talents and resources to every challenge. (LO: 1) 8-6. What are the characteristics of tall organizations and flat organizations?

A flat organization has relatively few levels in the management hierarchy, whereas a tall organization has many hierarchical levels, typically with fewer people reporting to each manager than is the case in a flat organization. (LO: 1) 8-7. What are the advantages and disadvantages of work specialization?

Work specialization, also called a division of labor, refers to the degree to which organizational tasks are broken down into separate jobs. When employees specialize in one task in a series needed to complete a job, they can complete it far more efficiently than if they performed every task necessary to complete the job. However, because repetition of tasks creates boredom, employees can become unmotivated and feel isolated. For this reason, companies are balancing specialization and employee motivation through teamwork. (LO: 1) 8-8. What are the advantages and disadvantages of functional departmentalization?

Functional departmentalization (grouping employees according to their skills and resource use) has several distinct advantages. First, because divisions are selfcontained, they can react quickly to change. Second, because each division focuses on a limited number of products, processes, customers, or locations, divisions can often provide better service to customers. However, it can also increase costs through duplication. Also, poor coordination among divisions can cause them to become fixated on divisional goals at the expense of the organization’s overall goals. Finally, divisions may compete with one another, causing rivalries that hurt the organization as a whole. (LO: 2) 8-9. What are the three categories of conflict in team and workplace settings?

The three categories of conflict are structural, situational, and interpersonal. (LO: 5) 8-10. What are the advantages and disadvantages of the unstructured organizational model?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Advantages of the unstructured organizational model include: (1) increased agility to assemble, reconfigure, and disassemble organizations as dictated by market trends; (2) lower fixed costs and more flexible capacity management; (3) access to otherwise unreachable talent; (4) benefits of competition; (5) workers are evaluated on measurable, performance-based evaluation; (6) freedom and flexibility; and (7) access to jobs that might be otherwise unattainable. The unstructured organization is not without its disadvantages, however, and these include: (1) complexity and control issues; (2) uncertainty; (3) loss of meaning and connection because employees do not have the opportunity to form bonds; (4) diminished loyalty; (5) employees must assume more responsibility for career development; (6) lack of management succession; and (7) less clarity in terms of accountability and liability. (LO: 6) 8-11. What is robotic process automation?

Robotic process automation (RPA) is a software capability that does for knowledge work what robots do for manufacturing and other physical processes.

(LO: 7, AACSB: Information technology)

Questions for Analysis 8-12. Why is it important for companies to decide on their core competencies before choosing an organization structure?

Core competencies are the activities in which a company excels and have the potential to create competitive advantages. Those are precisely the activities that companies should focus on themselves rather than outsource to other companies.

Therefore companies need to decide on their core competencies, that is, the activities they should focus on before they choose an organizational structure.

(LO: 1 AACSB: Analytical thinking) 8-13. How can a virtual organization reduce costs?

In the virtual organization structure, companies hire the services that are needed when they are needed and then are able to change them once they are no longer needed. Thus, rather than hiring individual employees to perform specific functions and paying for the training and development of these employees, the virtual organization structure allows the flexibility of focusing on its core competencies and outsourcing other key activities to firms who specialize in those specific areas. (LO: 2, AACSB: Information technology) 8-14. What can managers do to help teams work more effectively?

To help teams work more effectively, managers can show strong support for team concepts, give the teams the authority to make their own decisions, and help them to establish clear objectives. Managers can also offer financial incentives for team performance, such as stock options, profit sharing, and bonuses. Public recognition is an additional powerful motivation for success. (LO: 4, AACSB: Reflective thinking) 8-15. How can companies benefit from using virtual teams?

A virtual team uses communication technology to bring geographically distant employees together to achieve goals. Companies can benefit from using virtual teams because they have the opportunity to assemble teams of experts wherever they may be, rather than rely on the people who happen to work in a given geographic locations. (LO: 3, AACSB: Information technology)

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8-16. How might a team leader use conflict in a positive way?

A team leader might use conflict in a positive way by getting those directly involved in conflict to participate in resolving it or to encourage openness by getting feelings out in the open before dealing with the main issue. (LO: 5) 8-17. Why are self-managed teams becoming more popular in business?

They are becoming popular because of lower costs, faster decision-making, greater flexibility and innovation, and improved quality stemming from the increased pride of ownership that an independent team feels in its work. (LO: 3) 8-18. Why are many companies now rethinking or abandoning classical concepts of organization structure?

Some entrepreneurs and leaders are pushing the concepts of network structures and virtual teams to the extreme to create unstructured organizations that have little or no permanent structure, at least in terms of the traditional forms. These companies use digital technologies—and global socioeconomic changes enabled by these technologies—to rapidly form and re-form work patterns that bear almost no resemblance to the classic structures. (LO: 6) 8-19.

Ethical considerations. A company executive accidentally emailed you a confidential spreadsheet with the salaries of all the employees in the company. You took only a quick peek before deleting it, but you looked long enough to discover that other managers at your level are earning anywhere from 10 to 40 percent more than you, even though you’ve been at the company longer than any of them. Based on this discovery, you believe you deserve consideration for a raise. How will you handle the situation?

Clearly, there are some ethical issues involved in this situation. Because this information was obtained when reviewing confidential company documents, students must take this issue into account when responding. Although the employee should seek a raise in salary, it would be a mistake to mention the salaries of other employees as a reason for greater pay. Answers should emphasize the reasons that the employee deserves a raise rather than simply comparing salaries (and it would probably be better not to mention others’ salaries at all). (LO: 3, AACSB: Ethical understanding and reasoning)

Questions for Application 8-20.

You are the leader of a cross-functional work team whose goal is to find ways of lowering production costs. Your team of eight employees has become mired in the storming stage. The team members disagree on how to approach the task, and they are starting to splinter into factions, each pursuing its own goals. What can you do to help the team move forward?

The team leader’s focus at this point should be to resolve the conflict and help the team become more cohesive. The leader can encourage the disputing parties to confront the issue by openly discussing it at a special meeting. After both parties have stated their views, a compromise may be possible. If not, the leader can suggest that the team vote on the issue, with all parties agreeing to accept the outcome. If this fails, the leader can turn to a neutral third party to mediate the dispute. (LO: 5, AACSB: Application of knowledge)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 8-21.You’ve recently accepted a job as the U.S. sales manager for a German manufacturing company. One of your first assignments is serving on a virtual problem-solving team with colleagues from Germany, France, Japan, and South Korea. Budgets are tight, so you won’t have the opportunity to meet with your teammates in person to get to know one another. What steps can you take to help the team develop into a cohesive and efficient unit?

Students’ answers will vary but some key points to consider include: (A) take full advantage of the diverse viewpoints, experiences, and skills of the various team members; (B) use technology to replicate resources that in-person teams rely on; and (C) take extra care to keep the team functioning effectively. (LO: 3, AACSB: Information technology) 8-22.

Concept Integration. One of your competitors has approached you with a merger proposal. The economies of scale would be terrific, so are the growth possibilities. There’s just one issue to be resolved. Your competitor is organized under a flat structure and uses lots of cross-functional teams.

Your company is organized under a traditional tall structure that is departmentalized by function. Using your knowledge about culture clash (see page 134), what are the likely issues you will encounter if these two organizations are merged?

Students’ answers will vary but the following are points of consideration: (A) The organizational cultures of the two merged firms must be harmonized somehow, which can result in clashes between different values, management styles, communication practices, and other aspects of life on the job. A company that simply tries to impose its culture on the merger partner firm can experience significant resistance and even widespread employee defection and (B) A company with a flat structure and lots of cross-functional teams tends to be more decentralized while a firm with a tall structure that is departmentalized by function tends to be more centralized. The two merged firms need to decide together what the new organizational structure needs to look like (e.g., stick with one of the existing structures or adopt a hybrid structure, etc.). (LO: 1, AACSB: Application of knowledge)

8-23.

Concept Integration. Chapter 7 discussed several styles of leadership, including autocratic, democratic, and laissez-faire. Using your knowledge about the differences in these leadership styles, which style would you expect to find under the following organization structures: (a) tall organization with departmentalization by function; (b) tall organization with departmentalization by matrix; (c) flat organization; and (d) self-directed teams? a. When an organization is departmentalized by function, employees are grouped according to skill, resource use, and expertise. This kind of grouping is typical of a vertical organization and would function well with either an autocratic or democratic leader. b. When an organization is departmentalized by matrix, employees from functional departments form teams to combine specialized skills. The structure of these organizations is less rigid than those departmentalized by function. A leader for this style of organization would have to be democratic.

Laissez-faire leaders would be too unstructured for this organization and autocratic leaders would be too rigid.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual c. Horizontal organizations tend to use teams and reject separation of people and work into functional departments. Leaders for this type of organization would likely be democratic; they cannot be autocratic as they must delegate a lot of authority and trust employees to act with prudence. d. Self-directed teams manage their own activities and require little supervision: Clearly, the best leader for this structure would be a laissez-faire leader. This type of leader could act as mentor and guide but would allow the selfdirected team to function on its own. (LO: 1, AACSB: Application of knowledge)

Expand Your Knowledge Discovering Career Opportunities Management jobs require a range of skills and experience, and, not surprisingly, the demands increase with the scope and scale of the opportunity. Use a website such as Indeed or Simply Hired to find three supervisor or management jobs in different companies or industries. Study the listed qualifications and then choose which of the three jobs is the most appealing to you. Compare the requirements of this job with our current qualifications and outline a plan (additional education or steppingstone positions) you could pursue to develop the skills and experience to land your chosen job.

Students’ answers will vary depending on the choice of jobs, as well as their personal skills and experience. (LO: 1, AACSB: Application of knowledge)

Intelligent Communication Technology Research a current robotic process automation system or a system that includes this capability. In a brief report, summarize the function of the system and its potential benefits to businesses.

Students’ answers will vary depending on the choice of system. (LO: 7, AACSB: Information technology)

Practice Your Skills Resolving Ethical Dilemmas A self-managed team you work on doesn’t have a formal leader, but people often look to you for guidance on a variety of issues. Tomorrow, the team is presenting to top management the results of the project it has been working on for nearly a year.

Each member has a five-minute slot on the agenda to discuss his or her contribution to the project. This morning over coffee, two of your teammates confided that for the past six months they have been covering for a third teammate who has been experiencing a lot of disruption in his personal life and hasn’t really done much work.

They now wonder if it was right to be so generous for so long (they originally thought it would last only a week or two) and if they should let the presentation go ahead as planned, with this teammate presenting work output that he didn’t really accomplish. How should you respond?

Students’ answers will vary depending on personal experiences and opinions. (LO: 3, AACSB: Interpersonal relations and teamwork, Ethical understanding and reasoning)

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Sharpening Your Communication Skills In group meetings, some of your colleagues have a habit of interrupting and arguing with the speaker, taking credit for ideas that aren’t theirs, and shooting down ideas they don’t agree with. You’re the newest person in the group and not sure if this is accepted behavior in this company, but it concerns you both personally and professionally. Should you go with the flow and adopt their behavior or stick with your own communication style, even though you might get lost in the noise? In two paragraphs, explain the pros and cons of both approaches.

Students’ answers will vary depending on personal opinion. (LO: 5, AACSB: Interpersonal relations and teamwork)

Building Your Team Skills What’s the most effective organization structure for your college or university? With your team, obtain a copy of your school’s organization chart. If this chart is not readily available, gather information by talking with people in administration and then draw your own chart of the organization structure.

Analyze the chart in terms of span of management. Is your school a flat or a tall organization? Is this organization structure appropriate for your school? Does decision-making tend to be centralized or decentralized in your school? Do you agree with this approach to decision-making?

Finally, investigate the use of formal and informal teams in your school. Are there any problem-solving teams, task forces, or committees at work in your school? Are any teams self-directed or virtual? How much authority do these teams have to make decisions? What is the purpose of teamwork in your school?

What kinds of goals do these teams have?

Share your team’s findings during a brief classroom presentation and then compare the findings of all teams. Is there agreement on the appropriate organization structure for your school?

Universities and community colleges tend to be rich with examples of different types of organizational structures. There are usually many committees, and task forces, as well as “tall” organizational structures to examine. This blending of structures is a good example for students to explore because it demonstrates the ways in which different types of structures can coexist. Students may tend to overlook the informal committees, groups, and networks; be sure to encourage them to notice the informal as well as the formal structures. (LO: 2, AACSB: Application of knowledge)

Developing Your Research Skills Although teamwork can benefit many organizations, introducing and managing team structures can be a real challenge. Search past issues of business journals or newspapers to locate articles about how an organization has overcome problems with teams.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 8-24. Why did the organization originally introduce teams? What types of teams are being used?

Answers will vary depending on the articles selected. (LO: 3, AACSB: Interpersonal relations and teamwork) 8-25.

What problems did each organization encounter in trying to implement teams? How did the organization deal with these problems?

Answers will vary depending on the articles selected. (LO: 4, AACSB: Interpersonal relations and teamwork)

8-26. Have the teams been successful from management’s perspective and from the employees’ perspective? What effect has teamwork had on the company, its customers, and its products?

Answers will vary depending on the articles selected. (LO: 4, AACSB: Interpersonal relations and teamwork)

Assisted-graded Questions 8-27. What are some possible benefits and risks of having teams compete against each other, such as having the sales teams from various regions compete to add the most new customers?

Possible benefits of having teams compete against each other would be a stronger drive and motivation to succeed. This could lead to some innovative ideas and solutions that could eventually be shared with all teams throughout the company.

Possible downsides would be losing some of the actual advantages of working in teams, namely, increased diversity of views and lower levels of stress and destructive behavior. If team members are competing against one another, they are less likely to share their perspectives and opinions. When people work together toward a common goal rather than competing for individual recognition, their efforts and energies tend to focus on the common good. If they are competing, this will not be the case. Competition could make them lose the sense of belonging to a group and being involved in a collective effort that is a source of job satisfaction for most people. (LO: 4, AACSB: Interpersonal relations and teamwork) Review the “Loss of meaning and connection” bullet point on page 218 in the discussion of the potential challenges of unstructured organizations.

If you were planning to launch an unstructured organization, what steps could you take to help ensure that any independent contractors you hire on a project-by-project basis will have the same pride in their work that a dedicated, full-time employee would have?

A manager could try to seek out self-motivated people who take pride in their work for its own sake and hire these kinds of people as independent contractors.

Once hired, the manager could be sure to give credit and praise to independent contractors for their contributions to projects so that they feel their work is acknowledged. (LO: 6, AACSB: Interpersonal relations and teamwork)

8-28.

CHECKPOINTS

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Bovee/Thill, Business in Action 9/e Instructor’s Manual LEARNING OBJECTIVE 1: Explain the major decisions needed to design an organization structure.

Critical thinking: (1) What are the risks of a poorly designed organization structure?

A poorly designed structure can create enormous waste, confusion, and frustration for employees, suppliers, and customers.

(2) How does a flat structure change the responsibilities of individual managers?

A flat structure widens the span of management for individual managers.

It’s your business: (1) What would you say are your two or three core competencies at this point in your career?

Students’ responses will vary depending on personal experiences and opinions.

(2) Would you function better in a highly centralized or highly decentralized organization? Why? Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 2: Define four major types of organization structure.

Critical thinking: (1) Should a retail store use the same organization structure in each of its stores around the country? Why or why not?

It should use the same organization structure since that will give customers all over the country the same shopping experience and convey a uniform brand image.

(2) Why does a matrix structure create potential problems in the chain of command?

A matrix structure creates potential problems because in a matrix structure, an employee reports to two superiors simultaneously.

It’s your business: (1) Do you think you would function well in a matrix structure, where you would need to report to two bosses simultaneously? Why or why not?

Students’ responses will vary depending on personal opinions.

(2) How well would you function in a matrix—could you share control with another manager?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Explain how a team differs from a group, and describe the six most common forms of teams.

Critical thinking: (1) How might the work of a task force or committee disrupt the normal chain of command in an organization?

The work of a task force or committee disrupts the normal chain of command in an organization because task forces and committees are cross-functional and they

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Bovee/Thill, Business in Action 9/e Instructor’s Manual require team members to take time away from their own departments or divisions to meet and work on specific activities.

(2) Should new hires with no business experience be assigned to virtual teams? Why or why not?

They can be assigned to virtual teams as long as they get to meet in person at least once with other team members before working on the virtual teams.

It’s your business: (1) Would you function well in a virtual team setting that offered little or no chance for face-to-face contact with your colleagues? Why or why not?

Students’ responses will vary depending on personal opinions.

(2) If you had two similar job offers, one with a company that stresses teamwork and another with a company that stresses independent accomplishment, which would you choose? Why? Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 4: Highlight the advantages and disadvantages of working in teams, and list the characteristics of effective teams.

Critical thinking: (1) Is groupthink similar to peer pressure? Why or why not?

Groupthink is uniformity of thought that occurs when peer pressures cause individual team members to withhold contrary or unpopular opinions; therefore, groupthink is definitely related to peer pressure.

(2) Is supporting a group decision you don’t completely agree with always a case of groupthink? Explain your answer.

Not necessarily. It could be that you believe the group decision is for the good of the whole firm or group even though it may affect you negatively. In this case, it is known as a personal sacrifice for the common good rather than groupthink.

It’s your business: (1) How would you characterize the experience you’ve had working in teams throughout your high school and college years?

Students’ responses will vary depending on personal experiences.

(2) How can you apply experience gained on athletic teams and other collaborative activities to the business world?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 5: Review the five stages of team development, and explain why conflict can arise in team settings.

Critical thinking: 1) How can a team leader know when to step in when conflict arises and when to step back and let the issue work itself out?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual It depends on whether the team leader perceives such conflicts as constructive or destructive. If they were constructive, he/she should step back, but if they were destructive, he/she should step in.

(2) What are the risks of not giving new teams the time and opportunity to “storm” and “norm” before tackling the work they’ve been assigned?

The risks include delaying the potential conflicts (rather than dealing with them first) until such conflicts prevent them from successful teamwork.

It’s your business: (1) Have you ever had to be teammates (in any activity) with someone you simply didn’t like on a personal level? If so, how did this affect your performance as a team member?

Students’ responses will vary depending on personal experiences.

(2) Have you ever had to adapt your regular personality in order to succeed on a particular team? Was this a positive or negative experience?

Students’ responses will vary depending on personal experiences.

LEARNING OBJECTIVE 6: Explain the concept of an unstructured organization, and identify the major benefits and challenges of taking this approach.

Critical thinking: (1) “Unstructured” organization is something of a contradiction in terms; are such companies still “organized” if they have no permanent structure? Why or why not?

Companies with an unstructured organization are indeed organized, but in a very flexible, nontraditional manner. These companies use digital technologies to form and re-form work patterns almost on a project-by-project basis.

(2) How can workers develop marketable skills if they work as independent contractors?

Although independent contractors have to assume more responsibility for their career development—as opposed to progressing through the ranks of an organization—they also have the opportunity to seek positions in which they can learn new skills.

Independent contractors can pick and choose projects that interest them and that they believe will assist them in obtaining marketable skills.

It’s your business: (1) Where do you think you would be most comfortable, as a regular employee in a conventionally structured firm or as an independent contractor, moving from project to project? Why? Students’ responses will vary depending on personal experiences.

(2) Assume that you went to work for a conventional employer and then left to work as an independent contractor as soon as you developed enough of a skill set to make it on your own. (Assume as well that you were not violating any sort of employment contract and were free to leave.) Would you have any ethical concerns about leaving an employer who had invested in your professional development? Why or why not?

Students’ responses will vary depending on personal experiences.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual LEARNING OBJECTIVE 7: Describe the use of taskbots and robotic procession automation in contemporary business.

Critical thinking: (1) Should a company apply any RPA solution without critically examining its processes first? Why or why not?

No, a company should not apply an RPA solution without examining its processes first. RPA is a rules-based method of automation, so it is vital to ensure that the rules are in accordance with how the company processes its claims, for example, to ensure the proper outcomes.

(2) If taskbots, RPA, and related technologies eventually take over so much work that they affect employment opportunities, how should society respond?

Answers will vary. It is worth noting that despite recurring worries about robots and AI destroying jobs, employees generally welcome RPA because it takes on the tedious and repetitive work that most people dislike.

It’s your business: (1) Would you rather work alongside a human teammate who occasionally makes mistakes that cost you time and energy or an AI-enabled taskbot that performs flawlessly? Explain your answer.

Students’ responses will vary depending on personal opinions and experiences.

(2) Would you be comfortable getting a medical diagnosis from a bot? Why or why not?

Students’ responses will vary depending on personal opinions and experiences.

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Chapter 9 PRODUCTION SYSTEMS Chapter Overview This chapter combines the two important business functional areas of operations and information technology. It introduces the key concept of business systems and uses it as a foundation to describe value chain, supply chain management, and quality control. It then surveys how businesses use information systems to help improve both the efficiency and quality of various business processes.

Chapter Outline I.

The Systems View of Business A. Business can be viewed from a systems perspective. A system is an interconnected and coordinated set of elements and processes that convert inputs to desired outputs B. A company is made up of numerous subsystems (i.e., marketing, accounting, and manufacturing) that constitute the overall system of the company C. Seven principles of systems thinking that can help managers are: 1. Help employees see how they contribute to the overall goal 2. Understand how individual systems work and how they interact 3. Understand problems before fixing them and focus on things that are meaningful, not simply measurable 4. Understand the potential impact of solutions before implementing them 5. Do not move problems from one subsystem to another without fixing them 6. Understand how feedback works in the system 7. Use mistakes as opportunities to learn and improve

II. Value Chains and Value Webs A. A value chain consists of all the elements and processes that add value as raw materials are transformed into final products made available to the customer B. The value web concept expands this model into a multidimensional network of suppliers and outsourcing partners 1. Outsourcing allows companies to focus on core competencies and contract out other functions or operations to other companies C. A variation of outsourcing is known as offshoring, in which a company transfers a part or all of a business function to a facility (a different part of the company or another company entirely) in another country in pursuit of lower costs 1. Offshoring debate highlights the conflicting priorities in the stakeholder model, helping investors and customers while harming employees and local communities

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Bovee/Thill, Business in Action 9/e Instructor’s Manual III. Supply Chain Management A. A supply chain is a set of connected systems that coordinates the flow of goods and materials from suppliers to final customers B. Supply chain management (SCM) combines business procedures and policies with information systems that integrate the various elements of the supply chain into a cohesive system C. Benefits of SCM include: 1. Managing risks from costs and availability to health and safety issues 2. Responding to customer needs 3. Managing business relationships 4. Promoting sustainability (i.e., resource usage, waste, and environmental impact) D. SCM encompasses the following functions: 1. Inventory control—determining the right quantities of supplies and products to have in inventory (goods and materials kept in stock for production or sale) 2. Procurement—the acquisition of raw materials, parts, components, supplies, and finished products required to produce goods and services.

3. Significant emerging systems: a. Planning systems including materials requirement planning (MRP) and enterprise resource planning (ERP) b. Tracking methods including RFID, GPS functions, and IoT sensors c. Blockchain IV. Production and Operations Management A. Production and operations management oversees all the activities involved in producing goods and services B. It encompasses the following functions: 1. Lean systems are systems in manufacturing and other functional areas that maximize productivity by reducing waste and delays a. Productivity is the efficiency with which a company can convert inputs to outputs b. Lean systems rely on just-in-time (JIT) inventory management, in which goods and materials are delivered throughout the production process right before they are needed 2. Depending on the nature of the product and desires of target customers, goods and services can be created through: a. Mass production—the creation of identical goods or services, usually in large quantities b. Customized production—the creation of a unique good or service for each customer c. Mass customization—a manufacturing approach in which part of the product is mass produced and the remaining features are customized for each buyer 3. Facilities location and design (factory layout), determining the arrangement of production work centers and other elements 4. Forecasting and capacity planning—establishing the overall level of resources needed to meet customer demand 5. Scheduling—determining how long each operation takes and deciding which tasks are done in which order. Tools used in this function include:

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Bovee/Thill, Business in Action 9/e Instructor’s Manual a. Master production schedule (MPS) to coordinate production of goods b. Gantt charts to show the progress of tasks needed to complete a project c. Program evaluation and review technique (PERT) chart to identify the optimal sequencing of activities i. The sequence of operations that requires the longest time to complete is known as the critical path V. The Unique Challenges of Service Delivery A. Operations management in the service sector faces a number of unique challenges, including: 1. Perishability—services are consumed at the same time they are produced and cannot exist before or after that time 2. Location constraints—services, customers, and providers need to be in the same place at the same time 3. Scalability—the potential to increase production by expanding or replicating initial production capacity 4. Performance variability and perceptions of quality—the quality of services is often subjective 5. Customer involvement and provider interaction—the interpersonal experience affects customer perception of quality VI. Product and Process Quality A. Quality is the degree to which a product or process meets reasonable or agreed-upon expectations B. Operations management must define those expectations and then organize resources and systems to achieve that level, and this becomes more difficult with the increasing complexity of products C. The traditional means of maintaining quality is quality control—measuring quality against established standards after the goods or service has been produced and weeding out defective products 1. Quality assurance is a more comprehensive and proactive approach of company policies, practices, and procedures designed to ensure that every product meets quality standards a. Many firms organize their quality-oriented activities under a companywide commitment to total quality management (TQM), in which every aspect of company operations pushes toward excellence in goods and services delivery 2. Four major tools and strategies for ensuring product quality are: a. Continuous improvement b. Statistical process control (SPC), which involves the use of random sampling and tools such as control charts to monitor the production process c. Six Sigma—a rigorous quality management program that strives to eliminate deviations between the actual and desired performance of a business system d. ISO 9000—a globally recognized family of standards for quality management systems VII.

Thriving in the Digital Enterprise: Industry 4.0 and the Smart Factory

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Bovee/Thill, Business in Action 9/e Instructor’s Manual A. Industry 4.0 refers to the digital transformation of manufacturing and moving from automated factories to smart factors that emphasize the use of cyber-physical systems 1. Encompasses cyber-physical systems including industrial robots, additive manufacturing, and the Internet of Things 2. Promises improvements in speed and efficiency, reduction of need for tedious and dangerous manual work, as well as greater agility and adaptability C. Two significant concerns are as follows: 1. The reliance on networking makes smart factories more vulnerable to hacking and other malicious attacks 2. The likelihood that Industry 4.0 will displace some workers in the manufacturing sector and redefine the nature of work for many others Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class with real-time diagnostics. Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it. For more information on using Learning Catalytics in your course, contact your Pearson Representative.

Classroom Activities Breakout group discussion: Offshoring Goal: Ask students to debate whether it is ethical for firms to offshore production facilities to countries with less strict environmental standards.

Time Limit: 20 minutes.

Details: 1. Break students into groups of four or five, with half of the groups supporting offshoring and the other half opposing offshoring. (2 minutes) 2. Ask the supporting groups to come up with the top two or three reasons why they support offshoring, for example, more job opportunities for the host country, stronger economies, and improved living standards. Ask the opposing groups to come up with the top two or three reasons why they oppose offshoring such as degrading environmental conditions in the host country, job losses in the home country, and so on. (10 minutes) 3. Ask teams from both sides to debate each other on the topic whether it is ethical for firms to offshore production facilities to countries with less strict environmental standards. The teams may go back and forth, attacking each other’s viewpoints and rationales. (8 minutes)

End-of-Chapter Behind the Scenes Printing the Impossible at Voodoo Manufacturing

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Critical Thinking Questions 9-1. How does a service such as Voodoo support the concepts of virtual and unstructured organization discussed in Chapter 8?

Voodoo’s service supports these concepts by allowing a company or individual create, manufacture, and ship products without the overhead of designers, manufacturing facilities, or shipping personnel. (LO: 7, AACSB: Information technology) 9-2. What advantages does iterative prototyping offer companies that are introducing new types of products to the market?

It allows companies to quickly produce actual items that can be tested for design errors or functional issues and to quickly put products into potential customer hands and get their feedback. (LO: 7, AACSB: Information technology) 9-3.

How does Voodoo represent the concepts of cyber-physical systems and the smart factory?

Voodoo represents cyber-physical systems because it carries out one of the prominent examples of these systems, additive manufacturing, or #D printing. It represents the smart factory because it is not an automated factory but one that can manufacture any product a client can think up. (LO: 7, AACSB: Information technology)

Learn More Online Visit voodoomfg.com .com and explore the examples section to see what the company has been manufacturing for its customers. Read about the printing, design, and fulfillment services to get a better idea of how the company can support a wide range of customers. What materials and printing services does Voodoo currently offer? How does it present those capabilities to potential customers?

Students’ responses will depend, in large part, on the material currently posted on the website. (LO: 4)

Test Your Knowledge Questions for Review 9-4.

What role does feedback play in a system?

Feedback is information from the output applied back to the input. Systems respond to feedback. In the case of an ad campaign, the response from target customers is a form of feedback that helps the department understand whether the campaign is working. Feedback can work in unanticipated ways, too. A good example is when managers send mixed signals to their employees, such as telling them that customer satisfaction is the top priority but then criticizing anyone who spends too much helping customers. Employees will respond to this feedback by spending less time with customers, leading to a decline in customer satisfaction.

(LO: 1)

9-5.

How does a value web differ from a value chain?

A value chain is all the elements and processes that add value as raw materials are transformed into the final products made available to the ultimate customer.

Value webs are multidimensional networks of suppliers and outsourcing partners.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual (LO: 2) 9-6. Why is offshoring controversial?

Offshoring is controversial because companies usually eliminate many of the jobs associated with the business functions they are outsourcing in the value chain to foreign countries in which costs are lower. It also has negative implications in terms of “knowledge transfer and theft” as well as “national security concerns.” (LO: 2 AACSB: Ethical understanding and reasoning) 9-7.

Why is supply chain management (SCM) considered a strategic business function?

SCM can have a profound strategic impact on companies and the broader economy in several ways, including managing risks, responding to customer needs, managing business relationships, and promoting sustainability. (LO: 3)

9-6.

What is a lean system?

A lean system is a manufacturing system that maximizes productivity by reducing waste and delays. It is at the heart of many productivity improvement efforts. (LO: 4)

9-7.

What is mass customization?

Mass customization is the use of mass production techniques to build products specifically tailored to individual customers’ needs. (LO: 4)

9-10. What is scalability, in the context of managing a service business?

Scalability is the potential to increase production by expanding and replicating its initial production capacity. Service businesses that depend on the skills of specific professionals can be particularly difficult to scale. Examples range from chefs to interior designers to business consultants and graphics designers, particularly when the business is built around the reputation of a single person (e.g., Martha Stewart Living). (LO: 5) 9-11. What is Industry 4.0?

Industry 4.0 is the e-digital transformation of manufacturing, moving from automated factories to smart factories that emphasize the use of cyber-physical systems. (LO: 7, AACSB: Information technology) 9-12. What is a cyber-physical system?

A cyber-physical system is one in which the digital realm and the physical realm are seamlessly integrated. (LO: 7, AACSB: Information technology)

Questions for Analysis 9-13. Why is it important to monitor performance variables that are the most meaningful, not those that are the most easily measurable?

It is important to monitor performance because the most meaningful performance variables can most significantly improve or hinder the quality of operating systems. (LO: 1, AACSB: Reflective thinking)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 9-14. Why do some firms now think in terms of value webs instead of value chains?

Instead of the linear value chain, some businesses now think in terms of value webs, multidimensional networks of suppliers, and outsourcing partners. The outsourced, value-web approach has several key advantages, including speed, flexibility, and the opportunity to access a wide range of talents and technologies that might be expensive or impossible to acquire otherwise. Established companies can narrow their focus to excel at their core competencies; entrepreneurs with product ideas can quickly assemble a team of designers, manufacturing plants, and distributors in far less time than it would take to build an entire company from scratch. (LO: 2) 9-15. How can supply-chain management (SCM) help a company establish a competitive advantage?

Supply-chain management enables a company to produce better quality goods and services at lower costs and in shorter time periods by integrating design and production with the procurement of supplies. It also facilitates greater flexibility in production, enabling the company to customize products for specific customer needs. All of these benefits help the company to establish an advantage over competitors. (LO: 3, AACSB: Analytical thinking) 9-16. How does the lean approach to manufacturing put more responsibility in the hands of front-line workers?

In lean manufacturing, goods and materials are delivered throughout the production process right before they are needed rather than being stockpiled in inventories. This approach can encourage employees to be more engaged at work because their inputs and concerns are respected and acted upon, and it can help a company clarify its competitive strategy. However, because this approach places a lot of responsibility on front-line employees and lower-level managers, top managers need to make sure that appropriate goals, incentives, and support systems are in place to ensure smart and ethical decision-making. (LO: 4) 9-17. How does perishability affect the delivery of services?

Perishability means that services are consumed at the same time they are produced and cannot exist before or after that time. It also means that for many services, customers and providers need to be in the same place at the same time.

Perishability can have a profound impact on the way services businesses are managed and delivered, from staffing (making sure enough people are on hand to help with peak demands) to pricing (using discounts to encourage people to buy services when they are available). (LO: 5) 9-18. How does complexity affect product quality?

As many products become increasingly complex, defining and maintaining quality becomes an ever-greater challenge. For example, even identical, massproduced computers immediately become unique when their new owners start adding software, downloading files, and connecting them to printers and other devices, each of which is a complex hardware/software system in its own right.

All these changes and connections increase the chances that something will go wrong and thereby lower the functional quality of the product. In other words, even though the company verified the quality of the products before they left the factory, it could have thousands of quality issues on its hands over time. (LO: 6)

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9-19. Ethical Consideration. How does society’s concern for the environment affect a company’s decisions about facility location and layout?

Our society’s concern for the environment affects facility-location decisions because firms must recognize that the public wants the least amount of environmental impact possible. In particular, the public is concerned that firms don’t put manufacturing plants in their “backyards.” This puts pressure on firms to find locations that are acceptable to the public and still cost effective. Layout decisions are also affected by public interest in the environment because firms need to be as efficient as possible with as little waste as possible to meet today’s environmental standards. (LO: 4, AACSB: Ethical understanding and reasoning)

Questions for Application 9-20. Business is booming. Sales last month were 50 percent higher than the month before, and so far, this month is looking even better than last month.

Should you hire more people to accommodate the increase? Explain your answer.

Students’ answers may vary but the following are some points to consider. We need to take a look at the type of business this is and in particular whether seasonality may be a factor that affects sales. If seasonality is a factor, we need to compare sales figures with the same month(s) last year to get an accurate picture of whether sales actually increased from year to year. If sales did increase over the same period last year, it might be time to hire more people. (LO: 4, AACSB: Application of knowledge) 9-21. If 30 percent of the patrons eating at your restaurant say they won’t eat there again, what steps would you take to define the problem(s) that needs to be solved, measure the relevant performance variables, and then analyze the root cause of the problem(s)?

Students’ answers may vary but the following are some points to consider.

Patrons won’t eat at your restaurants again possibly because the food was substandard, or the quality of service was poor. Performance variables may include quality of good, speed and quality of service, and cleanliness of restaurant. (LO: 5, AACSB: Application of knowledge) 9-22. You’ve developed a reputation as an outstanding math tutor, and you want to turn your talent into a full-time business after graduation. How will you address the challenge of scalability in your new venture?

Students’ answers will vary but they will need to address the scalability issue, that is, service businesses that depend on the skills of specific professionals can be particularly difficult to scale. (LO: 5, AACSB: Application of knowledge) 9-23. Concept Integration. How might supply chain management issues influence your decision on how to expand your vitamin and nutritional supplements company internationally?

Supply chain management (SCM) combines business policies/procedures with information systems and coordinates the flow of goods and materials from suppliers to the final customer. Supply chain management would make it easier to expand into international markets because you could monitor the status of activities across all of your suppliers, plants, storage facilities, and distribution centers. This means everything from ordering and acquiring raw materials to

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Bovee/Thill, Business in Action 9/e Instructor’s Manual delivering them to your international customers could be accomplished more effectively and more efficiently. (LO: 3, AACSB: Application of knowledge)

Expand Your Knowledge Discovering Career Opportunities Visit the Occupational Outlook Handbook at www.bls.gov/ooh and locate “Industrial Production Managers” in the “Management” section.

9-24. What is the nature of the work for industrial production managers?

Does the combination of people management and technical problem solving appeal to you?

Students’ answer may vary depending on interests, but industrial production managers plan, direct, and coordinate the production activities required to produce the vast array of goods manufactured every year in the United States.

They make sure that production meets output and quality goals while remaining within budget. Depending on the size of the manufacturing plant, industrial production managers may oversee the entire plant or just one area of it. Industrial production managers devise methods to use the plant's personnel and capital resources to best meet production goals. They may determine which machines will be used, whether new machines need to be purchased, whether overtime or extra shifts are necessary, and what the sequence of production will be. They monitor the production run to make sure that it stays on schedule, and they correct any problems that may arise. (LO: 4, AACSB: Reflective thinking) 9-25. What is the outlook for careers in this profession? If you were interested in this field, would you consider it, given the job outlook?

Students’ answers will vary depending on their interest. Employment of industrial production managers is expected to show little or no change; a decline of just 1 percent over the 2016–2026 decade is projected. Most of these managers are employed in various manufacturing industries, which are expected to see a decrease in overall employment as a result of increased productivity. In the past, employment of industrial production managers was less affected by productivity gains since these managers were responsible for coordinating work activities with the goal of increased productivity. However, as facilities adapt to this new, leaner production model, employment of workers and managers should be equally affected by productivity increases.

Some manufacturing jobs are at risk of being sent to other countries with lower wages, dampening some employment growth. However, this risk may be reduced by recent trends of “reshoring,” where previously outsourced personnel and services are being brought back to the United States, and “domestic sourcing” where firms move jobs to lower cost regions of the United States instead of to other countries. (LO: 4, AACSB: Reflective thinking) 9-26. If you decide you want to work in a production-related job, what additional classes should you consider taking before you graduate?

Students’ answers may vary but possible classes to consider may include both engineering and business and management courses since applicants who have a

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Bovee/Thill, Business in Action 9/e Instructor’s Manual bachelor’s degree in industrial management or business administration should have the best prospects (LO: 4, AACSB: Application of knowledge)

Improving Your Tech Insights: Nanotechnology Research the latest offerings from several industrial robot makers, such as ABB, Fanuc, and Kawasaki. What innovations are these companies promoting? How do they position their robots within the Industry 4.0 and smart factory concepts?

Summarize your findings in a brief report.

Students’ answers will vary depending on the actual products they identify. (LO: 7, AACSB: Information technology)

Practice Your Skills Resolving Ethical Dilemmas You’re the manufacturing manager for a midsize company with a good reputation in its markets, particularly for delivering a level of quality that is well above advertised parameters. The board of directors recently decreed that the company needs to cut costs across the board and specifically wants you to switch to lower-cost materials and components. Your team has determined that the company could still advertise the same performance levels using these lower-quality materials and components, but the quality margin would be razor thin. Even though you will still be delivering the promised level of quality, strictly speaking, it will be lower than you’ve delivered in the past and lower than what customers have come to expect from your company.

Explain why this switch would or would not be ethical.

Students’ answers will vary based on personal experiences and opinions. (LO: 6, AACSB: Ethical understanding and reasoning)

Sharpening Your Communication Skills As the newly hired manager of Campus Athletics, a shop featuring athletic wear logos of colleges and universities, you are responsible for selecting the store’s suppliers. Demand for merchandise with team logos and brands can be quite volatile. When a college team is hot, you’ve got to have the merchandise. You know that selecting the right supplier is a task that requires careful consideration, so you have decided to host a series of selection interviews. Think about all the qualities you would want in a supplier and develop a list of interview questions that will help you assess whether that supplier possesses those qualities.

Students’ answers will vary but should address several key points: (1) production design, (2) facility layout, and (3) commitment to quality. Questions should seek to find out how efficient the firm is and how committed to quality and service the firm is. (LO: 4, AACSB: Application of knowledge)

Building Your Team Skills Identify a company that has decided to offshore some part of its operations in the recent past. With the other members of your team, identify all the

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Bovee/Thill, Business in Action 9/e Instructor’s Manual stakeholder groups that were or might be affected by this decision and speculate on the impact it had on each group. Weighing the effect on all the stakeholders, vote on whether this was a wise decision for the company. Be prepared to present your conclusions to the class.

Students’ answers will vary depending on the company chosen but they should reflect the stakeholder model in Chapter 4. The best answers should seek to balance the interests of various stakeholder groups. (LO: 2, AACSB: Ethical understanding and reasoning)

Developing Your Research Skills Research a company that has updated its production operations with a new generation of technology and try to find answers to as many of these questions as you can.

9-27. What problems or opportunities led the company to rethink its operations? What kind of technology did it choose to address these problems or opportunities? What goals did the company set for applying technology in this way?

Answers will vary depending on the article and company selected by the student.

(LO: 4) 9-28.

Before adding the new technology, what did the company do to analyze its existing operations? What changes, if any, were made as a result of this analysis?

Answers will vary depending on the article and company selected by the student.

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How did technology-enhanced operations help the company achieve its goals for financial performance, for customer service and for growth or expansion?

Answers will vary depending on the article and company selected by the student.

(LO: 4)

Assisted-graded Questions 9-30. How does the offshoring controversy reflect the larger question of balancing the competing demands of stakeholder groups?

Answers will vary but will address the idea that the interests of various stakeholders are often at odds with one another. Acting in the interests of one particular group can be detrimental to the interests of others. Businesses need to consider the big picture but ultimately choices must be made, perhaps depending on the magnitude of the impact or upon which stakeholders deserve primary allegiance. (LO: 2, AACSB: Ethical understanding and reasoning) 9-31.

Why might a service business be more selective than a goods-producing business regarding the customers it pursues or accepts?

A service business might be more selective about the customers it pursues or accepts because customers are often involved in—and thereby can affect the quality of—the service delivery. For instance, personal trainers can instruct clients in the proper way to exercise, but if the clients don’t follow directions, the result will be unsatisfactory. Similarly, a business consultant relies on accurate

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Bovee/Thill, Business in Action 9/e Instructor’s Manual information from managers in a client organization; lacking that, he or she will be unable to craft the most effective advice. When customers and service providers interact, the quality of the interpersonal experience also affects customer perceptions of quality. In this sense, service delivery is something of a performance that needs to instill confidence in the client. Weak communication skills or poor etiquette can create dissatisfaction with a service that is satisfactory or even exceptional in all other respects. (LO: 5, AACSB: Application of knowledge)

CHECKPOINTS LEARNING OBJECTIVE 1: Explain the systems perspective, and identify seven principles of systems thinking that can improve your skills as a manager.

Critical thinking: (1) Why are leverage points in a system so critical to understand?

Leverage points are so critical to understand because a leverage point is a relatively small correction that could make the entire company perform better and represents low cost and high return on investment.

(2) Why should a manager in marketing care about systems in the finance or manufacturing departments?

A manager in marketing should care about systems in the finance or manufacturing departments because the systems view states that all of the departments, including finance, marketing, and manufacturing are all interconnected. Seeing how such departments connect with each other, that is, seeing the big picture, is critically important for business success.

It’s your business: (1) How could a systems approach to thinking help you get up to speed quickly in your first job after graduation?

Students’ responses will vary depending on personal opinions.

(2) Think back to your experience of registering for this class. How might you improve that system?

Students’ responses will vary depending on personal experiences or opinions.

LEARNING OBJECTIVE 2: Describe the value chain and value web concepts, and discuss the controversy over offshoring.

Critical thinking: (1) Do U.S. companies have an obligation to keep jobs in the United States? Why or why not?

Students’ responses will vary depending on personal opinions but points to consider include the fact that many U.S. companies choose to send manufacturing jobs to developing countries because of lower labor costs in such countries.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual (2) Will global labor markets eventually balance out, with workers in comparable positions all over the world making roughly the same wages? Explain your answer.

Students’ responses will vary depending on personal opinions.

It’s your business: (1) How vulnerable are your target professions to offshoring?

Students’ responses will vary depending on personal experiences.

(2) Should such concerns affect your career planning?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Define supply chain management, and explain its strategic importance.

Critical thinking: (1) Why can’t companies just stockpile huge inventories of all the parts and materials they need rather than carefully manage supply from one day to the next?

Companies just stockpile huge inventories because warehousing large quantities of parts and materials takes a lot of space, which may not be available to many manufacturers. It can also be quite expensive. In addition, parts and materials can become obsolete. Keeping a huge inventory of parts and materials may present a significant financial risk.

(2) Why would a company invest time and money in helping its suppliers improve their business practices? Why not just dump underperformers and get better suppliers?

A company invests time and money in helping its suppliers improve their business practices because high-quality supplier network typically takes time and effort to build and can become a significant competitive advantage for manufacturers.

It’s your business: (1) In any current or previous job, what steps have supervisors taken to help you understand your role in the supply chain?

Students’ responses will vary depending on personal experiences.

(2) How might a manufacturer or retailer use the transparency and traceability afforded by blockchain to promote closer relationships with its customers?

Customers would be reassured to know that a company was using blockchain technology to avoid concerns related to counterfeit goods, unethically or illegally sourced materials, and product safety.

LEARNING OBJECTIVE 4: Identify the major planning decisions in production and operations management.

Critical thinking: (1) Why is it essential to identify tasks in the critical path of a project?

It is essential to identify tasks in the critical path of a project because such tasks collectively represent the most efficient way to complete a project.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual (2) How does mass customization help a company balance productivity and customer satisfaction?

Mass customization has the twin advantages of economies of scale, which maximize a firm’s productivity, as well as providing a relatively customized customer experience, which improves customer satisfaction.

It’s your business: (1) The phrase “lean and mean” is sometimes used to describe lean systems. What are the risks of using such language?

Students’ responses will vary depending on personal opinions.

(2) Is this course an example of mass production, customization, or mass customization? Explain.

Students’ responses will vary depending on personal experiences or opinions.

LEARNING OBJECTIVE 5: Explain the unique challenges of service delivery.

Critical thinking: (1) How can technology help some service businesses address the challenge of scalability?

Technology can potentially help improve service efficiency and accuracy and thereby help address the challenge of scalability related to services.

(2) If customers are paying for a service, why should they ever have to share in the responsibility of ensuring quality results?

Customers should ensure quality because quality of experience is often an important aspect of customer service, and under most circumstances, feedback on quality of experience can only come from the customers.

It’s your business: (1) Do you think you have a natural personality for working in a service business?

Why or why not?

Students’ responses will vary depending on personal opinions.

(2) If you’re not a “natural,” what steps could you take to succeed in a service job anyway?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 6: Define quality, explain the challenges of quality and product complexity, and identify four major tools and strategies for ensuring product quality.

Critical thinking: (1) How significant is the role of software in product quality today?

As products become increasingly complex, defining and maintaining quality becomes an even greater challenge. Additionally, sophisticated production methods also increase the chance that something can—and most likely will—go wrong. Quality management software can assist a company in managing corrective and preventive actions, root cause analysis, audits, and customer and supplier issues.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual (2) How can process simplicity contribute to quality?

Process simplicity can contribute to quality because by reducing process complexity, manufacturers can often dramatically reduce mistakes and thereby achieve higher quality.

It’s your business: (1) Are the grades you get in your various classes an example of quality control or quality assurance? Explain your answer.

Students’ responses will vary depending on personal experiences or opinions.

(2) Have you ever tried anything like the Six Sigma DMAIC process in your own life, even partially or informally?

Students’ responses will vary depending on personal experiences.

LEARNING OBJECTIVE 7: Explain the concept of Industry 4.0 and the smart factory.

Critical thinking: (1) Would you characterize Industry 4.0 as a revolution or more of an evolution?

Why? As with most revolutions, Industry 4.0 is not a distinct break with the past or a rigid boundary around a specific set of things but rather a label for the gathering consensus that a new way of doing things has emerged.

(2) Why might various companies have an interest in promoting Industry 4.0 as a conceptual “brand”?

The Industry 4.0 concept encompasses a variety of technologies, but one of the most fundamental are cyber-physical systems in which the digital realm and the physical realm are seamlessly integrated.

It’s your business: Because students don’t always consider the manufacturing sector as a career, do the innovations of Industry 4.0 make manufacturing more appealing to you? Why or why not?

Students’ responses will vary depending on personal experiences or opinions.

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Chapter 10 EMPLOYEE MOTIVATION Chapter Overview This chapter covers the important topic of employee motivation. It first defines motivation and introduces several classical motivation theories. It then identifies and discusses more current motivation theories and models such as expectancy theory, goal-setting theory, job characteristics model, and reinforcement theory. It lists five managerial strategies that are crucial to maintaining a motivated workforce. Lastly, it discusses potential strengths and weaknesses of performance management systems.

Chapter Outline I.

What Motivates Employees to Peak Performance?

A. Motivation is the combination of forces that drive individuals to take certain actions and avoid others B. Workplace motivation can be assessed by measuring four indicators: 1. Engagement—an employee’s rational and emotional commitment to his or her work 2. Satisfaction—how happy employees are with work and how they are treated 3. Commitment—the degree to which employees support the company and its mission 4. Rootedness—the likelihood that employees will stay or leave C. Motivation stems from four fundamental needs: 1. The drive to acquire both physical and psychological goods 2. The drive to bond with others and feel a part of something larger 3. The drive to comprehend—learning, growing, and meeting challenges 4. The drive to defend people, ideas, and organizations they hold dear D. Classical theories of motivation include: 1. Taylor’s scientific management—an approach designed to improve employees’ efficiency by scientifically studying their work 2. The Hawthorne studies—research that suggested that understanding an employee’s performance is affected by his/her emotional and cultural makeup both on and off the job a. The studies also brought to light the Hawthorne effect, in which the behavior of workers changes when they are being observed 3. Maslow’s Hierarchy of Needs—the theory that behavior is determined by needs, which are arranged in Maslow’s hierarchy, with basic needs at the bottom and more advanced needs toward the top 4. Theory X and Theory Y—managers approach motivation in two radically different ways: a. Theory X managers assume that employees are irresponsible, unambitious, and dislike work and managers must use force, control, or threats to motivate them

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Bovee/Thill, Business in Action 9/e Instructor’s Manual b. Theory Y managers assume that employees like to work and can be motivated by working for goals and seek out responsibility 5. Herzberg’s two-factor theory—a model that divides motivational forces into satisfiers (motivators) and dissatisfiers (hygiene factors) 6. McClelland’s three-needs theory—a model of motivation that highlights individuals’ needs for power, affiliation, and achievement II. Explaining Employee Choices A. More contemporary theories of motivation attempt to explain the choices that employees make 1. Expectancy theory—the theory that the effort employees put into their work depends on expectations about their own ability to perform, expectations about likely rewards, and the attractiveness of those rewards 2. Equity theory—the theory that employees base their level of satisfaction on the ratio of their inputs to the job and the outputs or rewards they receive from it III. Motivating with Challenging Goals A. Goal-setting theory is a motivational theory suggesting that setting goals can be an effective way to motivate employees B. For goals to function as effective motivators, they need to meet several criteria: 1. Goals must be specific 2. Goals must be difficult enough to inspire performance 3. Clear “ownership” of goals 4. Timely feedback 5. Individuals’ belief in their ability to meet goals 6. Cultural support for individual achievement and independence C. Management by objectives (MBO) is a motivational approach in which managers and employees work together to structure personal goals and objectives for every individual, department, and project to mesh with the organization’s goals 1. MBO involves four steps: setting goals, planning action, implementing the plans, and reviewing performance D. Goal setting theory has several weaknesses, including: 1. Establishing overly narrow goals 2. Establishing overly challenging goals 3. Establishing inappropriate time horizons for goal completion 4. Unintentional performance limitations 5. Missed learning opportunities 6. Unhealthy internal competition 7. Decreased intrinsic motivation IV. Redesigning Jobs to Stimulate Performance A. The job characteristics model suggests that five core dimensions influence three critical psychological states that determine motivation, performance, and other outcomes.

1. The core job dimensions include: a. Skill variety—the range of skills needed to accomplish the job b. Task identity—the degree to which an employee has responsibility for completing an entire task

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Bovee/Thill, Business in Action 9/e Instructor’s Manual c. Task significance—the employee’s perception of the impact the job has on others in the organization d. Autonomy—the degree of independence in carrying out the tasks e. Feedback—timely information about the employee’s performance 2. These core job dimensions contribute to three critical psychological states: a. Experienced meaningfulness of the work b. Experienced responsibility for results c. Knowledge of actual results B. Three popular approaches to improve job satisfaction include: 1. Job enrichment—making jobs more challenging and interesting by expanding the range of skills required 2. Job enlargement—a horizontal expansion of the job in which more tasks are added 3. Cross-training or job rotation—training workers to perform multiple jobs and rotating them through these jobs in order to combat boredom or burnout V. Reinforcing High-Performance Behavior A. Reinforcement theory is a motivational approach based on the idea that managers can motivate employees by influencing their behaviors with positive and negative reinforcement B. Positive reinforcement offers pleasant consequences (rewards) for particular actions and behaviors 1. This increases the likelihood that behaviors will be repeated 2. Many companies use incentives—monetary payments or other rewards of value used for positive reinforcement C. Negative reinforcement encourages the repetition of a behavior (desirable or not) through the reduction, removal, or absence of an unpleasant outcome 1. This is different from punishment, which refers to actions used to diminish the repetition of unwanted behaviors by adding unpleasant outcomes VI. Motivational Strategies A. Provide timely and frequent feedback—feedback is the mechanism that shapes employee behavior, and it provides information needed to assess performance and make needed improvements B. Personalize motivational efforts 1. Establish systems and policies that are fair and automatic 2. Be as flexible as possible while still being fair 3. Get to know employees as individuals in order to understand what is important to them C. Use gamification, the application of game principles such as scorekeeping to various business processes D. Address workplace negativity E. Serve as an inspiring leader and avoid micromanaging—overseeing every small detail of employees’ work and refusing to give them freedom or autonomy F. Self-motivation

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Bovee/Thill, Business in Action 9/e Instructor’s Manual VII.

Thriving in the Digital Enterprise: Performance Management Systems A. Not many people are happy with the conventional ways of assessing performance, but employees want to know how they’re doing, and managers want to know what they can do to help their staffs perform to their full potential B. Moving away from annual reviews toward real-time monitoring and feedback C. Performance management systems are now available to help companies set goals, monitor performance, provide feedback, and adjust plans in real time 1. Can avoid human biases and errors, including recency bias 2. Still must address fundamental questions of what to measure and how to measure it

Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class with real-time diagnostics. Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it. For more information on using Learning Catalytics in your course, contact your Pearson Representative.

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Classroom Activities In-class activity: What motivates you in the workplace?

Goal: Ask students to name various factors that motivate them at work and vote on such factors to determine which are considered the most important by the whole class. Help students understand that different individuals are likely motivated by different factors and that “money” is not necessarily the most important motivator for many individuals.

Time Limit: 10 minutes.

Details: 1. Ask the class to name various factors that motivate them the most in the workplace. Possible factors may include: high salary, generous benefits, a good relationship with co-workers, available training opportunities, a sense of constant learning and growing on the job, etc. If not enough students have work experience, ask them instead what motivates them the most in school.

2. On the blackboard, list the various factors that were named by students in step one. Have students vote which factors are the most popular for the class as a whole. Make it clear to students that each is allowed to vote only once.

Tally up the votes for each factor.

3. Let students know that recent research has indicated monetary factors such as “high salary and benefits” are known as “dissatisfiers,” which means workers won’t be happy if they are not paid well. However, “money” is not a “satisfier,” that is, a motivating factor that ultimately influences an employee’s decision to stay with a firm. Research has indicated that the top “satisfiers” include good relationships with co-workers, available training opportunities, and a sense of constant learning and growing on the job.

End-of-Chapter Behind the Scenes Motivating the Minds Behind Some of the World’s Most Popular Video Games Critical Thinking Questions 10-1. Would someone who isn’t interested in video games find it motivating to work at Blizzard? Why or why not?

Answers will vary. Blizzard fosters longevity and rewards it with special presentations at 5, 10, and 20 year milestones. Healthy debate is encouraged, and disagreeing is okay. Quality work is expected and empowered by allowing employees to keep iterating and improving products until they get them right, instead of being held to preset release deadlines. Personal and professional growth is also fostered. (LO: 1, AACSB: Reflective thinking)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 10-2. Would Blizzard need to use different motivational strategies for people who work on the creative side and the business side of the company? Why or why not?

Answers will vary. Some of the strategies might seem more applicable to people on a particular side. The ability to keep iterating and improving products until they get them right would have great appeal to creative professionals who don’t want to compromise because of deadline, budget, or organizational acceptance of subpar products. Others seem to have general appeal, like offering training courses for professional and personal growth and allowing disagreement and allowing healthy debate. (LO: 1, AACSB: Reflective thinking) 10-3. How might a company that isn’t a “fun” industry use the motivational techniques Blizzard uses?

Answers will vary. The longevity awards and celebrations that Blizzard engages in, inspired by the games employees have worked on, could be tailored to the industry or culture of other industries to have a unique appeal. The training courses that are offered could be adapted to the industry, culture, or personal preferences of employees as well. (LO: 1, AACSB: Reflective thinking)

Learn More Online Visit Blizzard’s careers website, careers.blizzard.com/en-us, and its mission statement and values at us.blizzard.com/en-us/ company/about/mission.html . What impression do you get about the company from reading this material? Would you find it inspiring to work for such a company? How does it compare to other companies you have explored as you consider your next career move?

Students’ responses will vary depending on personal opinions. (LO: 1, AACSB: Reflective thinking)

Test Your Knowledge Questions for Review 10-4. What is motivation?

Motivation is the combination of forces that moves individuals to take certain actions and avoid others in pursuit of individual objectives. Motivation is a complex psychological subject, and researchers have proposed a variety of theories to help explain why humans are driven to behave in a way they do. (LO: 1) 10-5. What is expectancy theory?

Expectancy theory, considered by some experts to offer the best available explanation of employee motivation, links an employee’s efforts with the outcome he or she expects from that effort. Like equity theory, expectancy theory focuses less on the specific forces that motivate employees and more on the process they follow to seek satisfaction in their jobs. Expectancy theory expands on earlier theories in several important ways, including linking effort to performance and linking rewards to individual goals. The effort employees will put forth depends on (1) their expectations about their own ability to perform, (2) their expectations about the rewards that the organization will give in response to

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Bovee/Thill, Business in Action 9/e Instructor’s Manual that performance, and (3) the attractiveness of those rewards relative to their individual goals. (LO: 2)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 10-6. What is management by objectives?

Management by objectives (MBO) is a motivational approach in which managers and employees work together to structure personal goals and objectives for every individual, department, and project to mesh with the organizational goals. (LO: 3) 10-7. What are the core job dimensions in the job characteristics model?

The core job dimensions in the job characteristics model include skill variety, task identity, task significance, autonomy, and feedback. (LO: 4) 10-8. What are the risks of goal-setting theory?

The risks are overly narrow or overly challenging goals, inappropriate time horizons, unintentional performance limitations, missed learning opportunities, unhealthy internal competition, and decreased intrinsic motivation. (LO: 3) 10-9. What is negative reinforcement?

Negative reinforcement allows people to avoid unpleasant consequences by behaving in a particular way. It encourages behavior through the removal or absence of an unpleasant outcome and increases the likelihood that a behavior will be repeated because an unpleasant outcome is avoided when that behavior is exhibited. (LO: 5)

Questions for Analysis 10-10. Should managers apply theories of motivation that lack strong empirical proof? Why or why not?

Answers will vary. Several of the classical, widely-touted theories of motivation, like Maslow’s hierarchy and Theory X and Theory Y, lack empirical validation.

(LO: 1, AACSB: Analytical thinking) 10-12. How does the expectancy theory explain the effect of self-doubt on employee motivation?

According to the expectancy theory, self-doubt may cause an employee to believe that no amount of effort she/he is willing or able to apply to a task will result in an acceptable level of performance. She/he will be much less motivated and will likely say, “Well, why bother?” (LO: 2, AACSB: Reflective thinking) 10-12. How might a deadline that is too easy to meet cause someone to work more slowly than he or she might otherwise work?

According to the goal-setting theory, carefully designed goals can motivate employees to higher performance. On the other hand, goals that are too easy to achieve (e.g., a deadline that is too easy to meet) will not motivate an employee to a higher performance. In fact, it may cause the employee to perform worse (e.g., work more slowly) than she/he might otherwise. (LO: 3, AACSB: Analytic thinking) 10-13. Is positive reinforcement a good thing? Explain your answer.

Answers will vary. Positive reinforcement can be a useful tool, encouraging employees to repeat desired behaviors and even motivate them to perform well in other areas (chaining). However, managers must be on constant alert for unintended consequences of incentives and other reinforcement efforts. For

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Bovee/Thill, Business in Action 9/e Instructor’s Manual example, because they often focus on a single variable, incentive programs can distort performance by encouraging employees to focus on that variable to the detriment of other responsibilities. (LO: 5, AACSB: Analytical thinking) 10-14. What effect will job enhancement likely have on someone with low growth needs? Why? Job enhancement makes jobs more challenging and interesting by expanding the range of skills required; however, it may demotivate someone with low growth needs because the increased responsibility can be more a source of stress than inspiration. (LO: 4; Analytic thinking) 10-15. Why do managers often find it difficult to motivate employees who remain after downsizing? Explain your answer in terms of one or more motivational theories discussed in the chapter.

Responses will vary based upon which motivational theories students select. But the general point that will likely be raised is that many of the employees left behind feel a sense of inequity in being asked to shoulder the work of those who left, without getting paid more for the extra effort. (LO: 2, AACSB: Analytic thinking) 10-16. How can gamification improve employee motivation and performance?

Gamification involves applying game principles such as scorekeeping to various business processes. Encouraging participation in and contribution to social networks and other communities is a good example of how gamification can motivate employees and other stakeholders. Depending on the system, members can earn points, badges, and other rewards. (LO: 6) 10-17.

Ethical Considerations. Motivational strategies that reward employees for meeting specific performance targets can encourage them to work hard—sometimes too hard. Overwork can contribute to mental and physical health problems as well as interfere with other aspects of employees’ lives. As a manager, how do you determine how much work is too much for your employees?

Students’ answers will vary but the following are points of consideration.

According to goal-setting theory, setting goals that are too challenging may demotivate an employee and lead to risky behavior, belligerent negotiating tactics, and ethical lapses as employees cut corners to reach targets. A manager may want to conduct a job analysis to determine the appropriate amount of work for an employee. (LO: 3, AACSB: Ethical understanding and reasoning) 10-18. Who ultimately has responsibility for motivation, the employee or the manger? Why? Every employee has an ethical obligation to find the motivation to accomplish the tasks for which he or she is getting paid. Managers can foster motivation (and they can certainly diminish it through clumsy leader- ship), but the motivation must originate from within each employee. (LO: 6)

Questions for Application 10-19.

You manage the customer service department for an online clothing retailer. Customers tend to call or email with the same types of complaints and problems, day after day, and your employees are getting bored and

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Bovee/Thill, Business in Action 9/e Instructor’s Manual listless. Some are starting to miss more days of work than usual, and several have quit recently. A few customers have called you directly to complain about poor treatment from your staff. Use the job characteristics model to identify several ways you could improve motivation, job satisfaction, and performance.

Students’ answers will vary but they need to incorporate the job characteristics model, including possibly upgrading the job dimensions of skill variety, task identity, task significance, autonomy, and feedback in an effort to improve motivation, job satisfaction, and performance. (LO: 4, AACSB: Application of knowledge) 10-20.

How do you motivate yourself when faced with school assignments or projects that are difficult or tedious? Do you ever try to relate these tasks to your overall career goals? Are you more motivated by doing your personal best or by outperforming other students?

Students’ answers will vary depending on personal opinions. (LO: 1, AACSB: Application of knowledge) 10-21 As a manger, you’re intrigued by the job characteristics model and are looking at ways to expand and enrich jobs to make work more meaningful for your employees. Some employees hear about your investigation and start to circulate complaints about being asked to do more for the same pay. How should you respond?

Answers will vary. Job enrichment needs to be approached carefully, however.

Some employees respond well, but for others, the increased responsibility is more a source of stress than of inspiration. (LO: 4) 10-22.

Imagine yourself in one of the jobs you would like to land after graduation. Thinking about the importance of personalizing motivational tactics whenever possible, identify several steps your manager could take to make sure you stay motivated. Would these steps be fair to other employees as well?

Students’ answers will vary depending on the jobs chosen. (LO: 6, AACSB: Application of knowledge) 10-23.

Concept Integration. Chapter 7 discussed several styles of leadership, including autocratic, democratic, and laissez-faire. How do each of these styles relate to Theory X and Theory Y assumptions about workers? a. Theory X assumes that employees are irresponsible, are unambitious, and dislike work and that managers must use force, control, or threats to motivate them. Theory X is more consistent with the autocratic style of leadership, which includes leaders who do not involve others in decision-making. b. Theory Y assumes that employees enjoy meaningful work, are naturally committed to certain goals, are capable of creativity, and seek out responsibility under the right conditions. Theory Y is more consistent with democratic leaders, who delegate authority and involve employees in decision-making, as well as with laissez-faire leaders, who leave most instances of decision-making up to employees, particularly concerning dayto-day matters. (LO: 1, AACSB: Application of knowledge)

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Expand Your Knowledge Discovering Career Opportunities Careers in sales can be highly rewarding, if you have the right skills, opportunities, and incentives. Search online job postings for a sales position that is related to a career path you might want to pursue (even if you’re not interested in sales specifically). Study the job description and identify the circumstances you would need to have in place in order to get motivated to excel in this job. For example, would the opportunity to help customers solve challenging problems motivate you? Students’ response will vary depending upon the choice of position, as well as personal opinions about motivation. (LO: 1, AACSB: Reflective thinking)

Intelligent Business Technology Research one of the employee performance management solutions currently on the market. What benefits does the company promote for this system? Do any of them relate to motivation? Do you see any aspects of using the system that have the potential to demotivate employees? How does the system handle privacy and data security?

Students’ responses will vary depending on the choice of solution. (LO: 7, AACSB: Information technology)

Practice Your Skills Resolving Ethical Dilemmas You’re on a cross-functional team responsible for launching your company’s latest product. As is usually the case with product launches, it’s a stressful affair with immovable deadlines, more work than the team seems capable of handling, and dozens of “fires” that need to be put out. Fortunately, the team leader is a master at motivation, and so far the team is accomplishing the impossible. As the weeks (and late nights and weekends) roll on, though, you get the uncomfortable feeling that the leader’s motivational techniques have crossed the line from inspirational to manipulative. The “let’s do this for the team” ethos has taken on a “you’re either with us, or you’re against us” vibe, with subtle jabs at people whose family commitments prevent them from working 60 or 70 hours a week. How should you respond?

Students’ answers will vary. Managers with low emotional intelligence can create toxic work environments that demotivate even the most driven employees, so it is essential for managers to understand the effect that their behaviors and attitudes have on employees. (LO: 2-5, AACSB: Ethical understanding and reasoning)

Sharpening Your Communication Skills Choose one of the major motivation theories discussed in this chapter: expectancy, goal-setting, job characteristics, or reinforcement theory. Create a brief electronic presentation using a presentation app of your choice, explaining the theory and identifying its strengths and weaknesses as a practical management approach.

Students’ answers will vary depending on the specific motivation theory chosen.

(LO: 2–5, AACSB: Written and oral communication)

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Building Your Team Skills With your teammates, explore the careers sections of the websites of six companies in different industries. Look for descriptions of the work environment, incentive plans, career paths, and other information about how the company develops, motivates, and supports its employees. After you’ve compiled notes about each company, vote on the most appealing company to work for. Next, review the notes for this company and identify all the theories of motivation described in this chapter that the company appears to be using, based on the information on its website.

Students’ answers will vary depending on the companies they have researched. (LO: 1–6, AACSB: Analytical thinking)

Developing Your Research Skills Various periodicals and websites feature “best companies to work for” lists. Locate one of these lists and find a company that does a great job of attracting and motivating high performers. Learn as much as you can about the company’s management philosophies. Which of the motivation theories does the company appear to be using? Summarize your findings in a brief email message to your instructor.

Emails will vary depending on the specific company chosen. (LO: 1-6, AACSB: Analytical thinking)

Assisted-graded Questions 10-24. If a manager does nothing in response to a particular type of employee behavior that the company wants to encourage, is this an instance of reinforcement? Why or why not?

This could be considered a form of negative reinforcement, in the sense that employees are spared criticism or discipline when they perform this behavior.

Negative reinforcement means encouraging the repetition of a particular behavior by removing unpleasant consequences for the behavior. (LO: 2, AACSB: Information technology) 10-25. Do you have an ethical responsibility to motivate yourself at work, no matter the circumstances? Why or why not Students’ responses will vary based on personal opinions. (LO: 1, AACSB: Ethical understanding and reasoning)

CHECKPOINTS LEARNING OBJECTIVE 1: Define motivation, and identify the classical motivation theories.

Critical thinking: (1) How could a manager tap into the drive to defend as a way to help rally employees?

The manager can use the drive to defend employees, to motivate employees, to fight for what is right, and rally employees around the company’s mission or goals.

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(2) Could Herzberg’s hygiene factors help explain the significant problem of employee theft and embezzlement? Why or why not?

Yes, Herzberg’s hygiene factor can help explain significant problem of employee theft and embezzlement because hygiene factors are mostly extrinsic and include working conditions and company policies. In this case, the company may not have a company policy that is strong enough to deter behaviors such as theft and embezzlement.

It’s your business: (1) If you are a typical college student who doesn’t have much financial security but is also trying to fulfill higher-order needs such as social interaction and selfactualization through your education, would it make more sense, according to Maslow, to drop out of college and work seven days a week so you could help ensure that your physiological and safety needs are met? Why or why not?

Students’ responses will vary depending on personal opinions.

(2) Do you think today’s college students more closely match the descriptions of Theory X employees or Theory Y employees? What evidence can you provide to support your conclusion?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 2: Explain why many consider expectancy theory to be the best current explanation of employee motivation.

Critical thinking: (1) What steps could managers take to alleviate the self-doubt employees often feel when they join a company or move into a new position?

A manager can ensure that the employees have the skills they need to perform the jobs, that tasks are clearly defined, and that company policies and processes are functional. They can also provide encouragement and role models for the employees.

(2) If you were a human resources manager in a large corporation, how might you respond to employees who complain that the CEO makes 200 or 300 times more than they make?

Students’ responses will vary depending on personal opinions.

It’s your business: (1) Have you ever given less than your best effort in a college course because you didn’t believe you were capable of excelling in the course?

Students’ responses will vary depending on personal experiences.

(2) If so, was the outcome satisfying? Would you handle a similar situation the same way in the future?

Students’ responses will vary depending on personal experiences or opinions.

LEARNING OBJECTIVE 3: Identify the strengths and weaknesses of goalsetting theory.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Critical thinking: (1) Why is collaboration between employee and manager essential to goal setting in MBO? Collaboration between employee and manager is essential to goal setting in MBO because jointly setting clear and challenging but achievable goals can encourage employees to reach higher levels of performance.

(2) How can overly narrow goals and overly challenging goals contribute to ethical lapses?

Overly narrow goals and overly challenging goals can contribute to ethical lapses because overly narrow goals and overly challenging goals will encourage employees to either miss vital aspects of the bigger picture or lead to risky behaviors, both of which contribute to ethical lapses.

It’s your business: (1) Do goals motivate you? Why or why not?

Students’ responses will vary depending on personal opinions.

(2) Does the motivation depend on whether the goals are your own or imposed by someone else?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 4: Describe the job characteristics model, and explain how it helps predict motivation and performance.

Critical thinking: (1) Can the job characteristics model be used to motivate employees in such positions as janitors or security guards in a factory? How? Yes, employees such as janitors or security guards can be motivated in this case by emphasizing the important job characteristics such as task significance, autonomy, and feedback.

(2) Is modifying the five core job dimensions likely to motivate employees who have low growth needs? Why or why not?

Probably not since employees with low growth needs have little intrinsic need to grow and can be among the most difficult to motivate, no matter what steps managers take.

It’s your business: (1) Has the requirement of working in teams ever lowered your motivation or satisfaction on a school project? If so, how does the job characteristics model explain this?

Students’ responses will vary depending on personal experiences or opinions.

(2) How does taking elective courses improve your experience of meaningfulness in your college “work?”

Students’ responses will vary depending on personal opinions.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual LEARNING OBJECTIVE 5: Define reinforcement theory, and differentiate between positive and negative reinforcement.

Critical thinking: (1) Is demoting an employee for failing to finish a project an attempt at negative reinforcement or punishment? Why? It is punishment. While punishment decreases the likelihood that a particular behavior will be repeated, negative reinforcement increases the likelihood that a behavior will be repeated because an unpleasant outcome is avoided when that behavior is exhibited.

(2) In what ways is reinforcement theory similar to goal-setting theory?

Students’ answers may vary depending on personal opinions but points to consider include that both have the intention of motivating employees to a higher performance either through setting goals or through behavior modification.

It’s your business: (1) How does your instructor in this course use positive reinforcement to motivate students to higher levels of performance?

Students’ responses will vary depending on personal experiences.

(2) If you study diligently to avoid being embarrassed when a professor calls on you in class, is this positive or negative reinforcement in action? Why? It should be negative reinforcement in action since a positive behavior is repeated because an unpleasant outcome is avoided.

LEARNING OBJECTIVE 6: List five managerial strategies that are vital to maintaining a motivated workforce.

Critical thinking: (1) Referring to the job characteristics model, how does micromanaging destroy motivation?

The job characteristics model states that “autonomy” is one of the five key job characteristics that helps motivate an employee. Micromanaging refuses to give an employee the freedom or autonomy to perform her job and therefore destroys motivation.

(2) Annual performance reviews are common in many companies; how might this tactic fail to motivate employees?

It may fail to motivate employees because giving feedback once a year is not timely and frequent enough.

It’s your business: (1) If you are motivated more by the love of learning than the promised rewards of a grade, how can you motivate yourself when grades play a key role in your success as others perceive it?

Students’ responses will vary depending on personal opinions.

(2) At work or in academic situations, how do you prevent someone else’s negative attitude and behavior from dragging down your own performance?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Students’ responses will vary depending on personal experiences.

LEARNING OBJECTIVE 7: Discuss the potential strengths and weaknesses of performance management systems.

Critical thinking: (1) How could a performance management system help mangers avoid recency bias in employee evaluations?

By capturing goals and logging measured performance as work progresses, a performance management system could avoid the human biases like recency bias.

(2) Can a performance management system completely eradicate biases from performance evaluations? Explain your answer.

No. In any system, whether it’s entirely manual or fully automated and AI enhanced, there is the never-ending challenge of measuring what is meaningful, not just what is easy to measure.

It’s your business: (1) Would you take a job at a company knowing that it will use workplace analytics to monitor how you use your computer and mobile devices? Why or why not?

Students’ responses will vary depending on personal opinions.

(2) Would you welcome or resist the use of a goal-setting and tracking system? Why? Students’ responses will vary depending on personal experiences and opinions.

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Chapter 11 HUMAN RESOURCES MANAGEMENT Chapter Overview This chapter examines the critical business function of human resources management. It highlights the challenges that firms face in today’s workplace and discusses employment trends such as diversity and alternative work arrangements. It then describes important HR practices such as recruiting, hiring, and training. It also explains different types of employee compensations and benefits. The role of labor unions in today’s business world is discussed. Finally, there is a discussion of workforce analytics in HR management.

Chapter Outline I.

Guiding the Human Side of Business A. Human resources (HR) management is the specialized function of planning how to obtain employees, oversee their training, evaluate them, and compensate them B. Contemporary staffing challenges include: 1. Aligning the workforce with organizational needs 2. Creating safe workplaces—physical as well as psychological safety a. Sexual harassment—unwelcome sexual advances, requests for sexual favors, or other verbal or physical conduct of a sexual nature within the workplace 3. Ensuring fair treatment and equal opportunity a. Fairness in recruiting b. Fairness in employee development c. Transparent and inclusive networking opportunities d. Fairness in project assignments and promotion opportunities: glass ceiling—an invisible barrier attributable to subtle discrimination that keeps women and minorities out of top positions in an organization e. Fairness in compensation 4. Promoting employee well-being by managing work-life balance— efforts to help employees balance the competing demands of their personal and professional lives a. HR attempts to improve quality of work life (QWL)—the overall environment that results from job and work conditions C. The evolving role of HR 1. Tactical administrative function versus strategic acquisition of talent 2. Battle of loyalties between employees and management 3. Legal compliance, performance evaluations, and surveillance tasks

II. Managing a Diverse Workforce A. Diversity includes all the characteristics and experiences that define people as individuals

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Bovee/Thill, Business in Action 9/e Instructor’s Manual B. Diversity in the workforce presents managerial challenges, and some of the most important diversity issues today include: 1. Age—cultural assumptions about age and seniority as well as different values, expectations, and communication habits among generations 2. Gender—There are several significant issues to be addressed by HR, including: a. Sexism—discrimination on the basis of gender b. Outdated concepts of gender and sexual orientation 3. Race and ethnicity 4. Religion 5. Ability—addressing ways in which individuals with disabilities can function effectively in the job C. Many companies are establishing diversity and inclusion initiatives— programs and policies that help companies support diverse workforces and markets III. Managing the Employment Life Cycle A. Human resource planning requires a lot of work. Many companies rely on workforce analytics, a computer-based statistical approach to analyzing and planning for workforce needs. Steps in human resource planning include: 1. Evaluating job requirements through the process of job analysis.

Through job analysis, HR develops: a. A job description, a formal statement summarizing work tasks and the conditions under which the employee will work b. A job specification, a statement describing the type of personnel the job requires, including skills, education, experience, and personal attributes 2. HR must also forecast the numbers and types of employees who will be needed at different times a. An important factor in forecasting is turnover rate—the percentage of the workforce that leaves every year b. HR must also work with top executives to identify potential replacements for specific employees such as senior executives. This process is known as succession planning c. To ensure an adequate supply of experienced employees, HR focuses on employee retention—efforts to keep current employees d. If existing employees are not available, HR can look outside the company for people to join the company as either permanent employees or contingent employees—nonpermanent employees such as temporary workers, independent contractors, and full-time employees hired on a probationary basis B. To meet the needs and demands of a diverse workforce, HR can adopt alternative work arrangements, including: 1. Flextime—scheduling that allows employees to choose their own work hours within certain limits 2. Telecommuting—working offsite using electronic communications 3. Job sharing—an alternative work arrangement that allows two people to share a single full-time job 4. Situations in which employees want to limit work time or leave workforce entirely for a period of time, to raise children, attend school, or pursue other personal interests

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Bovee/Thill, Business in Action 9/e Instructor’s Manual C. The employment life cycle is comprised of three stages: 1. Hiring employees—The first stage is recruiting, the process of attracting suitable applicants for an organization’s jobs 2. Managing employee retirement a. The Age Discrimination in Employment Act (ADEA) outlaws mandatory retirement (required dismissal of an employee who reaches a certain age) unless an employer can demonstrate that age is a valid qualification b. A company can also induce employees to leave by offering them early retirement, using severance packages or buyouts—financial incentives to employees who voluntarily depart 3. Terminating employment—the process of getting rid of an employee.

This usually assumes one of two forms: a. Layoffs are the termination of employees for economic or business reasons unrelated to employee performance b. Firing employees—dismissing an employee for performance-related reasons IV. Developing and Evaluating Employees A. The effort to develop and evaluate employees includes providing performance appraisals, managing training and development programs, and promoting and reassigning employees B. To evaluate and improve employee performance, managers use performance reviews—periodic evaluations of employees’ work according to specific criteria 1. A multidimensional review in which an employee receives feedback from his/her supervisor as well as subordinates, peers, and outside stakeholders such as customers is known as a 360-degree review C. HR is also responsible for employee training and development 1. Training usually begins with new-employee orientation—training designed to acclimate new employees to the organization 2. Many companies also have more comprehensive onboarding programs, which may extend for several months and help new employees get comfortable and productive in their assigned roles 2. Other forms of training should continue throughout the employee’s career, and to determine what training is needed, an HR department may maintain a skills inventory—a list of the skills a company needs along with the specific skills that individual employees currently possess D. As employees grow and develop, promotion and/or reassessment may be needed 1. A company may adopt a “promote from within” policy to try and fill positions internally before seeking applicants outside the company 2. It may also become necessary to reassign employees if an individual is given a job beyond his/her competence or the job changes and the employee no longer possesses the needed skill set V. Administering Employee Compensation A. One of HR’s most significant responsibilities is administering employee compensation—the combination of direct payments such as wages and salary and indirect payments such as employee benefits B. There are two kinds of monetary compensation

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 1. Salary—fixed cash compensation for work, independent of the number of hours worked 2. Wages—cash payments based on the number of hours an employee has worked or the number of units an employee has produced C. Companies can also provide managers and employees with incentives to encourage productivity, innovation, and commitment to work, including: 1. Bonus—a payment in addition to the regular wage or salary that serves as a reward for achievement 2. Commissions—a form of compensation based on a percentage of sales made 3. Profit sharing—a system in which a portion of the company’s profits are distributed to employees 4. Gain sharing—a system that ties rewards to profits or cost savings achieved by meeting specific goals 5. Pay for performance—an incentive program that requires employees to accept a lower base pay but rewards them with bonuses, commissions, or stock options if they reach agreed-on goals 6. Knowledge-based pay—a system in which pay is tied to an employee’s acquisition of knowledge or skills D. Employee benefits are compensation other than wages, salaries, and incentive programs 1. Insurance—life, health, dental, vision, disability, and long-term care insurance 2. Retirement plans—company-sponsored programs for providing retirees with income, may include: a. Pension plans—traditional, defined-benefit retirement plans in which an employer specifies how much they will pay employees upon retirement b. 401(k) plan—a defined-contribution retirement plan in which employers often match a percentage of the amount employees invest in the plan c. Employee stock-ownership plan (ESOP)—a program in which a company places stock in trust, with each eligible employee entitled to a certain portion 3. Stock options grant employees the right to purchase a set number of shares of the employer’s stock at a specified price called the grant or exercise price within a certain period of time 4. Other benefits a. Paid vacation and sick leave b. Family and medical leave—companies with 50 or more employees are also required to provide up to 12 weeks of unpaid leave per year in accordance with the guidelines of the Family Medical Leave Act (FMLA) c. Child-care assistance d. Elder-care assistance e. Tuition loans and reimbursements f. Employee assistance programs (EAPs), which offer private and confidential counseling to employees with personal problems VI. The Role of Labor Unions

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Bovee/Thill, Business in Action 9/e Instructor’s Manual A. Labor relations is the relationship between organized labor and management B. Labor unions are organizations that represent employees in negotiations with management C. The effects of unionization from an employee’s perspective include: 1. Higher compensation—union employees earn more than nonunion workers 2. Greater benefits—union employees receive greater employee benefits than nonunion workers 3. Influence over hiring, promotions, and layoffs—union contracts have specific provisions about hiring, promotion, and layoffs, especially with respect to seniority—the length of time a person has worked for his/her current employer 4. Working conditions and workplace safety 5. Formal processes for employee grievances, discipline, and other matters 6. Solidarity and recognition D. The effects of unionization from an employer’s perspective include: 1. Direct costs in terms of wages and employee benefits are increased 2. Union contracts often include work rules that specify such things as the tasks employees are required to do or are forbidden to do 3. Mixed results in terms of productivity E. The future of organized labor 1. Union membership has decreased over the last several decades and membership in the U.S. is now at only 6.5% of private sector workers 2. Unions have had notable success working to raise the minimum wage in several large cities to $15 per hour, twice the federal minimum wage VI. Thriving in the Digital Enterprise: Workforce Analytics A. Workforce analytics, also called people analytics, applies the tools of big data and analytics across the full scope of HR management, from recruiting and hiring to training and development to compensation and employee benefits B. These systems are designed to give HR leaders answers to questions like: 1. Are we attracting the kind of talent we need to meet our business objectives?

2. What are out most productive channels for finding new employees?

3. Which candidates are most likely to respond to our recruiting efforts?

4. Are we at risk of losing our existing talent?

5. Are we compensating employees fairly and objectively?

6. How well does our current talent pool align with future business needs?

C. These insights are a combination of performance measurements and predictive analytics that help managers make better decisions, in some cases overcoming explicit and implicit bias in hiring, compensation, and promotion opportunities D. Data driven HR has helped Google shorten its notoriously lengthy interview process and widen its recruiting focus beyond prestigious private universities Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class

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Bovee/Thill, Business in Action 9/e Instructor’s Manual with real-time diagnostics. Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it. For more information on using Learning Catalytics in your course, contact your Pearson Representative.

Classroom Activities In-class activity: Job Description versus Job Specification Goal: Show students a real-life example of a job advertisement and have them identify the portions of the ad that correspond to job description and job specification.

Time Limit: 15 minutes.

Details: 1. Ask students to name their favorite company in the world (e.g., Google, Apple, BMW, Costco, and so on) and then have the class vote to determine the most popular company for the class. (5 minutes) 2. Go to the company’s Web page (e.g., using a laptop with Internet connection and a projector). On the company’s website, find a job advertisement, which may be located in most cases by clicking on the link “careers.” (If it is not possible to do Internet search real time in the classroom, have students conduct research before the class period and bring the job ads to school). (5 minutes) 3. Ask students to identify which portion of the job ad is considered job description and which portion of the ad is considered job specification.

Remind students that job descriptions typically include the duties and responsibilities of the job, while job specifications typically entail the qualifications (education, experience, etc.) the job requires. (5 minutes)

End-of-Chapter Behind the Scenes Aligning a Workforce with a Diverse Customer Base Critical Thinking Questions 11-1. In addition to its employment-related awards, Kaiser Permanente has also received dozens of awards for the quality of the health care it provides to clients. What are the implications of such recognition on the quality of work life at the company?

Being recognized for the quality of the health care it provides would suggest that the quality of work life at the company is high, as it enables the company to attract and retain a top-flight workforce. (LO: 1, AACSB: Analytical thinking) 11-2. Would health-care professionals require a different level or different type of support from their employers than professionals in other industries? Why or why not?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Students’ responses will vary. Health care professionals deal with sensitive, highpressure situations. This might increase the risk of employee burnout and could make work-life balance all the more important. (LO: 1, AACSB: Analytical thinking) 11-3. What is the significance of Kaiser Permanente being recognized for having one of the best employee wellness programs in the nation?

Students’ responses will vary. Having a well-regarded wellness program shows that Kaiser practices what it preaches, taking the well-being of its employees as seriously as its employees take the well-being of their patients. (LO: 1, AACSB: Analytical thinking)

Learn More Online Visit www.kaiserpermanentejobs.org and read about working at Kaiser Permanente. What impression do you get of the company? In what ways does the company support its employees? How does Kaiser Permanente compare to other employers that you might be considering?

Students’ responses will depend on the material currently posted on the website, as well as students’ experiences and opinions. (LO: 1, AACSB: Reflective thinking)

Test Your Knowledge Questions for Review 11-4.

What do human resources managers do?

Human Resources managers oversee activities of employees including: training, development, motivation, evaluation, and compensation. (LO: 1) 11-5.

What are some strategic staffing alternatives that organizations use to avoid overstaffing and understaffing?

To avoid overstaffing and understaffing, organizations are hiring more part-time employees, using temporary staffing services, outsourcing tasks to other organizations, and offering flextime, telecommuting, and job sharing. (LO: 3)

11-6.

What is the purpose of conducting a job analysis? What are some of the techniques used for gathering information?

Job analysis provides a formal and objective method of evaluating job requirements. The information-gathering techniques include interviewing employees, monitoring or observing employee activities, and having employees keep diaries of work activities. (LO: 3)

11-7. How do defined benefit plans differ from defined contribution plans?

Defined benefit plans are retirement plans in which companies specify how much they will pay employees upon retirement. Defined contribution plans are those in which companies specify how much they will put into the retirement fund, without guaranteeing any specific payouts during retirement. (LO: 5) 11-8. What is the glass ceiling?

The glass ceiling is an invisible barrier attributable to subtle discrimination that keeps women and minorities out of the top positions in business. The implication

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Bovee/Thill, Business in Action 9/e Instructor’s Manual is that women and minorities can see the top but can’t get there. (LO: 1, AACSB: Diverse and multicultural work environments) 11-9. Why have some companies replaced the annual performance review with other feedback mechanisms?

Writing these reports consumes a lot of management’s time, the long gaps between evaluations can result in employees drifting far off course before getting corrective input, and ranked evaluations can foster an unhealthy atmosphere of competition in the workplace. (LO: 4) 11-10. What is workforce analytics?

Workforce analytics applies the tools of big data and analytics across the full scope of HR management, from recruiting and hiring to training and development to compensation and employee benefits. (LO: 7, AACSB: Information technology)

Questions for Analysis 11-11. What does it mean to align a workforce with a company’s business objectives?

Keeping workforces in alignment with business needs is no easy task. HR managers must focus in three areas simultaneously: retaining the firm’s existing talent, reskilling current employees whose skill sets no longer align with job requirements, and attracting a continuing stream of new talent to fill newly created positions or to replace employees who leave. (LO: 1) 11-12. Why is it important that all employees have access to the same networking opportunities with senior management?

Informal connections among people at various levels in the company hierarchy and interactions that take place outside the regular course of business can unfairly advantage some employees and disadvantage others. A lack of “face time” with the managers could affect these employees’ career development. (LO: 1) 11-13. How do incentive programs encourage employees to be more productive, innovative, and committed to their work?

Incentive programs link the achievements and productivity of an employee with his or her earnings. By making this link direct, employees can feel in control of their income and are motivated to improve not only their own performance but also the performance of the company overall. Moreover, because employers show employees that their efforts will be rewarded, employees feel good about their jobs and are valued as employees creating a bond between company and employee. (LO: 5, AACSB: Analytic thinking) 11-14. Why do some employers offer comprehensive benefits even though the costs of doing so have risen significantly in recent years?

Even though the costs of providing employee benefits are on the rise, so are the costs of recruiting, hiring, and training employees in today’s tight labor market.

As a result, some employers have found that it actually costs them less to retain current employees by offering comprehensive benefits. (LO: 5, AACSB: Analytic thinking)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 11-15. Are clear diversity and inclusion policies sufficient to ensure a supportive and inclusive workplace? Explain.

For these initiatives to have meaningful impact, they must be integrated in a company’s strategic planning, decision-making, and employee development efforts. In particular, the idea of inclusion needs to be active—whether that is helping military veterans make the transition to civilian work or recruiting employees from a broader range of socioeconomic segments. In addition to taking positive steps, companies may also need to identify and overcome destructive attitudes and behaviors and resistance to equal opportunity and fair treatment. Holding managers and executives accountable with diversity-related performance metrics help ensure that company values will be practiced and not just preached. (LO: 2, AACSB: Diverse and multicultural work environments) 11-16. Why would a company spend money on an employee assistance program?

Doing so could help avoid or mitigate issues for employees that could negatively impact their work. Such a show of concern for its employees could also help retain high-quality employees. (LO: 2) 11-17. Why would companies include vesting criteria in their 401(k) retirement plans?

Including vesting criteria in a 401(k) plan could help with employee retention.

Employees may be less likely to leave a company if doing so before they have vested, means they will lose matching funds for which they were eligible. (LO: 5) 11-18. Why is it in a company’s best interests to break down the glass ceiling?

It is good business for companies to remove barriers to women and other minorities, as diversity can be a competitive advantage in a diverse marketplace.

Executives representing particular groups may have better insight into understanding and meeting their needs. Also, in a world where it is increasingly harder to find and retain top talent, it makes the most sense to look for and employ the best people, regardless of gender, religion, ethnicity, etc. (LO: 1, AACSB: Diverse and multicultural work environments) 11-19. Ethical Considerations. Corporate headhunters have been known to raid other companies of their top talent to fill vacant or new positions for their clients. Is it ethical to contact the CEO of one company and lure him or her to join the management team of another company?

Students’ answers will vary but should reflect ethical checks and verify educational credentials. (LO: 3, AACSB: Ethical understanding and reasoning)

Questions for Application 11-20. Assume you are the manager of human resources at a manufacturing company that employs about 500 people. A recent cyclical downturn in your industry has led to financial losses, and top management is talking about laying off workers. Several supervisors have come to you with creative ways of keeping employees on the payroll, such as exchanging workers with other local companies. Why might you want to consider this option? What other options exist besides layoffs?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Adopting a no-layoff policy makes sense for a number of reasons. The first is that the layoffs will likely damage company morale, which can lead to lower quality and lost sales. A second reason is that the company may need to hire more employees when business picks up again. Although you may be able to rehire some laid-off employees, you will also incur the financial and time costs associated with recruiting and training completely new employees. A third reason is that finding ways to keep the employees will earn their loyalty and respect, which can translate into increased productivity, greater innovation, and lower costs in the long run. (LO: 3, AACSB: Application of knowledge) 11-21. When you begin interviewing as you approach graduation, you will need to analyze job offers that include a number of financial and nonfinancial elements. Which of these aspects of employment are your top three priorities: a good base wage, bonus or commission opportunities, profit-sharing potential, rapid advancement opportunities, flexible work arrangements, good health-care insurance coverage, or a strong retirement program? Which of these elements would you be willing to forego in order to get your top three?

Students’ answers will vary depending on personal preferences. (LO: 5, AACSB: Reflective thinking) 11-22. What steps could you take as the owner of a small software company to foster “temporary loyalty” from the independent programmers you frequently hire for short durations (one to six months)?

Students’ answers will vary but possible considerations include personalized orientation and other training programs that will make independent programmers feel more like permanent employees, as well as incentive programs such as performance based bonuses and/or profit sharing which encourage programmers to do well while employed with the firm. (LO: 3, AACSB: Application of knowledge) 11-23.

Concept Integration. Of the five levels in Maslow’s hierarchy of needs, which is satisfied by offering salary? By offering healthcare benefits?

By offering training opportunities? By developing flexible job descriptions?

Salaries and healthcare benefits satisfy only the first level of Maslow’s hierarchy of needs, survival. Training opportunities and flexible job descriptions offer challenges to employees which satisfy the highest level of need, self-fulfillment.

(LO: 1, 5, AACSB: Application of knowledge)

Expand Your Knowledge Discovering Career Opportunities If you pursue a career in human resources, you’ll be deeply involved in helping organizations find, select, train, evaluate, and retain employees. You have to like people and be a good communicator to succeed in HR. Is this field for you? Find ads seeking applicants for positions in the field of human resources and then answer the following questions.

11-24. What educational qualifications, technical knowledge, or specialized skills are applicants for these jobs expected to have? How do these requirements fit with your background and educational plans?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Answers will vary according to students’ choices. (LO: 3, AACSB: Reflective thinking) 11-25. Next, look at the duties mentioned in the ad for each job. What do you think you would be doing on an average day in these jobs? Does the work in each job sound interesting and challenging?

Answers will vary according to students’ choices. (LO: 3, AACSB: Reflective thinking) 11-26. Now think about how you might fit into one of these positions. Do you prefer to work alone, or do you enjoy teamwork? How much paperwork are you willing to do? Do you communicate better in person, on paper, or by phone? Considering your answers to these questions, which of the HR jobs seems to be the closest match for your personal style?

Answers will vary according to students’ choices. (LO: 3, AACSB: Reflective thinking)

Intelligent Business Technology To minimize the potential for biased decision-making early in the recruiting process, some companies now use blind auditions or blind assessments, in which they evaluate candidates’ basic skill sets before knowing anything about their age, gender, education, or personal history. Research one of the systems or methods now in use and write a brief summary of its capabilities, benefits, and limitations.

Students’ responses will vary depending on their choices system/method. (LO: 1, AACSB: Information technology)

Practice Your Skills Resolving Ethical Dilemmas You’re facing one of the toughest decisions a manager ever needs to make: laying off part of your workforce after a downturn in business. Your company’s workforce analytics system is a big help because it ranks employees by measured performance, so you can see which employees it would be best to let go based on their low performance rankings. You need to lay off ten employees, and the system has identified nine of them for you. For the last unlucky slot, you have two employees to choose from. They have identical performance rankings, and you need to choose.

You know from personal conversations that one of these employees is in a worse financial situation than the other. Decide which employee you will choose and be prepared to support your decision.

Students’ responses will vary depending on their choices system/method. (LO: 7, AACSB: Ethical understanding and reasoning)

Sharpening Your Communication Skills Public companies occasionally need to issue news releases to announce or explain downturns in sales, profits, demand, or other business factors. Search the Web to locate a company that has issued a press release that recently reported lower earnings or other bad news and access the news release on the firm’s website. You can also search for press releases at www.prnewswire.com or www.businesswire.com. How

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Bovee/Thill, Business in Action 9/e Instructor’s Manual does the headline relate to the main message of the release? Does the company come right out and deliver the bad news or build up to it by explaining the circumstances behind it first? What does the company do to present the bad news in a favorable light, if applicable—and does this effort seem sincere and ethical to you? In a brief message to your instructor, give your assessment of how well the press release conveys the bad news without being overly negative or falsely positive.

Students’ answers will vary depending on the press releases selected. (LO: 3, AACSB: Written and oral communication)

Building Your Team Skills Team up with a classmate to practice your responses to interview questions. You can find many lists of these online. Take turns posing and responding to those questions.

Which questions did you find most difficult to answer? What insights did you gain about your strengths and weaknesses by answering those questions? Why is it a good idea to rehearse your answers before going to an interview?

Students’ answers will vary. However, remind students that interviews are an important part of the hiring process. Ask them to consider the value of such questions to employers in gaining knowledge about potential employees. (LO: 3, AACSB: Written and oral communication)

Developing Your Research Skills Locate one or more articles in business journals or newspapers that illustrate how a company or an industry is adapting to changes in its workforce. (Examples include retraining, literacy or basic-skills training, flexible benefits, and benefits aimed at working parents or people who care for aging relatives.)

11-27. What changes in the workforce or employee needs caused the company to adapt? What did the company do to respond to these changes? Was the company’s response voluntary or legally mandated?

Answers will vary according to students’ choices. However, changes in the workforce discussed in chapter 9 should be included in any discussion along with any other factors directly related to articles. For example, students should be reminded of the growing number of women in the workforce, as well as the rise in the average age of workers as baby boomers age. (LO: 2, AACSB: Diverse and multicultural work environments) 11-28. Is the company alone in facing these changes, or is the entire industry trying to adapt? What are other companies in the industry doing to adapt to the changes?

While individual articles will reflect specific circumstances, students should cite some constants in their discussion of changing workforces. For example, the need for skilled workers continues to grow at a rapid pace, while the need for unskilled workers is declining. As jobs are replaced by technology and companies continue to use team approaches to management, the face of American companies will become radically different. (LO: 2, AACSB: Analytical thinking)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 11-29. What other changes in the workforce or in employee needs do you think this company is likely to face in the next few years? Why? Students’ answers will vary. However, be sure that students draw from their own experiences in the workforce and the trends in companies discussed in this text.

For example, remind students that as companies become more horizontal, less management is required, or that as we continue to create a global market, the forces of competition, customer demand, and rate of change will escalate. (LO: 3, AACSB: Analytical thinking)

Assisted-graded Questions 11-30. How is management likely to change as companies increasingly use contingent workers over full-time employees?

Contingent workers generally do not receive benefits like insurance or healthcare, paid sick days, vacation days, etc. In addition to the cost savings associated with the lack of these benefits, there will be less work for the HR department in coordinating these benefits. However, challenges exist in finding these employees when the need arises and having them produce at the needed quality level. This can be more difficult with workers who have little or no training and/or experience in how a particular company does things. Also, there is an issue of instilling motivation and loyalty in employees who are only looking at a short-term relationship and who do not have a real vested commitment to the company or in its success. (LO: 3, AACSB: Analytical thinking) 11-31. What are some of the ways that pay-for-performance schemes could backfire if a company doesn’t set them up carefully or effectively manage the factors that affect employee performance?

To be successful, this method needs to be complemented with effective feedback systems that let employees know how they are performing throughout the year. If employees are not provided with timely, consistent feedback, and this prevents them from reaching their performance goals, they may be disappointed and even angry. (LO: 5, AACSB: Reflective thinking)

CHECKPOINTS LEARNING OBJECTIVE 1: Identify four contemporary human resources (HR) challenges, and discuss the evolving role of HR. Critical thinking: (1) How can alternative work arrangements also help companies reduce costs and their impact on the environment?

Alternative work arrangements can help companies reduce costs by reducing their energy costs (e.g., via telecommuting) and by reducing attrition rates (e.g., via job sharing). They can also reduce companies’ impact on the environment by reducing the number of employees who commute, avoiding the air pollution that would have resulted.

(2) How can digital communication and mobile connectivity contribute to employee burnout?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Digital communication and mobile connectivity allow employees to be plugged in 24/7, which makes it difficult for them to separate work life from personal life and create a feeling that work never ends. Such feelings will likely contribute to workrelated stress and contribute to employee burnout.

It’s your business: (1) Have you ever had the need to approach HR for help in a work situation? If so, how satisfied were you with the outcome?

Students’ answers will vary depending on personal experiences.

(2) Given the importance of engaged talent and enlightened leadership in business today, does working in HR appeal to you? Why or why not?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 2: Discuss the challenges and advantages of a diverse workforce, and identify five major dimensions of workforce diversity.

Critical thinking: (1) How could a company benefit by investing in assistive technologies for its workers?

By investing in assistive technologies for its workers, a company can create a vital link for employees with disabilities, giving them opportunities to pursue a greater range of career paths and giving the company access to a broader base of talent.

(2) How might socioeconomic diversity in a company’s workforce create both challenges and opportunities for the company?

Socioeconomic diversity in a company’s workforce might create challenges for the company because supervisors may face the challenge of communicating with employees who have different socioeconomic backgrounds from their own, motivating them, and fostering cooperation and harmony among them. Teams within the company also face the challenges of having employees with different socioeconomic background working together closely. Such socioeconomic diversity might also create opportunities for the company in that the company might benefit from a socioeconomically diverse workforce that offers a broad spectrum of viewpoints and ideas, helps the company better understand and identify with diverse markets (i.e., customers of various socioeconomic backgrounds), and enables the company to benefit from a wider range of employee talents.

It’s your business: (1) What general opinions do you have of the generation that is older than you and the generation that is younger than you? What experiences and observations shaped these opinions?

Students’ answers will vary depending on personal opinions.

(2) Do you believe that any aspect of your background or heritage has held you back in any way in college or at work? Why? Students’ answers will vary depending on personal opinions.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual LEARNING OBJECTIVE 3: Describe the three phases involved in managing the employment life cycle.

Critical thinking: (1) Why would a company spend money on outplacement counseling and other services for laid-off employees?

A company would spend money on outplacement counseling and other services for laidoff employees to help ease the pain of layoffs as well as to minimize the chances of wrongful discharge lawsuits.

(2) Why would a company spend money to induce retirement-age employees to stay on board for a while, rather than simply hiring younger employees to take their place?

A company induces retirement-age employees to stay rather than hiring young employees because in this case, it may be cheaper to spend money to induce retirement-age employees to stay on board for a while rather than to hire young employees and to train them and bring them up-to-speed.

It’s your business: (1) What impression would a potential employer get from studying your current online presence?

Students’ answers will vary depending on personal situations.

(2) Many companies now use online and AI-assisted interviewing tools to screen and evaluate employees. How do you feel about presenting yourself and your qualifications to potential employers through this sort of digital intermediation?

Students’ answers will vary depending on personal experiences and opinions.

LEARNING OBJECTIVE 4: Explain the steps used to develop and evaluate employees.

Critical thinking: (1) How can employers balance the need to provide objective appraisals that can be compared across the company’s entire workforce with the desire to evaluate each employee on an individual basis?

Employers can balance such need and desire by using a standard company performance appraisal form to ensure objectivity and consistency across the entire organization or by providing individualized evaluation through multidimensional reviews such as the 360-degree review of each employee and through using technologies such as electronic performance monitoring.

(2) Beyond increasing their skill and knowledge levels, how can training improve employees’ motivation and job satisfaction? (Review Chapter 10 if you need to.)

Training can improve employees’ motivation and job satisfaction by giving them a sense that they are constantly learning and growing on the job. That propels them towards the highest levels of Maslow’s Hierarchy of Needs, namely “esteem” and “self-actualization.”

It’s your business:

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Bovee/Thill, Business in Action 9/e Instructor’s Manual (1) Have you ever had a performance appraisal that you felt was inaccurate or unfair?

How would you change the process as a result?

Students’ answers will vary depending on personal experiences.

(2) Do the methods your college or university uses to evaluate your performance as a student to accurately reflect your progress? What changes would you make to the evaluation process?

Students’ answers will vary depending on personal experiences at their colleges or universities.

LEARNING OBJECTIVE 5: Describe the major elements of employee compensation, benefits, and support services.

Critical thinking: (1) What are some potential risks or limitations of performance-based pay systems?

Some potential risks or limitations may be (A) incentives are not closely linked to actions within employees’ control and (B) incentives are not complemented with effective feedback systems to let employees know how they are performing throughout the performance measurement period.

(2) How does equity theory (see Chapter 10) explain the anger some employees feel about the compensation packages their company CEOs receive?

Equity theory suggests that employee satisfaction depends on the perceived ratio of inputs to outputs. If an employee works side by side with a CEO, working for the same company and giving similar amount of effort, only to learn that the CEO earns significantly more money, he/she would not be satisfied in his/her work and will not be motivated to continue working hard. The employee may perceive a state of inequity and will not be happy with the situation.

It’s your business: (1) If you worked for a large corporation, would a profit-sharing plan motivate you?

Why or why not?

Students’ answers will vary depending on personal experiences.

(2) What questions would you ask before you accept a sales position in which most of your compensation would be based on commissions, rather than base salary?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 6: Characterize the role of labor unions in today’s business world.

Critical thinking: (1) Why is it so difficult to come up with a single conclusive answer about the effects of unionization on business productivity?

In a review of 73 studies on unionization, researchers found 45 studies that showed a positive effect of unions on productivity and 28 studies that showed negative effect.

The same analysis suggests that unions have had a net negative effect on productivity in the UK and Japan but a net positive effect on productivity in the U.S. (2) How do labor relations demonstrate the stresses inherent in the stakeholder model?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Labor relations involve managers and employees, two of the major stakeholders for businesses. They have conflicting interests and goals, in that managers want to reduce labor costs to maximize profitability, while employees and unions want to maximize the income and benefits of employees. Such conflicts are consistent with the stresses inherent in the stakeholder model.

It’s your business: (1) Union supporters often talk about the need for greater democracy in the workplace. Explain why you agree or disagree with this sentiment.

Students’ positions and explanations will vary depending on personal opinions.

(2) Would you rather be promoted on the basis of seniority or of merit? Why? Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 7: Describe the use of workforce analytics in HR management.

Critical thinking: (1) Attributes such as grit, creativity, and character play a big role in employee performance. How might companies measure such attributes?

In order to measure such characteristics, a company would have to associate some quantifiable outcome with it.

(2) Can workforce analytics tools give managers a full picture of employee performance? Why or why not?

Answers will vary. Workforce analytic tools can measure quantifiable outcomes but might not be able to capture intangibles.

It’s your business: (1) If you are interviewing at a company that places a lot of weight on grades and where you went to college, but you don’t meet those criteria particularly well, what steps could you take to make a positive impression?

Students’ answers will vary depending on personal experiences and opinions.

(2) If you don’t fit the “template” that a particular company has a reputation of using to select employees, would you bother applying for work there? Why or why not?

Students’ answers will vary depending on personal opinions.

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Chapter 12 THE ART AND SCIENCE OF MARKETING Chapter Overview This chapter introduces the dynamic business functional area of marketing. It defines marketing and discusses how firms use market research to learn more about their customers’ needs and wants. It then outlines the major steps in the strategic marketing planning process and highlights the various market segmentation techniques. It introduces the next two chapters by identifying the four elements of a firm’s marketing mix. Lastly, it defines marketing analytics and characterizes its use in contemporary marketing.

Chapter Outline I.

Marketing in a Changing World A. Marketing is the process of creating value for and building relationships with customers in order to capture value back from them B. Marketing applies to goods and services, as well as not-for-profit organizations, places, people and causes 1. Place marketing describes efforts to attract people and organizations to a particular geographic area 2. Cause-related marketing promotes a cause or social issue to selected target markets C. Marketing helps people satisfy needs and wants 1. Needs are the differences between a person’s actual state and his desired state 2. Wants are specific goods, services, experiences, or other entities desirable in light of a person’s experiences, culture, and personality D. Marketing facilitates the exchange process—the act of trading something of value (money) for something else of value 1. When the exchange actually occurs, it takes the form of a transaction— an exchange of value between the parties E. Marketers add utility (the power of a good or service to satisfy a human need) to goods and services. There are four types of utility: form utility, time utility, place utility, and possession utility F. The marketing concept is the idea that companies should respond to customers’ needs and wants while seeking long-term profitability and integrating marketing with other functional units in the organization 1. This involves relationship marketing—a focus on developing longterm relationships with customers, suppliers, and distribution partners 2. One of the goals of relationship marketing is customer loyalty—the degree to which customers continue to buy from one company versus another

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Bovee/Thill, Business in Action 9/e Instructor’s Manual II. Challenges in Contemporary Marketing A. There are three issues confronting marketing organizations: 1. Involving the customer in the marketing process. There are two types of technologies that foster this collaboration: a. Customer relationship management (CRM)—an information system that captures, organizes, and capitalizes on all the interactions a company has with its customers b. Social commerce—the creation and sharing of product-related information among customers and potential customers c. The voice of the customer—everything that current and potential customers are saying and writing about a company and its products; also refers to efforts to capture all this feedback 2. Learning about customers through collecting, analyzing, and using data to make better marketing decisions a. The challenge of measuring the effectiveness of marketing efforts largely focuses on the matter of attribution—how much does each marketing activity contribute to sales and other marketing metrics? a. Marketing research is the process of gathering and analyzing market intelligence about customers, competitors, and related marketing efforts through a combination of methods 3. Marketing with greater concern for ethics and etiquette a. Permission-based marketing is an approach in which firms request permission to deliver messages to an audience b. A major issue is stealth marketing—delivering marketing messages to people who are not aware that they are being marketed to c. Another issue is native advertising, or sponsored content— advertising material designed to look like regular news stories of social media posts 4. Effectively marketing the products of a sustainable business can be an ethical and environmental win if it encourages consumers and businesses to use more sustainable alternatives 5. Creating satisfying customer experiences—companies are responding to this expectation by evaluating the customer experience at every touchpoint, which is any point of interaction between a company and its current or potential customers. a. The customer experience is the cumulative effect of the customer journey from presales exploration through purchase through product use and ownership III. Understanding Today’s Customers A. The consumer market is made up of individuals and households that buy goods and services for personal use B. The organizational market is composed of companies and noncommercial institutions C. Consumers can use three distinct approaches to making purchase decisions 1. Cognitive decision-making—rational, data-driven approach 2. Habitual decision-making—buying the same model or brand as before 3. Affective decision-making—driven primarily by moods and emotions D. Consumer purchasing behavior is influenced by multiple factors: culture, socioeconomic level, reference groups, situational factors, and self-image

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 1. Cognitive dissonance is the tension that exists when a person’s beliefs does not match his/her behaviors; one form is buyer’s remorse 2. The influences that affect purchases are culture, socioeconomic level, reference groups, situational factors, and self-image D. Organizational purchasing behavior differs from consumer purchasing behavior in the following ways: 1. It is based on economic payback and rational, objective factors 2. There is typically a formal buying process 3. Greater complexity in product usage 4. Participation by and influence of multiple people in the buying process 5. Close relationships between buyers and sellers IV. Identifying Market Opportunities A. Strategic marketing planning involves three steps: 1. Examining the current market situation, including reviewing past performance, evaluating the competition, examining internal strengths and weaknesses, and analyzing the external environment 2. Assessing opportunities and establishing marketing objectives, including market share—a firm’s portion of the total sales within a market.

Marketing opportunities can be classified into four options: a. Market penetration—selling more of a firm’s existing products in the markets it already serves b. Product development—creating new products for current markets c. Market development—selling existing products to a new market d. Diversification—creating new products for new markets 3. Developing a marketing strategy V. Crafting a Marketing Strategy A. A company’s marketing strategy is its overall plan for marketing a product It involves three steps: segmenting the market, choosing target markets, and developing a marketing mix B. A market is the group of customers who want or need a particular product and have the money to buy it. Market segmentation is the process of dividing the market into smaller groups with similar needs, wants, and purchase behaviors. A market can be segmented in four basic ways: 1. Demographics—the statistical analysis of a population 2. Psychographics—categorizing customers based on their psychological makeup, interests, and lifestyles 3. Geographic segmentation—categorizing customers according to their geographic location 4. Behavioral segmentation—grouping customers according to their relationship with products or response to product characteristics C. After the market has been segmented, marketers will decide on its target markets—specific customer groups or segments to which the company wants to sell its products. There are four strategies for reaching the target market: 1. Undifferentiated marketing (mass marketing)—utilizing the same strategy for all potential buyers 2. Differentiated marketing—tailoring the marketing mix for each customer group 3. Concentrated marketing—focusing on only a single market segment

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 4. Micromarketing (individual)—targeting a single market or even a single customer D. After deciding on its target market, the company focuses on positioning— managing the company’s marketing mix in a way designed to occupy a particular place in the minds of target consumers VI. The Marketing Mix A. The marketing mix consists of four elements of the marketing strategy: product, price, distribution (place), and promotion (now often called “customer communication”) 1. Product is defined as the bundle of value that satisfies a customer need or want 2. Price is the amount of money charged for a product or service and is affected by numerous factors, including marketing objectives, government regulations, production costs, customer perceptions, competition, and customer demand 3. Distributions channels are the systems for moving goods and services from producers to customers. These channels include marketing intermediaries such as wholesalers and retailers 4. Promotion—all the activities a firm undertakes to promote its products to the customers. Goals include informing, persuading, and reminding VII. Thriving in the Digital Enterprise: Marketing Analytics A. Marketing analytics refers to a range of tools and techniques that help marketers plan and evaluate marketing activities. Its major goals are: 1. Tracking the customer journey 2. Measuring effectiveness 3. Testing and tuning promotional messaging 4. Optimizing the timing and placement of ads 5. Prioritizing customers 6. Measuring share of customer 7. Measuring competitors marketing activities B. Data sources for marketing analytics 1. The challenge starts with collecting the data 2. Data often needs to be cleaned or cleansed. It can be structured or unstructured.

3. Being able to tie it all together and use data productively remains a challenge for many companies

Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class with real-time diagnostics. Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it. For more information on using Learning Catalytics in your course, contact your Pearson Representative.

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Classroom Activities In-class activity: Making sense of product positioning.

Goal: Help students better understand product positioning.

Time Limit: 10 minutes.

Details: 1. Create a list on one side of the blackboard, including various products that exist currently in the market. Sample products include iPhones, BMWs, Volvos, McDonalds, etc.

2. Ask students to decide what attributes marketers emphasize about these products and how that contributes to its market position.

3. Have students share their work to see if there is consensus about the positioning of these products. If there are competing ideas, use this to discuss the idea that although marketers take all kinds of steps to position their products, it is customers who ultimately decide on the positioning: They’re the ones who interpret many messages they encounter in the marketplace and decide what they think and feel about each product.

End-of-Chapter Behind the Scenes Lego Stacks Billions of Bricks to Become the World’s Most Valuable Toy Brand Critical Thinking Questions 12-1.Lego products are designed to last for generations. How might this level of quality affect Lego’s ongoing sales, both positively and negatively?

The level of quality could increase sales positively, as it is seen as a compelling reason to buy Lego instead of one of the myriad other building sets on the market. However, it could also affect sales negatively. The quality could mean that Lego sets last so long that they don’t need to be replaced and can even be handed down to younger siblings, friends, etc. (LO: 1, AACSB: Analytical thinking) 12-2.Currently available recycled and recyclable plastics are not strong enough for Lego’s needs, but the company is working on a plant-based alternative and aims to manufacture its products from sustainable sources by 2030.

How should its marketing efforts address the issue of sustainability in the interim?

Lego should emphasize that using recyclable materials is not the only way that a company can embody sustainable principles. The company could champion the other ways in which it manages itself more sustainably, perhaps by using less electricity and fossil fuels, or using fewer physical resources in its advertising, sales activities, and promotional events. (LO: 2, AACSB: Analytical thinking)

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12-5. How do you imagine that the meaning of the Lego brand differs between adults and children?

For children, Lego might represent a well-designed and fun product that offers many products branded with their favorite movie and other entertainment characters. For adults, it could represent a nostalgia factor related to having played with the bricks as children themselves. It could also have strong appeal to collectors of brands like Star Wars, who seek out any merchandise related to the object of their fandom. For adults purchasing the bricks for children, the reputation for imaginative play might loom large as well. (LO: 5, AACSB: Analytical thinking)

Learn More Online Explore the Lego website at www.lego.com. How are the various elements of the marketing mix represented? How does the style of communication help Lego connect with customers? What sort of practical information is provided to help customers select and order products?

Students’ answers will vary depending primarily on what information is currently posted on the site. (LO: 6, AACSB: Reflective thinking)

Test Your Knowledge Questions for Review 12-4. What are the four utilities?

The four utilities are form, time, place, and possession. (LO: 1) 12-5. What is voice of the consumer?

Voice of the consumer is everything that current and potential customers are saying and writing about a company and its products (or would like to say about them if given the chance). (LO: 2) 12-6. Why is attribution such an important question in marketing?

Attribution is important because it would help companies understand which market to invest in the future. (LO: 2) 12-7. What is a touchpoint?

A touchpoint is any point of interaction—online, on the phone, or in person— between a company and its current and potential customers. (LO: 2) 12-8. How does the organizational market differ from the consumer market?

The organizational market differs from the consumer market in that it is more clearly driven by economics and influenced less by subconscious, emotional factors. It places an emphasis on economic payback and other rational factors; it is a formal buying process; it involves participation and influence of multiple people; and it typically involves closer relationships between buyers and sellers.

(LO: 3) 12-9.

What is strategic marketing planning, and what is its purpose?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual The purpose of strategic market planning is to help firms identify and create a competitive advantage, something that sets the firms apart from their rivals and makes their products more appealing to customers. Strategic market planning is a process that involves three steps: (1) examining the current marketing situation, (2) assessing opportunities and setting objectives, and (3) developing a marketing strategy to reach those objectives. (LO: 4) 12-10. Who decides how products are positioned in the minds of customers?

A vital and sometimes overlooked aspect of positioning is that although marketers take all kinds of steps to position their products, it is customers who ultimately decide on the positioning: They’re the ones who interpret many messages they encounter in the marketplace and decide what they think and feel about each product. (LO: 6) 12-11. What are the four basic components of the marketing mix?

The four components of a firm’s marketing mix consist of product, price, place (or distribution), and customer communication (or promotion). (LO: 6) 12-12. Why would a company want to measure share of customer?

Given how expensive it usually is to acquire new customers, companies try to get as much business as possible from their existing customers. The percentage of a given customer’s spending in a particular product category that a company captures is known as share of customer or share of wallet. Share of customer can be a particularly telling metric because it can reflect the customer’s overall journey or experience and involve product quality, support policies, and other elements that aren’t always under the marketing department’s direct control.

(LO: 7)

Questions for Analysis 12-13. Why is relationship marketing fundamental to the marketing concept?

Relationship marketing looks beyond individual transactions with a view toward customer lifetime value—the predicted cumulative profit that a customer represents over the expected span of the business relationship. Looking at lifetime value, rather than trying to maximize the profit from isolated transactions, is smart business: Keeping existing customers is usually much cheaper and easier than finding new customers, and satisfied customers are the best promotion a company can hope for, particularly given the power of social media and social commerce. (LO: 1) 12-14. How do customer service, warranty policies, and other post-sales elements affect the customer experience?

Post-sales elements can affect whether or not a customer decides to continue the relationship and repurchase the product, or other products from the company.

(LO: 2, AACSB: Analytical thinking) 12-15. Why would customers knowingly buy counterfeit luxury brands?

In today’s recessionary environment, consumers still aspire to enjoy the good life but they are forced by circumstances to alter their spending habits. Some would knowingly resort to buying counterfeit luxury brands because some producers have made their products look virtually the same as authentic, high-priced luxury goods. Customers are also less hesitant to buy counterfeit products in cultures

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Bovee/Thill, Business in Action 9/e Instructor’s Manual where there has not been strong intellectual property protection and enforcement.

(LO: 3, AACSB: Analytic thinking) 12-16. Should companies open themselves up to criticism by being active on social media?

Companies can build long-term relationships with satisfied customers by using social media to engage them in “conversation.” This increases customer loyalty, which not only can lead to repeat business but also to satisfied customers promoting the company and/or its products to other potential customers. (LO: 2, AACSB: Information technology) 12-17. Why does a company need to consider its current marketing situation, including competitive trends, when setting objectives for market share?

Market share is a firm’s portion of the total sales within a particular market; therefore, it is dependent on total market size as well as the firm’s proportion of the market. Current marketing situation such as the overall economic condition is important because it affects the overall market size, while competitive trends determine a firm’s relative share of the overall market. (LO: 4, AACSB: Analytic thinking) 12-18. Why do companies segment markets?

By grouping or segmenting customers with similar characteristics, behavior, and needs, companies can target their products or services to satisfy the needs of each segment. Market segmentation is a more economical, efficient, and effective way to market products—especially if you have limited resources. (LO: 5, AACSB: Analytic thinking) 12-19. Could a company effectively apply any aspect of marketing analytics if it can’t track the customer journey? Why or why not?

To evaluate marketing effectiveness, companies need to know where customers come from and how they make the journey toward a purchase. The effectiveness of marketing efforts cannot be measured if it is not known which efforts reached a customer. (LO: 7, AACSB: Information technology) 12-20. Ethical Considerations. Is it ethical to observe shoppers for the purposes of marketing research without their knowledge and permission? Why or why not?

Students’ responses will vary depending on personal opinions but they need to address the issues of privacy, intrusion, and deception. (LO: 2, AACSB: Ethical understanding and reasoning)

Questions for Application 12-21. How might a retailer use relationship marketing to improve customer loyalty?

A retailer would use relationship marketing to build long-term customer loyalty.

The retailer wants customers to continue to buy from him/her. Retailers might offer loyalty cards or programs or have special “customer-only” sales in which coupons are sent to registered customers’ homes for use in the retail store.

Students will have other responses based on personal experience. (LO: 1, AACSB: Application of knowledge)

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12-22. Think of a product you recently purchased and review your decision process. Why did you need or want that product? How did the product’s marketing influence your purchase decision? How did you investigate the product before making your purchase decision? Did you experience cognitive dissonance after your decision?

Students’ answers will vary depending on the product of choice. (LO: 3, AACSB: Reflective thinking) 12-23. Concept Integration. How might the key economic indicators discussed in Chapter 2, including consumer price index, inflation, and unemployment affect a company’s marketing decisions?

Marketers are affected by trends in interest rates, inflation, unemployment, personal income, and savings rates. During recessions, consumers still aspire to enjoy the good life, but they are forced by circumstances to alter their spending patterns. “Affordable luxuries” become particularly appealing during these times, for example. Recessions also create opportunities for agile and aggressive companies to take business away from companies weakened by poor sales and deteriorating finances. When the economy is good, consumers open their wallets and satisfy their pent-up demand for higher-priced goods and services. (LO: 4, AACSB: Analytic thinking)

Expand Your Knowledge Discovering Career Opportunities Jobs in marketing cover a wide range of activities, including a variety of jobs such as personal selling, advertising, marketing research, product management, and public relations. You can get more information about various marketing positions by consulting the Occupational Outlook Handbook (www.bls.gov/ooh), job-search websites such as Career Builder (www.careerbuilder.com) and Monster (www.monster.com), and other individual company websites resources.

12-24. Select a marketing job that interests you, and use the sites just mentioned to find out more about this career path. What specific duties and responsibilities do people in this position typically handle?

Students' answers will vary. However, encourage students to conduct a selfevaluation based on their strengths and weaknesses in much the same way that marketing planners do. Students should consider which type of job might be best suited to their individual capabilities. (LO: 4, AACSB: Reflective thinking) 12-25. Find two openings in the field you are researching. What educational background, work experience, and other qualifications are employers seeking in candidates for this position?

Students’ answers will vary; encourage students to consider ways in which they might try some of these jobs before “breaking into the field.” Internships are often available to eager students wanting to experience new fields. (LO: 4, AACSB: Reflective thinking)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 12-26. Now think about your talents, interests, and goals. How do your strengths fit with the requirements, duties, and responsibilities of this job? Do you think you would find this field enjoyable and rewarding? Why? Students’ answers will vary. (LO: 4, AACSB: Reflective thinking)

Intelligent Business Technology Find a company that offers marketing analytics software and explore its product offerings. How many of the measurement goals identified in the chapter does this software appear to address? What evidence does the company offer that its software can perform these functions?

Students’ answers will vary depending on which software is chosen. (LO: 7, AACSB: Information Technology

Practice Your Skills Resolving Ethical Dilemmas Imagine you’re the marketing manager for the housewares division of a major manufacturer. Your company makes dependable, sensibly priced products that do a great job of meeting customer needs in the kitchen, the laundry room, and elsewhere around the house. The division manager (your boss) has just proposed that the company add a new line of luxury housewares. These products would essentially duplicate the capabilities of your existing products, but they would have fancier finishes, more artful designs, and significantly higher prices.

You’re intrigued but troubled. Does anybody really need a $119 dish-drying rack that looks like it belongs in the Museum of Modern Art but doesn’t perform any better than the boring but perfectly functional $18 rack you currently sell? Would it be ethical to entice people to spend more than they really need to get a functional product? How would you resolve this dilemma?

Students’ answers will vary. (LO: 4, AACSB: Ethical understanding and reasoning)

Sharpening Your Communication Skills Think about a product (a good or a service) or a company that you either love or detest. What is it about this product or company that stirs such strong emotions?

What needs and wants of yours does this product or company satisfy or fail to satisfy? Summarize your reflections in an email to your instructor or in a post for your class blog.

Students’ responses will depend upon the sampling of information gathered. (LO: 3, AACSB: Analytic thinking)

Building Your Team Skills In a team assigned by your instructor, choose a product that interests one of you.

Identify two other products that compete with it and then conduct a careful competitive analysis of all three products using information available online. Base the analysis on product features and capabilities that you believe to be most important to target customers. Summarize your findings in a presentation or a post for your class blog, as your instructor directs.

Students’ responses will vary depending upon the products selected. (LO: 4, AACSB: Analytic thinking)

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Developing Your Research Skills From recent issues of business journals and newspapers, select an article that describes in some detail a particular company’s attempt to build relationships with its customers (either in general or for a particular product or product line).

12-27. Describe the company’s market. What geographic, demographic, behavioral, or psychographic segments of the market is the company targeting?

Answers will vary depending on the article selected. (LO: 5, AACSB: Analytic thinking) 12-28. How does the company communicate with and learn about its customers?

Answers will vary depending on the article selected. (LO: 5, AACSB: Analytic thinking) 12-29. According to the article, how successful has the company been in understanding its customers?

Answers will vary depending on the article selected. (LO: 5, AACSB: Analytic thinking)

Assisted-graded Questions 12-30. If you have a product that appeals to the majority of consumers in a given market, would there be any value in segmenting the market before launching the product? Why or why not?

A market contains all the customers who might be interested in a product and can pay for it. However, most markets contain subgroups of potential customers with different interests, values, and behaviors. To maximize their effectiveness in reaching these subgroups, many companies subdivide the total market through market segmentation, grouping customers with similar characteristics, behaviors, and needs. Each of these market segments can then be approached by offering products that are priced, distributed, and promoted in a unique way that is most likely to appeal to that segment. The overall goal of market segmentation is to understand why and how certain customers buy and what they buy so that one’s finite resources can be used to create and market products in the most efficient manner possible. (LO: 5, AACSB: Analytical thinking)

12-31. Is there still any need for traditional marketing techniques in a world of social commerce? Why or why not?

Students’ answers will vary depending on personal opinions. Some part of the population still is reached by traditional marketing techniques and would not be reached by social commerce. On the other hand, research shows that the advertising campaigns for two-thirds of established products in the marketplace don’t bring in more revenue. (LO: 2, AACSB: Information technology)

CHECKPOINTS

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Bovee/Thill, Business in Action 9/e Instructor’s Manual LEARNING OBJECTIVE 1: Define marketing, and explain its role in society.

Critical thinking: (1) Should every company see long-term relationships with customers as vitally important? Why or why not?

Every company seeking long-term profitability should view long-term relationships with customers as a critical success factor because research has indicated that the customer-focused companies in the long run tend to be more successful.

(2) Would a company that already dominates its markets ever care about the marketing concept? Why or why not?

Yes, a company that already dominates its markets should care about the marketing concept because today’s market domination does not necessarily translate to continued future success. To achieve long-term success, a company needs to embrace the marketing concept by responding to customers’ needs and wants while seeking long-term profitability and coordinating its marketing efforts to achieve the company’s long-term goals.

It’s your business: (1) What is your reaction when you feel as though you’re being “sold to” by a company that is clearly more interested in selling products than in meeting your needs as an individual consumer?

Students’ answers may vary depending on personal opinions.

(2) Do you want to have a “relationship” with any of the companies that you currently patronize as a customer? Why or why not?

Students’ answers may vary depending on personal opinions.

LEARNING OBJECTIVE 2: Identify five trends that help define contemporary marketing.

Critical thinking: (1) How can technology help companies replicate the community feel of a small neighborhood business on a global scale?

On one level, customer relationship management (CRM) systems can be powerful tools to help foster communication and collaboration between companies and their customers, allowing companies to record, organize, and act on all the interactions that a company has with its customers. On another level, social commerce using social networks, user-generated content, Twitter updates, and other social media allow customers to communicate with companies, with each other, and with marketplace influencers such as prominent bloggers and journalists. All of the above technologies help companies replicate the community feel of a small neighborhood business on a global scale.

(2) Why do some critics consider stealth marketing to be unethical?

Stealth marketing is considered unethical by some critics because customers don’t know they are being marketed to in such situations. Such practices have raised concerns of privacy and intrusion.

It’s your business:

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Bovee/Thill, Business in Action 9/e Instructor’s Manual (1) Are you so loyal to any brand or company that you refuse to accept substitutes— so much so that if you can’t have your favorite product, you’ll do without? If so, what is it about these products that earns your continued loyalty?

Students’ answers may vary depending on personal opinions.

(2) Have you ever been a target of stealth marketing? If so, how did you feel about the company after you learned you had been marketed to without your knowledge?

Students’ answers may vary depending on personal experiences and opinions.

LEARNING OBJECTIVE 3: Differentiate between consumer buying behavior and organizational buying behavior.

Critical thinking: (1) Can business-to-business marketers take advantage of new insights into consumer buying behavior? Why or why not?

Yes, business-to-business marketers can take advantage of new insights into consumer buying behavior because there are similarities between the consumer markets and business markets. For instance, the Rational Model of Buyer Decisions applies to both consumer and business purchases.

(2) How could families and individual consumers benefit from adopting some elements of organizational buying behavior?

Families and individual consumers could benefit from adopting elements of organizational buying behavior, including adopting a more rational and less emotional purchase approach, as well as getting multiple people involved (e.g., friends and family) in the purchase decision-making process.

It’s your business: (1) Do you read product reviews online before making important purchases? Why or why not? Have you ever contributed to social commerce by posting your own reviews or product advice?

Students’ answers may vary depending on personal experiences and opinions.

(2) Why did you buy the clothes you are wearing at this very moment?

Students’ answers may vary depending on personal experiences.

LEARNING OBJECTIVE 4: Define strategic marketing planning, and identify the four basic options for pursuing new marketing opportunities.

Critical thinking: (1) Why is it important to analyze past performance before assessing market opportunities and setting objectives?

Analyzing past performance is important because the firm will want to learn from its past mistakes and repeat its success. Reviewing where the firm was and how it got there can be good feedback for assessing market opportunities and setting objectives for the future.

(2) Why is diversification considered riskier than market penetration, product development, and market development strategies?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Diversification is the riskiest of the four strategies because not only does the firm need to develop a new product but also needs to enter a new market. The other three strategies rely on an existing product and/or an existing market.

It’s your business: (1) Do you see yourself as a trendsetter in any aspect of your life?

Students’ answers may vary depending on personal opinions.

(2) How could the four options for pursuing market opportunities be applied to your career planning at various stages in your career? (Think of your skills as the products you have to offer.)

Students’ answers may vary depending on personal experiences and opinions.

LEARNING OBJECTIVE 5: Identify the four steps in crafting a marketing strategy.

Critical thinking: (1) Would two companies interested in the same group of customers automatically use the same target market approach (such as differentiated or concentrated)? Why or why not?

Not necessarily. Companies with different core competencies and cultures may use different market approaches even though they are interested in the same group of customers.

(2) Why aren’t marketers ultimately in control of the positions their products achieve in the marketplace?

Marketers aren’t ultimately in control of the positions their products achieve in the marketplace because marketers are usually not alone in the marketplace. Their market positions are often determined by the positions of their competitors.

It’s your business: (1) Think of three car brands or specific models. How are these products positioned in your mind? What terms do you use to describe them?

Students’ answers may vary depending on personal opinions.

(2) Given your transportation needs in the near future (assuming you will need a car), which model is the most desirable and which is the least desirable?

Students’ answers may vary depending on personal experiences and opinions.

LEARNING OBJECTIVE 6: Describe the four main components of the marketing mix.

Critical thinking: (1) Why is price sometimes referred to as captured value?

Looking back at Kotler and Armstrong’s definition of marketing, price is the value captured from customers in exchange for the value offered in the product.

(2) Why do companies that embrace relationship marketing focus on “customer communication” rather than “promotion?”

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Companies focus on “customer communication” rather than “promotion” because today’s leading companies have moved beyond the unidirectional approach of promotion to interactive customer communication. By talking with their customers, marketers get immediate feedback on everything from customer service problems to new product ideas.

It’s your business: (1) If you could buy a product from a website or a store right down the street and the prices were the same, where would you make your purchase? Why? Students’ answers may vary depending on personal opinions.

(2) When buying products, do you tend to seek out products with visible logos (such as the Nike swoosh or the Dolce & Gabbana initials) or do you shun such products or do you not care one way or the other? Why? Students’ answers may vary depending on personal experiences and opinions.

LEARNING OBJECTIVE 7: Define marketing analytics, and characterize its use in contemporary marketing.

Critical thinking: (1) Does the power of marketing analytics replace the need for creative decisionmaking in marketing? Why or why not?

No, it does not. Data is collected to evaluate past marketing efforts and plan future efforts. This will help guide future marketing efforts, but creativity will still be needed to create campaigns.

(2) How might customers’ risk management strategies account for a supplier’s low share of customer?

A low share of customer can be a warning sign that you’re not satisfying customers as well as you need to be, or perhaps they view you as a risk and don’t want to rely on you too heavily.

It’s your business: (1) As a consumer yourself, does the convenience of online shopping outweigh the loss of privacy that marketing analytics can create? Why or why not?

Students’ answers will vary depending on personal experiences and opinions.

(2) If the creative side of marketing appeals to you, how do you feel about the dataheavy nature of marketing analytics?

Students’ answers will vary depending on personal experiences and opinions.

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Chapter 13 PRODUCT MANAGEMENT AND PRICING STRATEGIES Chapter Overview This chapter discusses two of the four elements in the marketing mix, product and price. It describes the various stages in product life cycle and product development and introduces the concepts of brand equity and loyalty, as well as packaging and labeling. It lists factors that influence pricing decisions and discusses nine common pricing strategies. Finally, it describes how companies are using virtual and augmented reality to create new products and new customer experiences.

Chapter Outline I.

Characteristics of Products A. Some products are predominantly tangible; others are mostly intangible. The product continuum indicates the relative amounts of tangible and intangible components in a product B. Products can be classified as consumer products or industrial/commercial products C. Consumer products are primarily sold to individuals for personal consumption. There are 4 subgroups: 1. Convenience products—everyday goods and services that people buy frequently, usually without much conscious planning 2. Shopping products—fairly important goods and services that people buy less frequently with more planning and comparison 3. Specialty products—particular brands that the buyer especially wants and will seek out regardless of location or price 4. Unsought products—products such as life insurance, cemetery plots, and items that are new to the marketplace D. Industrial and commercial products are purchased by organizations in large quantities and used to create other products or to operate the organization 1. Expense items are inexpensive products that organizations generally use within a year of purchase 2. Capital items are more expensive products with a longer useful life E. Most products undergo a product life cycle and progress through four stages: 1. Introduction—from the R&D phase through first commercial availability 2. Growth—an increase in sales, competitors, and distribution outlets 3. Maturity—sales begin to level off 4. Decline—sales and profits slip

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Bovee/Thill, Business in Action 9/e Instructor’s Manual II. The New-Product Development Process A. The product development process is a formal process of generating, selecting, developing, and commercializing product ideas. Six steps of product development process are as follows: 1. Idea generation—brainstorming product concepts that could satisfy unmet market needs 2. Idea screening—subjecting ideas to feasibility or concept testing to identify those with the best chance of turning into successful products 3. Business analysis—subjecting ideas that survive the screening stage to a business analysis based on estimates of production costs, sales volume, and selling price 4. Prototyping—developing functioning pre-release versions called prototypes to be used by target customers 5. Test marketing—releasing a finished product to selected customers or market segments 6. Commercialization—large scale production and distribution of products that have survived the testing process III. Product Identities A. A brand is a name, term, sign, symbol, design, or combination of those used to identify the products of a firm and to differentiate them from competing products. Multiple components are as follows: 1. The portion that can be expressed orally, including letters, words or numbers is the brand name 2. The portion that cannot be expressed verbally is its brand mark 3. The graphical and/or textual representation of a brand is its logo 4. Brand names and symbols registered as trademarks have legal protection so that their owners have exclusive rights to their use B. Branding creates value for a product—this is brand equity C. The degree to which customers continue to purchase a specific brand is known as brand loyalty D. There are many types of brand names and types: 1. National brands—brands owned by manufacturers and distributed nationally 2. Private brands—brands that carry the label of a retailer or wholesaler instead of the manufacturer 3. Generic brands—products in plain containers that bear only the name of the product 4. Co-branding—a partnership between two or more companies to closely link their brand names together for a single product 5. Companies can also license their brands—sell the rights to its brand name and symbols G. Packaging serves numerous roles, including making products easier to display, facilitating the sale of smaller products, serving as a means of product differentiation, and enhancing the product’s appeal and convenience 1. Labeling is an important aspect of packaging IV. Product-Line and Product-Mix Strategies A. Companies must manage individual products, product lines, and product mixes. This role is handled by the marketing manager in a smaller company.

In a larger company, it is handled by a brand manager—a manager who

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Bovee/Thill, Business in Action 9/e Instructor’s Manual develops and implements the marketing strategies and programs for specific products or brands 1. A product line is a group of products from a single manufacturer that are similar in terms of use or characteristics (i.e., snack-foods) 2. A product mix is a complete list of all products that a company offers for sale. A product mix has three dimensions: a. Width—how many product lines it has b. Length—how many items in its product lines c. Depth—how many versions of each product in a product line B. A company’s product line and mix can be expanded in several different ways 1. Line filling—introducing additional items in a given category under the same brand name (new flavors and package size) 2. Line extension—adding new and similar products with the same product name (also known as family branding) 3. Brand extension—applying a successful brand name to a new product category 4. Line stretching—adding items with price points above or below the current product line C. If a company is expanding internationally, brand managers must decide which products to offer and whether it will standardize or customize the products V. Pricing Strategies A. Pricing involves capturing value back from the customer in exchange for the value provided in the product. There are a number of considerations in establishing pricing: 1. Marketing objectives 2. Government regulations, including price discrimination, deceptive pricing, and price fixing 3. Customer perceptions 4. Market demand—how sensitive are goods and services to changes in price. This measure is known as price elasticity 5. Competition B. The company must also consider its cost structure that determines how much it must spend to create and market its products, including: 1. Fixed costs—business costs that remain constant regardless of the number of units produced (i.e., rent and salaries) 2. Variable costs—business costs that increase with the number of units produced (i.e., raw materials, supplies, and commissions) C. One critical calculation in setting prices is break-even analysis—calculating the minimum volume of sales needed at a given price to cover all costs 1. The break-even point is the minimum sales volume that the company must achieve to avoid losing money VI. Pricing Methods A. A company can use one of three fundamental drivers as the primary factors in establishing costs: 1. Cost-based pricing—setting prices based on production and marketing costs, rather than conditions in the marketplace 2. Value-based pricing—setting prices based on customer perceptions of value

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 3. Competition-based pricing—a method of setting prices based on what suppliers of similar products are charging B. A company can apply a variety of other methods to optimize and adjust prices: 1. Algorithmic pricing—a variety of computational methods used to set price, either in more nuanced ways than simple cost- or competitionbased pricing or in dynamic ways that respond in real time to fluctuations in demand and other market conditions. These methods go by a variety of names, including optimal pricing, dynamic pricing, yield management, and surge pricing 2. Companies can adjust their pricing strategies as products move through the life cycle a. Skim pricing—charging a high price for a new product during the introductory stage and lowering the price later b. Penetration pricing—introducing a new product at a low price in order to build sales volume quickly 3. Loss-leader pricing—setting a price on one product at a loss as a way to entice customers to consider other products 4. Auctions and participative pricing—buyers competitively bid on products being sold, or customers pay the amount they think a product is worth 5. Free and freemium pricing—offering some products for free while charging for others 6. Subscription pricing—a pricing model in which customers are charged a recurring fee for the right to continue using a product B. After a company has established its initial price, it can also use a number of price adjustment tactics to adjust the prices up or down over time, including: 1. Discounts—temporary price reductions to stimulate sales or lower prices to encourage certain behaviors (i.e., paying cash) 2. Bundling—offering several products for a single price that is presumably lower than the total of the products’ individual prices (i.e., Microsoft Office) VII. Thriving in the Digital Enterprise: Virtual and Augmented Reality A. Virtual reality (VR) systems create a simulation in which the person experiences the sensation of being in an environment, even though that environment is entirely computer generated. Some current business applications of VR are: 1. Product design and evaluation 2. Virtual walk-throughs 3. Retailing and business-to-business sales 4. Advertising 5. Virtual fittings 6. Training 7. Remote meetings, conferences, and interviews B. Augmented reality (AR) starts with reality and enhances the user experience by superimposing visual or textual information on it. Some current AR application in business are: 1. Manufacturing—can help workers perform complex procedures in fabrication and assembly by superimposing images of parts

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 2. Training—can guide trainees step by step, combining virtual and real parts and systems 3. Maintenance and repair—can display information whenever a technician aims the camera of a mobile device at a machine, or provide real-time guidance from experts in a different location

Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class with real-time diagnostics. Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it. For more information on using Learning Catalytics in your course, contact your Pearson Representative.

Classroom Activities Breakout group Discussion: Skim Pricing versus Penetration Pricing.

Goal: Ask students to discuss the advantages and disadvantages of skim pricing versus penetration pricing strategies and when it is best to use each of them Time Limit: 15 minutes.

Details: 1. Break students into groups of four or five. (2 minutes) 2. Ask each group to come up with some advantages and disadvantages of skim pricing versus penetration pricing strategies. Then ask students to summarize when it is appropriate to use each strategy. (Hint: One major advantage of skim pricing is maximized profit in the short term, while a major disadvantage is lower market penetration due to high price. A big advantage of penetration pricing is keeping competitors at bay with low price and ensuring maximum marketing share in the long run while a disadvantage is the lower profit in the short term.) (10 minutes) 3. Ask representatives/speakers from each group to present their results to the whole class, either verbally or written (on the blackboard). (3 minutes)

End-of-Chapter Behind the Scenes OXO Gets a Handle on Universal Design Critical Thinking Questions 13-1. How far could OXO take its brand extensions and the promise of making everyday tasks easier? Should it consider an OXO-branded smartphone, for instance? Smartphones are everyday tools, after all—would an expansion into this product category make sense? Why or why not?

Answers will vary. OXO is already taking its brand and expanding into other products, including electrical appliances, sports and exercise equipment, and products for small children. Smartphones might be too big a leap as far as their technical and

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Bovee/Thill, Business in Action 9/e Instructor’s Manual manufacturing expertise is involved. It might make more sense to partner with an established manufacturer to collaborate on a smartphone product. (LO: 4, AACSB: Analytical thinking) 13-2. What other products are you aware of that could benefit from more inclusive design?

Answers will vary. (LO: 4, AACSB: Application of knowledge) 13-3. The bent-metal style of vegetable peeler is still widely available. Why do you suppose this is, given how much more comfortable the ergonomically designed alternatives like OXO are?

Answers will vary. The vegetable peeler is inexpensive to manufacture and sell, so there is likely still a demand among consumers who don’t want to or can’t afford to spend more on cooking utensils like those produced by OXO. (LO: 4, AACSB: Application of knowledge)

Learn More Online Explore the company’s product offerings at www.oxo.com. What do you notice in terms of commonality across the entire product mix? Read the Our Philosophy and Our Team pages in the About Us section. Would you enjoy the experience of working at OXO? Students’ responses will depend, in large part, on the material currently posted on the website as well as personal opinion. (LO: 4, AACSB: Application of knowledge)

Test Your Knowledge Questions for Review 13-4. What are the four stages of the product life cycle?

The four stages through which a product progresses are introduction, growth, maturity, and decline. (LO: 1) 13-5. What does it mean to commercialize a product?

Commercialization is the large-scale production and distribution of products that have survived the testing process. (LO: 2) 13-6. What is test marketing?

Test marketing is a product development stage in which a product is sold on a limited basis to gauge its market appeal. (LO: 2) 13-7. How does a brand name differ from a brand mark?

The brand name is the portion of a brand that can be spoken, including letters, words, or numbers. The brand mark is the portion of a brand that cannot be expressed verbally, like the Nike swoosh and McDonald’s golden arches. (LO: 3) 13-8. What are the functions of packaging?

Packaging serves the initial function of protecting products from damage or tampering. It can also make it convenient for customers to purchase or use a product. In some cases, it is an essential part of the product itself. Packaging also plays an important role in a product’s marketing strategy. It makes products

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Bovee/Thill, Business in Action 9/e Instructor’s Manual easier to display, facilitates the sale of smaller products, serves as a means of product differentiation, and enhances the product’s overall appeal and convenience. (LO: 3) 13-9.How many books will a publisher have to sell to break even if fixed costs are $100,000, the selling price per book is $60, and the variable costs per book are $40?

The Breakeven Point = Fixed costs/(Selling price − Variable costs per unit) = 100,000/(60 − 40) = 5,000 units. (LO: 5, AACSB: Application of knowledge) 13-10. How does cost-based pricing differ from value-based pricing?

Cost-based pricing starts with the cost of producing a good or service and then adds a markup to the cost of the product to produce a profit. Value-based pricing establishes a target price on a product’s potential or perceived value in the market place, then works backward to identify a cost structure that will yield acceptable profit margins. (LO: 6) 13-11. What is algorithmic pricing?

Algorithmic pricing refers to a variety of computational methods used to set price, either in more nuanced ways than simple cost- or competition-based pricing or in dynamic ways that respond in real time to fluctuations in demand and other market conditions. (LO: 6) 13-12. How does virtual reality differ from augmented reality?

Virtual reality simulates reality, while augmented reality starts with reality and enhances the user experience by superimposing visual or textual information on it. (LO: 7, AACSB: Information technology)

Questions for Analysis 13-13. How does branding help consumers?

Branding gives consumers a way of recognizing and specifying a particular product so they can choose it again. It also provides consumers with information about the product. (LO: 3, AACSB: Reflective thinking) 13-14. Why are some well-established brands worth millions or even billions of dollars?

Some well-established brands are worth millions or even billions of dollars because a well-established brand typically took millions or billions of dollars of advertising to establish over time. A brand name is important because it provides customers with a way of recognizing and specifying a particular product so that they can choose it again or recommend it to others. In fact, a brand name can be an organization’s most valuable asset because it helps generate tremendous amount of revenue in the long run. Strong brands simplify marketing efforts because the target audience tends to associate positive qualities with any product that carries a respected brand name—and vice versa. (LO: 3, AACSB: Reflective thinking) 13-15. Given the weaknesses of cost-based pricing, why would any company use this method?

Cost-based pricing is risky because it does not take into consideration any external factors such as customer demand or willingness to pay, as well as the

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Bovee/Thill, Business in Action 9/e Instructor’s Manual prices of competitors. However, some companies may use it because it greatly simplifies the pricing task. (LO: 6, AACSB: Reflective thinking) 13-16. Why is it important to review the objectives of a strategic marketing plan before setting a product’s price?

The first step in setting a price is to match it to the objectives you set in your strategic marketing plan. Is your goal to increase market share, increase sales, improve profits, project a particular image, or combat competition? Students’ answers should focus on one objective. (LO: 5, AACSB: Reflective thinking) 13-17. Ethical Considerations. If your college neighborhood is typical, many companies in the area adorn themselves in your school colors and otherwise seek to identify their names with your school name and thereby encourage business from students. Some of these firms probably have brand licensing agreements with your college or are involved in sponsoring various groups on campus. However, chances are some of them are using school colors and other branding elements without having any formal arrangement with the college. In other words, they may be getting commercial benefit from the association without paying for it. Is this ethical? Why or why not?

Students’ answers may vary depending on their personal positions but they need to analyze whether firms’ actions are consistent with their personal value system.

(LO: 3, AACSB: Ethical understanding and reasoning) 13-18. Is subscription pricing likely to be as popular with customers as it is becoming with many product suppliers? Why or why not?

Customers may be less excited about subscription pricing. They might not like the idea of having to continually pay to keep access to a product, instead of being able to purchase it outright. (LO: 6)

Questions for Application 13-19. In what ways might Mattel modify its pricing strategies during the life cycle of a toy product?

For products in the introduction or growth stage of the product life cycle, Mattel may pursue either skim pricing or penetration pricing to either maximize profits or to establish market leadership position. For products in the maturity stage, Mattel may use price competition to undercut its competitors. For products in the decline stage, Mattel may use discount pricing or sale prices to attract customers.

(LO: 6, AACSB: Application of knowledge) 13-20. Why would a company ever want to sell its goods or services for less than they cost to produce?

One reason is loss-leader pricing, setting a price on one product so low that they lose money on every sale but recoup that loss by enticing customers to try a new product or buy other products. Another reason is penetration pricing, in which a company tries to build sales volume and secure market share by charging a low initial price. (LO: 6) 13-21. Do you consider yourself an early adopter when it comes to trying out new products or new fashions, or do you tend to take a wait-and-see attitude? How does your attitude toward new products and new ideas influence your decision-making as a consumer?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Students’ answers will vary depending on the personal opinions or experiences.

(LO: 6, AACSB: Reflective thinking) 13-22. Concept Integration. Review the theory of supply and demand in Chapter 2 (see pages 39–43). How do skimming and penetration pricing strategies influence a product’s supply and demand?

Skim pricing keeps the initial product price high and typically keeps customer demand low, that is, limited to those that are early adopters. The high price does encourage supply and will result in competitors coming into the sector in pursuit of high profit margin. Penetration pricing keeps initial product price low to build sales volume and results in higher customer demand. However, there is less incentive for the suppliers because profit margin is low, thus discouraging competitors from entering the sector. (LO: 6, AACSB: Analytic thinking) 13-23. Concept Integration. Review the discussion of cultural differences in international business in Chapter 3 (see pages 74 and75). Which cultural differences do you think Disney had to consider when planning its product strategies for Disneyland Paris? Originally the company offered a standardized product but was later forced to customize many of the park’s operations. What might have been some of the cultural challenges Disney experienced under a standardized product strategy?

Students’ answers may vary but here are some key points for consideration.

According to Chapter 3, companies like Disney must recognize the importance of cultural differences in international business. Such cultural differences include differences in language, social values, ideas of status, decision-making habits, attitude toward time, use of space, body language, manners, and ethical standards, which collectively posed challenge to Disney’s standardized product strategy. Disney had to customize many of its park operations to meet such challenges. For instance, in the area of food service alone, Disney had 29 restaurants built inside Disneyland Paris to satisfy European customers’ high expectations for food. Menus and prices were also adapted to better suit European tastes. Disney started the precedent of serving alcoholic beverages in some parts of the park and installed 2,100 patio seats (30% of seating in the park) to satisfy Europeans’ preference of eating outdoors in good weather. (LO: 4, AACSB: Diverse and multicultural work environments)

Expand Your Knowledge Discovering Career Opportunities Being a marketing manager is a big responsibility, but it can be a lot of fun at the same time. Read what the U.S. Department of Labor has to say about the nature of the work, working conditions, qualifications, and job outlook for marketing managers by accessing the Bureau of Labor Statistics Occupational Outlook Handbook at www.bls.gov/ooh.

13-24. What does a marketing manager do?

Marketing managers estimate the demand for products and services that an organization and its competitors offer. They identify potential markets for the organization’s products. They also develop pricing strategies to help firms

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Bovee/Thill, Business in Action 9/e Instructor’s Manual maximize profits and market share while ensuring that the firm’s customers are satisfied. In collaboration with sales, product development, and other managers, they monitor trends that indicate the need for new products and services, and they oversee product development. Marketing managers work with advertising and promotion managers to promote the firm’s products and services and to attract potential users. (LO: 4) 13-25. What are some key questions you might want to ask when interviewing for a job in marketing?

Students’ answers will vary. (LO: 4, AACSB: Reflective thinking) 13-26. What training and qualifications should a marketing manager have?

Most marketing managers have a bachelor’s degree. Courses in business law, management, economics, finance, computer science, mathematics, and statistics are also advantageous. In addition, completing an internship while in school is highly recommended. (LO: 4)

Intelligent Business Technologies Research one of the yield management or revenue management solutions now available for hotels. What capabilities does it offer? In what ways does it promise to increase revenue for hotels, and what evidence can it provide to support these claims?

Students’ responses will depend on the solution students choose. (LO: 6, AACSB: Information technology)

Practice Your Skills Resolving Ethical Dilemmas You own a franchised gas station and recently decided to use the latest AI-enhanced pricing software. You appreciate how it has boosted revenues and profits for you by dynamically adjusting prices in response to competitive moves and other market conditions. However, you do wonder if you might be taking advantage of customers on occasion, such as by raising prices toward the end of the workday, when many people are driving home. Is it ethical to charge people more when they need gas to make it home from work? How might you resolve this dilemma?

Answers will vary. (LO 6, AACSB: Ethical understanding and reasoning)

Sharpening Your Communication Skills Now’s your chance to play the role of a marketing specialist trying to convince a group of customers that your product concept is better than the competition’s. You’re going to wade into the industry battle over digital photo printing. Choose a side: either the photo printer manufacturers (such as Brother, Epson, or HP) who want consumers to buy printers to print their own digital photos or the service providers (such as Walmart or Costco) who want consumers to use their services instead.

Prepare a short presentation on why the approach you’ve chosen is better for consumers. Feel free to segment the consumer market and choose a particular target segment if that bolsters your argument.

Students’ responses will depend on the approach they end up choosing. (LO: 2, AACSB: Analytic thinking)

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Building Your Team Skills Select a high-profile product with which you and your teammates are familiar.

Do some online research to learn more about that brand. Then answer these questions and prepare a short group presentation to your classmates summarizing your findings.  Is the product a consumer product, industrial product, or both?  At what stage in its life cycle is this product?  Is the product a national brand or a private brand?  How do the product’s packaging and labeling help boost consumer appeal?  How is this product promoted?  Is the product mix to which this product belongs wide? Long? Deep?  Is the product sold in international markets? If so, does the company use a standardized or a customized strategy?  How is the product priced in relation to competing products?

Students’ responses will depend on the product they end up choosing. (LO: 1 & 3-6, AACSB: Application of knowledge)

Developing Your Research Skills Scan recent business journals and newspapers (print or online editions) for an article related to one of the following:  New-product development  The product life cycle  Brand extensions  Pricing strategies  Packaging 13-27. Does this article report on a development in a particular company, several companies, or an entire industry? Which companies or industries are specifically mentioned?

Answers will vary depending on the article selected. (LO: 2) 13-28. If you were a marketing manager in this industry, what concerns would you have as a result of reading the article? What questions do you think companies in this industry (or related ones) should be asking? What would you want to know?

Answers will vary depending on the article selected. (LO: 2, AACSB: Application of knowledge) 13-29. In what ways do you think this industry, other industries, or the public might be affected by this trend or development in the next five years?

Why? Answers will vary depending on the article selected. (LO: 2, AACSB: Analytic thinking)

Assisted-graded Questions 13-30. What sort of customers should a company target for the introductory phase of a product’s life cycle?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual The first stage in the product life cycle is the introductory stage, which extends from the research-and-development (R&D) phase through the product’s first commercial availability. The introductory stage is a crucial phase that requires careful planning and often considerable investment. For new types of products, companies may need to educate potential customers and influencers (such as widely read bloggers) on the uses and benefits of a product. (LO: 1, AACSB: Analytic thinking) 13-31. Is it ethical for companies to split-test price points by offering different prices to different groups of customers? Why or why not?

Students’ answers will vary depending on their personal opinions or experiences.

(LO: 6, AACSB: Ethical understanding and reasoning)

CHECKPOINTS LEARNING OBJECTIVE 1: Identify the main types of consumer and organizational products, and describe the four stages in the life cycle of a product.

Critical thinking: (1) Do manufacturers have a responsibility to create safe products even if customers don’t care and don’t want to pay for safety features? Why or why not?

Yes, manufacturers have a responsibility to create safe products even if customers don’t care and don’t want to pay for safety features. Under U.S. product liability law, manufactures are legally liable if customers suffer any injuries because their products are unsafe. Creating products that are unsafe will expose the manufacturers to litigation risks and potentially hurt the firms’ brand and reputation.

(2) Do automobiles ever enter the decline stage of the product life cycle? Explain your answer.

Various automobile brands and models (e.g., Oldsmobile, Pontiac, Yugo, and so on) have entered the decline stage of the product life cycle while automobiles overall as a product class has not yet entered the decline stage, although one can argue that gasguzzling SUVs as a product form are also entering the decline stage, as hybrids and electric vehicles are becoming increasingly popular.

It’s your business: (1) Have you ever had the urge to be “the first one on the block” to buy a new product, try a new fashion, or discover a new musical artist? If so, were you pleased or displeased when “the masses” began to imitate your choice? What does your reaction say about you as a consumer?

Students’ answers will vary depending on personal opinions.

(2) Have you ever replaced a product (such as a computer or smartphone) that was still functional, just because a newer version had hit the market? What influenced your decision?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Students’ answers will vary depending on personal opinions and experiences.

LEARNING OBJECTIVE 2: Describe six stages in the product development process.

Critical thinking: (1) Apple claims to never do any marketing research for new product ideas but instead creates products that Apple employees themselves would be excited to have.

What are the risks of this approach? Would it work for all consumer and organizational markets?

The risks of this approach include that Apple employees may not be a good representation of consumers in general. In that case, products that have appeal to Apple employees may not be well received by consumers in general. Using this logic, Apple’s new product development approach may not work for all consumer and organizational markets.

(2) Consumers and government regulators sometimes complain about identical products being sold at different prices to different customers as part of test marketing efforts. Are such tests ethical? Why or why not?

Students’ answers will vary depending on personal opinion but points of consideration include the fact that many products are currently sold at different prices at different retailers, whether they are part of test marketing efforts or not.

It’s your business: (1) What currently unavailable services can you think of that could be offered on mobile phones?

Students’ answers will vary depending on personal opinions and experiences.

(2) In addition to the mobile phone itself, what other product elements (such as a website or phone accessories) would be required to launch such a service?

Students’ answers will vary depending on personal opinions and experiences.

LEARNING OBJECTIVE 3: Define brand, and explain the concepts of brand equity and brand loyalty.

Critical thinking: (1) Can a brand with a bad reputation be rescued? Would a company be wiser to just drop a “bad brand” and start fresh with something new?

Yes, a brand with a bad reputation can be rescued. Historically there have been brands that have gone through rough times with consumers and have subsequently come back or been resurrected. It is up to the company to conduct a cost/benefit analysis to determine whether the “rescuing effort” is worth the effort rather than starting fresh with a new brand.

(2) Is staying with the same product only a case of brand “loyalty?” Could other factors be in play that lead consumers or organizations not to switch brands? Explain your answer.

Not necessarily. Sometimes the switching cost is so prohibitive and consumers or organizations decide to stay put.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual It’s your business: (1) How many visible brand marks are you currently wearing? Are these common brands?

Students’ answers will vary depending on personal experiences.

(2) What do you think these brands say about you?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 4: Identify four ways of expanding a product line, and discuss two risks that product-line extensions pose.

Critical thinking: (1) If McDonald’s had been relatively unknown to French diners when the company entered that market in 1972, would it have made more sense to use a different and more “French-sounding” brand name? Why or why not?

It may not have made sense because by using a different and more “Frenchsounding” brand name for fast food, which is also relatively unknown to French diners, McDonald’s would have undertaken a diversification strategy, that is, introducing a new product to a new market, which is riskier than simply introducing a new product to an existing market or introducing an existing product to a new market.

(2) Would a consumer products manufacturer ever want to create more product extensions and variations than it could explain in terms of pure market appeal? Why or why not?

No it wouldn’t. It may confuse consumers and hurt the firm’s brand image if a manufacturer creates more product extensions and variations that it can explain.

It’s your business: (1) Citing specific examples, how has branding helped you as a consumer? Think about the assurance you have buying a known and trusted brand, for example.

Students’ answers will vary depending on personal experiences.

(2) Think about some of the consumer products you buy frequently, such as cereal, painkillers, or snack foods. Do you appreciate the range of choices available to you when you shop for these items, or do you wish that companies would narrow the options to a handful in each category? Why? Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 5: List the factors that influence pricing decisions, and explain break-even analysis.

Critical thinking: (1) Why wouldn’t a firm just drop any product that isn’t selling in high enough volume to reach its break-even point?

There are various reasons why a firm would not just drop a product that isn’t selling in high enough volume to reach its break-even point. Some firms may decide to recoup as much of the research and development cost as possible while others may

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Bovee/Thill, Business in Action 9/e Instructor’s Manual decide to use such a product as a “loss leader” to lure customers into their stores hoping that they would buy other products that are at least break-even in pricing.

(2) Is “9”-style pricing ethical? Why or why not?

Students’ answers may vary but they need to address the fact that “9”-style pricing is legal and that research has indicated that our minds equate that “9” with a bargain, even when it isn’t.

It’s your business: (1) Do you factor in the value of your time when you price comparison shop? Why or why not?

Students’ answers will vary depending on personal opinions and experiences.

(2) As a consumer taking charge of your own financial future, what lessons could you take from the business concepts of fixed and variable costs?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 6: Compare the three foundational pricing methods, and list six situational pricing methods.

Critical thinking: (1) What steps could a company take to determine the perceived value of its products in its target markets?

A company can conduct market research such as surveys with its targeted customers (sometimes coupled with price sensitivity analysis) to ascertain the perceived value of its products in its target markets. In some cases, managers of the firm need to estimate perceptions of customer value in order to establish the price. They then need to adjust the price up and down based on customer feedback.

(2) How can patterns of temporary price discounts “train” consumers to stop buying at full price?

Such patterns will lead consumers to expect price discounts periodically and stop buying at full price altogether in anticipation of discounted prices. It is particularly true with the “high-low” pricing model, in which products are priced high most of the year and then discounted occasionally, particularly during the end-of-the-year holiday shopping season.

It’s your business: (1) Have you ever bid on anything on eBay, another online auction site, or an inperson auction? If so, how did you decide how much to bid? Did you set a maximum price you’d allow yourself to spend? Did you get caught up in the competitive emotions of bidding against someone else?

Students’ answers will vary depending on personal experiences.

(2) Have you ever purchased a hot new product as soon as it hit the market, only to see the price drop a few months later? If so, did you resolve never to buy so quickly again?

Students’ answers will vary depending on personal opinions and experiences.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual LEARNING OBJECTIVE 7: Describe how companies are using virtual and augmented reality to create new products and new customer experiences.

Critical thinking: How might the growth of VR gaming affect the application of VR in business?

Students’ answers will vary.

It’s your business: Have you ever used a VR headset for gaming? If so, did you experience any drawbacks that business users should be aware of?

Students’ answers will vary depending on personal experiences.

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Chapter 14 CUSTOMER COMMUNICATION AND PRODUCT DISTRIBUTION Chapter Overview This chapter discusses customer communication. It introduces the promotional mix of advertising, public relations, personal selling, and sales promotion. It also distinguishes direct marketing from advertising. It then emphasizes the increasing usage of social media in customer communications. It discusses the importance of marketing intermediaries and contrasts the role of wholesalers and retailers. Finally, it describes how companies are using augmented and automated writing to communicate with customers.

Chapter Outline I.

Customer Communication: Challenges, Strategies, and Issues A. Marketing communication has changed over the years to a social communication model, an approach based on interactive social media and conversational communicational styles B. The goals of communication strategy are: 1. Establishing communication goals to move potential customers toward purchases. This includes: a. Generating awareness of new products and companies b. Providing information and creating positive emotional connections c. Building preference d. Stimulating action—convincing a consumer to act on a product preference e. Reminding past customers that a product or company is still available 2. Defining customer messages. Marketers must define the core message— the single most important idea the company hopes to convey to the target audience about its products or the company 3. Assembling the communication mix—the combination of advertising, direct marketing, personal selling, sales promotion, social media, and public relations that a company can use to reach current and potential customers. Companies must consider product, market, and distribution channel factors in developing this mix a. One key decision is whether to focus communication efforts on intermediaries or on final customers i. With a push strategy, a producer focuses on intermediaries and tries to convince them to carry and promote its products ii. With a pull strategy, the producer appeals directly to end consumers b. Inbound versus outbound marketing:

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Bovee/Thill, Business in Action 9/e Instructor’s Manual i.

Rather than interrupting people while they are pursuing something else, inbound marketing attracts customers by offering value-added information related to the subjects they are already engaged in and the products that already interest them ii. The tactic of offering helpful, value-added content to potential customers is known as content marketing c. Integrated marketing communication (IMC) is a strategy of coordinating and integrating communication and promotion efforts with customers to ensure greater efficiency and effectiveness C. There are many legal ramifications to marketing communication, including regulations of the Federal Trade Commission (FTC) and state laws: 1. Marketing and sales messages must be truthful and nondeceptive 2. You must back up your claims with evidence 3. “Bait-and-switch” advertising is illegal 4. Marketing messages, websites, and mobile apps aimed at children are subject to special rules 5. In many instances, promotional relationships with people outside the company must be disclosed 6. Marketers must follow laws governing customer privacy and data security II. Advertising and Direct Response Marketing A. Advertising is defined as the delivery of announcements and promotional messages via time or space purchased in various media B. There are several types of advertising: 1. Product advertising promotes the features/benefits of specific products 2. Comparative advertising highlights how one product is better than others 3. Institutional advertising is designed to create goodwill and build a desired image for a company 4. Advocacy advertising presents a company’s opinions on public issues C. In planning a promotional campaign, the company must choose the advertising appeal—a creative tactic designed to capture the audience’s attention and promote preference for the product/company being advertised The 7 basic appeals are: logic, emotion, humor, celebrity, sex, music, and scarcity D. The company must also choose the advertising media for its products— communication channels such as newspapers, radio, television, or the Internet 1. Most media choices fall into these five groups: television, radio, print, out-of-home (also called outdoor), and digital E. The major types of digital advertising are: 1. Display ads are square or rectangular spaces on websites that contain some combination of text, visuals, animation, or video 2. Search ads are brief messages that display above or beside the results generated by search engines 3. Videos 4. Native advertising, or sponsored content, is advertising designed to look like regular news stories, articles, or social media posts 5. Video games: In-game advertising is a multibillion dollar business. With product placement, which is also popular in television and movies, advertisers pay to have their brands and products displayed during games

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 6. Mobile: All these types of digital advertising can also be optimized for mobile devices E. Direct response marketing, also known as direct marketing, is personalized marketing communication that doesn’t rely on a third-party communication channel 1. Direct marketing is now a data-driven multimedia effort that includes print mail, email, text messaging, telephone, personalized website messages, and mobile media 2. The heart of any direct marketing effort is a customer database such as a customer relationship management (CRM) system that contains contact histories, purchase records, and profiles of each potential buyer III. Personal Selling A. Personal selling is one-on-one interaction between a salesperson and a prospective buyer B. Personal selling has evolved from peddling products to creating customer partnerships and now involves consultative selling, in which the salesperson acts as a consultant and advisor to help customers find the best solutions to their personal or business needs C. The personal selling process involves seven steps: 1. Prospecting—finding and qualifying potential customers 2. Preparing—learning more about the people or organizations to be contacted 3. Approaching the prospect 4. Aligning with customer needs 5. Handling objections 6. Closing—bringing the sales process to a successful conclusion by asking for and receiving an affirmative purchase decision 7. Following up IV. Sales Promotion A. Sales promotion consists of a wide range of events and activities designed to promote a brand or stimulate interest in a product B. Sales promotions consist of two categories: consumer promotion and trade promotion C. Consumer sales promotions are used to stimulate repeat purchases and entice new users and include: 1. Contests and other audience involvement tactics 2. Experiential marketing—special events emphasizing fun, discovery, or community involvement 2. Coupons and promotional codes—coupons are printed or electronic certificates that offer discounts and are redeemed at the time of purchase; promotion codes are “on-demand” coupons that customers use while shopping online 3. Rebates—partial reimbursement of price, offered as a purchase incentive 4. Point-of-purchase (POP) displays—an in-store presentation designed to promote products to potential customers as they are making their purchase decisions 5. Samples and trial-use versions 6. Special-event sponsorship

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 7. Other promotions, such as in-store demonstrations, loyalty programs, premiums (free or bargain-priced items offered to encourage consumers to buy a product), and specialty advertising (coffee mugs, pens or calendars containing a company’s name, and other advertising) D. Trade promotions are aimed at inducing wholesalers or retailers to sell a company’s product and include: 1. Trade allowances—discounts or other financial considerations offered by producers to wholesalers and retailers 2. Dealer contests and bonus programs V. Social Media and Public Relations A. Social media are electronic media that transform passive audiences into active participants by allowing them to share, revise, or respond to content or contribute new content B. Social media activities combine new technologies with word of mouth— communication among customers and other parties and transmitting information about companies and products through online or offline personal conversation C. Interactive participation is the driving force behind conversation marketing, in which companies initiate and facilitate conversations in a networked community of potential buyers and other interested parties D. Another major impact of social media has been the rapid spread of brand communities—formal or informal groups of people united by their interest in and ownership of particular products E. With social customer care, companies use Twitter, Facebook, YouTube, and other social media platforms to listen for complaints of frustrations, to respond to customers who ask for help, and to share useful information with their brand communities E. Public relations are nonsales communication that businesses have with their audiences (including both communication with the general public and press relations) 1. A press release is a short message sent to the media covering topics that are of potential news interest 2. A company can also call a press conference, an in-person or online gathering of media representatives at which companies announce new information VI. Product Distribution and Marketing Intermediaries A. Most companies use marketing intermediaries to bring their products to market—people and organizations that assist in moving and marketing goods and services between producers and consumers B. A distribution channel is an organized network of intermediaries that work together to move goods from producer to customer or to facilitate the delivery of services C. There are two general types of marketing intermediaries: 1. Wholesalers sell products to other intermediaries for resale or to organizations for internal use 2. Retailers sell goods and services to individuals for their own personal use D. Wholesalers and retailers perform the following distribution functions: 1. Matching buyers and sellers

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 2. Providing market information 3. Providing promotional and sales support 4. Gathering assortments of goods 5. Transporting and storing products 6. Assuming risks 7. Providing financing 8. Completing product solutions E. A distribution channel is an organized network of intermediaries that work together to move goods from producer to customer or to facilitate the delivery of services F. Wholesaling and industrial distribution: Most wholesalers are independent companies that can be classified as merchant wholesalers, agents, or brokers 1. The majority of wholesalers are merchant wholesalers, independently owned businesses that buy from producers, take legal title to the goods, and then resell them to retailers or to organizational buyers 2. Merchant wholesalers are usually grouped into the two subcategories of wholesalers, which sell products to retailers and distributors and which sell products to manufacturers and other companies for their own use 3. Agents and brokers, in contrast, arrange transactions between buyers and sellers but don’t take legal title to the products themselves G. Retailing—The retailing sector ranges from tiny local shops to some of the world’s largest companies, like Walmart and Amazon 1. Retailing’s role in the buying process 2. The challenging economics of retailing 3. The outlook for retailing: innovation, disruption, and the great divide a. Online versus in-store retailing b. Omnichannel retailing—strategy in which a company builds an integrated online and offline presence so that consumers have a seamless experience throughout the buying process c. Retail theater and experiential merchandising—Tactics designed to engage retail consumers in ways that foster store loyalty, keep shoppers in stores longer, and encourage repeat business are known as retail theater d. Mobile commerce e. Subscription shopping f. Data-driven personalization e. The retail apocalypse H. Manufacturers’ distribution decisions: A distribution strategy is a company’s overall plan for moving products through intermediaries and on to final customers.

1. The ideal distribution mix varies widely. Some factors that are considered when designing the distribution mix include: a. Customer needs and expectations b. Positioning objective and brand compatibility c. Established industry patterns and requirements d. Market coverage i. Intensive distribution—a market coverage strategy that tries to place a product in as many outlets as possible ii. Exclusive distribution—a market coverage strategy that gives intermediaries exclusive rights to sell a product in a specific geographic area

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Bovee/Thill, Business in Action 9/e Instructor’s Manual iii. Selective distribution—a market coverage strategy that uses a limited number of carefully chosen outlets to distribute products e. Distribution costs VII.

Thriving in the Digital Enterprise: Augmented and Automated Writing A. Augmented writing—systems that provide real-time advice about the effectiveness of written language B. Automated writing—the use of AI to produce finished or near finished writing

Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class with real-time diagnostics. Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it. For more information on using Learning Catalytics in your course, contact your Pearson Representative.

Classroom Activities Breakout group discussion: Advertising versus Public Relations Goal: Ask students to discuss the pros and cons of advertising and public relations in an effort to distinguish these two major types of customer communications.

Time Limit: 15 minutes.

Details: 1. Break students into groups of five. (2 minutes) 2. Ask each group to come up with the main pros and cons of advertising and public relations. Sample pros for advertising include “firms have total control of the message and the tone of such communications” and “communications can be as frequent as needed,” while sample cons include “advertising is not free and can often be expensive.” Sample pros for public relations include “communications are usually free” while sample cons include “firms typically have no control of the message and the tone of such communications” and “communications tend to be one time only.” (10 minutes) 3. Ask representatives/speakers from each group to present their results to the whole class, either verbally or written (on the blackboard). (3 minutes)

End-of-Chapter Behind the Scenes Staking Out a New Position in the Skin Care Market Critical Thinking Questions 14-1. How does Tata Harper’s messaging incorporate both logical and emotional appeals?

Tata’s messaging uses a logical appeal, making a claim based on a rational

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Bovee/Thill, Business in Action 9/e Instructor’s Manual argument supported by solid evidence, when it emphasizes the natural ingredients it uses instead of the synthetic chemicals used in other products. It uses an emotional appeal, calling on audience feelings and sympathies rather than on facts, figures, and rational arguments, when it emphasizes that the uncompromising and discriminating customers deserves the best skincare. (LO: 2, AACSB: Application of knowledge) 14-2. Should Harper consider expanding sales by putting her name on a lowerpriced line of skin care products that are a hybrid of natural ingredients and a synthetic chemical base? Why or why not?

Answers will vary depending on students’ opinions. But answers will likely include the fact that doing so could dilute the essential nature of the all-natural product. It could also undercut the air of exclusivity the brand has created through its narrow distribution strategy, being sold only in the high-end department stores and the top day spas. (LO: 6, AACSB: Analytic thinking) 14-3. Assume Harper wants to engage in a cooperative advertising campaign with another luxury brand, outside the skin care market. Identify a brand that would make a good complementary fit and explain your choice.

Answers will vary depending on students’ research and opinions. (LO: 6, AACSB: Application of knowledge)

Learn More Online Visit www.tataharperskincare.com and study the current presentation of the natural + high performance message. Has the messaging changed? Do Harper and her farm still feature prominently? In how many retail stores are the products now available?

Students’ responses will vary depending the material currently posted on the website.

(LO: 1, AACSB: Information technology)

Test Your Knowledge Questions for Review 14-4. What are two key ways in which the social communication model differs from conventional promotional communication?

Conventional promotional communication tends to be one-direction only, and audiences are passive recipients of such communications. In contrast, social communication model involves two-direction communications, and in this case, the audiences are active participants of such communications. (LO: 1) 14-5.

What is the difference between using a push strategy and using a pull strategy to promote products?

Push strategy focuses on intermediaries, motivating them to promote (or push) products toward end users, while pull strategy stimulates consumer demand via advertising and other communication efforts, thereby creating a pull effect through the channel. (LO: 1)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 14-6. What is inbound marketing?

Rather than interrupting people while they are pursuing something else, inbound marketing attracts customers by offering value-added information related to the subjects they are already engaged in and the products that already interest them.

(LO: 1) 14-7.

What are the advantages of personal selling over other forms of customer communication?

Personal selling has the following advantages over other forms of customer communication: (A) It involves one-on-one communications, whereas other forms of communication tend to be one-to-many and (B) personal selling tends to be interactive while other forms of customer communication tend to be onedirection. (LO: 3)

14-8. How do display ads differ from search ads?

Display ads are square or rectangular spaces on websites that contain some combination of text, visuals, animation, or video. Search ads are brief messages that display above or beside the results generated by search engines.

(LO: 2) 14-9. What is an advertising appeal?

An advertising appeal is a creative tactic designed to capture the audience’s attention and promote preference for the product or company being advertised.

(LO: 2) 14-10. What are some common types of consumer promotion?

Some common types of consumer promotion are coupons, premiums, point-ofpurchase displays, rebates, games, and sweepstakes. (LO: 4)

Questions for Analysis 14-11. Why is social customer care an essential part of marketing?

It is an essential part of marketing because it involves using social media platforms including Twitter, Facebook, YouTube, to listen for complaints of frustrations, to respond to customers who ask for help, and to share useful information with their brand communities. (LO: 5) 14-12. How does inbound marketing demonstrate the marketing concept?

Inbound marketing demonstrates the marketing concept because instead of interrupting people while they are pursuing something else, it attracts customers by offering value-added information on the subjects they are already engaged in and the products that already interest them. (LO: 1) 14-13. Why is it important for sales professionals to qualify prospects?

It is important because time is often the salesperson’s most valuable asset and time must be spent wisely, focusing on the most valuable prospects that are most likely to purchase. (LO: 3, AACSB: Analytic thinking) 14-14. Is native advertising ethical? Why or why not?

If not labeled as advertising, native advertising could be considered unethical.

The Federal Trade Commission (FTC) requires companies to label native advertising as sponsored content if it is likely to mislead customers into thinking

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Bovee/Thill, Business in Action 9/e Instructor’s Manual it is “anything other than an ad. (LO: 2, AACSB: Ethical understanding and reasoning) 14-15. What are the potential disadvantages of using celebrity appeals in advertising?

The potential disadvantages are that celebrities are expensive, and celebrity endorsements can be risky because the brand’s image becomes linked in the celebrity’s image, including whatever behavioral missteps and other image problems the celebrity experiences in his or her personal life. (LO: 2) 14-16. Why do some companies avoid email marketing, particularly to noncustomers?

Some companies avoid email marketing because such email marketing may very likely be considered “spam” by noncustomers and will probably be deleted by them. (LO: 2) 14-17. What would experiential marketing need to accomplish in order to be a useful promotional technique?

In order to be a useful promotional technique, experiential marketing would need to make a strong enough connection to the product being promoted that it would induce repeat purchases and entice new users. (LO: 4) 14-18. Do marketers have any control over social media? Why or why not?

Marketers have some control over social media through good publicity. They can also create a good public image through offering high quality goods and services, thus generating positive “word of mouth.” (LO: 5, AACSB: Analytic thinking) 14-19. Ethical Considerations. Is your privacy being violated when a website you visit displays ads that are personalized in any way, even if it’s just geographically targeted to the local area (based on your computer’s Internet address)? Why or why not?

Students’ answers may vary depending on personal opinion but they need to address that such practice is legal under current law. (LO: 6, AACSB: Ethical understanding and reasoning)

Questions for Application 14-20. If you were a real estate agent, how would you determine whether it’s worth investing a significant amount of time in a particular prospect?

Students’ answers may vary depending on personal opinion but possible consideration includes determining how serious of a buyer or seller a prospect is.

This means figuring out whether the prospect has both the authority and the available money to buy. In the case of real estate, this could mean verifying that prospects are pre-qualified for mortgage loans and/or checking their credit reports to confirm that their financial means are on target for the price range of properties they are interested in. (LO: 3, AACSB: Application of knowledge) 14-21. Think about an advertisement (in any medium) that had either a strongly positive or strongly negative effect on your attitude toward the product being advertised or the advertiser itself. Why did the ad have this effect? If you responded positively to the ad, do you think you were being manipulated in any way? If you responded negatively—and you are a

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Bovee/Thill, Business in Action 9/e Instructor’s Manual potential buyer of the product that was advertised—what changes would you make to the ad to make it more successful?

Answers will vary according to the ads that the students select. (LO: 2, AACSB: Application of knowledge) 14-22. Would it be a good idea to “repurpose” conventional press releases as posts on your company blog? Why or why not?

Students’ answers may vary depending on personal opinion but possible points of consideration include that conventional press release is one-way where the audience in passive, while a blog is a social media that includes two-way communication in which the audience can be potentially interactive by posting feedback or comments on the blog. (LO: 5 AACSB: Application of knowledge) 14-23. Concept Integration. Should companies involve their marketing channels in the design of their customer communications programs? What are the advantages and disadvantages of doing so?

Students’ answers may vary depending on personal opinion but possible advantages include synergy among the channel partners via cross marketing, and possible disadvantages include the possibility that channel partners could be discordant in their marketing approaches and messages, resulting in possible confusion of the audiences. (LO: 1, AACSB: Analytic thinking)

Expand Your Knowledge Discovering Career Opportunities Jobs in customer communication—advertising, direct marketing, personal selling, sales promotion, social media, and public relations—are among the most exciting and challenging in all of marketing. Choose a particular job in one of these areas. Using personal contacts, local directories of businesses or business professionals, or online resources such as company websites or search engines (including Twitter and blog search tools), arrange a brief phone, email, or personal interview with a professional working in your chosen marketing field.

14-24. What are the daily activities of this professional? What tools and resources does this person use most often on the job? What does this professional like most and least about the job?

Students’ answers will vary depending on their choices of professionals.

(LO: 1-7) 14-25. What talents and educational background does this professional bring to the job? How are the person’s skills and knowledge applied to handle the job’s daily activities?

Students’ answers will vary depending on their choices of professionals.

(LO: 1-7) 14-26. What advice does the person you are interviewing have for newcomers entering this field? What can you do now to get yourself started on a career path toward this position?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Students’ answers will vary depending on their choices of professionals.

(LO: 1-7, AACSB: Reflective thinking)

Intelligent Communication Technology Online advertisers continue to experiment with a variety of technologies that allow them to pinpoint individual audience members with targeted ads or customized messages. One interesting result of this is that some advertising media or retailing formats are starting to look more like direct marketing media. Amazon.com, for example, personalizes a store front for every one of its customers. Google’s behavioral targeting technology, which it refers to as “interest-based advertising,” displays ads based on your web-surfing patterns. With the specific technique of dynamic retargeting, you might see an ad related to a website you just left, designed to nudge you into returning for another look.

Identify one form of individualized advertising now in use (you can search for “individualized advertising,” “personalized advertising,” “behavioral targeting,” or “interest-based advertising”). In a brief email message to your instructor, describe the technology, explain how it helps businesses reach customers more effectively, and identify any privacy concerns involved with the medium (including restrictions resulting from the EU’s GDPR).

Students’ email messages will vary depending on their choices of technology. (LO: 2, AACSB: Ethical understanding and reasoning)

Practice Your Skills Resolving Ethical Dilemmas Imagine you’re the marketing manager for a company that makes home security equipment—intrusion alarms, fire alarms, and similar products. Your ad agency has just pitched a new campaign idea to you that features grieving parents who wish they would’ve done more to protect their children. You think the campaign will be effective, but you also worry that it is emotionally manipulative. What should you do?

Students’ responses will vary but should include the idea that to be effective, appeals to fear must be managed carefully. Laying it on too thick can anger the audience or even cause them to block out the message entirely. (LO: 2, AACSB: Ethical understanding and reasoning)

Sharpening Your Communication Skills The good news: The current events blog you started as a hobby has become quite popular. The bad news: The blog now takes up so much of your time that you’ve had to quit a part-time job you were using to supplement your regular income. After some discussions with other bloggers, you decide to join Google’s AdSense program (www.google.com/adsense) to help pay for the costs of operating your blog. With this program, small ads triggered by keywords in the content you publish will appear on your site. However, you’re worried that your audience will think you’ve “sold out” because you’re now generating revenue from your blog. Write a short message that could be posted on your blog, explaining why you consider it necessary to run ads and assuring your readers of your continued objectivity, even if that means criticizing organizations whose ads might appear on your blog.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Students’ messages will vary. (LO: 5, AACSB: Written and oral communication)

Building Your Team Skills In small groups, discuss three or four recent ads or consumer promotions (in any media) that you think were particularly effective. Using the knowledge you’ve gained from this chapter, try to come to consensus on what attributes contributed to the success of each ad or promotion. For instance: Was it persuasive? Informative?

Competitive? Creative? Did it stimulate you to buy the product? Why? Compare your results with those of other teams. Did you mention the same ads?

Did you list the same attributes?

Students’ answers will vary. (LO: 2, 4, AACSB: Analytic thinking)

Developing Your Research Skills Choose an article from recent issues of business journals or newspapers (print or online editions) that describes the advertising or promotion efforts of a particular company or trade association.

14-27. Who is the company or trade association targeting?

Answers will vary depending on the article selected. (LO: 2, 4, AACSB: Analytic thinking) 14-28. What specific marketing objectives is the organization trying to accomplish?

Answers will vary depending on the article selected. (LO: 1, AACSB: Analytic thinking) 14-29. What role does advertising play in the promotion strategy? What other promotion techniques does the article mention? Are any of them unusual or noteworthy? If so, why?

Answers will vary depending on the article selected. (LO: 2, 4, AACSB: Analytic thinking)

Assisted-graded Questions 14-30. What is likely to happen to a company’s promotional efforts if it fails to define the core message for a new product before launching it?

Starting with a clear and compelling core message increases the chances that it will reach its target audience intact. If the core message is not clear or not credible, it will surely be altered or refuted as it passes from one outside commentator to the next. (LO: 1, AACSB: Ethical understanding and reasoning) 14-31. Other than image, what factors might prompt manufacturers of highend technical or luxury products to decide not to sell their products through Costco?

Answers will vary. Students may cite that Costco negotiates directly and fiercely with its suppliers, so the manufacturer would be looking at lower prices for its merchandise than it can get elsewhere. Costco also carries a smaller number of items than other warehouse clubs and stores like Target, so the manufacturer might be looking at a one time deal instead of a longer term relationship. (LO: 4, AACSB: Analytic thinking)

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CHECKPOINTS LEARNING OBJECTIVE 1: Describe the three major tasks in crafting a communication strategy, and identify six important legal aspects of marketing communication.

Critical thinking: (1) Why do credit card companies target students even though most have little or no income?

They target students since many of them will soon graduate and get jobs with higherthan-average income. They will become future consumers with buying power.

(2) Would it be wise for a manufacturer that is new to a particular industry (and unknown within it) to invest most of its promotional resources in a pull strategy?

Why or why not?

Yes, it would be wise since a manufacturer that is new to a particular industry typically does not have existing relationships with wholesalers and retailers in the same industry. By using a pull strategy, they can appeal directly to end customers and have customers request its products through the distribution channels, thereby establishing relationships with wholesalers and retailers.

It’s your business: (1) What is your “core message” as a future business professional? How would you summarize, in one sentence, what you can offer a company?

Students’ answers will vary depending on personal opinions.

(2) Would you consent to allowing companies to track your online behavior in order to present more personalized advertising to you? Why or why not?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 2: Identify the most common advertising appeals and the most important media used in advertising and direct response marketing.

Critical thinking: (1) Do fragmented media make it easier or harder for marketers to engage in segmented or concentrated marketing? Explain your answer.

Fragmented media makes it harder for marketers to engage in segmented or concentrated marketing because it means marketers will now have to buy media coverage in bits and pieces of varieties of media outlets rather than in large chunks in a concentrated fashion. It is also more difficult for marketers to coordinate over fragmented media a consistent brand image and marketing message, which are essential for segmented and concentrated marketing.

(2) Why would a company such as McDonald’s, which is already well known to virtually all consumers in the United States, continue to spend heavily on advertising?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Companies such as McDonald’s continue to spend heavily on advertising despite having well known brands because they want to keep up with their competitors and attract new customers and develop new markets.

It’s your business: (1) Have you ever believed that you could create better advertising for a product than the company behind the product created? If so, explain the type of appeal you would’ve used and why.

Students’ answers will vary depending on personal opinions.

(2) Do you find that you tend to watch and listen to most television commercials, or do you mute or channel surf during commercials? If you pay attention to commercials, what is it that captures your interest?

Students’ answers will vary depending on personal opinions and experiences.

LEARNING OBJECTIVE 3: Describe consultative selling, and explain the personal selling process.

Critical thinking: (1) Why is the canned approach inadequate for many selling situations?

Canned approach is inadequate for many selling situations because many selling situations require an interactive approach in which customers will ask questions that are not necessarily included in the canned script and expect answers directly from the sales person.

(2) Why should a salesperson take the time to qualify sales leads?

A salesperson should take the time to qualify sales leads because taking the time to qualify sales leads will significantly improve the chances of generating sales by helping salespersons focus their time and attention on the leads that are the most likely buyers.

It’s your business: (1) Would you be comfortable in a personal-selling role? Why or why not?

Students’ answers will vary depending on personal opinions.

(2) What can you learn from professional selling methods to help you in a job interview?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 4: Define sales promotion, and characterize the differences between consumer and trade promotions.

Critical thinking: (1) If most coupons are never used, why do companies keep distributing so many?

Companies still keep distributing them because they have been doing them for a while and coupons are still more effective than some of the other promotional tools.

(2) If wholesalers and retailers can make money selling a manufacturer’s product, why would the manufacturer need to offer incentives such as sales contests?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Manufacturers would offer incentives such as sales contests as a part of a pull strategy to entice consumers to come into a store and to demand the manufacturer’s product.

It’s your business: (1) Do you use coupons? If not, what stops you from doing so, given that they can save you money on many of the goods and services you buy?

Students’ answers will vary depending on personal opinions but a point to consider includes the idea that some consumers feel such a strong brand preference that they are not interested in buying other brands, even at a savings. Also, people may forget to use coupons, or feel they are a hassle, requiring that certain conditions exist to be redeemed.

(2) Do you think it is ethical for a retailer to steer you toward a particular brand because of trade promotions offered by the brand manufacturer, without telling you?

Why or why not?

Students’ answers will vary depending on personal opinions and experiences.

LEARNING OBJECTIVE 5: Explain the uses of social media in customer communication and the role of public relations.

Critical thinking: (1) If marketers are advised against blatantly promoting their products in social media, why should they bother using these media at all?

Social media relies on “word of mouth,” which is more effective than blatant product promotion.

(2) How should companies respond to unfair criticism leveled at them through social media?

Companies should use Twitter, Facebook, YouTube, and other social media platforms to listen for complaints or frustrations. Responsive customer service is one of the best forms of marketing any company can engage in.

It’s your business: (1) Have you ever used social media to ask questions about a product or to criticize or compliment a company? Did anyone from the company respond?

Students’ answers will vary depending on personal experiences.

(2) Do you consider yourself a member of any brand communities (formal or informal)? If so, what effect do these groups have on your purchasing behavior?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 6: Discuss the importance of marketing intermediaries, and contrast the roles of wholesalers and retailers.

Critical thinking: (1) Why would a manufacturer such as Apple choose to establish its own retail chain?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual A manufacturer could choose to do so to engage in retail theater, seeking to engage consumers in ways that foster store loyalty, keep shoppers in stores longer, and encourage repeat business.

(2) Why are “balanced” retail stores struggling in today’s environment?

“Balanced” stores that try to compete on a combination of price and other factors, such as quality and selection, but don’t stand out in any unique way, are part of the wave of brick-and-mortar stores facing closure. Some are trying to find something unique to offer today’s customers to avoid becoming part of the retail apocalypse.

It’s your business: (1) When you have the choice of buying a product in a local retail stores or buying it online, which do you normally choose? Why? Students’ answers will vary depending on personal opinions.

(2) Have you ever had to work with more than one retailer to get a complete product solution (such as getting car parts or home improvement supplies from multiple stores)? If so, was the experience satisfactory?

Students’ answers will vary depending on personal experiences and opinions.

LEARNING OBJECTIVE 7: Describe how companies are using augmented and automated writing to communicate with customers.

Critical thinking: Could a company endanger its brand image by using AI to generate messages that consumers think are written by humans? Why or why not?

Some consumers might be taken aback to realize messages they thought had been written by humans were actually created using AI. If the message were otherwise effective, many consumers might not notice or care.

It’s your business: Would you respond differently to advertising messages if you knew they were written by AI rather than by a human? Why or why not?

Students’ answers will vary depending on personal opinions.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual

Chapter 15 FINANCIAL INFORMATION AND ACCOUNTING CONCEPTS Chapter Overview This chapter covers the important business functional area of accounting. It defines accounting and discusses how managers and other stakeholders use financial information. It summarizes the impact of the Sarbanes-Oxley Act and introduces the three important financial statements, namely, the balance sheet, income statement, and cash flow statement. It discusses ratio analysis and identifies the major categories of financial ratios. Finally, it explains why businesses would be interested in blockchain and other distributed ledger technologies.

Chapter Outline I.

Understanding Accounting A. Accounting is measuring, interpreting, and communicating financial information to support internal and external decision-making 1. Financial accounting is concerned with preparing financial information for users outside the organization 2. Management accounting is concerned with preparing data for use by managers within the organization B. Bookkeeping is the clerical aspect of accounting, but accountants do more than bookkeeping and may specialize in areas such as cost accounting, tax accounting, financial analysis, or forensic accounting C. Accountants are classified as either private accountants or public accountants 1. Private accountants are in-house accountants employed by organizations and businesses a. They work under the supervision of the organization’s controller, the highest-ranking accountant in a company who is responsible for overseeing all accounting functions 2. Public accountants are professionals who provide accounting services to other businesses and individuals for a fee a. Many public accountants are licensed certified public accountants (CPAs), accountants who meet certain requirements for education and experience and pass a comprehensive examination b. Accountants must obtain CPA and state licensing certifications before they can conduct an audit—a formal evaluation of the fairness and reliability of a client’s financial statements

II. Major Accounting Rules A. Financial accountants are expected to follow a number of rules to ensure the veracity and quality of the financial information released to the public

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Bovee/Thill, Business in Action 9/e Instructor’s Manual B. GAAP (generally accepted accounting principles) are standards and practices used by publicly held corporations in the preparation of financial statements 1. GAAP is overseen in the U.S. by the Financial Accounting Standards Board (FASB) 2. The FASB has been working with the International Accounting Standards Board to harmonize GAAP with international financial reporting standards (IFRS) and develop global accounting standards C. External auditors are independent accounting firms that provide auditing services for public companies 1. Large companies may also use internal auditors—employees who investigate and evaluate the organization’s internal operations and data D. The Public Company Accounting Reform and Investor Protection Act (Sarbanes-Oxley) is comprehensive legislation designed to improve the integrity and accountability of financial information III. Fundamental Accounting Concepts A. Accountants are guided by three basic concepts: the fundamental accounting equation, double-entry bookkeeping, and the matching principle B. The fundamental accounting equation is: Assets – Liabilities = Owners’ equity 1. Assets are any items of value owned or leased by a business 2. Liabilities are claims against a firm’s assets by creditors 3. Owners’ equity is the portion of a company’s assets that belongs to the owners after obligations to all creditors have been met C. Double-entry bookkeeping is a method of recording financial transactions that requires a debit entry and credit entry for each transaction to ensure that the accounting equation is always kept in balance D. The matching principle requires that expenses incurred in producing revenue be deducted from revenues they generated during an accounting period 1. Accountants match revenue to expenses by adopting the accrual basis of accounting, in which revenue is recorded when a sale is made and expense is recorded when it is incurred 2. A company may also operate on a cash basis, in which revenue is recorded when payment is received and expense is recorded when cash is paid 3. Depreciation is an accounting procedure for systematically spreading the cost of a tangible asset over its estimated useful life. This is another way that companies match expenses with revenue because the cost of the asset must be matched to the income it generates in future years IV. Using Financial Statements: The Balance Sheet A. After individual sales, purchases and other transactions are recorded, classified, and summarized; accountants must review the transaction summaries and correct errors and/or discrepancies before closing the books—transferring net revenue and expense account balances to retained earnings for the period B. The balance sheet is a statement of a firm’s financial position on a particular date

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Bovee/Thill, Business in Action 9/e Instructor’s Manual C. A company prepares a balance sheet at least once a year, usually at the end of its calendar year—the 12-month accounting period that begins on January 1 and ends on December 31 1. Companies can also use a fiscal year reporting basis—any 12 consecutive months used as an accounting period D. The company’s balance displays the status of the following: 1. Assets—These can be tangible (buildings and land) or intangible (intellectual property and goodwill). The asset section is divided into current assets and fixed assets: a. Current assets are cash and items that can be converted into cash within one year b. Fixed assets are assets retained for long-term use, such as land, buildings, machinery and equipment 2. Liabilities are listed on the balance sheet in the order in which they will come due. There are two categories: a. Current liabilities (such as accounts payable and accrued expenses) are obligations that must be met within one year b. Long-term liabilities (such as loans, leases, and bonds) are obligations that fall due more than one year from the date of the balance sheet 3. Owners’ equity is the owners’ investment in a business listed on the balance sheet. This can be displayed in different ways depending on the structure of the business (i.e., sole proprietorship, partnership, and so on) a. In a corporation, shareholders’ total investment value is the sum of the value of shares currently held plus retained earnings—cash that is kept by the company rather than distributed to shareholders in the form of dividends V. Using Financial Statements: Income and Cash Flow Statements A. The income statement is a financial record of a company’s revenues, expenses, and profits over a given period of time; it is also known as a profitand-loss statement B. The income statement summarizes revenue (income) and expenses (costs that have arisen in generating revenue) C. Expenses and income taxes are then subtracted from revenues to show the actual profit or loss of a company, a figure known as net income—also called profit or, informally, the bottom line.

D. Cost of goods sold—the cost of producing or acquiring a company’s products for sale during a given period—is then deducted from net sales 1. The result is the company’s gross profit, also known as the gross margin D. Operating expenses are all costs of operation that are not included under cost of goods sold. These include selling expenses and general expenses 1. Deducting operating expenses from the gross profit shows the company’s net operating income, which is often a better indicator of financial health because it gives an idea of how much case the company is able to generate E. Another measure of profitability is EBITDA—earnings before interest, taxes, depreciation, and amortization F. Companies may also prepare a statement of cash flows, which shows how much cash the company generated over a period of time and where it went

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Bovee/Thill, Business in Action 9/e Instructor’s Manual VI. Analyzing Financial Statements A. Trend analysis involves the tracking of absolute numbers from one year to the next in order to uncover patterns B. Ratio analysis creates relative numbers by comparing sets of figures from a single year’s performance C. Profitability ratios show the state of the company’s financial performance or how well it generates profits. Three common profitability ratios include: 1. Return on sales—the ratio between net income after taxes and net sales 2. Return on equity—the ratio between net income after taxes and total owners’ equity 3. Earnings per share—a measure of a firm’s profitability for each share of outstanding stock, calculated by dividing net income after taxes by the average number of shares of common stock outstanding D. Liquidity ratios measure a firm’s ability to pay its short-term obligations 1. Working capital (current assets minus current liabilities) 2. Current ratio (current assets divided by current liabilities) 3. Quick ratio (also called the acid-test ratio) is calculated by adding cash, marketable securities, and receivables and then dividing that sum by current liabilities E. Activity ratios analyze how well a company is managing and making use of its assets. Two common activity ratios include: 1. Inventory turnover ratio, a measure of the time a company takes to turn its inventory into sales, calculated by dividing the cost of goods sold by the average value of inventory for a period 2. Accounts receivable turnover ratio, a measure of the time a company takes to turn its accounts receivable into cash, calculated by dividing sales by the average value of accounts receivable for a period F. Leverage or debt ratios are a measure of the company’s ability to pay its long-term debt. Common ratios include: 1. Debt-to-equity ratio—a measure of the extent to which a business is financed by debt as opposed to invested capital, calculated by dividing the company’s total liabilities by owners’ equity 2. Debt-to-assets ratio—a measure of a firm’s ability to carry long-term debt, calculated by dividing total liabilities by total assets VII.

Thriving in the Digital Enterprise: Distributed Ledgers and Blockchain A. The not-so-simple process of recording transactions B. Rethinking the ledger: 1. Distributed ledger—method of verifying and recording transactions that replaces the individual ledgers of market participants with a shared ledger that everyone can access 2. Blockchain—A type of distributed ledger in which each new transaction is captured in a “block,” which is then appended to the previous block in a continuous chain C. Business benefits and applications of blockchain 1. Lower costs 2. Fewer errors 3. Faster transactions 4. Greater transparency 5. Simpler auditing procedures 6. Tighter data security, including immutability

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 7. Tighter network security, with no single point of attack 8. Traceability and greater control over which assets get into the system 9. Opportunities to apply big data analytics across an entire business D. Blockchain in financial services E. Blockchain in supply chain management F. Blockchain in human resources Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class with real-time diagnostics. Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it. For more information on using Learning Catalytics in your course, contact your Pearson Representative.

Classroom Activities In-class activity: Distinguishing the financial statements.

Goal: Help students better understand the differences between two major financial statements, namely, the balance sheet and the income statement.

Time Limit: 10 minutes.

Details: 1. Create a list on one side of the blackboard, including an assortment of line items that belong to either the balance sheet or the income statement. Sample line items include accounts receivable, gross sales, fixed assets, cost of goods sold, current liabilities, selling expenses, retained earnings, gross profit, and common stock.

2. Draw two columns on the other side of the blackboard, one labeled “Balance Sheet” and the other labeled “Income Statement”.

3. Ask students to pair up and recreate the content of the blackboard on their notebooks and subsequently assign all of the line items into the correct columns.

End-of-Chapter Behind the Scenes An American Icon Struggles to Right Itself Questions for Critical Thinking 15-1. If GE wants to focus attention on its restructuring plan and the solid performance of the business units it intends to keep as it moves forward, isn’t it reasonable for it to highlight the performance of those units with a special version of the EPS calculation? Why or why not?

Responses will vary. GE certainly believes it to be reasonable, but critics argue it doesn’t reflect the firm’s true performance as long as those business units are still part of the company and still weighing down its financial results. (LO: 2, AACSB: Application of knowledge)

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15-2. The U.S. government has at times offered temporary financial support to struggling companies that were deemed significant to the national economy. Looking at GE’s portfolio of businesses, should the government consider helping GE? Why or why not?

Students’ responses will vary depending upon the current portfolio of business, as well as individual opinions. (LO: 1, AACSB: Application of knowledge) 15-3. If so many companies find non-GAAP calculations useful when communicating with their stakeholders, should the FASB adopt some of them? Why or why not?

Students’ responses will vary. The practice is controversial, and some accountants and investors are wary that companies really use non-GAAP metrics to obscure poor performance rather than to highlight areas of good performance.

Moreover, because the definitions of these measurements are not standardized, companies can change them over time, potentially to make performance look better. (LO: 2, AACSB: Application of knowledge)

Learn More Online Retrieve GE’s latest quarterly and annual reports and scan the financial news for recent items about the company’s turnaround plan. How is the company faring now?

Has it sold off any additional assets? Have the SEC and Department of Justice investigations and various shareholder lawsuits been resolved? Has the stock price recovered? What is your assessment of the company’s future?

Students’ responses will depend on the information found in the reports. (LO: 3, AACSB: Analytic thinking)

Test Your Knowledge Questions for Review 15-4. How do the responsibilities of private accountants and public accountants differ?

Private accountants work for corporations, government agencies, and not-forprofit organizations. Their titles vary by function and include corporate accountant, managerial accountant, and cost accountant. Private accountants generally work together as a team under the supervision of the organization’s controller, who reports to the vice president of finance or the chief financial officer (CFO). In contrast to private accountants, public accountants are independent of the businesses, organizations, and individuals they serve. Most public accountants are employed by public accounting firms that provide a variety of accounting and consulting services to their clients. (LO: 1) 15-5. What is GAAP? GAAP is generally accepted accounting principles that apply to all published financial statements; all U.S. public companies must comply with GAAP. They include basic accounting standards and procedures that have been agreed upon by the accounting profession. (LO: 2)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 15-6. Why do companies sometimes report non-GAAP results?

Companies may opt to report non-GAAP metrics when executives believe the GAAP calculations don’t provide a complete or compelling picture of the company’s performance and prospects. (LO: 2) 15-23. What is an audit, and why are audits performed?

An audit is a formal evaluation of the fairness and reliability of financial statements. Companies whose stock is publicly traded in the United States are required to file audited financial statements with the SEC. (LO: 1) 15-8. What is the accounting equation?

The accounting equation is: Owners’ equity = Assets – Liabilities. (LO: 3) 15-9. What is the matching principle?

The matching principle requires that expenses incurred in producing revenue be deducted from the revenue they generated during the accounting period. (LO: 3) 15-10. What is the relationship between the accounting equation and the balance sheet?

The balance sheet is also known as the statement of financial position and it reflects the accounting equation. The balance sheet reports a company's assets, liabilities, and owner's (or stockholders') equity at a specific point in time. (LO: 4) 15-11. What are the three main profitability ratios, and how is each calculated?

The three main profitability ratios are return on sales, return on equity, and earnings per share. Return on sales is calculated by dividing net income after taxes by net sales. Return on equity is calculated by dividing net income after taxes by total owners’ equity. Earnings per share are calculated by dividing net income after taxes by the average number of shares of common stock outstanding for that period. (LO: 6) 15-12. What is the value of an income statement?

The main value of an income statement is that it shows whether a firm is making a profit or loss. It also indicates the company’s size, its trends in sales, and its major expenses. (LO: 5) 15-13. Why are many companies interested in blockchain and other distributed ledger technologies?

Distributed ledger technologies and blockchain in particular can help businesses overcome the limitations of each party in a business relationship having its own transactional ledger. Working through independent and sometimes incompatible ledgers can be inefficient, and it makes a transactional network vulnerable to errors, delays, and fraud. By accessing a single, shared ledger, parties have one “source of truth” in which transactions are verified by the system before they are accepted, and once accepted they are immutable. (LO: 7)

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Questions for Analysis 15-14. Why were efforts made to converge the GAAP and IFRS standards?

GAAP is not used in other countries. Converging GAAP and IFRS would help investors who want to purchase stocks of companies based in other countries, help U.S. stock exchanges by making them more competitive in world capital markets, help foreign companies that want to sell stock in the U.S., and help multinational firms by letting them settle on a single set of accounting standards.

After a decade-long effort to harmonize the GAAP and IFRS, the two systems are closer in some respects but still different in some significant ways. In fact, there was a lot of momentum over the years to converge the two systems into a single, global set of standards. However, that convergence effort now appears to be stalled. (LO: 2, AACSB: Reflective thinking) 15-15. Could a privately held company benefit from using GAAP accounting, even though it isn’t legally required to do so? Why or why not?

It could because it would be able to measure its performance more consistently against public competing companies. (LO: 2) 15-16. Why are the costs of fixed assets depreciated?

Fixed assets generally benefit more than one accounting period. According to the matching principal, the cost of the asset must be matched to the income it generates in future years. This is accomplished by spreading the cost of the asset over its useful life. (LO: 4, AACSB: Analytic thinking) 15-17. Why is EBITDA controversial?

EBITDA is criticized because it doesn’t reflect costs that every company has and therefore could mask serious financial concerns. (LO: 5) 15-18. Why would a bank lending officer be interested in the cash flow statement of a company that is applying for a loan?

A bank lending officer would be interested in the cash flow statement of a company that is applying for a loan because the cash flow statement provides a good idea of a company’s ability to pay its short-term obligations when they become due, that is, whether a company is likely to go bankrupt. (LO: 5, AACSB: Reflective thinking) 15-19. Ethical Considerations. You are preparing a presentation for your company’s investors. When discussing your forecasts of next year’s revenues and costs, should you use your most optimistic projections, your most pessimistic projections, or your most likely projections? Why? Answers will vary. Using the most optimistic projections could mislead investors, while using the most pessimistic could paint too poor a picture.

Perhaps using the most likely projections as the basis of the presentation is the right way, while citing the most and least optimistic as well. (LO: 1, AACSB: Ethical understanding and reasoning)

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Questions for Application 15-20. The senior partner of an accounting firm is looking for ways to increase the firm’s business. What other services besides traditional accounting can the firm offer to its clients? What new challenges might this additional work create?

Some of the additional services include: designing accounting systems, updating computer information systems and management reporting systems, providing business valuations, consulting on profit improvement, developing employee benefits programs and inventory control systems, and performing financial analysis reports for any number of situations. (LO: 1, AACSB: Application of knowledge) 15-21. Visit the websites of Google and Microsoft and retrieve their annual reports. Using these financial reports, compute the working capital, current ratio, and quick ratio for each company. Does one company appear to be more liquid than the other? If so, why?

Answers will vary due to the timing of data; students should give evidence that they understand how to calculate the various ratios and know how to compare the liquidity ratios of different firms. (LO: 6, AACSB: Application of knowledge) 15-22. If you were asked to lend money to your cousin’s clothing store to help her through a slow sales period, would you be more interested in looking at the current ratio or the quick ratio as a measure of liquidity? Why? The quick ratio is more appropriate in this case since it leaves out inventories and becomes a better indicator of a firm’s ability to pay creditors than the current ratio. Leaving out inventories is an important step here since the clothing store is going through a slow sales period. (LO: 6, AACSB: Application of knowledge) 15-23. Concept Integration. Your appliance manufacturing company recently implemented a just-in-time (JIT) inventory system (see Chapter 9) for all parts used in the manufacturing process. How might you expect this move to affect the company’s inventory turnover rate, current ratio, and quick ratio?

Since the goal of JIT systems is to have only the right amount of materials when needed (with the ideal of “zero inventory”), you might reasonably expect the company’s inventory turnover rate to be higher than it was before the JIT system was implemented. You might also expect the current ratio, which divides current assets by current liabilities, to be lower since current inventories would be lower than before. The quick ratio, on the other hand, would be unaffected by the JIT system since it does not include inventory in its calculation; instead, it is calculated by adding cash, marketable securities, and receivables, than dividing that sum by current liabilities. (LO: 6, AACSB: Application of knowledge)

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Expand Your Knowledge Discovering Career Opportunities People interested in entering the field of accounting can choose among a wide variety of careers with diverse responsibilities and challenges. Visit the Accountants and Auditors page at www.bls.gov/ooh to read more about career opportunities in accounting.

15-24. What are the day-to-day duties of this occupation? How would these duties contribute to the financial success of a company?

Accountants and auditors help to ensure that firms are run efficiently, public records kept accurately, and taxes paid properly and on time. They analyze and communicate financial information for various entities such as companies, individual clients, and federal, state, and local governments. Specific job duties vary widely among the specialized fields of accounting and auditing: public accounting, management accounting, government accounting, internal auditing, and information technology auditors. They contribute to the financial success of a company by suggesting ways to reduce costs, enhancing revenues, and improving profits. (LO: 1) 15-25. What skills and qualifications would you need to enter this occupation?

How do these qualifications fit with your current plans, skills, and interests?

Most accountant and auditor positions require at least a bachelor's degree in accounting or a related field. Some employers prefer applicants with a master's degree in accounting, or with a master's degree in business administration with a concentration in accounting. Some universities and colleges are now offering programs to prepare students to work in growing specialty professions such as internal auditing.

In some cases, those with associate’s degrees, as well as bookkeepers and accounting clerks who meet the education and experience requirements set by their employers, get junior accounting positions and advance to accountant positions by showing their accounting skills on the job.

Many colleges help students gain practical experience through summer or parttime internships with public accounting or business firms.

Students’ answers regarding their plans, skills, and interests will vary. (LO: 1, AACSB: Reflective thinking) 15-26. What kinds of employers hire people for this position? According to your research, does the number of employees seem to be increasing or decreasing? How do you think this trend will affect your employment possibilities if you choose to enter this career?

Employment of accountants and auditors is projected to grow 10 percent from 2016 to 2026, faster than average for all occupations. In general, employment growth of accountants and auditors is expected to be closely tied to the health of the overall economy. As the economy grows, these workers will continue to be needed to prepare and examine financial records.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Technological change is expected to affect the role of accountants over the next 10 years. As platforms such as cloud computing become more widespread, some routine accounting tasks may become automated. Although this will allow accountants to become more efficient, this change is not expected to reduce the overall demand for accountants. Instead, with the automation of routine tasks, such as data entry, the advisory and analytical duties of accountants will become more prominent.

Demand for accountants may lead to good prospects for entry-level positions.

However, competition will be stronger for jobs with the most prestigious accounting and business firms.

Accountants and auditors who have earned professional recognition, especially as Certified Public Accountants (CPAs), should have the best prospects. Job applicants who have a master’s degree in accounting or a master’s degree in business administration (MBA) with a concentration in accounting also may have an advantage. (LO: 1)

Intelligent Business Technology The Sarbanes-Oxley Act’s requirement that publicly traded companies regularly verify their internal accounting controls spurred the development of software tools to help companies flag and fix problems in their financial systems. Some software vendors have gone beyond Sarbox compliance to integrate the monitoring of a wide range of legal and financial issues that require management attention. This category of software is generally known as governance, risk, and compliance (GRC) software.

GRC capabilities can either be built into other software packages (such as accounting and finance software, process management software, or business intelligence software) or offered as standalone compliance programs. Vendors that offer GRC capabilities include Oracle (www.oracle.com), SAP (www.sap.com), and IBM (www.ibm.com), among many others.

Explore one GRC software solution. In a brief email message to your instructor, describe the benefits of using this particular software package.

Students’ answers will vary depending on their choices of the GRC solutions. (LO: 2, AACSB: Written and oral communication)

Practice Your Skills Resolving Ethical Dilemmas You’re the sole proprietor of a thriving company with 50 employees, and you have the opportunity to acquire another company in your industry. The acquisition could have several benefits, including a more competitive product mix and more advancement opportunities for your employees. However, this other company is heavily in debt, and you will have to take on that debt as part of the acquisition. If the combined firm hits your sales forecasts, you’ll have enough money to make the debt payments every month, but you can never be sure what the future might bring. If sales decline, the debt burden could put you in a financial bind.

Bearing in mind that you are the sole owner of this company, do you have an ethical responsibility to tell your employees that you are considering taking on a

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Bovee/Thill, Business in Action 9/e Instructor’s Manual considerable amount of debt as a way to expand the company? After all, their futures are at stake, at least indirectly. How would you resolve this dilemma?

Students’ responses will vary. (LO: 3, AACSB: Ethical understanding and reasoning)

Sharpening Your Communication Skills Obtain a copy of the annual report of a business (these can be found online) and examine what the report shows about finances and current operations.

15-27. Consider the statements made by the CEO regarding the past year: Did the company do well, or are changes in operations necessary for its future well-being?

What are projections for future growth in sales and profits?

15-28. Examine the financial summaries for information about the fiscal condition of the company. Did the company show a profit?

15-29. Obtain a copy of the company’s annual report from the previous year and compare it with the current report to determine whether past projections were accurate.

15-30. Prepare a brief written summary of your conclusions.

Students’ answers will vary according to the annual report they choose to examine. In developing their conclusions, students should show that they have applied the following:  

  

Check the CPA’s report to see if the annual report conforms to generally accepted accounting principles (GAAP) When examining the chairman’s letter, pay attention to phrases like “Except for…” (which may indicate problems), and look for what’s new in each line of business (to indicate whether the company is in good shape to meet challenges of the future) Check the trend in the company’s working capital, analyze earnings per share (along with corresponding footnotes), and examine the trend in net sales Scrutinize the company’s debt-to-equity ratio Compare the report to the company’s previous annual reports, as well as to industry norms (LO: 4-6, AACSB: Application of knowledge)

Building Your Team Skills Divide into small groups and compute the following financial ratios for Alpine Manufacturing using the company’s Balance Sheet and Income Statement.

Compare your answers to those of your classmates:    

Profitability ratios: return on sales; return on equity; earning per share Liquidity ratios: current ratio; quick ratio Activity ratios: inventory turnover; accounts receivable turnover Leverage ratios: debt to equity; debt to total assets

  

Profitability ratios: 16.67%, 30%, $3 Liquidity ratios: 1.75, 1.125 Activity ratios: 4, 5.14

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Bovee/Thill, Business in Action 9/e Instructor’s Manual  Leverage ratios: 2, 0.67 (LO: 6 AACSB: Application of knowledge)

Developing Your Research Skills Select an article from a business journal or newspaper (print or online editions) that discusses the quarterly or year-end performance of a company that industry analysts consider notable for either positive or negative reasons.

15-31. Did the company report a profit or a loss for this accounting period?

What other performance indicators were reported? Is the company’s performance improving or declining?

Students’ answers will vary according to the particular articles students have chosen. For ease of evaluation, instructors might find it helpful to ask students to attach a photocopy of the article to their report. (LO: 4-6, AACSB: Reflective thinking) 15-32. Did the company’s performance match industry analysts’ expectations, or was it a surprise? How did analysts or other experts respond to the firm’s actual quarterly or year-end results?

Students’ answers will vary according to the particular articles students have chosen. (LO: 4-6, AACSB: Reflective thinking) 15-33. What reasons were given for the company’s improvement or decline in performance?

Students’ answers will vary according to the particular company being evaluated.

(LO: 4-6)

Assisted-graded Questions 15-34. Should public companies be allowed to publish any non-GAAP performance metrics? Why or why not?

There is concern that companies use these non-GAAP metrics to obscure poor performance rather than to highlight areas of good performance. Companies are required to label such figures as non-GAAP data in their financial reports, and securities regulators can ask them to remove or modify the presentation of nonGAAP data if these figures might mislead investors. (LO: 2, AACSB: Ethical understanding and reasoning) 15-35. How could you apply the concept of a balance sheet to your personal financial planning?

A balance sheet is a snapshot of a company’s financial position on a particular date. In effect, it freezes all business actions and provides a baseline from which a company can measure change from that point forward. This concept could be used with personal financial planning, allowing one to create a baseline of their financial health that can be referred back to with the passage of time. One can keep track of the value of one’s assets, as well as short- and long-term liabilities.

(LO: 4, AACSB: Application of knowledge)

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CHECKPOINTS LEARNING OBJECTIVE 1: Define accounting, and describe the roles of private and public accountants.

Critical thinking: (1) Why would a private accountant bother with becoming a CPA? A private accountant would bother with becoming a CPA because some may consider a career with a big four Public Accounting firm more prestigious and more lucrative.

(2) What effect can unreliable or uncertain accounting have on the economy?

Unreliable or uncertain accounting at the microeconomic level will make it more difficult for economists to compile accurate or reliable macroeconomic data and make reasonable projections about the economy at the macro level.

It’s your business: (1) How rigorous are your personal bookkeeping and accounting efforts? Do you keep accurate records, analyze spending, and set budgets?

Students’ answers will vary depending on personal experiences.

(2) If you don’t really account for your personal finances, how might doing so help you, now and in the future?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 2: Explain the impact of accounting standards such as GAAP and the Sarbanes-Oxley Act on corporate accounting.

Critical thinking: (1) Should U.S. public companies with no significant overseas business activity be forced to follow international accounting standards? Why or why not?

Not at the moment because it will be a waste of time and financial resources.

However, U.S. public companies should be informed of the potential convergence of GAAP and IFRS and act accordingly.

(2) How does requiring CEOs to personally attest to the accuracy of financial statements eliminate errors and misrepresentations?

It makes top executives of firms such as CEOs personally and legally accountable to any possible accounting errors and can potentially serve as a deterrent of accounting fraud.

It’s your business: (1) If you were considering buying stock in a company, would you support rigorous (and potentially expensive) financial accountability such as that called for by Section 404 of Sarbanes-Oxley? Why or why not?

Students’ answers will vary depending on personal opinions.

(2) Would you consider investing in a privately held company whose financial records had not been reviewed by an external auditor? Why or why not?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Describe the accounting equation, and explain the purpose of double-entry bookkeeping and the matching principle.

Critical thinking: (1) How does double-entry bookkeeping help eliminate errors?

The double-entry bookkeeping system was created in the early days to help eliminate errors caused by entering and adding figures by hand. More recently, in double-entry bookkeeping, each transaction is entered twice, as a pair of offsetting entries, to ensure that the accounting equation stays in balance.

(2) Why is accrual-based accounting considered more fraud-proof than cash-based accounting?

Accrual-based accounting is considered more fraud-proof than cash-based accounting because cash-based accounting can be misleading. For instance, in cash-based accounting, it is easy to inflate income by delaying the payment of bills. That is the main reason that accrual-based accounting is considered more fraud-proof.

It’s your business: (1) Does looking at the accounting equation make you reconsider your personal spending habits? (Think about taking on liabilities that don’t create any long-term assets, for example.) Why or why not?

Students’ answers will vary depending on personal opinions.

(2) How would accrual basis accounting give you better insights into your personal finances?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 4: Identify the major financial statements, and explain how to read a balance sheet.

Critical thinking: (1) Why do analysts need to consider different factors when evaluating a company’s ability to repay short-term versus long-term debt?

Analysts need to consider different factors when evaluating a company’s ability to repay short-term versus long-term debt because short-term debts are obligations that will have to be met by the firm within one year whereas long-term debt have payment period beyond one year. That means the concerns for the short-term debt are much more immediate. Short-term expenses will also need to be booked as liability immediately. If such expenses and their associated liabilities were not recorded, the company’s financial statements would be misleading and would violate the matching principle.

(2) Would the current amount of the owners’ equity be a reasonable price to pay for a company? Why or why not?

Not really. The current amount of the owners’ equity would be a reasonable price to pay for a company because successful companies are worth a premium beyond the

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Bovee/Thill, Business in Action 9/e Instructor’s Manual current amount of owner’s equity and such a premium would need to be included in the purchase price of the firm.

It’s your business: (1) What are your current and long-term financial liabilities? Are these liabilities restricting your flexibility as a student or consumer?

Students’ answers will vary depending on personal opinions.

(2) As a potential employee, what intangible assets can you offer a company?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 5: Explain the purpose of the income statement and the statement of cash flows.

Critical thinking: (1) How could two companies with similar gross profit figures end up with dramatically different net operating income?

One possibility is that the two companies have dramatically different operating costs, with one paying more in salaries, for marketing, etc.

(2) How might a statement of cash flows help a turnaround expert decide how to rescue a struggling company?

A statement of cash flows shows how much cash the firm generated over time and where it went and it can help a turnaround expert decide which cash outflows will need to be reduced or eliminated all together.

It’s your business: (1) What would your personal income statement look like today? Are you operating “at a profit” or “at a loss?”

Students’ answers will vary depending on personal opinions.

(2) What steps could you take to reduce your “operating expenses?”

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 6: Explain the purpose of ratio analysis, and list the four main categories of financial ratios.

Critical thinking: (1) Why is it so important to be aware of extraordinary items when analyzing a company’s finances?

It is so important to be aware of extraordinary items when analyzing a company’s finances because extraordinary items may have affected a company’s finances in one period but not the next. Being aware of such items are important when conducting trend analysis of a firm’s finances.

(2) Why is the quick ratio frequently a better indicator than the current ratio of a firm’s ability to pay its bills?

A quick ratio is typically a better indicator than the current ratio because it subtracts inventories from current assets and then divides the result by current liabilities.

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It’s your business: (1) Assume you are about to make a significant consumer purchase, and the product is available at two local stores, one with high inventory turnover and one with low.

Which store would you choose based on this information? Why? Students’ answers will vary depending on personal opinions.

(2) If you were applying for a home mortgage loan today, would a lender view your debt-to-assets ratio favorably? Why or why not?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 7: Explain why businesses would be interested in blockchain and other distributed ledger technologies.

Critical thinking: How might blockchain help address the problem of spoilage and waste in the food industry?

End-to-end traceability can help participants know where food close to expiration is in the chain and allow them to get it somewhere it can be consumed before it spoils.

It’s your business: Would knowing that fresh foods you buy were tracked in a blockchain affect your purchasing decisions? Why or why not?

Students’ answers will vary depending on personal opinions.

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Chapter 16 FINANCIAL MANAGEMENT AND FINANCIAL MARKETS Chapter Overview This chapter covers the important business functional area of finance. It defines finance and identifies the key responsibilities of a financial manager. It introduces budgeting and describes the major types of budgets. It contrasts debt financing with equity financing and discusses in details the major categories of both types of financing. It describes four major steps required to become an investor. Finally, it explains how businesses can use smart contracts to facilitate transactions.

Chapter Outline I.

The Role of Financial Management A. Financial management is planning for a firm’s money needs and managing the allocation and spending of funds. Three fundamental concepts are as follows: 1. Balancing short-term and long-term demands 2. Balancing potential risks against potential rewards (i.e., the risk/reward trade-off) 3. Balancing leverage and flexibility B. Financial management starts with a financial plan—a document that outlines the funds needed for a certain period of time, along with sources and intended uses C. Financial management must also monitor cash flow—money flowing into and out of the business—in order to avoid a liquidity crisis (i.e., having insufficient cash to meet short-term needs). This means monitoring working capital accounts, including: 1. Accounts receivable—amounts that are currently owed to a firm 2. Accounts payable—amounts that a firm currently owes to other parties 3. Inventory 4. Cash reserves—cash or cash equivalents that can be converted to cash quickly D. Financial managers are responsible for developing a budget, a planning and control tool that reflects expected revenues, operating expenses, and cash receipts and outlays 1. Once the budget has been developed, the finance manager compares actual results with projections to determine variances and recommends corrective action. This is financial control E. Issues faced by managers in budgeting are: 1. Companies have a finite amount of money available and projects and departments compete for these resources 2. Revenues and costs are often difficult to predict

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Bovee/Thill, Business in Action 9/e Instructor’s Manual a. Companies protect themselves against future price increases by hedging—entering into contracts that allow them to buy supplies in the future at predetermined prices b. Companies may also use rolling forecasts and/or scenario planning 3. Managers may be uncertain how much revenue will be received or how much money should be spent a. A common practice is to use the previous year’s budget as a baseline b. With zero-based budgeting, each department starts from zero every year and must justify each item 4. Types of budgets include: a. Operating budget—identifies all sources of revenue and coordinates the spending of those funds throughout the coming year b. Capital budget—outlines expenditures for capital investments such as real estate, new facilities, major equipment, and other items of permanent value d. Cash budget—identifies cash flows using accounts payable and accounts receivable, helping managers monitor cash flow over a defined period e. Financial budget—includes the cash budget and the budgeted income statement and balance sheet f. Master budget—incorporates the other budgets to present a comprehensive view of the company’s financial status and plans II. Financing Alternatives: Factors to Consider A. There are two categories of financing: debt and equity 1. Debt financing involves borrowing money 2. Equity financing involves selling ownership shares in the company A firm’s capital structure is the overall mix of debt and equity is used to meet short- and long-term needs B. Financing can also be categorized as short-term or long-term 1. Short-term financing will be repaid within one year 2. Long-term financing will be repaid in a period longer than one year C. Another consideration in choosing a method of financing is the company’s cost of capital—the average rate of interest a firm pays on its combination of debt and equity. Cost of capital depends on three main factors: 1. Risk—Lenders expect their returns to be in proportion of the quality and the length of time of the venture 2. Interest rate—The cost of money varies with interest rates. The prime interest rate is the lowest rate offered on short-term bank loans to preferred borrowers D. Firms must also evaluate opportunity cost—the value of the most appealing alternative from among those that were not chosen 1. A company may use leverage—increasing the rate of return on an investment by financing it with borrowed funds—if it can earn a greater rate of return than the rate of interest paid III. Financing Alternatives: Debt Financing A. There are several options for short-term debt financing, including: 1. Credit cards—an expensive but widely available form of short-term financing 2. Trade credit—credit obtained by a purchaser directly from a supplier

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 3. Secured loans—loans backed up by something of value, known as collateral 4. Unsecured loans—loans which require a good credit rating but no collateral. One common type is a line of credit, an arrangement in which a lender makes an agreed-upon amount of money for use at any time after it is approved 5. Commercial paper—a short-term promissory note to repay a borrowed amount by a specified time with a specified interest rate 6. Factoring—obtaining funding by selling the firm’s accounts receivable a. The company is paid a percentage of the total outstanding amount B. There are several long-term debt financing options available, including: 1. Long-term loans (term loans)—loans with maturities of longer than a year, sometimes up to 25 years or more a. Long-term loans on real estate are called mortgages b. Lenders look at the 5 Cs when considering applications for long-term loans: character of the company owners, capacity or ability to repay the loan, capital (i.e., whether the company has enough capital to succeed), condition of the economy and industry, and collateral (i.e., tangible assets the lender can seize if the borrower defaults) 2. Leases—Instead of borrowing money to purchase an asset, a firm can enter into a lease, in which the owner of an asset (the lessor) allows another party (the lessee) to use the asset in exchange for regular payments 3. Corporate bonds—Bonds are certificates that obligate the company (the issuer or borrower) to repay a certain sum plus interest to the bondholder (the lender) on a specific date. Several types are as follows: a. Secured bonds—bonds backed by company-owned property that passes to bondholders if the issuer does not repay the amount borrowed b. Debentures—unsecured bonds backed only by the company’s promise to pay c. Convertible bonds—bonds that can be exchanged at the investor’s option for a certain number of shares of the company’s common stock 4. Corporations usually retain the right to repay bonds before maturity.

These are known as callable bonds or redeemable bonds IV. Financing Alternatives: Equity A. Equity financing involves selling ownership shares of the company B. Equity financing can involve private equity, in which ownership assets are not publicly traded 1. Examples include venture capital, angel investors, and leveraged buyouts C. Going public involves offering shares of stock to the public through a stock market such as the NYSE 1. The first time a company offers its shares of stock to the public is known as an initial public offering (IPO) 2. The potential rewards are so high that every year hundreds of companies around the world attempt to go public

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Bovee/Thill, Business in Action 9/e Instructor’s Manual V. Financial Markets A. Securities markets can be divided into primary markets (which handle IPOs) and secondary markets (which handle public buying and selling after the IPO) B. Organizations that facilitate the buying and selling of stock are known as stock exchanges. These include the New York Stock Exchange, the NASDAQ, and other national and international exchanges C. The bond market—the collective buying and selling of bonds—is done over the counter; that is, outside organized exchanges D. The money market is an over-the counter marketplace for short-term debt instruments such as Treasury bills and commercial paper E. The derivatives market is a market that includes exchange trading for futures and some options and over-the-counter trading for all other derivatives, contracts whose value is derived from some other entity (usually an asset of some kind, but not necessarily); used to hedge against or speculate on risk VI. Investment Strategies and Techniques A. Individuals should take several steps to become informed investors: 1. Establish investment objectives—how much you can invest, how much liquidity you require, tax consequences, and your tolerance for risk a. Risk is inversely related to potential rate of return, the gain or loss of an investment over time 2. Learn to analyze financial news and understand financial terminology a. A bull market is a market situation in which most stocks are increasing in value b. A bear market is a market situation in which most stocks are declining in value 3. Create an investment portfolio—a collection of various types of investments a. Managing a portfolio to balance potential returns with an acceptable level of risk is known as asset allocation and involves dividing investments among cash instruments, income instruments, and bonds B. Buying and selling of securities often requires using a broker—a certified expert who is legally registered to buy and sell securities on behalf of individual and institutional investors C. Investors can use other buying and selling strategies, such as: 1. Margin trading, in which investors borrow money from brokers to buy stock, pays interest on the borrowed money, and leaves the stock with the broker as collateral 2. Short selling—selling stock borrowed from a broker with the intention of buying it back later at a lower price, repaying the broker, and keeping the profit Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class with real-time diagnostics. Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it. For more information on using Learning Catalytics in your course, contact your Pearson Representative.

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Classroom Activities Breakout group discussion: Debt versus Equity Financing Goal: Ask students to discuss the key advantages and disadvantages of debt and equity to contrast these two major types of financing available to many firms.

Time Limit: 15 minutes.

Details: 1. Break students into groups of three or four. (2 minutes) 2. Ask each group to come up with the main advantages and disadvantages of debt and equity financing. Some key criteria to consider include maturity, claim on assets, influence over management, risk, and tax consequences. For instance, regarding “influence over management”, lenders typically do not have influence over management while shareholders typically do have influence over management to various degrees. (10 minutes) 3. Ask representatives from each group to present their results to the whole class, either verbally or written (on the blackboard). (3 minutes)

End-of-Chapter Behind the Scenes Landing Venture Capital at Court Buddy Questions for Critical Thinking 16-1. What other professional service businesses might be able to use an automated matchmaking service like Court Buddy?

Students’ answers will vary but will likely include situations in which consumers are not prepared in their search by past shopping experiences, like looking for colleges, houses, or marriage counselors. (LO: 1, AACSB: Application of knowledge) 16-2. What are the costs (financial and otherwise) of pursuing and accepting VC funding, as Kristina Jones did?

VCs invest in companies in exchange for a share of ownership. (LO: 4, AACSB: Analytic thinking) 16-3. Would Kristina Jones’s entrepreneurial/start-up story be an effective element to include in Court Buddy’s marketing efforts? Why or Why not?

How would this compare with marketing efforts by someone such as Tata Harper in Chapter 14?

Students’ answers will vary. (LO: 4, AACSB: Analytic thinking)

Learn More Online Visit www.courtbuddy.com and explore the latest news from the company. Review its start-up story and the long list of rewards and recognitions. Also, take a look at the SheWorx and 500 Startups websites. How can communities and programs like these help entrepreneurs get vital funding?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual Students’ responses will depend in large part on the material currently posted on the website. (LO: 4)

Test Your Knowledge Questions for Review 16-4. What are the two foundations of financial management?

Planning for a firm’s money needs and managing the allocation and spending of funds are the foundations of financial management. (LO: 1) 16-5. What is a liquidity crisis?

A liquidity crisis means having insufficient cash to meet a company’s short-term needs. (LO: 1) 16-6. What is the difference between accounts payable and accounts receivable?

Accounts receivable are amounts that are currently owed to a firm, while accounts payable are amounts that a firm currently owes to other parties. (LO: 1) 16-7. What is a firm’s capital structure?

Capital structure refers to the total mix of debt and equity used by a firm to meet its short- and long-term financing needs. (LO: 2) 16-8. What is the difference between a secured loan and an unsecured loan?

A secured loan is one in which a lender provides cash using borrower’s assets as collateral and is also known as asset-based loan. An unsecured loan is one in which a lender provides lump sum of cash via a promissory note or on-demand access to cash via a credit line. Such a loan is not secured with assets. (LO: 3) 16-9. What does it mean when someone refers to a company’s capital structure?

Capital structure refers to the total mix of debt and equity used by a firm to meet its short- and long-term financing needs. (LO: 2) 16-10. How can factoring help a company manage its cash flow?

Factoring is the approach in which a company sells its accounts receivable to an intermediary that collects from the customer. It helps a company manage its cash flow by freeing up working capital and making cash flow more predictable. It can also provide some protection from bad debts and consumer bankruptcies. (LO: 3) 16-11. What is a smart contract?

A smart contract is a digital agreement in a distributed ledger such as blockchain that automatically executes when its criteria are fulfilled by incoming data. (LO: 7, AACSB: Information technology)

Questions for Analysis 16-12. Would it be wise for a young company that is growing quickly but still hasn’t achieved profitability to attempt to issue bonds as a way to expand its working capital? Why or why not?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual It may not be wise for such a young company to issue bonds because it either needs to issue secured bonds with company-owned property or issue unsecured bonds but pay higher interest rates to attract buyers. Neither is easy or ideal for a young firm that has not achieved profitability. Equity financing such as venture capital or an IPO may be more appropriate in this case because of the company’s high growth. (LO: 3, AACSB: Analytic thinking) 16-13. Why would a company use zero-based budgeting, given that it requires more time and effort from managers throughout the company?

Because it forces managers at every level to scrutinize their operations, zerobased budgeting can also identify unproductive organizational habits and other bottlenecks and thereby improve efficiency and effectiveness. One of the biggest complaints about this approach historically has been the amount of time it can take, but modern financial systems with powerful data analytics capabilities can give managers more-detailed insights in less time than ever before. (LO: 1, AACSB: Analytic thinking) 16-14. Why is careful management of accounts receivable and accounts payable so essential to ensuring positive cash flow?

Because by carefully managing accounts receivable and accounts payable, a firm can maximize cash inflow through collecting money owed by customers as early as possible and minimize cash outflow through postponing payment till the last minute, thereby ensuring positive cash flow. (LO: 1, AACSB: Analytic thinking) 16-15. Why are claims on income discretionary with equity financing but nondiscretionary with debt financing?

Debt obligations must be repaid, regardless of whether the company is profitable.

At management’s discretion and if company is profitable, shareholders may receive dividends after creditors have been paid. However, company is not required to pay dividends. (LO: 2, AACSB: Analytic thinking) 16-16. Why would a company choose to factor its receivables, given that it will get less money than the receivables are worth?

The use of factoring has increased in recent years, particularly as banks and other lenders have reduced the level of credit that many businesses rely on to manage cash flow. Because it is a comparatively expensive method, factoring is generally best suited for profitable, growing companies with pressing cash flow needs and large, creditworthy customers (businesses or government agencies, not consumers) that are likely to pay their bills but are just slow in doing so.

Particularly for companies that sell to retailers, factoring is sometimes a necessity because they have contracts that require them to keep retailers supplied with inventory on a regular schedule and need the cash flow to do so. (LO: 3) 16-17. Why do lenders often refuse to finance 100 percent of the cost of a purchase, requiring borrowers to make a down payment that covers a portion (typically from 10 to 25 percent) of the purchase price? After all, a lender could potentially earn more by financing the entire purchase amount.

Because by requiring borrowers to make a down payment, a lender is lowering the risk of the loan and offering itself some protection against default on the loan.

(LO: 3, AACSB: Analytic thinking)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 16-18. Why is it important to establish objectives before you begin to invest?

A common mistake in investing is chasing after promising investments without having any long-range goals in mind. Asking oneself some simple questions before investing will help to establish realistic investment objectives that are right for you and your family. (LO: 6, AACSB: Analytic thinking) 16-19. Ethical Considerations. Budget projections always involve a degree of judgment because managers can never predict the future with total accuracy. For instance, one manager with an optimistic view and another manager with a pessimistic view could look at the same set of facts and arrive at distinctly different conclusions about the company’s financial prospects. When budgets will influence decisions made by investors or lenders, how should the people who prepare the budgets deal with the variance between optimistic and pessimistic viewpoints? On the one hand, being too pessimistic could result in lower levels of funding, which could be detrimental to employees, existing investors, existing creditors, and other financial stakeholders. On the other hand, being too optimistic could be detrimental to prospective investors or creditors. How do you find the right balance?

Students’ answers will vary but they need to address the proper balance between being optimistic and pessimistic. (LO: 4, AACSB: Ethical understanding and reasoning)

Questions for Application 16-20. The company you cofounded last year is growing rapidly and has strong prospects for an IPO in the next year or two. The additional capital that an IPO could raise would let you hire the brightest people in the industry and continue to innovate with new product research. There is one potential glitch: You and the rest of the executive team have been so focused on launching the business that you haven’t paid much attention to financial control. You’ve had plenty of funds from venture capitalists and early sales, so working capital hasn’t been a problem, but an experienced CEO in your industry recently told you that you’ll never have a successful IPO unless you clean up the financial side of the house. Your cofounders say they are too busy chasing great opportunities right now, and they want to wait until right before the IPO to hire a seasoned financial executive to put things in order.

What should you do and why?

Students’ answers will vary depending on personal opinion but points of consideration include monitoring cash flow and managing cash reserves so that the firm will not go bankrupt from a cash crunch. (LO: 4, AACSB: Application of knowledge) 16-21. Why might a company’s board of directors decide to lease office space even though it would be more economical to purchase the property and finance it with a long-term loan?

A company’s board of directors will decide to lease office space even though it would be more economical to purchase the property and finance it with a longterm loan because the board may be more interested in the flexibility that a lease provides rather than a long-term loan; for example, the firm wants to expand into a larger office in a few years. It could also be that the property is extremely expensive to purchase and difficult to sell. (LO: 3, AACSB: Reflective thinking)

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16-22. You’re getting ready to expand your woodworking hobby into a full-time business of building custom kitchen cabinets. To create top-quality cabinets, you know you’ll need to upgrade from the consumer-grade machinery you have now to industrial-grade equipment. The new equipment will be much more expensive but, if properly cared for, should last for decades, and you hope to be in business for at least 20 years. If the overall costs of leasing this equipment or borrowing money to buy it are roughly the same, which financing method would you choose? Why? In this case, borrowing money to buy the equipment makes more sense since you want to be in business for at least 20 years. (LO: 3, AACSB: Reflective thinking) 16-23. Concept Integration. Review the definitions of current and fixed assets in Chapter 15 (see page 413). Why would a potential lender be interested in these two classes of assets when reviewing the balance sheet of a company applying for a long-term loan?

A potential lender may be interested in fixed assets if it wants to provide a secured loan to the borrower, that is, such fixed assets can be used as collaterals.

The same lender may also be interested in current assets to ensure the borrower has enough cash for payments in the near term. (LO: 3, AACSB: Analytic thinking)

Expand Your Knowledge Discovering Career Opportunities People interested in entering the field of financial management can choose among a wide variety of careers with diverse responsibilities and challenges. Visit the “Financial Managers” page at www.bls.gov/ooh to read more about career opportunities in financial management.

16-24. What are the day-to-day duties of this occupation? How would these duties contribute to the financial success of a company?

Financial managers oversee the preparation of financial reports, direct investment activities, and implement cash management strategies. Managers also develop strategies and implement the long-term goals of their organization.

The duties of financial managers vary with their specific titles, which include controller, treasurer or finance officer, credit manager, cash manager, and risk and insurance manager. Controllers oversee the accounting, audit, and budget departments. Treasurers and finance officers direct their organization's budgets to meet its financial goals. Credit managers oversee the firm's issuance of credit, establishing credit-rating criteria, determining credit ceilings, and monitoring the collections of past-due accounts. Cash managers monitor and control the flow of cash receipts and disbursements to meet the business and investment needs of their firm. Risk and insurance managers oversee programs to minimize risks and losses that might arise from financial transactions and business operations.

Insurance managers decide how best to limit a company’s losses by obtaining insurance against risks such as the need to make disability payments for an employee who gets hurt on the job or costs imposed by a lawsuit against the company. (LO: 1)

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Bovee/Thill, Business in Action 9/e Instructor’s Manual 16-25. What skills and educational qualifications would you need to enter this occupation? How do these qualifications fit with your current plans, skills, and interests?

Students’ answers will vary depending on personal experiences and opinions but most financial managers need a bachelor's degree and many have a master's degree or professional certification. Bank managers often have experience as loan officers or in other sales positions. Financial managers also need strong interpersonal, math, and business skills. (LO: 1, AACSB: Reflective thinking) 16-26. What kinds of employers hire people for this position? According to your research, does the number of employers seem to be increasing or decreasing? How do you think this trend will affect your employment possibilities if you choose this career?

Employment of financial managers is projected to grow 19 percent from 2016 to 2026, much faster than the average for all occupations. However, growth will vary by industry.

Services provided by financial managers, such as planning, directing, and coordinating investments, are likely to stay in demand as the economy grows. In recent years, companies have been accumulating more cash on their balance sheets. This will lead to demand for financial managers, as companies will be in need of cash management expertise.

There has been an increased emphasis on risk management within the financial industry, and this trend is expected to continue. In response to both the financial crisis and financial regulatory reform, banking institutions will place a greater emphasis on stability and managing risk rather than on maximizing profits. This is expected to lead to employment growth for risk managers.

Overall growth of employment for financial managers will be limited by slower expected growth in depository credit intermediation. This industry includes commercial banking and savings institutions and employs a large percentage of these managers. From 2012 to 2022, employment of financial managers is projected to grow 5 percent in the depository credit intermediation industry.

(LO: 1, AACSB: Reflective thinking)

Intelligent Business Technology Credit scoring software is a type of business intelligence software that measures the credit worthiness of applications for credit cards, mortgages, business loans, and other forms of credit. It has the dual objective of filtering out applications that don’t meet a lender’s criteria while speeding up the process for applications that do meet the criteria. Software with predictive modeling or predictive analytics helps predict which applicants will make the best customers (lowest risk and highest profit potential) for a given lender. Explore the credit scoring and risk assessment products now on the market. In a brief email message to your instructor, explain how this tool can help lenders make better decisions.

Students’ emails will vary depending on the actual choices of credit scoring products.

(LO: 3, AACSB: Information technology)

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Practice Your Skills Resolving Ethical Dilemmas Imagine you’re a small-business owner applying for a bank loan to buy some new equipment. You have a solid personal credit rating and 10 years of profitable operations, so it’s not much of a surprise that your bank has approved your application. However, as you get ready to sign, you think about two new competitors that are moving into your neighborhood—a dynamic that the bank didn’t consider when evaluating your application. You’ve begun to worry about how well your business will be able to compete against these newcomers and how that might affect your ability to repay the loan. Should you tell the bank before you sign? Why or why not?

Student’s responses will vary. (LO: 3, AACSB: Ethical understanding and reasoning)

Sharpening Your Communication Skills You’ve just been hired as the CFO of a start-up company that is just a few months away from launching its first products. Unfortunately, the company is running short of cash and doesn’t have enough to pay for initial manufacturing costs. Your boss, Connie Washington, is getting frantic. She has worked for several years to get to this point, and she doesn’t want the company to collapse before it even starts selling products. She comes to you asking for ideas to generate some funds—immediately.

Several investors have expressed interest in helping with financing, but Connie doesn’t want to surrender any control by using equity financing. She wants to start applying for loans, even stacks of credit cards if that’s what it takes.

However, you don’t think piling on debt is a wise idea at this point. The company doesn’t have any revenue yet, and there’s no guarantee that the new products will be successful. You’d rather share the risk with some equity investors, even if that means that Washington will have to give up some of her managerial authority. Draft a short memo to her, explaining why you think equity financing is a better option at this stage (make up any details you need).

Students’ memos will vary but they should present persuasive arguments for using equity rather than debt financing. (LO: 2, AACSB: Written and oral communication)

Building Your Team Skills You and your team are going to build an operating expense budget worksheet for a neighborhood Domino’s pizza franchise. Begin by brainstorming a list of expenses that are typical of a franchise delivery restaurant. One way to do so is to think about the company’s process—from making the pizza to delivering it. List the types of expenses and then group your list into categories such as delivery, marketing, manufacturing, financing, and so on. Leave the budget dollar amounts blank. Finally, develop a list of capital investments your company will make over the next three to five years. Compare your budget worksheets to those of the other teams in your class. Which operating and capital expenses did other teams have that your team did not? Which expenses did your team have that other teams omitted?

Did all the teams categorize the expenses in a similar manner?

Students’ answers will vary depending on the actual budget worksheets they create.

(LO: 1, AACSB: Application of knowledge)

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Developing Your Research Skills Choose a recent article from a business journal or newspaper that discusses the financing arrangements or strategies of a particular company.

16-27. What form of financing did the company choose? Did the article indicate why the company selected this form of financing?

Students’ answers will vary depending on the actual choices of articles. (LO: 2-4) 16-28. Who provided the financing for the company? Was this arrangement considered unusual, or was it routine?

Students’ answers will vary depending on the actual choices of articles. (LO: 2-4) 16-29. What does the company intend to do with the arranged financing— purchase equipment or other assets, finance a construction project, finance growth and expansion, or do something else?

Students’ answers will vary depending on the actual choices of articles. (LO: 2-4)

Assisted-graded Questions 16-30. Assuming the interest rates are roughly the same, would you prefer to finance your new company by getting cash advances on your credit cards or by taking out a second mortgage on your house? Why? Students’ answer will vary depending on personal opinions and experiences.

Answers might include the fact that credit cards are a costly means of financing, but that getting a second mortgage could jeopardize a crucial personal asset. (LO: 2, AACSB: Reflecting thinking) 16-31. What is the fundamental difference in the way businesses approach debt and the way consumers approach it?

Business debt usually doesn’t have the same negative connotations as consumer debt, whereas consumers are advised to avoid most kinds of debt if at all possible and being in debt is often a sign of financial trouble or financial mismanagement.

Robust and well-run businesses of all shapes and sizes use debt as a routine element of financial management. The key difference is that—unlike with nearly all consumer debt other than loans for education—businesses can make money by borrowing money. Of course, companies can get into debt trouble through bad choices and bad luck, just as consumers can, and it’s up to financial managers to make smart borrowing choices. (LO: 3, AACSB: Application of knowledge)

CHECKPOINTS LEARNING OBJECTIVE 1: Identify three fundamental concepts that affect financial decisions, and identify the primary responsibilities of a financial manager.

Critical thinking: (1) What role does the company’s strategic plan play in the process of financial management?

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Bovee/Thill, Business in Action 9/e Instructor’s Manual The company’s strategic plan establishes the company’s overall direction and identifies the need for major investments, expanded staffing, and other activities that will require funds.

(2) How does zero-based budgeting help a company spend its cash in the most effective ways possible?

Zero-based budgeting is the approach in which each department starts from zero every year and must justify every item in the budget. It helps a firm spend its cash in the most effective way possible because it forces each department to show how the money it wants to spend will support the overall strategic plan.

It’s your business: (1) What is your financial plan for getting through college?

Students’ answers will vary depending on personal opinions and experiences.

(2) How well do you budget your personal finances? If you don’t budget, how do you monitor cash flow to make sure you don’t run out of money each month?

Students’ answers will vary depending on personal experiences.

LEARNING OBJECTIVE 2: Compare the advantages and disadvantages of debt and equity financing, and explain the two major considerations in choosing from financing alternatives.

Critical thinking: (1) What factors might lead a company to gain additional funds through debt financing rather than through equity financing?

A company might lean towards using debt rather than equity financing if the prevailing interest rate is low, if the management wants to maintain tight control of the firm, or when stock options are not important parts of employee benefits.

(2) Why does consumer debt have a more negative connotation than business debt?

Because for consumers, being in debt is often a sign of financial trouble or financial mismanagement. In contrast, businesses can make money by borrowing money. In fact, robust and well-run businesses of all types use debt as a routine element of financial management.

It’s your business: (1) Do you know your credit score, or have you ever looked at your credit report? To learn more about free credit reports, visit www.ftc.gov/freereports.

Students’ answers will vary depending on personal experiences.

(2) How should the cost of capital figure into your decisions about attending college, buying cars, and buying housing?

Students’ answers will vary depending on personal opinions.

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Bovee/Thill, Business in Action 9/e Instructor’s Manual LEARNING OBJECTIVE 3: Identify the major categories of debt financing.

Critical thinking: (1) How does getting a secured loan using accounts receivable as collateral differ from factoring?

Getting a secured loan using accounts receivable is a form of short-term debt financing, while factoring is not really a form of borrowing in the conventional sense and is an alternative to short-term debt financing. It obtains funding by selling accounts receivable.

(2) Why would lenders want to see that a business already has some level of capitalization before giving it access to more capital by means of a loan?

Lenders want some level of capitalization because lenders want to minimize the risks of default by the borrowers. Having some level of capitalization makes the borrowers less risky.

It’s your business: (1) Would you launch a new company if the only way to finance it was through the use of your personal credit cards? Why or why not?

Students’ answers will vary depending on personal opinions.

(2) Which of the debt alternatives identified in this section are available to you as a consumer?

Students’ answers will vary depending on personal experiences.

LEARNING OBJECTIVE 4: Outline the advantages and disadvantages of equity financing.

Critical thinking: (1) High-tech firms tend to dominate IPO filings year after year; why do you suppose this is so?

High-technology firms tend to have high growth and high profit potential and these are the same firms that tend to capture the interests of not only the investing public but also the venture capital firms and investment banks that play important roles either leading to or during the IPOs. (2) Why does the volume of IPOs tend to track the ups and downs of the stock market?

The volume of IPOs tends to track the ups and downs of the stock market because stock market conditions tend to reflect the general interest of investors in the equity markets and such interests (or lack thereof) are the same that will make IPOs successful (or not).

It’s your business: (1) If you had the choice between working at a company still in the pre-IPO stage, which is offering a lower salary but a share of ownership that will become shares of company stock after the IPO, or a higher paying job with no stock, what additional information would you need before you would be comfortable making a choice?

Students’ answers will vary depending on personal experiences.

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16-14

Bovee/Thill, Business in Action 9/e Instructor’s Manual (2) Choose any business that you might like to start as an entrepreneur. How would you make a compelling pitch to private equity investors to encourage them to invest in your company?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 5: Identify the four most important financial markets for most businesses.

Critical thinking: (1) If derivatives can be so risky, why do so many businesses continue to use this market to manage their finances?

Derivatives can be used defensively to protect profits by hedging a position to guard against the risk of a sudden loss or, offensively, to seek profits by speculating on future price changes.

(2) Why do individual investors participate in the stock and bond markets but not in the money market?

Because unlike stocks and many bonds, the amounts traded in the money market are far beyond the reach of individual investors.

It’s your business: (1) What is your emotional reaction to the term Wall Street? Explain your answer.

Students’ answers will vary depending on personal opinions.

(2) Have you explored investing in stocks or bonds? What else would you need to know before you would be comfortable doing so?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 6: Describe four major steps required to become an investor.

Critical thinking: (1) Why is it important to establish objectives before you begin to invest?

A common mistake in investing is chasing after promising investments without having any long-range goals in mind. Asking oneself some simple questions before investing will help to establish realistic investment objectives that are right for you and your family.

(2) Why is asset allocation a fundamentally important strategy for investors?

In general, younger investors want to focus on building capital through equity investments, whereas older investors want to focus on protecting capital through income and cash instruments, so they rebalance their portfolios over time.

It’s your business: (1) Do you think you currently have the discipline needed to control your spending in order to free up cash for regular investing? If not, what changes could you make?

Students’ answers will vary depending on personal opinions.

(2) If someone gave you a “hot tip” on stock, how would you go about researching the opportunity before making an investment decision?

Students’ answers will vary depending on personal experiences.

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16-15

Bovee/Thill, Business in Action 9/e Instructor’s Manual

LEARNING OBJECTIVE 7: Explain how businesses can use smart contracts to facilitate transactions.

Critical thinking: (1) If a smart contract malfunctions, who should be held liable—the people who developed it or the people using the system?

Students’ responses will vary. The malfunction could be inherent in the smart contract, or it could be related to implementation by the people using the system.

(2) How might the growth of blockchain and smart contracts affect unemployment in financial services or freight and logistics?

It could decrease the number of jobs available by automating much of the paperwork involved in these processes.

It’s your business: Does the prospect of working with blockchain and related technologies sound appealing? Would you consider pursuing a career in this area?

Students’ answers will vary depending on personal opinions.

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16-16