Better Business, 5th Edition Michael R Solomon Solution Manual

Type:

Solution Manual

Resource:

Better Business

Edition:

3rd Edition

Author(s):

Michael R. Solomon Mary Anne Poatsy Kendall Martin

CHAPTER 1: BUSINESS BASICS CHAPTER OPENER Many students come to an introduction to business class not quite sure about what’s in it for them. However, the course has something for everyone, from those who have been in the business world a while to those without any experience at all. As the book unfolds, students will develop an understanding of the foundations of business and will be able to apply what they already know about business to many parts of the course.

This first chapter dives right into the world of business: • explaining the differences between goods and services • differentiating between for-profit businesses and not-for-profit organizations • identifying and describing the factors of production Next, the chapter covers the ways in which competition, the social environment, globalization, and technological growth both challenge and provide opportunities to business owners. Students will then be introduced to different types of businesses in terms of their scope. Finally, the chapter will make the vital connection between their current life skills and the business environment.

DETAILED LECTURE OUTLINE I. The Business Landscape A. Business Defined 1. What exactly is a business? a. Businesses are entities that offer products and services to their customers in order to earn a profit. b. A profit is earned when a company’s revenue (the money it brings in) exceeds its expenses (the money it pays out). c. When expenses exceed revenue, the company posts a loss.

2. What kinds of products do businesses offer? a. Products can be either a good or a service. b. Goods are physical products a business sells. c. A service is an intangible product that is bought or sold. d. Some companies (such as restaurants) offer products that are both goods and services. e. Countries change over time in whether goods or services dominate their economic system.

3. What do businesses do with their profits? a. As profits are generated, a company can reward its employees, increase its productivity, or expand its business.

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b. A successful business benefits both the owner and society because they offer desired goods and services, provide employment, and generate income and spending in the economy.

4. What about not-for-profits? a. Not-for-profit organizations do not pursue profits for its owners, but instead seek to service the community through social, educational, or political means. b. Profits are used to further the organization’s causes by expanding the services they provide.

B. The Factors of Production 1. What do businesses use to create the products they sell? a. The factors of production are the resources used to create goods and services. These are as follows: i. Labor refers to any physical or intellectual work (ideas and knowledge) that people contribute to a business’s production. ii. Natural resources are raw materials provided by nature that are used to produce goods and services. iii. Capital, both real and financial: a.) Real capital refers to the physical facilities used to produce goods and services. b.) Financial capital refers to money used to facilitate a business enterprise. iv. Entrepreneurial talent: a.) An entrepreneur assumes the risk of creating, organizing, and operating a business and directs all of a business’s resources. v. Intellectual property consists of privately owned, intangible assets developed as a result of people’s intellect and creativity. a.) Examples include patents, copyrights, and trademarks. vi. Technology refers to goods and services such as computers and software that make businesses more efficient and productive.

II. Common Business Challenges and Opportunities A. Competition 1. How does competition influence business? a. Competition arises when two or more businesses vie to attract customers and gain an advantage. b. Competition forces companies to improve their product offerings, lower their prices, promote their brands, and focus on customer satisfaction. i. It weeds out less efficient companies and less desirable products from the marketplace. c. Companies need to deliver customer satisfaction, understand the power of social networking, and empower their employees. i. Social networking sites are websites that make it easier for people to connect with one another online for the purposes of building and supporting social relationships. .

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a.) Companies are increasingly using social networking to connect to their customers, promote their products, offer discounts, and build relationships. ii. It is also essential to empower workers to feel free to deal with customer needs by giving them greater decision-making responsibilities.

B. Social Environment 1. How does the social environment affect business? a. A social environment is an interconnected system of demographic factors such as race, ethnicity, gender, age, income distribution, sexual orientation, and other characteristics. b. Three specific issues surrounding the social environment present potential challenges and opportunities for today’s businesses. i. An aging population a.) Baby boomers, the generation born between 1946 and 1964, make up the majority of the aging population in the United States. b.) The aging U.S. population presents opportunities for businesses but it also presents challenges for the U.S. economy. c.) Potential problems include funding entitlement programs such as Social Security and Medicare. d.) Caring for the needs of an older population presents growth opportunities for businesses, especially retirement centers, healthcare, pharmaceutical companies, and the travel industry. ii. Increasing workforce diversity a.) The U.S. Census Bureau reports that the minority population in the United States is about 35 percent, making 1 in 3 residents a minority. b.) Companies must develop diversity initiatives such as nondiscrimination policies, a minority network, or diversity education to manage, retain, and promote a diverse workforce. c.) The term minority applies to more than just people of different ethnicities. i.) Minority groups might represent gender, culture, religion, sexual orientation, or disability and all groups must be treated fairly. iii. The green movement a.) Anxieties about global warming and climate change have motivated businesses to become involved in a green economy— one that factors ecological concerns into business decisions. i.) The demand for more green products presents new opportunities for entrepreneurs to meet those needs. ii.) “Green-collar” jobs can revitalize large swaths of the U.S. manufacturing economy.

C. Globalization 1. How has globalization affected business?

a. Multinational enterprises—companies that have operations in more than one country—are among the leaders of a movement called globalization. b. Globalization is a movement toward a more interconnected and interdependent world economy. i. Economies around the world are merging as technology, goods and services, labor, and capital move back and forth more easily across international borders. ii. A growing number of companies are offshoring—relocating their production facilities overseas or subcontracting components to foreign companies to achieve lower manufacturing costs. iii. Globalization presents both benefits and risks to the U.S. economy. a.) Lowered production costs allow firms to lower the cost of products for consumers, yet people remain concerned about workers in the United States who lose their jobs to workers overseas. iv. Globalization poses other risks for U.S. companies, including: a.) Increased competition from international companies b.) Fluctuations in the value of the U.S. dollar c.) Security and patent protection concerns d.) Unstable political climates in foreign countries D. Technological Changes 1. Why does the pace of technological change present challenges to businesses today? a. Companies must stay on the cutting edge of technology to remain competitive, and that is an expensive and time-consuming operation. b. Advancements in technology are completely changing the foundation and focus of how many businesses are run.

2. What benefits does technology provide to business? a. Technology, when used and implemented effectively, can help streamline businesses and cut costs. b. Companies can also use new technology systems to increase productivity. c. Technology makes it possible for employees to telecommute, or work from home or another location away from the office.

3. What role does the Internet play in technological growth? a. E-commerce i. E-commerce consists of three different kinds of business trade: business-to-consumer (B2C), business-to-business (B2B), and consumer-to-consumer (C2C). a.) B2C interactions take place between a business and a consumer. b.) B2B interactions involve the sale of goods and services from one business to another. c.) C2C transactions have become possible through consumer-driven storefronts where individuals offer goods directly for sale to customers. ii. E-commerce has been growing rapidly since the new millennium, and e-commerce will continue to be a driving force in the economy. b. Online security .

i. Widespread access to information that the Internet affords affects businesses in a variety of ways. ii. As the number of people and businesses who trade and store personal information online rises, so does the number of people who are victims of identity theft—the illegal gain and use of personal information. c. Privacy i. E-mails, internal documents, and chat transcripts all contain private information that is not intended for public viewing but many of these documents can be accessed online because of online storage in the “cloud.” ii. With this universal access, it is increasingly difficult to ensure that information remains private.

III. Types of Businesses A. Local and Regional Businesses 1. What defines local or regional businesses? a. A local business is usually one of a kind and relies on local consumers to generate business. b. Regional businesses serve a wider area than local businesses, but do not serve national or international markets.

2. What special challenges do local and regional businesses face? a. The most common challenge is managing money. Poor financial planning and unfavorable economic conditions can lead to bankruptcy. b. Undercapitalization occurs when a business owner cannot gain access to adequate funding. c. Business owners also have to take taxes and insurance costs into consideration, such as health insurance and liability insurance.

B. National Businesses 1. What defines national businesses in the United States? a. A national business serves the country and provides goods and services to virtually all U.S. residents. b. National businesses do not serve an international market.

2. What special challenges do national companies face? a. Because laws vary from state to state, national companies must be aware of state laws in every state where they do business. b. National companies also face a longer, more complex supply chain—the flow by which products, information, and money move between a supplier and a consumer.

C. Multinational (International) Businesses 1. What categorizes a company as multinational (or international)? a. Multinational businesses make and/or sell products in several countries. b. They provide goods or services to international consumers or serve only one country but have suppliers or production facilities in other countries.

2. What special challenges do multinational corporations face? a. Multinational corporations must be familiar and comply with the laws of the countries in which they operate. .

b. Cultural differences such as language barriers, values, and customs relating to business etiquette also have an impact. c. Multinational companies also must contend with economic differences, such as different levels of economic development, interest rates, and inflation rates.

IV. Taking Business Personally A. Life Skills for Business 1. How do you receive funding? a. You’re receiving money from somewhere, such as from work, a family member, a student loan, or savings.

2. What are your expenses? a. Expenses such as rent, clothing, food, and tuition must be paid for with cash, credit, or a loan.

3. How does the social environment affect your life? a. This includes learning from people who are different from you, embracing diversity, and finding ways to make your lifestyle more eco-friendly.

4. How does globalization affect your life? a. You purchase items designed and/or manufactured in other countries. b. As globalization continues, the chances that you will work in a foreign country for part of your career continue to climb.

5. How do you keep up with new technology? a. Whether or not you consider yourself to be tech-savvy, chances are you still use some sort of technology to run your life.

6. What sort of e-commerce do you use? a. You may purchase items online or sell things on sites such as eBay. 7. How do you keep your business secure? a. You help keep your information secure by changing online passwords regularly, making sure your wireless connections are secure, and removing personal information from social networking sites.

8. What types of financial goals do you have? a. To reach your financial goals, you need to make informed decisions about how you spend and save your money.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity: Ice Breaker What Do You Know About Business?

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

Time Limit: 20 minutes AACSB: Diverse and multicultural work environments What to Do: 1. Ask each student to take out a piece of paper and divide it into two columns. In the first column, students should write the most important four or five things they currently know about business, and in the second column, the four or five things they would like to learn. Tell them if they are having difficulty coming up with items to list, take a look at the table of contents of the text. It will give them some clues so that they don’t feel frustrated when completing this task. (5 minutes) 2. Divide students into groups of three to five people and ask them to share their lists with one another. As they listen, they can delete or add anything that seems relevant.

(5 minutes) 3. Ask them to switch groups so that they are with all new people, and repeat the process of sharing their lists. (5 minutes) 4. Ask students to switch to a third group of all new people. With this group, the goal is to synthesize their lists into one big idea of what they know, and one big idea of what they want to learn. (5 minutes) Don’t Forget: This activity allows students to get to know one another as well as set expectations for the course. The underlying agenda is to get them talking to one another, setting the stage for active participation throughout the class.

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

Supplemental In-Class Activity 1 Structuring Businesses by Industry Learning Objective 1-3: Types of Businesses AACSB: Application of knowledge .

Activity Overview: This activity gives students an understanding about how various legal structures can help more in some businesses than others.

Time Limit: 10–15 minutes What to Do: Set up student teams of three to four each. Have them select an industry (not a business) that is well-known locally. Have the team determine which legal structure or ownership would be best for a company starting out in that industry and explain why.

Don’t Forget: Make sure the industries are varied to allow for different structures that might be the best.

Wrap-Up: Ask students what they learned.

Supplemental Homework Activity 2 Interview a Manager Learning Objective 1-1: The Business Landscape AACSB: Application of knowledge

Homework Assignment: Students are asked to interview a business owner or senior manager, finding out how demand and supply affect the business, what essential factors of production are most important, and the impact of economic indicators on the business.

Deliverable: A brief paper detailing the outcome of the interview. Answers will vary, but students should recognize that demand and supply affect every business in some way.

Typical factors of production cited in this answer include capital, labor, physical resources, information resources, and entrepreneurship. Economic indicators affect businesses differently at different times, depending on whether they are manufacturers or retailers. Ultimately, price increases in an industry will affect the buying power of consumers, which will affect how much is produced and purchased.

At-Home Completion Time: 1 to 2 hours.

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ENHANCING THE ONLINE COURSE Business Biography: Ask students to consider the role of business in their lives. Have them write a two-paragraph business biography that highlights their own background, but with a connection to the business world (such as “my uncle owned a hardware store”).

Ask students to post these on the discussion page as they would their typical biographies at the beginning of the semester. (Learning Objective 1-1: The Business Landscape AACSB: Application of knowledge)

Profit vs. Not-for-Profit: Ask students to develop a visual using open source graphics to depict the differences between profit and not-for-profit organizations as well as goods and services. Have students post their “illustrations” of these concepts on the discussion board. (Learning Objective 1-1: The Business Landscape AACSB: Application of knowledge) Mindmap: Ask students to create an online “mindmap” (a chart with connected “branches”) using the graphics tools on the computer. This mindmap would depict the factors of production as they relate to business. Ask your students to write a paragraph describing how all the branches contribute to the business and post these on the discussion board or post them as graded assignments. (Learning Objective 1-1: The Business Landscape AACSB: Application of knowledge)

Podcast: Create a short discussion on the topic of types of businesses. Record it using the microphone on your computer. You can create a podcast of the mini-lecture using the RSS link that is usually one of the features in an online environment. (Learning Objective 1-3: Types of Businesses AACSB: Application of knowledge)

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ANSWERS TO END-OF-CHAPTER MATERIALS Self Test Multiple Choice 1-1 Which of the following are the factors of production? a. Labor, natural resources, capital, entrepreneurs, technology, and intellectual property Learning Objective 1-3: Types of Businesses AACSB: Analytical thinking 1-2 Goods are products a business sells like b. conveyer belts.

Learning Objective 1-1: The Business Landscape AACSB: Application of knowledge 1-3 Which of the following is a current sociocultural trend? d. An increase in the population of Americans ages 65 and over Learning Objective 1-2: Common Business Challenges and Opportunities AACSB: Application of knowledge 1-4 A green economy b. factors ecological concerns into business decisions.

Learning Objective 1-2: Common Business Challenges and Opportunities AACSB: Application of knowledge 1-5 If a firm decides to shift the production of goods or services to an overseas company, this is called b. offshoring.

Learning Objective 1-2: Common Business Challenges and Opportunities AACSB: Application of knowledge 1-6 The four types of businesses are b. local, regional, national, and multinational.

Learning Objective 1-3: Types of Businesses AACSB: Analytical thinking 1-7 B2B and B2C interactions are a. common now because of the explosive growth of e-commerce.

Learning Objective 1-2: Common Business Challenges and Opportunities AACSB: Application of knowledge 1-8 A social environment is an interconnected system of different demographic factors such as c. gender, age, and income.

Learning Objective 1-2: Common Business Challenges and Opportunities AACSB: Application of knowledge .

1-9 Which of the following is NOT a common challenge facing most national companies? a. Undercapitalization Learning Objective 1-2: Common Business Challenges and Opportunities AACSB: Application of knowledge 1-10 You are managing your own life like a business when you a. consider how your expenses, the social environment, and globalization impact your life.

Learning Objective 1-4: Taking Business Personally AACSB: Reflective thinking

True/False 1-11 Profit is another word for revenue.  False Learning Objective 1-1: The Business Landscape AACSB: Analytical thinking 1-12 Identity theft is mainly a problem for senior citizens.  False Learning Objective 1-4: Taking Business Personally AACSB: Application of knowledge 1-13 The supply chain is the process by which products, information, and money move between a supplier and the consumer.  True Learning Objective 1-3: Types of Businesses AACSB: Analytical thinking 1-14 Globalization poses risks to the U.S. economy because of security and patent protection concerns.  True Learning Objective 1-2: Common Business Challenges and Opportunities AACSB: Application of knowledge 1-15 A not-for-profit organization uses any revenue to reward the management team.  False Learning Objective 1-1: The Business Landscape AACSB: Application of knowledge Critical Thinking Questions: Suggested Answers 1-16 Answers will vary.

Learning Objective 1-2: Common Business Challenges and Opportunities .

AACSB: Analytical Thinking 1-17 Answers will vary, but many students will recognize the importance of green practices. Some companies, such as retailers, will affect the environment little; instead promoting the green options available to customers as being very important. On the other hand, many students will recognize that manufacturers need to pay particular attention to the environment in the implementation of their production processes and would tout this in any marketing campaign. Going green can be expensive but the trade-off is poor publicity, loss of sales, etc.

Learning Objective 1-2: Common Business Challenges and Opportunities AACSB: Analytical Thinking 1-18 Answers will vary, but many students will recognize that an online presence can drive business into a store, facilitate shopping, appeal to varying demographics but can also cannibalize in-store purchases.

Learning Objective 1-2: Common Business Challenges and Opportunities AACSB: Analytical Thinking

Team Time The Competitive Edge Answers will vary. However, the point of the exercise is to stress the dynamic nature of competition. Those companies that are responsive to consumer demands and offer a unique and distinct high-quality product at a reasonable price will win more market share and earn higher profits. Another key to business success is to foster good customer relations and repeat business by remaining responsive to changing customer demands and anticipating customer desires before they are expressed.

Learning Objective 1-2: Common Business Challenges and Opportunities AACSB: Application of knowledge

Ethics and Corporate Social Responsibility Cultural Awareness: Unwritten Laws Answers will vary. However, it is important for multinational companies to research the values and customs of a foreign country with whom they intend to conduct business because the best laid business plans can go awry if foreign cultural sensitivities are offended. Some of the important cultural factors include language, educational levels, gender relationships, etiquette, and religious values, as well as attitudes toward cooperation between management and labor and toward work in general.

Learning Objective 1-2: Common Business Challenges and Opportunities AACSB: Diverse and multicultural work environments .

Web Exercises 1-19 Are You Savvy to Society?

Students’ answers will vary. However, it is important for local businesses to research the demographics of the population in the area to determine if the business can thrive in the area. Demographic factors include race, ethnicity, gender, age, income, and sexual orientation of the population.

Learning Objective 1-2: Common Business Challenges and Opportunities AACSB: Application of knowledge 1-20 The Language of the Global Marketplace Students’ answers will vary. Google, WorldLingo, and other companies have free online website translation services that translate text and Web pages. Babelfish.com and LanguageLine.com have a variety of services, including an on-demand video remote interpreting service, pay-as-you-go interpreting services, and document translation services.

Learning Objective 1-2: Common Business Challenges and Opportunities AACSB: Application of knowledge 1-21 Business Technology On-the-Go Students’ answers will vary depending on the trend selected.

Learning Objective 1-2: Common Business Challenges and Opportunities AACSB: Application of knowledge 1-22 Nonprofit Business Is Still Business Students’ answers will vary depending on the tools selected.

Learning Objective 1-1: The Business Landscape AACSB: Application of knowledge 1-23 Comparing Companies Students’ answers will vary depending on the companies and states selected.

Learning Objective 1-3: Types of Businesses AACSB: Application of knowledge MyBizLab: Suggested Answers 1-24 Answers will vary but this is an opportunity for students to tap into their entrepreneurial imagination and envision their future considering the factors of production, organization, and communication. .

Learning Objective 1-2: Common Business Challenges and Opportunities AACSB: Application of knowledge 1-25 Answers will vary.

Learning Objective 1-3: Types of Businesses AACSB: Application of knowledge

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CHAPTER 2: ECONOMICS AND BANKING CHAPTER OPENER Chapter 2 covers the fundamentals of economics—how business decisions are shaped by supply and demand and the degrees of competition.

This chapter will introduce students to concepts such as: • the different types of economic systems throughout the world • how economic indicators such as the gross domestic product (GDP), price indices, the unemployment rate, and productivity reflect the health of an economy • the four stages of the business cycle • how the government uses fiscal policy to smooth swings in the business cycle Finally, students will learn about the money supply, the Federal Reserve Bank, and the tools it uses to stabilize the economy through monetary policy.

DETAILED LECTURE OUTLINE I.

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The Basics of Economics A. Economics Defined 1. So what is economics? a. Economics is the study of how individuals and businesses make decisions to best satisfy wants, needs, and desires with limited resources. b. There are two basic studies of economics: microeconomics and macroeconomics. i. Microeconomics is the study of how individual businesses, households, and consumers make decisions to allocate their limited resources in the exchange of goods and services. ii. Macroeconomics is the study of the behavior of the overall economy.

B. Economic Systems 1. What are the different types of economic systems? a. An economy is a system that tries to balance the available resources of a country, such as land, capital, and labor, against the wants and needs of consumers. b. An economy is defined by: i. What is produced ii. How it is produced iii. Who gets the finished product c. The world’s different economies are classified into three basic economic systems: planned (or controlled) economies, free market economies, and mixed economies (Table 2.1).

C. Planned Economic Systems 1. In a planned economic system, the government plays a significant role in determining the goods and services produced and distributed.

2. Communism is an economic system in which a state’s government makes all economic decisions and controls all social services, as well as many of the major resources required for the production of goods and services.

3. Socialism is a system whereby the government owns or controls many basic businesses and services, and the profits from them are distributed evenly among the people. a. The government charges high tax rates to pay for the services it provides. b. This economic system may tend to reduce people’s motivation to work as hard as they might otherwise. c. Many socialist and communist countries are beginning to change their economies into free market economies through privatization—the conversion of government-owned production and services to privately owned, profit-seeking enterprises.

D. Market Economies 1. In a market economy, individuals are more able to make their own economic decisions.

2. Capitalism is an economic system that allows freedom of choice and encourages private ownership of resources required to make and provide goods and services.

3. The production and pricing of goods and services is determined through the operation of a market—the mechanism by which buyers and sellers exchange goods and services.

E. Mixed Economies 1. Most economic systems are mixed economies—a blend of market and planned economies. See Figure 2.1.

F. Business and Economics 1. Why do business managers need to be concerned with economics? a. Businesses need to know how much of their goods to produce or services to offer, as well as how much to charge. b. They need to be aware of the potential impact that government decisions and the decisions of collective businesses can have on their individual business.

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Determining Price: Supply and Demand A. Definitions 1. Currency is a unit of exchange for the transfer of goods and services and provides a consistent standard.

2. The market price for a good or service is the price at which everyone who wants the item can get it—without wanting more or without any of the items being left over.

B. Supply 1. What is supply? a. Supply refers to how much of a product or service is available. It is derived from a producer’s desire to maximize profits. b. The law of supply states that the amount supplied will increase as the price increases; if the price is lower, then less of the product is supplied.

c. A supply curve shows the relationship between supply and price.

C. Demand 1. What is demand? a. Demand refers to how much people want to buy at any given time. b. The amount demanded increases as price declines. c. A demand curve illustrates the relationship between demand and price.

D. Factors That Determine Price 1. What factors determine price? a. As a price of a product increases, more of it is likely to be supplied. b. As the price of the produce decreases, more of it is likely to be demanded by customers. c. If supply exceeds demand, there is a surplus. d. If demand exceeds supply, there is a shortage. e. The price at which supply equals demand is the market price or the equilibrium price and is illustrated in a supply-and-demand curve.

E. Factors That Affect Demand 1. What other factors besides price affect demand? a. Determinants of demand include: i. Changes in income levels a.) When income levels increase, people are able to buy more products. b.) When income levels decrease, people cut back on spending and buy fewer products. ii. Population changes a.) Increases in population create greater demand. b.) Demographic changes also affect demand for certain goods and services. iii. Consumer preferences a.) Demand for a product can change based on what is popular at any given moment. iv. Complementary goods a.) Products or services that go with each other and are consumed together, such as apps and iPhones, are considered complementary goods. v. Substitute goods a.) Goods that can be used in place of other goods, such as Coke for Pepsi, are substitute goods. b. A positive change in any of these shifts the demand curve to the right. c. A negative change in any of these shifts the demand curve to the left.

F. Factors That Shift Supply 1. What makes supply change? a. Factors that can create a change in supply are known as determinants of supply and include: i. Technology changes

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a.) Improvements in technology enable suppliers to produce goods or services more efficiently and with fewer costs, thus increasing their ability to supply more. ii. Changes in resource prices a.) Increases and decreases in the price of the resources used to produce a good or a service affect the cost of their production. i.) An increase in resource prices increases the cost of production and reduces profits, thus lowering the incentive to supply a product. iii. Price expectations a.) The expected future price of a product will affect how much of it producers are willing to supply. i.) If prices are expected to increase in the future, a supplier might stockpile the product and supply more at a later time when prices are higher. ii.) If prices are expected to decrease, the supplier might attempt to sell its supply while prices are high. iv. The number of suppliers a.) The supply of a good or a service increases as the number of competitors increases. v. The price of substitute goods a.) If there are equally comparable goods available at a lower price, the supply of the more expensive good will be affected. b. Changes in any of these factors can shift the supply curve to the left (negative impact on supply) or to the right (positive impact on supply).

III.

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Degrees of Competition A. Monopolies 1. What is a monopoly? a. A monopoly occurs when a provider of a good or service has control of all or nearly all of its market.

2. Why aren’t there many monopolies? a. Without competition, a firm that has a monopoly can charge a higher price and may be less responsive to consumer needs. b. The U.S. Federal Trade Commission (FTC) and the Department of Justice must review mergers between large competitors to determine whether the combined firm would result in a monopoly that would thwart competition. c. Natural monopolies (such as utility companies that sell natural gas or water) may be permitted in the United States to conserve natural resources but the government regulates the prices, preventing the companies from overcharging.

B. Duopolies and Oligopolies 1. What happens when one or two other companies enter a monopolistic market? a. A duopoly is where only two suppliers exist, or only two firms dominate a market.

b. An oligopoly is a form of competition in which only a few sellers exist and each seller has a fairly large share of the market.

C. Monopolistic Competition 1. What happens when there isn’t much differentiation between products? a. Monopolistic competition occurs when there are many buyers and sellers and the products are similar but not identical. b. Often there is a perceived difference among consumers so the products are not perfectly substitutable products.

D. Perfect Competition 1. What happens when products are almost identical? a. Perfect competition occurs when there are many buyers and sellers of products that are virtually identical and any seller can easily enter and exit the market. b. No single supplier can influence the price.

IV.

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Economic Indicators A. Definitions 1. Business managers need to be aware of certain statistics about economic activities, called economic indicators. a. Leading indicators are statistics that can be used to help predict how the economy will do in the near future. b. Coincident indicators are statistics that reflect how the economy is currently doing. c. Lagging indicators are statistics that change only after the economy as a whole changes.

2. The gross domestic product, consumer and producer price indices, and the unemployment rate are three economic indicators closely watched by businesspeople.

B. The Gross Domestic Product 1. How do we determine the health of an economy? a. The broadest measure of the health of any country’s economy is its gross domestic product (GDP), which measures how productive a nation is; that is, the overall market value of final goods and services produced in a country in a year. b. Only those goods that are actually produced in the country are counted in the country’s GDP. 2. How does the GDP act as an economic indicator? a. A rising GDP indicates that more goods and services are being produced and that businesses are doing well. b. A downward-moving GDP indicates that fewer goods are being produced, fewer services are being sold, and businesses are not doing as well. c. A nation’s GDP is often viewed in tandem with the country’s debt level. i. A low debt-to-GDP ratio indicates an economy that is healthy. ii. A high debt-to-GDP ratio indicates a country that is spending beyond its means.

C. Consumer and Producer Price Indices

1. What else is used to gauge the health of an economy? a. There are two price indices used as economic indicators: the consumer price index and the producer price index. b. A consistent increase in either indicator indicates inflation. i. Inflation is a rise in the general level of prices over time. ii. A decrease in the rate of inflation is disinflation. iii. A continuous decrease in prices over time is deflation.

2. How are changes in the price of consumer products measured? a. The consumer price index (CPI) tracks changes in prices over time by measuring changes in prices of goods in services that consumers purchase. b. It is a lagging indicator, so it shifts after the economy changes. c. The CPI measures price changes by creating a “market basket” of a specific set of goods and services that represent the average buying pattern of urban households.

3. What goods and services are included in the CPI? a. The expenditure items fall into eight major groups: apparel, education and communication, food and beverages, housing, medical care, recreation, transportation, and other goods and services (Figure 2.8).

4. Does the CPI measure the change in price of all goods? a. The CPI measures the change in prices of consumer goods only. b. The producer price index (PPI) tracks the average change in prices at the wholesale level. i. It tracks the prices of goods sellers use to create products, such as raw materials, product components that require further processing, and finished goods sold to retailers.

5. Why are price indices important? a. They measure purchasing power and consequently trigger business decisions. b. During periods of increasing prices, consumers’ purchasing power decreases. i. As a result, wages increase to compensate for the higher cost of living, and businesses must eventually increase the prices of their products to offset higher labor costs, again decreasing the consumer’s purchasing power.

D. The Unemployment Rate 1. What other indicators are used to measure the economy? a. The unemployment rate measures the number of workers who are at least 16 years old, are not working, and who have tried to find jobs within the past four weeks. b. There are different measurements of unemployment: i. Frictional unemployment is temporary unemployment that results when workers move among jobs, careers, and locations. ii. Structural unemployment is permanent unemployment that occurs when an industry changes and jobs are terminated completely. iii. Cyclical unemployment occurs when firms must cut back their workforces when there is a downturn in the business cycle. .

iv. Seasonal unemployment occurs when workers get laid off during the off-season or after the holiday shopping season ends.

2. Why is unemployment an important economic measure? a. High unemployment results in an increase in unemployment benefits and government spending on social programs such as welfare. b. If the unemployment drops too low, more workers have increased buying power and spend more, causing prices to rise and resulting in inflation.

E. Productivity of Firms 1. How is the productivity of a firm’s workforce measured? a. Productivity measures the quantity of goods and services that a firm’s human and physical resources can produce in a given time period.

2. Why is measuring productivity important to businesses? a. An increase in productivity indicates that workers are producing more goods or services in the same amount of time, often resulting in lower costs and lower prices.

V.

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Government and the Economy A. Economic Policies 1. Why does the state of the economy change? a. Over time, the economy naturally goes through periodic increases and decreases, called the business cycle. There are four stages (Figure 2.9): i. Peak occurs when an economic expansion is at its most robust point. ii. Recession is a decline in the GDP for two or more successive quarters.

A very severe or long recession is a depression. iii. A trough occurs when the recession hits bottom and the economy begins to expand again. iv. Expansion or recovery refers to the phase when the economy begins to grow again and enters into an expansionary or recovery phase.

Eventually the recovery will hit a peak and the cycle begins again.

2. How does the government control swings in the business cycle? a. To smooth out the swings in the business cycle, lawmakers use fiscal policy to determine the appropriate level of taxes and government spending.

B. Fiscal Policy 1. Why does the government increase taxes to influence the economy? a. Tax increases mean consumers spend less, which slows down the growth of businesses and the economy by reducing the amount of money in the system, and this lowers inflation. b. Decreasing taxes does not have the opposite effect because the amount of money entering the system depends on how much of the reduction in taxes consumers spend and how much they save.

2. How does government spending help stimulate the economy? a. The government spends money on a wide variety of projects, such as infrastructure improvements and projects that benefit the military, education, and health.

b. This increases the cash flow in the economy faster than decreasing taxes does and also creates additional jobs, which also helps stimulate the economy.

C. Monetary Policy 1. What else can be done to control the economy? a. The second tool to manage the economy is monetary policy, which is exercised by the Federal Reserve System (the Fed), the central banking system of the United States. i. It includes 12 regional Federal Reserve Banks, a Board of Governors, and the Federal Open Market Committee, which sets the policies of the Fed. ii. Through its monetary policy, the Fed affects the nation’s money supply and helps shape the direction of the economy.

2. What is the money supply? a. The money supply is the combined amount of money available within an economy. b. There are different components to the money supply (see Figure 2.11): i. M-1: Coins and bills (currency), traveler’s checks, and checking accounts. These are the most liquid assets. ii. M-2: M-1 plus savings deposits, money market accounts, and certificates of deposit (CDs) less than $100,000. iii. M-3: M-1, M-2, and less liquid funds such as larger CDs, money market accounts held by large banks and corporations, and U.S. dollars deposited in banks outside the United States.

3. Why is the money supply important? a. The more money we have, the more we tend to spend. b. As consumers spend more, businesses do better, increasing demand for resources, labor, and capital, and the economy improves. c. However, when the money supply continues to expand, there may not be enough goods and services to satisfy demand and it may result in inflation. d. When the economy begins to slow down due to decreased spending, either disinflation or deflation results. e. The Fed uses three tools to affect money supply: reserve requirements, short-term interest rates, and open market operations.

D. Reserve Requirements 1. What are reserve requirements? a. The reserve requirement, determined by the Fed, is the minimum amount of money banks must hold in reserve to cover deposits. b. The Fed can ease or tighten the money supply by increasing or decreasing the reserve requirement. i. If the Fed increases the reserve requirement, it forces banks to hold on to more money rather than lending it out, slowing down economic activity. c. The Fed rarely uses the reserve requirement as a means of monetary policy.

E. Short-Term Interest Rates .

1. What is the discount rate? a. When commercial banks borrow funds from the Fed, they are charged an interest rate called the discount rate. b. The Fed has the power to increase or decrease the discount rate in its efforts to control money supply. i. When the Fed lowers the discount rate, commercial banks are encouraged to obtain additional reserves by borrowing funds from the Fed and then lending those reserves to businesses, thereby stimulating the economy. ii. When the Fed increases the discount rate, it discourages banks from borrowing additional reserves and lending to businesses.

2. Is the discount rate the same as the federal funds rate? a. The federal funds rate is the interest rate that banks charge other banks when they borrow funds overnight from one another. b. The Fed does not control the federal funds rate directly. The rate is the equilibrium price created through the Fed’s open market operations and the exchange of securities. i. The excess reserves that are available to lend among banks come from securities that the Fed buys and sells through its open market operations. a.) To increase the federal funds rate, the Fed sells bonds in the open market, and banks buy the securities, reducing their excess reserves available for loans. b.) To decrease the federal funds rate, the Fed buys bonds in the open market, increasing banks’ excess reserves and making more money available.

F. Open Market Operations 1. What are open market operations? a. The primary tools the Fed uses in its monetary policy are open market operations, buying and selling U.S. Treasury and federal agency bonds on the “open market.” b. When the Fed buys or sells U.S. securities, it is changing the level of monetary reserves in the banking system by adding or taking away money from the system.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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

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

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

Supplemental Homework Activity Let’s Go Shopping!

Homework Assignment: Visit a local shopping mall or shopping area. List each store that you see and determine what degree of competition it faces in its immediate environment. For example, if there is only one store in the mall that sells shoes, that store represents a monopoly. Note those businesses with direct competitors (e.g., two jewelry stores) and show how they compete with one another.

Deliverable: A brief paper reporting on degrees of competition and the tactics stores use to compete with one another. Answers will vary, but students should recognize different levels of competition and how stores respond to competition by advertising, reducing prices, and so on.

At-Home Completion Time: 1 to 2 hours. .

ENHANCING THE ONLINE COURSE Online Lecture: Define the terms microeconomics and macroeconomics and use examples to distinguish between the two disciplines. Video tape yourself giving the short “mini-lecture.” Many institutions have video cameras for your use in the library or you can use a digital camera with the help of another professor. Load the short video online (using procedures as specified by your online platform). Have your students watch the short video and do a quiz afterward.

Economics Model Search: Ask students to search the Internet to illustrate each of the boxes in Table 2.1. Require students to develop and send in a table with graphics and examples in each of the cells to illustrate the differences among the systems of economics.

Create a Model: Ask your students to use photos or other graphics to show the relationship of supply and demand. Limit the written discussion (in words) to one page to be e-mailed back to the discussion board. Ask the students to relate the content of their responses to current events posted on the Internet.

Price Points: Require your students to check the prices of products for three weeks in a row (suggested products: bread, eggs, chicken, tomatoes, milk, oranges, coffee, potato chips, gasoline). What could account for the changes in price? Ask your students to report back on the findings of their “study,” to analyze the price differences, and, using the information in the text, to develop some ideas about what has caused the price differences. Students can post the reports via the discussion board.

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ANSWERS TO END-OF-CHAPTER MATERIALS Self Test

Multiple Choice 2-1

Which of the following is a good example of microeconomics? a. How a specific company would maximize its production and capacity so it could better compete in its industry Learning Objective 2-1: The Basics of Economics ACSB: Analytical thinking

2-2 There are four coffee shops in your town. All of them claim to have the “freshest tasting coffee.” Each shop advertises the unique benefits of its coffee and prices. This is an example of d. an oligopoly.

Learning Objective 2-3: Degrees of Competition AACSB: Analytical thinking 2-3 Jeannette has a successful organic spa business in which she gives massages, facials, and organic body treatments. Last summer, another organic spa opened up in town. The supply curve for Jeanette’s business would shift in which direction? a. To the right Learning Objective 2-2: Determining Price: Supply and Demand AACSB: Application of knowledge 2-4 Which of the following is a determinant of demand? c. Price of substitute goods Learning Objective 2-2: Determining Price: Supply and Demand AACSB: Application of knowledge 2-5

Racerback Swimwear, an Australian company, opens a factory near Tallahassee, Florida. The value of the swimsuits produced in the new Florida factory is included in which country’s GDP? b. United States Learning Objective 2-4: Economic Indicators AACSB: Application of knowledge

2-6

Which of the following tracks the prices of goods and resources sellers use to create their products? b. CPI Learning Objective 2-4: Economic Indicators AACSB: Application of knowledge

2-7 Jackson Paulson works as a waterskiing instructor at Migis Lodge on Sebago .

Lake. He claims unemployment from October through April. Jackson experiences which type of unemployment? b. Seasonal Learning Objective 2-4: Economic Indicators AACSB: Application of knowledge 2-8 Which of the following is an example of the government’s fiscal policy to stimulate an economy? a. Increased government spending Learning Objective 2-5 Government and the Economy AACSB: Application of knowledge 2-9 What results when there is an increase in overall prices? a. Inflation Learning Objective 2-4: Economic Indicators AACSB: Application of knowledge 2-10 At which point in the business cycle is the economy when GDP declines for two or more successive quarters? b. Recession Learning Objective 2-5: Government and the Economy AACSB: Analytical thinking

True/False 2-11 Microeconomics is the study of the behavior of the overall economy.  False Learning Objective 2-1: The Basics of Economics AACSB: Analytical thinking 2-12 The discount rate is what is charged when banks borrow emergency funds from each other.  False Learning Objective 2-5: Government and the Economy AACSB: Analytical thinking 2-13 Sweden, with its high taxes and widespread government programs, is a good example of a market economy.  False Learning Objective 2-1: The Basics of Economics AACSB: Analytical thinking 2-14 To celebrate the first day of summer, an ice cream shop dropped the price of its cones to 10 cents and sold out of them within two hours. This created a shortage of ice cream cones.  True Learning Objective 2-2: Determining Price: Supply and Demand .

AACSB: Application of knowledge 2-15 The M-1 money supply measure consists of currency, traveler’s checks, and checking accounts.  True Learning Objective 2-5: Government and the Economy AACSB: Analytical thinking

Critical Thinking Questions: Suggested Answers 2-16

Both monetary and fiscal policy are used to stimulate economic growth or control inflation.

Monetary policy is carried out by the Federal Reserve System (the Fed), and it involves controlling the supply of money. The Fed has three tools with which it can do this: • The reserve requirement involves raising or lowering the percentage of commercial bank’s checking and savings accounts that they must keep in the bank as cash. o To increase the money supply, the Fed would lower the reserve requirement. o To decrease the money supply, the Fed would increase the reserve requirement.

• Open market operations consist of the buying and selling of government bonds. o To increase the money supply, the Fed buys government bonds from individuals, corporations, or organizations that are willing to sell. o To decrease the money supply, the Fed sells government bonds.

• The discount rate is the interest rate that the Fed charges for loans to its member banks. o To increase the money supply, the Fed would lower the discount rate, encouraging banks to borrow money and thereby increasing the funds they have available for loans. o To decrease the money supply, the Fed would increase the discount rate, discouraging banks from borrowing money and thereby reducing the funds they have available for loans.

Fiscal policy refers to the federal government’s efforts to stabilize the economy.

The government can do this in one of two ways: • Taxation o When the government wants to slow down inflation, it can increase taxes.

A tax increase means that consumers have less money to spend. This in turn slows the growth of businesses, because they have to produce less, and consequently slows down the economy.

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o Although decreasing taxes conceptually gives consumers more money to spend, it does not have the same direct effect because consumers may choose to save the money rather than spend it.

Fiscal spending o To simulate the economy, the government spends money on a wide variety of projects, such as infrastructure improvements (highways, bridges, etc.) and other projects that benefit the military, education, and health care.

This creates additional jobs, puts money into consumers’ hands, and stimulates spending.

Learning Objective 2-5: Government and the Economy AACSB: Application of knowledge

2-17

Answers will vary regarding the privatization of the U.S. Postal Service and Amtrak. Some of the points the students should consider are: Pros 1. Privatization can be an effective way to fund critical infrastructure needs.

2. Privatization can provide a source of immediate revenue for strained public budgets.

3. Private infrastructure funds are an attractive investment vehicle for certain investors, making infrastructure privatization appealing to potential bidders.

4. Historically low interest rates enable private firms to make highly leveraged infrastructure investments.

5. Because the private sector can often deliver greater efficiencies than government, privatization can result in better service at lower cost 6. Privatization can be a politically expedient solution to public problems.

Cons 1. Privatization constrains future options.

2. Privatization may have social implications, adversely affecting certain groups.

3. Stealing from the future? Privatization deals typically generate huge cash windfalls in the present in exchange for revenue streams that would otherwise accrue to citizens in the future.

4. Privatization may result in an undervalued deal.

5. Private entities may fail to fulfill contractual obligations.

6. A lack of public input.

1.1.1 The Pros & Cons of Privatization | Government Finance Officers ... www.gfoa.org/pros-cons-privatization Date Published: June 2011 Learning Objective 2-5: Government and the Economy AACSB: Application of knowledge

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2-18. Answers will vary with some students arguing that the definition of GDP should be changed but most students will probably argue that the current definition is sufficient recognizing that whatever definition that is used will be criticized by somebody. The value of the current definition is the consistency when comparing various economies.

Learning Objective 2-4: Economic Indicators AACSB: Application of knowledge

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Team Time The Great Debate 2-19

Answers will vary. However, the point of the exercise is to help students understand the process of monetary regulation and to discuss who has a right to regulate how money flows in the U.S. economy.

Learning Objective 2-5: Government and the Economy AACSB: Application of knowledge

2-20

Answers will vary. However, the point of the exercise is to help students understand the process of monetary regulation and to discuss who has a right to regulate how money flows into the U.S. economy.

Learning Objective 2-5: Government and the Economy AACSB: Application of knowledge

2-21

Answers will vary. However, the point of the exercise is to help students understand the process of monetary regulation and to discuss who has a right to regulate how money flows into the U.S. economy.

Learning Objective 2-5: Government and the Economy AACSB: Application of knowledge

Ethics and Corporate Social Responsibility Economic Inequality Answers to questions 2-22, 2-23, 2-24, and 2-25 will vary. However, be sure to have students consider how the type of economy in which they are currently living (capitalism) influences their answers to this question. Would students living in a planned economy, such as communism or socialism, answer the questions in the same way?

Learning Objective 2-1: The Basics of Economics AACSB: Application of knowledge Web Exercises 2-26 Getting Acquainted with Your Local Federal Reserve Bank The Federal Reserve Banks are: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

Students’ answers will vary, depending upon the Federal Reserve Bank selected and the latest news/policies on its website.

Learning Objective 2-5: Government and the Economy AACSB: Application of knowledge

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2-27 AT&T and Antitrust Regulations Students’ answers will vary, depending on their personal experience with the communications industry and their opinions regarding the government’s intervention in breaking up the AT&T monopoly.

Learning Objective 2-3: Degrees of Competition AACSB: Application of knowledge 2-28 Learning More About Supply and Demand Students’ answers will vary, depending on their experience with the game. The game puts students in the position of being the inventor of a new product and walks them through decisions such as determining demand and supply, plotting demand and supply curves, whether shortages or surpluses exist at certain price points, if other goods are complementary or substitute, and how certain factors will cause shifts in the demand and supply curve. Answers should reflect these concepts.

Learning Objective 2-2: Determining Price: Supply and Demand AACSB: Application of knowledge 2-29 Pro Sports and the Economy Students’ answers will vary, depending on their experience with the game. The game is divided into nine “innings” and each inning examines a different issue, such as how the pro sports market evolved, how leagues gained market power, why athletes earn as much as they do, the sources of pro sports revenue, why tickets cost so much, why there is such a high level of economic conflict in modern pro sports, and the globalization of pro sports. Reference the Teacher’s Guide for the game at http://www.bostonfed.org/peanuts/teacher/guide.htm Learning Objective 2-2: Determining Price: Supply and Demand AACSB: Application of knowledge 5. Monetary Policy: You’re in Control Students’ answers will vary, depending on their experience with the game. The game asks students to take charge of a simulated economy and make decisions about adjusting the federal funds rate every three months for the next four years. As they make decisions, they will see the resulting effects on inflation and unemployment, and they will also be asked to react to other events (such as oil shortages) that affect the economy.

Learning Objective 2-5: Government and the Economy AACSB: Application of knowledge MyBizLab: Suggested Answers 2-31 Answers will vary but students should focus on the shift in the supply curve based on an increase in the number of competitors.

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Learning Objective 2-2: Determining Price: Supply and Demand AACSB: Application of knowledge 2-32 Answers will vary. This question gives students and opportunity to focus on macroeconomic outcomes and the role that government plays in the economy.

Learning Objective 2-5: Government and the Economy AACSB: Application of knowledge

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CHAPTER 3: ETHICS IN BUSINESS CHAPTER OPENER This chapter examines the expression of personal values and ethics in business settings, and the expression of organizations’ ethical values through corporate social responsibility.

Students will explore: • examples of both ethical and unethical behavior in organizations • the role of legal regulations in changing corporate behavior • how organizations can nurture ethical behavior • the business opportunities created by corporate social responsibility • how an organization can recover from unethical behavior

DETAILED LECTURE OUTLINE I. Ethics: The Basics A. Ethics Defined 1. What exactly is ethics? a. Ethics is the study of the general nature of morals and the specific moral principles that govern a person’s behavior.

B. Systems of Ethical Conduct 1. What are the different systems of ethical conduct? a. Moral relativism is a perspective that holds that there is no universal moral truth; instead, there are only people’s individual beliefs, perspectives, and values. b. Another ethical system is situational ethics, whereby people make decisions based on a specific situation instead of universal laws. c. Judeo-Christian ethics refers to the common set of basic values shared across both Jewish and Christian religious traditions, such as respecting property and relationships and being kind to others.

2. Unethical behavior is defined as behavior that does not conform to a set of approved standards of social or professional behavior. a. This is different from amoral behavior, in which a person has no sense of right and wrong and no interest in the moral consequences of his/her actions.

C. Personal Ethics 1. What are personal ethics? a. Personal ethics are principles that guide the decisions you make in your life.

2. How can I clarify what my personal ethics are? a. Table 3.1 outlines one way to analyze your own ethical system. i. Step 1: Write down what kind of person you are—your character. ii. Step 2: List the beliefs that influence your decision making. iii. Step 3: Think about how you came to believe them. .

iv. Step 4: Consider your behavior with regard to the places you work, study, and live and how you relate to people around you.

3. How can an ethical life get me ahead? a. Ignoring laws can have an immediate negative impact in your life. b. Living ethically may even be good for your health.

II.

Personal Ethics Meets Business Ethics A. You as a Person and as an Employee 1. What role do personal ethics have in a business environment? a. Our personal ideas of right and wrong influence our actions, words, and thoughts. b. Off-the-job behavior, integrity, and honesty relate to on-the-job performance.

2. What if you are asked to do something that conflicts with your understanding of ethical behavior? a. It can be challenging to decide whose ethics to follow, yours or your company’s, and each path has legal and moral consequences. b. Price fixing occurs when a group of companies agree among themselves to set a product’s price artificially high so customers have to pay more than they should for the product. c. Although some people decide they will be flexible with their own ethical standards in the workplace, it can take a toll on their mental state, relationships, and physical health.

B. Identifying a Company’s Ethics 1. How do I examine a company’s ethics? a. Some companies have a written code of ethics, also called a code of conduct, a statement of their commitment to certain ethical practices. b. Many companies also have a public mission statement that defines the core purpose of the organization and describes the company’s values, goals, and aspirations.

2. How can I find out the best and worst aspects of a company’s ethical conduct? a. You can check the legal compliance of a corporation by researching actual charges filed or cases adjudicated against a company. b. There are also organizations that work with corporations to help them define, plan, and institute their corporate citizenship.

III.

Corporate Social Responsibility A. The Five Pillars of Corporate Social Responsibility 1. What is corporate social responsibility? a. Corporate social responsibility (CSR) is defined as a company’s obligation to conduct its activities with the aim of achieving social, environmental, and economic development. b. Being socially responsible requires a company to make good decisions in five major areas (Figure 3.1): i. Human rights and employment standards in the workplace ii. Ethical sourcing and procurement

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iii. Marketing and consumer issues iv. Environmental, health, and safety concerns v. Community and good-neighbor policies c. Human rights and employment standards in the workplace i. How a company respects and cares for its employees is reflected locally in the policies a company sets and the impact a company has on the community. ii. As a business interacts more with the global marketplace, it will have to make decisions about ethical standards on issues such as child labor, pollution, fair wages, and human rights. d. Ethical sourcing and procurement i. Once a business considers purchasing materials from a supplier in a different country, it is tied to environmental and social concerns in that area. e. Marketing and consumer issues i. In addition to issues regarding truth in advertising, marketers must consider messages that may be manipulative, even if they contain no outright lies. f. Environmental, health, and safety concerns i. Many industries and even small companies make decisions every day that affect the environment and the safety of their workers or neighbors. g. Community and good neighbor policies i. CSR relates to how a company affects the communities in which it does business, particularly the surrounding neighborhoods.

B. The Conflict of CSR in the Business Environment 1. Can a corporation really be socially responsible? a. A company has a responsibility to its stockholders to deliver a profit at the end of the year. b. There can be a conflict between a company’s need to produce profits and the demands of CSR. c. Although a business reaps benefits by being socially responsible, managers at very high strategic levels must have a common vision of how the interests of the business can be supported by an effective CSR policy.

C. The Benefits of CSR 1. What are the benefits of CSR? a. Having a strong and clear ethical policy helps a business in a number of ways: i. Positive reputation in the marketplace with consumers, suppliers, and vendors ii. Recruitment and retention of talent iii. Efficiency increases when companies use materials resourcefully and minimize waste iv. Sales increase through new product innovations and environmentally and ethically conscious labeling D. Measuring CSR .

1. Is it possible to measure a company’s CSR level? a. Social audits i. A social audit is a study of how well a company is meeting its social responsibilities. b. Ratings and rankings i. Some organizations assess corporate responsibility and publish their findings; others provide corporate responsibility ratings and reports to consumers. c. Self-reporting i. The practice of companies self-reporting their own efforts is becoming more prevalent. d. Corporate philanthropy i. Many companies participate in corporate philanthropy, the practice of donating some of their profits or resources to charitable organizations.

E. CSR and Social Networking 1. What does social networking have to do with CSR? a. Social networking is changing the face of CSR. i. Wendy’s used Twitter to fundraise for the Dave Thomas Foundation for Adoption. ii. Chase has moved into crowdsourced philanthropy with its Chase Community Giving Program.

F. The Challenges of CSR 1. What challenges does CSR pose? a. It is a challenge for modern business leaders to balance their need to respond to investors and produce a profit with their desire to alleviate human suffering. b. Nonetheless, some corporations manage to consistently balance the demands of social responsibility and successful business practices.

G. The Effects of CSR on Society 1. How does CSR affect society as a whole? a. Environmental effects i. How businesses operate has both local and global effects. ii. It is increasingly important for industry leaders to have some structured ethical system to make complex, long-reaching decisions. b. Economic effects i. The long-term consequences of businesses implementing a strong CSR plan have an impact on prices, product availability, and product quality. c. Effects on employee morale i. The ethical culture of a company and its leadership has effects on its workers.

H. The Effects of Individuals on CSR 1. How can I affect how businesses operate ethically? a. Your choices about where and on what you spend your money greatly influence corporate behavior. .

b. Socially responsible investing (SRI) is the practice of investing only in companies that have met a certain standard of CSR. c. When you choose an employer, you’re making a clear statement on ethical conduct by offering the company your time and energy.

IV.

Dangers of a Weak Ethical Focus A. Legal Regulations and Legal Compliance 1. How is a company regulated legally? a. Legal regulations are the specific laws governing the products or processes of an industry. b. Legal compliance refers to conducting a business within the boundaries of all the legal regulations of that industry.

2. Don’t companies often break the law and still make money? a. There are plenty of cases in which companies have broken the law and seemed to benefit for a time. b. To avoid future occurrences of illegal activities such as Enron, the Sarbanes-Oxley Act of 2002 was enacted. i. Under this act, CEOs are required to verify their companies’ financial statements and vouch for their accuracy with the SEC. B. Recovering from Weak Ethical Conduct 1. What if your company is breaking the law and you want it to stop? a. A whistle-blower is an employee who reports misconduct, most often to an authority outside the firm. b. Legal protection for whistle-blowers varies from state to state and industry to industry.

2. Can a company really recover from an ethical lapse? a. Companies that try to recover from highly publicized ethical lapses often face a long road. b. Recovering from a scandal almost certainly requires pervasive change. c. Companies that are attempting to recover from scandal often follow some common strategies: i. They work to find a leader who will set an example of the new ethical image of the company. ii. They restructure their internal operations to empower employees to consider the ethical implications of their decisions and feel free to speak up when they spot a concern. iii. They redesign internal rewards.

V.

Business Opportunities Created by Ethical Needs A. Creating New Markets with an Ethical Focus 1. How can firms create business by acting ethically? a. Offering clean fuel i. An energy company in Canada has launched a chain of alternative fuel stations that sell only renewable fuel blends, such as gasoline combined with corn ethanol. b. Creating medical vaccines

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i. Sanaria, a new pharmaceutical company, has secured government grants and a $29.3 Gates Foundation grant to develop a malaria vaccine. c. Fighting censorship i. Dynamic Internet Technology and similar companies provide a paid service that counteracts the impact of censorship by the Chinese government.

B. Businesses Going Green 1. How can businesses benefit by going green? a. Increasingly, companies are attempting to reduce the impact they have on the environment. b. Sustainability is the process of improving the quality of people’s lives in ways that simultaneously protect and enhance the earth’s life support systems.

VI.

How Businesses Develop an Ethical Environment A. Ethical Focus from the Start 1. How can a business improve its own culture of ethical and responsible conduct? a. There are steps businesses can take to make sure employees get off to an ethical start: i. Make sure a strict code of ethics and a meaningful and current mission statement are in place and communicated to employees. ii. Offer orientation programs to new employees to inform them of ethical standards in place.

B. Ethical Focus Every Day 1. How can a business maintain its policy of ethical conduct in the workplace? a. Managers talk regularly with employees about acceptable and unacceptable business practices and check to determine that the code of ethics is being followed. b. Some companies create a hotline for employees to anonymously report ethics violations. c. Companies can employ ongoing ethics training programs designed to boost awareness of their employees about ethics issues.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity 1 Finding the Balance Activity Overview: This activity asks students to role-play and share their views on ethics in a real-world situation.

Time Limit: 35 minutes What to Do: 1. Divide students into four-member teams and give them the handout below. Tell teams to read and follow the instructions for the Exercising Your Ethics: Team Exercise.

Students should each choose one of the roles in the exercise. (20 minutes) 2. Reassemble the class as a whole and discuss what disagreements came up within their groups. How did the role they played affect their perspective? (15 minutes) Don’t Forget: Remind students that what one individual or group considers unethical may not be considered unethical by another individual or group.

Wrap-Up: Wrap up the activity by reminding students that striking the right ethical balance between an organization and its employees can be difficult—there is much room for ethical ambiguity. When other agents—customers, competitors, stockholders, suppliers, dealers, and unions—come into play, reaching an ethical balance is especially challenging. The right ethical balance involves creating a situation in which all involved parties can benefit in the best way possible.

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Finding the Balance Handout The Situation: Managers often find it necessary to balance the interests of different stakeholders. For instance, paying employees the lowest possible wages can enhance profits, but paying a living wage might better serve the interest of workers. As more businesses outsource production to other countries, these trade-offs become even more complicated.

The Dilemma: The Delta Company currently uses three different suppliers in Southeast Asia for most of its outsourced production. Due to increased demand for its products, it needs to double the amount of business it currently subcontracts to one of these suppliers.

(For purposes of this exercise, assume that the company must award the new supplier contract to a single firm, and that it must be one of these three. You can also assume that the quality provided is about the same for all three companies.)

Subcontractor A provides a Spartan, but clean, work environment for its workers. Even though the local weather conditions are hot and humid much of the year, the plant is not air conditioned. Delta Company safety experts have verified, though, that the conditions are not dangerous, simply a bit uncomfortable at times. The firm pays its workers the same prevailing wage rate that is paid by its local competitors. Although it has never had a legal issue with its workforce, it does push its employees to meet production quotas and has a very tough policy regarding discipline for tardiness. For instance, an employee who is late gets put on probation; a second infraction within three months results in termination. This supplier provides production to Delta Company at a level such that Delta can attach a 25 percent markup.

Subcontractor B also provides a Spartan work environment. It pays its workers about 5 percent above local wage levels and, hence, is an attractive employer. However, because of its higher pay, this firm is actually quite ruthless with some of its policies. For instance, any employee who reports to work more than 15 minutes late without a medical excuse is automatically terminated. This supplier’s costs are such that Delta Company can achieve a 20 percent markup.

Subcontractor C runs a much nicer factory; the plant is air conditioned, for instance. It also pays its workers about 10 percent above local wage levels. The company operates an on-site school for the children of its employees, and provides additional training for its workers so they can improve their skills. Due to its higher costs, Delta Company’s markup on this firm’s products is only around 15 percent.

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Team Activity: Assemble a group of four students and assign each group member to one of the following roles: • Delta Company executive • Delta Company employee • Delta Company customer • Delta Company investor Action Steps: Before hearing any of your group’s comments on this situation, and from the perspective of your assigned role, which firm do you think should get the additional business? Which firm is your second choice? Write down the reasons for your position.

1. Before hearing any of your group’s comments on this situation, and from the perspective of your assigned role, what are the underlying ethical issues in this situation? Write down the issues.

2. Gather your group together and reveal, in turn, each member’s comments on their choices. Next, reveal the ethical issues listed by each member.

3. Appoint someone to record main points of agreement and disagreement within the group. How do you explain the results? What accounts for any disagreement?

4. From an ethical standpoint, what does your group conclude is the most appropriate choice for the company in this situation?

5. Develop a group response to the following question: Would your decision have been any different if you were able to break up the new contract across different suppliers? Why?

Supplemental In-Class Activity 2 Escorting the Boss Activity Overview: This activity helps students become aware of making assumptions.

Time Limit: 10–15 minutes What to Do: Pose the following situation.

1. Pick a student. Set the scenario. Say your boss calls. Your boss will be in town next week for about 10 days.

2. The boss has never been to your town and, in addition to visiting your worksite, will have to attend many social occasions on behalf of the company while there.

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3. The boss doesn’t know the town at all and would like someone of the opposite sex to act as an escort around town and attend the social occasions. Therefore, this escort will be representing the company and must put forward a good image.

4. How does the student respond?

5. Most students will initially say that the situation is acceptable or doesn’t matter, but will quickly start referring to the boss as “He.” 6. After a few minutes of discussion, indicate to the students that you never said the boss was male. They simply assumed it. Watch their reaction, which is very often defensive.

Don’t Forget: Don’t say anything that refers to the boss’s gender.

Wrap-Up: What did the students learn? Answer: Be careful about making assumptions.

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ENHANCING THE ONLINE COURSE State Ethics: Have your students investigate, via the Internet, to see what kind of code of ethics has been adopted by the state in which they live. Does the state have an ethics commission? Can the students find the site for that organization? If so, ask the students to review the website for ethics guidelines and report back to you via e-mail on the topics and discussions covered.

Ethics Essay: “Can living ethically make you happy?” Require your students to post a one-page essay on the discussion board on this topic. The topic leads to discussion of “what is happiness”? Does one have to have material things to be happy? If so, is unethical behavior ever justified in order to have those material things? Have an online class meeting to discuss the topic using microphones.

Corporate Ethics: Ask students to search for at least three examples of corporate ethics codes posted online from major companies (suggested companies: Disney Corporation, Microsoft, Inc., Exxon Corporation, Krogers, Johnson & Johnson). Ask students to review the codes and compare and contrast the information from all three companies.

What are the similarities? Do your students believe the actions of the companies in the marketplace or the business world match the ethical codes?

Most Responsible Corporation: Have your students nominate the corporation which they feel is the most ethical corporation based on information gleaned from the Internet—such as the company website, current events, and industry journals. Once all the nominations have been posted (with at least a paragraph of support, listing information reviewed), have the students vote on the most responsible corporation via the chat room tool.

Online Interview: Have your students connect with a CEO of a company via the Internet.

You can do some groundwork by identifying several CEOs who are willing to participate, or, you can leave the assignment open and see what CEOs your students are able to get to participate. The CEO can be the head of a small, medium, or large company. Have students interview the CEOs regarding the five major areas of corporate responsibility as discussed in the text. Ask students to write the interviews and post them on the discussion board, chat room, or assignments tool.

Personal Code of Ethics: Ask your students to write a one-page “personal code of ethics” using the information on Table 3.1. Ask them to use the graphics tools to enhance the code so it will be suitable for framing. Have the students post the codes on the assignments tool, or the blog.

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ANSWERS TO END-OF-CHAPTER MATERIALS Self Test Multiple Choice 3-1 The study of moral principles is b. ethics.

Learning Objective 3-1: Ethics: The Basics AACSB: Application of knowledge 3-2 A corporation can behave in a socially responsible way by d. All of the above Learning Objective 3-3: Corporate Social Responsibility AACSB: Analytical thinking 3-3 Employees can be sure their behavior out of the office d. None of the above Learning Objective 3-3: Corporate Social Responsibility AACSB: Analytical thinking 3-4 CSR can be measured by b. organizations that monitor and rank performance on social issues.

Learning Objective 3-3: Corporate Social Responsibility AACSB: Analytical thinking 3-5 A business is in legal compliance if c. it meets all local, state, and federal regulations.

Learning Objective 3-4: Dangers of a Weak Ethical Focus AACSB: Analytical thinking 3-6 Amoral behavior is b. not caring about the moral consequences of your action.

Learning Objective 3-1: Ethics: The Basics AACSB: Analytical thinking 3-7 Socially responsible investing (SRI) means that you are investing in b. only companies that meet a certain standard of CSR. Learning Objective 3-3: Corporate Social Responsibility AACSB: Analytical thinking 3-8 Ethical sourcing means that c. a company follows accepted conduct when acquiring raw materials from suppliers.

Learning Objective 3-3: Corporate Social Responsibility AACSB: Analytical thinking

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3-9

Which of the following strategies is not designed to help a company recover from an ethical lapse? a. Ensuring whistle-blowers face legal consequences Learning Objective 3-4: Dangers of a Weak Ethical Focus AACSB: Application of knowledge

3-10 The practice of corporate philanthropy b. can build stronger relationships with employees and the community at large.

Learning Objective 3-3: Corporate Social Responsibility AACSB: Analytical thinking

True/False 3-11 A mission statement details the plans of how a company will achieve profitability.  False Learning Objective 3-4: Dangers of a Weak Ethical Focus AACSB: Analytical thinking 3-12 Minimizing a company’s carbon footprint is part of a plan to increase corporate philanthropy.  False Learning Objective 3-4: Dangers of a Weak Ethical Focus AACSB: Analytical thinking 3-13 Ethics is the study of the general nature of morals and the specific moral choices a person makes.  True Learning Objective 3-1: Ethics: The Basics AACSB: Analytical thinking 3-14 Price fixing is when a group of companies get together and decide to drop prices to make up for scarcity in the market.  False Learning Objective 3-2: Personal Ethics Meets Business Ethics AACSB: Application of knowledge 3-15 A weak ethical focus in a company allows it to compete more aggressively and guarantees higher profits.  False Learning Objective 3-4: Dangers of a Weak Ethical Focus AACSB: Application of knowledge

Critical Thinking Questions: Suggested Answers .

3-16 Answers will vary with students referencing the 3 systems of ethical conduct and applying them to their individual life situations. Many students will apply the information in the Biz CHAT Can Living Ethically Make You Happy? to answer this question. Other students might answer the question using “real-world” examples of companies and individuals who have benefitted from compromising behaviors.

Learning Objective 3-1: Ethics: The Basics AACSB: Application of knowledge 3-17 The five pillars of CSR include human rights and employment standards; ethical sourcing and procurement; marketing and consumer issues; environmental, health, and safety concerns; and community rights and “good neighbor” policies. Corporate social responsibility (CSR) can be defined as a company’s obligation to conduct its activities with the aim of achieving social, environmental, and economic development. All business organizations, regardless of their size, have a corporate responsibility. Individual answers will vary.

Learning Objective 3-3: Corporate Social Responsibility AACSB: Application of knowledge 3-18 Answers will vary with students discussing the dilemma Apple faces balancing its responsibility to the individual Apple customer and its responsibility to the general public. Students will probably be divided as to whether the “greater good” is served by Apple refusing the numerous requests from law enforcement to break into iPhones while other students will support helping law enforcement.

Learning Objective 3-3: Corporate Social Responsibility AACSB: Application of knowledge

Team Time One Issue, Three Sides Answers will vary. There is no easy solution. Each of the viewpoints presents valid arguments, based on their priorities: the pharmaceutical companies want to introduce innovative products and argue that it is for the common good; the diseased patients and families argue that curing their suffering by any means necessary is still a good thing; and the DNA “owners” may argue a sense of ultimate invasion of privacy to have their own genetic material declared as a public resource. Michael Crichton’s novel, Next (especially the appendix of research at the end of the novel), is a good resource here.

Learning Objective 3-5: Business Opportunities Created by Ethical Needs AACSB: Application of knowledge

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Ethics and Corporate Social Responsibility Personal and Business Ethics Answers will vary. Students may wish to use one of the professional ethical codes as a guideline for their own personal statements.

Learning Objective 3-2: Personal Ethics Meets Business Ethics AACSB: Application of knowledge Web Exercises 3-19 Government’s Role in Happiness Students’ answers will vary. The Gross National Happiness Index is an index developed from 33 indicators categorized under nine weighted domains, including psychological well-being, standard of living, governance, health, education, community vitality, cultural diversity and resilience, time use, and ecological diversity and resilience.

3-20 Identify Your Strengths Students will need to register in order to take the survey but there is no cost involved.

Students’ answers will vary depending upon the results of their surveys.

3-21 Socially Conscious: How Do Your Investments Measure Up? Students’ answers will vary depending upon the mutual funds they select.

Learning Objective 3-4: Dangers of a Weak Ethical Focus AACSB: Application of knowledge 3-22 Whistle-Blower or Traitor?

Students’ opinions on whether Snowden should be convicted of espionage will vary.

However, they should list sources that support both points of view: that he committed espionage and endangered the country, and that his actions were in the interests of the citizens of the United States.

Learning Objective 3-2: Personal Ethics Meets Business Ethics AACSB: Application of knowledge 3-23 Corporate Social Responsibility with Your Prescription Students’ answers will vary.

Learning Objective 3-3: Corporate Social Responsibility AACSB: Application of knowledge MyBizLab: Suggested Answers 3-24 Answers will vary but students should refer to the Table 3.1 Determining Your Code of Personal Ethics to help them develop their personal ethical code.

Learning Objective 3-1: Ethics: The Basics .

AACSB: Application of knowledge 3-25 Answers will vary.

Learning Objective 3-3: Corporate Social Responsibility AACSB: Application of knowledge

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CHAPTER 4: BUSINESS IN A GLOBAL ECONOMY CHAPTER OPENER This chapter introduces students to the fundamentals of international business—from the definition of globalization to the economic factors and challenges that impact global trade.

Students will learn about: • the organizational structures which facilitate international trade • the costs and benefits of entering a global marketplace • different types of trade barriers • various ways in which a business can enter foreign markets • exchange rates and how they impact international trade This chapter will also explore other issues that pose challenges to conducting business in a global marketplace, such as sociocultural, political, legal, and ethical factors.

DETAILED LECTURE OUTLINE I.

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What Is Globalization?

A. Definitions 1. Importing is buying products from other countries.

2. Exporting is selling domestically produced products to other countries.

B. The Effects of Globalization 1. How does globalization affect the United States? a. Globalization is the movement toward a more interconnected and interdependent world economy. b. Whatever happens in the U.S. economy will have a significant impact on people not only in the United States but also worldwide. c. Likewise, economic conditions in other countries also affect the U.S. economy.

2. How does globalization offer more marketing opportunities to businesses? a. The globalization of markets refers to the movement away from thinking of the market for your products as being local market or national and the entire world instead. b. When it comes to doing business abroad, most marketing experts advise firms to “think globally and act locally.” i. In other words, companies should adjust their products or marketing campaigns to suit the unique tastes and preferences of local customers, wherever they may be.

3. How does globalization make it easier to manufacture products? a. The globalization of production refers to the trend of moving production to different locations around the globe to take advantage of lower costs or enhance quality.

i. Outsourcing is the assignment of certain tasks, such as production or accounting, to an outside company or organization. ii. Much outsourcing is offshore outsourcing (or offshoring), which involves moving production from a domestic site to a foreign location.

C. Reasons for the Rise in Globalization 1. Why has globalization accelerated so rapidly? a. Two main factors underlie the trend toward greater globalization: i. A dramatic decline in trade and investment barriers that makes global business cheaper and easier to conduct. ii. Technological innovations, especially in communications and transportation, have made it possible to better manage the global production and marketing of products.

D. Global Business Trends 1. Where will trends in global business take us? a. Some noteworthy business trends likely to continue are as follows: i. A growing role for developing nations ii. A rise in non-U.S. foreign direct investment—the purchasing of property and businesses in foreign nations iii. A rise in multinational enterprises—businesses that manufacture and market products in two or more countries a.) Mini-multinationals (small- and medium-sized multinational enterprises) have also become prominent. iv. Increasing democratization and the adoption of free market economies around the globe II.

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International Trade A. International Competition 1. What is the theory of comparative advantage? a. The theory of comparative advantage states that specialization and trade among countries benefit all who are involved. b. Each country should specialize in the production of those products for which it possesses a comparative advantage—that is, produce the goods and services it can produce relatively more efficiently compared to other countries. c. This is not to be confused with an absolute advantage, which is the ability to produce more of a good or service than any other country. d. When all countries focus on producing products for which they have a comparative advantage, collectively they all have more production to share.

B. Fostering Competitiveness 1. What can a country do to have an edge in world markets? a. Governments focus on improving their nation’s competitiveness by improving their resources—natural resources, labor, capital (plant, equipment, and infrastructure), technology, innovation, and entrepreneurialism.

b. They invest in health, education, and training designed to increase the productivity of their labor forces. c. Many governments create incentives to attract investments made by private companies, such as plant and equipment. d. They invest in public capital (also called infrastructure), such as roads, bridges, dams, electric grid lines, and telecommunications satellites. e. They try to promote technological advances to give their nations a competitive edge, such as investments in basic and applied research at state-funded higher-educational institutions.

2. What can businesses do to be more competitive? a. Successful companies try to gain access to cheap raw materials, invest in workers’ training and productivity, and purchase state-of-the-art plants and equipment that will give them an edge. b. They invest in cutting-edge technology and promote innovativeness. c. If a company, industry, or nation has lost its competitive advantage, then it has failed in one or more of these areas.

C. The Benefits and Costs of International Trade 1. What are the benefits and costs of international trade? a. The theory of comparative advantage indicates that countries that participate in international trade will experience higher standards of living because of the greater quantity and variety of higher-quality products offered at lower prices. b. The costs of international trade are borne by those businesses and their workers whose livelihoods are threatened by foreign competition.

2. Do the benefits of international trade outweigh the costs? a. One measure used to quantify a country’s international trade is the balance of payments, which summarizes all transactions (payments, financial aid, and gifts) that take place between residents of a country and the external world. b. However, one number does not express the complexities of international trade because benefits such as a greater quantity and variety of products and/or price reductions are often slow and subtle.

III.

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Free Trade and Protectionism A. Types of Trade Barriers 1. Free trade refers to the unencumbered flow of goods and services across national borders.

2. What trade barriers can governments put in place? a. Tariffs and subsidies i. A tariff is a tax imposed on an imported good or service. ii. With a subsidy, governments make payments to domestic producers. b. Quotas and embargoes i. A quota is a limitation on the amount of an import allowed to enter a country. ii. An embargo is a total restriction on an import or an export. c. Administrative trade barriers

i. These are government rules designed to limit imports. ii. One example is a local content requirement, which requires that some portion of a good be produced domestically.

B. Trade Barriers: Winners and Losers 1. Who benefits and who suffers from protectionist trade barriers? a. Trade barriers benefit domestic producers and their workers but hurt domestic consumers. b. Trade barriers increase costs to foreign companies or restrict the supply of imports, driving up prices and reducing sales in the domestic market. c. Trade barriers also hurt consumers because the overall quantity, variety, and quality of products are lower as a result of curtailing foreign competition.

2. What are common arguments in favor of protectionist trade barriers? a. National security i. The national security argument states that certain industries critical to national security should be protected from foreign competition. b. Infant industry i. The infant industry argument states that an undeveloped domestic industry needs time to grow and develop to compete in the global economy. c. Cheap foreign labor i. The cheap foreign labor argument centers on lower wages paid to workers of foreign companies and how domestic companies can compete with these low wages. d. Threat of retaliation i. The threat of retaliation (or the bargaining chip) argument says that, if a trading partner increases its trade barriers on your exports or fails to reduce trade barriers when you reduce yours, then an uneven playing field is created. ii. Dumping refers to selling a product at a price below its cost in a foreign country to drive competitors there out of business so you can take over the market.

3. How do economists feel about protectionist trade barriers? a. Economists believe that the best way to address the concerns is not to impose protectionist trade barriers. b. Table 4.1 summarizes the economic benefits and costs of free trade and protectionism for a nation.

C. International Organizations Promoting Free Trade 1. What groups are working to promote free trade? a. The General Agreement on Tariffs and Trade (GATT) created in 1948 successfully reduced tariffs and other obstacles to free trade on goods. b. The World Trade Organization (WTO) replaced GATT in 1995 and has strengthened the world trading system by extending GATT rules to services and increasing the protection for intellectual property rights. i. It has taken on the responsibility for arbitrating trade disputes and monitoring the trade policies of member countries. .

2. Can more be done to promote free trade? a. Advocates of free trade argue that much more can be done to reduce trade barriers, but it has been far more difficult than anyone imagined to get concrete results.

3. What problems can result from free trade? a. WTO protests reflect an ongoing concern that free trade encourages firms to shift production to countries with low wages and lax labor standards. b. Other concerns are the exploitation of workers in low-wage countries and environmental issues.

D. Regional Free Trade Agreements 1. What are regional free trade agreements? a. Regional free trade agreements abolish trade barriers among member countries. These include: i. The European Union (EU) a.) The European Union is the oldest and largest free trade area, with membership of 28 countries. b.) It is the largest exporter in the world and the second-largest importer. ii. The North American Free Trade Agreement (NAFTA) a.) NAFTA is an ongoing agreement to move the United States, Mexico, and Canada closer to true free trade. iii. Other Free Trade Areas a.) MERCOSUR—A regional coalition of South American countries including Brazil, Argentina, Paraguay, Uruguay, and Venezuela. b.) The Association of Southeast Asian Nations (ASEAN) includes Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar, and Cambodia. c.) The Asia-Pacific Economic Cooperation (APEC) currently has 21 member countries, including the United States, Japan, and China.

IV.

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Conducting Business Internationally A. International Business Strategies 1. What types of strategies can an international business pursue? a. Companies that pursue a global strategy sell a standardized (or homogenous) product across the globe. i. Standardized products are basic products that meet universal needs. b. Companies that pursue a multidomestic strategy customize or differentiate their products to meet unique local needs, tastes, or preferences. c. Companies that pursue a transnational strategy offer a product globally, to many countries, working simultaneously to sell it at the lowest possible price.

B. Entering Foreign Markets 1. How do firms enter foreign markets? a. Exporting

i. Many firms initially enter foreign markets by exporting their products because it is relatively easy and inexpensive. ii. It is not economical for heavy or bulky products with high transportation costs. b. Turnkey projects i. When firms export their technological know-how in exchange for a fee, they have implemented a turnkey project. c. Franchising i. Franchising involves selling a well-known brand name or a proven method of doing business to an investor in exchange for a fee and a percentage of sales or profits. d. Licensing i. Licensing is an agreement in which the licensor’s intangible property—patents, trademarks, service marks, copyrights, trade secrets, or other intellectual property—may be sold or made available to a licensee in exchange for a royalty fee. e. Joint ventures i. Joint ventures are formed when two firms team up to better take advantage of a business opportunity than either one of them could alone. ii. The two companies share the costs and risks of developing and selling the product the joint venture has to offer. f. Strategic alliances i. Strategic alliances are cooperative arrangements between actual or potential competitors. ii. Unlike a joint venture, in a strategic alliance each partner retains its business independence. g. Contract manufacturing i. Contract manufacturing occurs when a firm subcontracts part or all of its goods to an outside firm as an alternative to owning and operating its own production facility. h. Wholly Owned Subsidiaries i. A wholly owned subsidiary is a facility owned entirely by the investing firm.

C. The Advantages and Disadvantages of Each Entry Mode 1. Which mode of entering foreign markets is optimal? a. The optimal entry mode depends on many factors, including a firm’s strategy. b. Table 4.2 summarizes the advantages and disadvantages of the various entry modes.

V.

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International Business: Economic Factors and Challenges A. The Role of Exchange Rates 1. What are exchange rates? a. Exchange rates are the rates at which currencies are converted into another country’s currency.

i. A strong dollar means that the U.S. dollar exchanges for a relatively large amount of foreign currency; a weak dollar does not.

2. How do exchange rates affect international business? a. Export and import prices i. Currency appreciation is an increase in the exchange rate of a nation’s currency, causing the relative price of imports to fall and the relative price of exports to rise. ii. Currency depreciation is a decrease in the exchange rate of a nation’s currency; exports become cheaper and imports become more expensive. iii. Sometimes the government issuing the currency decides to devalue its currency; this is different than depreciation, where the change is happening due to outside forces. b. Trade deficits and trade surpluses i. A trade deficit exists when the value of a country’s imports exceeds the value of its exports. ii. A trade surplus occurs when the value of a country’s exports exceeds the value of its imports. iii. Sovereign wealth funds (SWFs) are government investment funds that are managed separately from the official currency reserves of the country. c. Fixed and freely floating exchange rate systems i. Most countries operate under a freely floating (or flexible) exchange rate system, in which the global supply and demand for currencies determines exchange rates. ii. The problems are that they can create relative price changes outside the control of international businesses and engender risks of losses due to rapid and unexpected changes in exchange rates. d. Nonconvertible currency and countertrade i. Governments also reserve the right to restrict the convertibility of their currency. ii. Many developing countries have a nonconvertible currency, which cannot be exchanged for another currency. iii. These governments fear that allowing convertible currency will result in capital flight—the transfer of domestic funds into a foreign currency held outside the country. iv. Global companies can still do business with countries that have nonconvertible currencies through the use of countertrade—a form of international barter, the swapping of goods and services for other goods and services.

B. Other Economic Challenges to Conducting International Business 1. What are some other economic challenges to conducting international business? a. Economic growth and development

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i. Some developing countries still lack the basic infrastructure necessary for the effective transportation of goods and/or lack access to dependable electricity. b. Government economic policies i. International businesses prefer free market economies to state-run or socialized economies because the bureaucratic red-tape drives costs up. c. Socioeconomic factors i. These factors include the demographics of population density, age distribution, income distribution, ethnicity, and the cultural behaviors of a community.

VI.

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Creating Successful International Businesses A. Sociocultural Challenges 1. How does culture affect business? a. Culture is the complex set of values, behaviors, lifestyles, arts, beliefs, and institutions of a population that are passed on from generation to generation. b. Ethnocentrism is the belief that one’s own culture is superior to all other cultures, making succeeding in international business very difficult.

2. Why do aesthetics matter when it comes to international business? a. Aesthetics refers to what is considered beautiful or in good taste; it affects a culture’s etiquette, customs, and protocol.

3. What other cultural prejudices must be examined for success in other countries? a. Attitudes toward time vary considerably across the world. b. Religion plays a profound role in shaping a culture.

4. Why is knowing the native language not enough? a. Unspoken language, or body language, also differs significantly around the world.

B. Political Challenges 1. What are the political challenges to conducting international business? a. International businesses look for nations that have stable governments because political upheaval can severely disrupt commerce and jeopardize the success of their firms. b. Government intervention in the process of determining which goods are undesirable and whether goods should be regulated, taxed, or banned also varies from country to country.

C. Legal Challenges 1. What are the legal challenges to conducting international business? a. Laws, regulatory standards, and access to unbiased judicial systems differ considerably around the world. b. No universal laws, regulatory standards, or global courts exist to settle disputes in the global economy c. Different laws also govern the use of bribery throughout the world.

D. Ethical Challenges

1. What are some ethical challenges faced by international business? a. Should a firm conform to its home country’s environmental, workplace, and product safety standards—even though it’s not legally required to do so—while operating in another country? b. When conducting international business, companies must determine whether they are willing to defy ethical codes to enhance their profits.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity: Ice Breaker Where’s It Made?

Activity Overview: This exercise generates student interest in globalization by “personalizing” the concept. Ask students to identify where their personal belongings are made.

Time Limit: 20 minutes What to Do: 1. Made in the USA? Not so fast. It’s more likely that your belongings come from all over the world. Take this personal inventory and decide for yourself.

2. Check the labels on the following items to determine where they were made.

• Shoes • Shirt • Pants • Purse or backpack • Technological device (cell phone computer, camera, MP3 player, etc.)

Calculate the number of countries, other than the United States, that are represented.

If your personal belongings represent . . .

Your goods…

0 countries 1–2 countries 3 or more countries

Are homegrown Have international flair Truly reflect the growing trend of globalization

Supplemental In-Class Activity 1 Marketing U.S. Products Abroad Activity Overview: This activity gives students insight into international marketing.

Time Limit: 10–15 minutes What to Do: Set up student teams of three to four each. Have them identify a product that is made in the United States, but not marketed in a specific country of the team’s choosing. The team should then create a short marketing plan for introducing the product to the country.

In creating the marketing plan, be sure to consider: .

a. Why Americans use the product. b. The sociocultural factors that may make the product unnecessary in another country. c. The needs of people in the specific foreign country. d. How the U.S. product may meet needs in a foreign country which are different from the needs of U.S. customers.

Don’t Forget: Be sure students pick products that are not currently being marketed in their country of choice. Another way to approach this activity, especially if you have a diverse class, is to ask students in the class to talk about what products are available in the United States that are generally not used in their home country. For example, in one class, a student from India mentioned that most people in India did not use paper towels.

This led to a very interesting discussion about why people did not use the towels, and how paper towels could be marketed in India.

Wrap-Up: Reinforce the concept that marketing internationally may require extra sensitivity to local customs and practices. In some cases, a product that sells well in one country may have to be modified significantly if it is to be sold in a different country.

Supplemental In-Class Activity 2 How the Chinese Stole the Grinch Activity Overview: This activity asks students to look at the effects of piracy on international business.

Time Limit: 30 minutes What to Do: 1. In advance, assign the reading of the article by Craig S. Smith, “A Tale of Piracy: How the Chinese Stole the Grinch” (found online and in the New York Times, December 12, 2000).

2. Divide students into groups and ask them to answer these questions in their small groups. (15 minutes) (a) If you were exporting legitimate copies of U.S. movies to Asian markets, would you target China? Why or why not? (b) How do you think the United States and other world governments should respond to piracy of videos in China if it continues? How effective do you think these actions would be? (c) Pirates can sell films within a couple of days of their U.S. debuts, whereas legitimate distributors wait up to nine months to release authorized videos. How do you think this contributes to the problem, and what can be done about it?

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3. Once students have answered the questions, discuss their answers as a class. As students discuss their answers, make sure they include the following points: (15 minutes) (a) Answers will vary depending on whether students think the size of the Chinese market is worth the difficulties inherent in the widespread pirating of films. (b) World governments could consider placing tariffs on Chinese products, which might have limited results and take considerable time to have any impact. They could also request that the Chinese government enforce its intended crackdown; however, this might also have limited results. (c) Pent-up demand for Western products encourages pirates to take the risk of obtaining legitimate copies of the films in the United States rather than wait out the lengthy period in which the U.S. distributors try to make money in theaters.

Tighter security might help, but the solution ultimately rests with the Chinese government.

Don’t Forget: Be sure to keep students on the case topic—a controversial issue such as this often invites much discussion.

Wrap-Up: Bring the discussion to a close by asking students for examples of additional piracy issues not mentioned in the case. Ask students how many of them have heard of Kevin Cogill, a blogger who was convicted of a felony for posting nine songs from an unreleased Guns N’ Roses album on the Internet. Reemphasize that piracy, like bribery: • may be viewed as just a way of doing business by some • may not have the ethical ramifications we think it should • is not just applicable to other countries, but occurs here as well

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ENHANCING THE ONLINE COURSE

Mindmap: Ask your students to develop slide presentations that would show evidence of “worldwide culture.” Students can use images from any number of online media to illustrate the concept. Ask them to share their information via the discussion tool, chat tool, or assignments board.

Comparative Advantage Scrapbook: Have students use graphics to show the comparative advantages of at least five countries. Limit explanation in words to only one paragraph.

Students can post their scrapbook pages on the discussion board or on a blog.

Trade Barriers: Ask your students to identify the types of trade barriers and to create a table or chart that will be posted on the discussion board, showing both the types of barriers and the problems created by each one. Students can post this on either the discussion board or a blog tool.

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ANSWERS TO END-OF-CHAPTER MATERIALS Self Test Multiple Choice 4-1 The globalization of markets refers to moving away from thinking a. the market for your product is local.

Learning Objective 4-1: What Is Globalization?

AACSB: Analytical thinking 4-2 The globalization of markets and the globalization of production mean that d. companies design products for global markets and can produce them offshore.

Learning Objective 4-1: What Is Globalization?

AACSB: Analytical thinking 4-3 The theory that states that specialization and trade are mutually beneficial to all economies involved in trade is called the a. theory of comparative advantage.

Learning Objective 4-2: International Trade AACSB: Analytical thinking 4-4 Ethnocentrism is a belief that d. can lead to conflict when conducting business globally.

Learning Objective 4-6: Creating Successful International Businesses AACSB: Analytical thinking 4-5 The theory of comparative advantage indicates that a. a country should sell to other countries the products it produces most efficiently and buy from other countries the products that it cannot produce as efficiently.

Learning Objective 4-2: International Trade AACSB: Analytical thinking 4-6 Which of the following are examples of regional free trade agreements? a. European Union, NAFTA, and APEC Learning Objective 4-3: Free Trade and Protectionism AACSB: Analytical thinking 4-7 A mini-multinational is a company that a. is small but still does international sales.

Learning Objective 4-1: What Is Globalization?

AACSB: Analytical thinking

4-8 Exchange rates affect international businesses because the exchange rate .

d. all of the above.

Learning Objective 4-5: International Business: Economic Factors and Challenges AACSB: Analytical thinking 4-9 Which method of entering foreign markets has the advantage of allowing for test-marketing a product in a foreign market at the lowest cost? d. Contract manufacturing Learning Objective 4-4: Conducting Business Internationally AACSB: Analytical thinking 4-10 A local content requirement is one kind of government rule meant to b. limit imports.

Learning Objective 4-3: Free Trade and Protectionism AACSB: Analytical thinking True/False 4-11 A free-floating exchange rate system uses global supply and demand to set exchange rates.  True Learning Objective 4-5: International Business: Economic Factors and Challenges AACSB: Analytical thinking 4-12 Dumping refers to selling a product below what it cost to make.  True Learning Objective 4-3: Free Trade and Protectionism AACSB: Analytical thinking 4-13 Increasing U.S. dominance of foreign direct investments has helped accelerate globalization.  False Learning Objective 4-1: What Is Globalization?

AACSB: Analytical thinking 4-14 Entering a foreign market through a joint venture means you will eventually be operating independently in that market.  False Learning Objective 4-4: Conducting Business Internationally AACSB: Analytical thinking 4-15 A transnational business strategy is used when a product is sold in many regions of a country at the same time.  False Learning Objective 4-4: Conducting Business Internationally AACSB: Analytical thinking Critical Thinking Questions: Suggested Answers .

4-16 Answers will vary but many students will argue that a country can never invest too much in education or technology given the impact on comparative advantage.

Learning Objective 4-2: International Trade AACSB: Application of knowledge 4-17

Companies pursuing a global strategy are very concerned with keeping their costs down and their prices low. They are much less concerned about customizing their products to satisfy unique local needs, tastes, and preferences because they sell a standardized product. The types of companies pursuing a global strategy include companies that sell agricultural commodities such as wheat, corn, and barley, raw materials such as coal, copper, and iron ore, or other bulk processed products such as chemicals and fertilizer.

Companies pursuing a multidomestic strategy are less concerned about keeping their costs down and their prices low. Instead, they are much more focused on customizing their products to meet the unique local needs, tastes, and preferences of their global customers. Firms pursuing a multidomestic strategy focus on selling a differentiated product, a product that is unique in some way to capture the attention of potential customers. International businesses that sell products such as food, clothes, and cosmetics globally, or sell services such as consulting services or restaurant services worldwide, focus on customizing their goods and services to satisfy the unique needs of local customers.

Companies pursuing a transnational strategy attempt to not only keep their costs and prices low, but—at the same time—try very hard to customize their products.

This strategy is very difficult to achieve in practice. Airline companies such as British Airways and some financial services businesses such as American Express are examples of multinational enterprises that pursue a transnational strategy.

Learning Objective 4-4: Conducting Business Internationally AACSB: Application of knowledge

4-18 Answers will vary but students should discuss the impact of national pride, exchange rate fluctuations, and the desire to control their own currency. Many students will probably cite the recent “Brexit” vote in Great Britain when answering this question.

Learning Objective 4-5: International Business: Economic Factors and Challenges AACSB: Application of knowledge

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Team Time The Devil’s Advocate 1. Students should exercise critical thinking. Some reasonable arguments and some historical evidence point to the exploitation of workers in developing countries, as well as the exertion of significant political influence over local national politics by international businesses looking to amass huge profits. At the same time, other rational arguments and evidence emphasize the opportunities that globalization can create for workers in developing countries and the consequent higher standards of living. Students should explore the factors that give rise to these different outcomes.

Learning Objective 4-1: What Is Globalization?

AACSB: Application of knowledge 2. The answer provided will likely depend on the size and the timing of the benefits and costs of free trade versus protectionism. Nevertheless, economists tell us that the benefits of free trade outweigh the costs over time. But, the economic perspective is not the only perspective. Other important social and political issues and goals have to be taken into account as well.

Learning Objective 4-4: Conducting Business Internationally AACSB: Application of knowledge 3. Students should exercise critical thinking. On the one hand, it could be argued that a country ought to abide by local laws and ethical standards when abroad. Others argue that this view is too simplistic; many other important factors need to be considered.

For example, the economic benefits which accrue to the family of the child could be significant—they may help to alleviate stark poverty. Moreover, this employment could provide long-term opportunities to the child, resulting in a much higher standard of living than might otherwise be possible.

Learning Objective 4-6: Creating Successful International Businesses AACSB: Application of knowledge Ethics and Corporate Social Responsibility Offshore Outsourcing 4-19

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The costs of moving your production overseas include the economic hardships imposed on local workers and the local community at large. The benefits would accrue to the foreign workers. The greater demand for their labor would push up their wages and reduce their unsafe working conditions over time as businesses compete for these workers. Benefits may also accrue to the business owner in terms of higher profits.

Learning Objective 4-2: International Trade AACSB: Application of knowledge 4-20

The answer to this question depends on perspective. Nevertheless, it is possible that if the business gains significant market share over time as a result of its cost-cutting efforts, then it may expand and create even more jobs in the local community than those initially lost. However, this assumes that the business owner would choose to expand production in the local community.

Learning Objective 4-2: International Trade AACSB: Application of knowledge

4-21

One alternative is that the local workers can accept a cut in pay or reduced benefits.

The business owner might be willing to accept a lower profit margin in order to preserve local community harmony. At the same time, some production can be shifted to the foreign site to take advantage of the lower costs, thereby lowering the price for the sewing machines. If this succeeds in generating increased market share and profits, then it can also increase the need for jobs in both locations.

Learning Objective 4-6: Creating Successful International Businesses AACSB: Application of knowledge

Web Exercises 4-22 The Complexity of The European Union Students’ answers will vary but should reflect the main points of the video. A brief summary of the video is as follows: The EU is comprised of countries that pay membership dues and vote on laws they all must follow. Citizens of member countries are automatically EU citizens as well. The countries of Norway, Iceland, and Liechtenstein are members of the European Economic Area. They must pay fees to the EU but are exempt from certain laws, notably in farming and fishing, largely because fishing is critically important to these countries’ economies and they want to maintain control over the laws. Switzerland is part of the Schengen area but not part of the European Union.

The Euro is used by most but not all of the European Union members. This economic union is called the Eurozone, and to join, a country must first reach certain financial goals: • Inflation less than 1.5 percent higher than the average of the lowest members • Debt-to-GDP ratio less than 60 percent • Government deficit less than 3 percent Portugal, France, and Spain have islands from their colonial days, and because they are members of the EU, the islands belong to the EU as well. These are called the outermost regions of the EU. However, the United Kingdom, Netherlands, Demark, and France .

have what are known as overseas territories. European Union law does not apply to these territories but people who live there are European Union citizens because they have the citizenship of their associated countries.

Learning Objective 4-3: Free Trade and Protectionism AACSB: Application of knowledge 4-23 Same Company, Different Products Students’ answers will vary, depending upon the products and countries selected for this exercise.

Learning Objective 4-1: What Is Globalization?

AACSB: Application of knowledge 4-24 Go State!

Students’ answers will vary, depending upon the career aspects they find appealing, and the information in the Fulbright Fellow Orientation Handbook that they select.

4-25 Cultural Guidelines Students’ answers will vary, depending upon the countries selected.

Learning Objective 4-6: Creating Successful International Businesses AACSB: Application of knowledge 4-26 You’re the Trader Students’ answers will vary. Reference the Teacher Guide to this interactive exercise at https://www.imf.org/external/np/exr/center/econed/g_trade.htm MyBizLab: Suggested Answers 4-27

Answers will vary but the students should discuss sociocultural differences and the possible impact on product design and us.

Learning Objective 4-6: Creating Successful International Businesses AACSB: Application of knowledge

4-28

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The theory of comparative advantage indicates that countries that participate in international trade will experience higher standards of living because of the greater quantity and variety of higher-quality products offered at lower prices.

These results stem from the increased competition associated with more open trade. But these benefits are not without their costs.

The costs of international trade are borne by those businesses and their workers whose livelihoods are threatened by foreign competition. Some domestic businesses may lose market share to foreign companies, stunting their profitability and ability to create jobs. Other firms may face so much foreign competition that they’re driven out of business entirely.

Learning Objective 4-2: International Trade AACSB: Application of knowledge MyBizLab Only—comprehensive writing assignment for this chapter

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CHAPTER 5: SMALL BUSINESS AND THE ENTREPRENEUR CHAPTER OPENER Chapter 5 introduces students to entrepreneurship and small business ownership through franchising. Starting with a discussion of the importance of small business to the U.S. economy, the chapter explores: • reasons for starting a new business • the impact of technology on small businesses • traits of successful entrepreneurs and types of entrepreneurs • the pros and cons of purchasing and running a franchise operation • the advantages and disadvantages of buying an existing business • the importance of planning when opening a small business The conclusion of the chapter provides information about where to get help when opening a business and what sources of funding are available to entrepreneurs.

DETAILED LECTURE OUTLINE I.

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Small Business: The Mainstream of the American Economy A. Small Business and the Economy 1. What is a small business? a. The Small Business Administration (SBA) defines a small business as one that is independently owned and operated and not dominant in its field of operation.

2. Why are small businesses important to the economy? a. Small businesses generate about 64 percent of net new jobs and nearly one-half of the U.S. gross domestic product.

3. How do small businesses foster innovation? a. Small companies often introduce new products or procedures that large businesses do not have the flexibility, time, resources, or inclination to offer.

4. How do small businesses help bigger companies? a. Small businesses often operate in cooperative relationships with bigger businesses. b. They may make and supply parts that are required in large manufacturing processes and provide larger companies with new and better product designs.

5. How do small businesses help consumers? a. Small businesses directly provide consumers with specialized products and services and those goods and services larger businesses can’t or don’t want to provide.

B. Small Business and the Workforce 1. What kinds of workers do small businesses employ? a. Small businesses account for most of the new jobs created in the economy.

b. Small businesses also hire a larger proportion of younger workers, older workers, and part-time workers.

2. Do small businesses provide opportunities for minorities? a. According to an SBA report, approximately one-fifth of all U.S. small businesses are owned by minorities. b. Women make up approximately one-third of all small business owners.

C. Reasons for Starting a Small Business 1. Why would I want to start my own business? a. People start small businesses for many different reasons. See Figure 5.4. i. Opportunity knocks—An idea for a new company often starts when someone envisions a product or service that isn’t being offered yet. ii. Financial independence—Many people launch small businesses to achieve financial independence. a.) However, traditionally it takes three to five years for a new business to become profitable. iii. Control—Being in control and making more business decisions than their current positions allow is another reason why people start their own businesses. iv. Flexibility—Running their own businesses gives people the flexibility to adjust their work schedules. v. Unemployment—It’s not uncommon for people to start their own businesses because they have no other employment opportunities.

D. The Impact of Technology on Small Businesses 1. How has technology affected new small businesses? a. Technology creates new business opportunities and new ways to conduct business.

E. Social Media and Mobile Marketing 1. Small businesses are finding that, compared to traditional advertising social networks, blogs, and mobile devices are more cost effective ways to interact with, market to, and keep abreast of their customers. a. Facebook, Twitter, Yelp, Foursquare, and LinkedIn are also popular way to connect with customers and prospective employees.

2. However, social media can also become problematic if not managed well. a. A well-thought-out technology plan is an important aspect of any business’s overall strategy.

II.

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Entrepreneurs and the American Dream A. Definitions 1. Entrepreneurs are people who assume the risk of creating, organizing, and operating a business.

2. Entrepreneurs most often start a business to satisfy a need in the market that is not being adequately fulfilled, known as an opportunity niche.

B. The Traits of Successful Entrepreneurs 1. What are the traits of successful entrepreneurs? a. Research has shown that successful entrepreneurs have the following characteristics:

i. Are innovative and have a vision ii. Take risks iii. Are motivated to succeed iv. Are flexible and self-directed v. Work well with others and possess good leadership skills vi. Are “system thinkers”—they view the whole process rather than just its individual pieces.

2. How are entrepreneurs innovative? a. Successful entrepreneurs see problems to be solved or opportunities that aren’t being addressed in the marketplace; they recognize opportunity niches. b. They also make improvements to existing products or systems, or they introduce something new and make profitable solutions out of problems.

3. How do entrepreneurs take risks? a. Successful entrepreneurs recognize that they can influence events but do not have control over them, and know they may fail. b. They take calculated risks—they consider the likelihood of success before deciding whether to take a particular risk.

4. What makes entrepreneurs motivated to succeed? a. Entrepreneurs are motivated by many different factors, including providing for themselves or their families and by personal fulfillment.

5. Why do successful entrepreneurs need to be flexible and self-directed? a. Because entrepreneurial ventures are risky, entrepreneurs need to be able to react quickly to unexpected situations and downturns. b. Entrepreneurs must be able to wear many hats and need to know when to sell or exit a business.

6. Why are people skills and leadership skills important to entrepreneurs? a. Entrepreneurs rarely work by themselves and need other people with complementary skills to join them in their ventures.

7. What does it mean for entrepreneurs to be “system” thinkers? a. Although entrepreneurs develop companies from an idea, they must focus on the entire process of turning their idea into a business to succeed.

C. Types of Entrepreneurs 1. Are there different types of entrepreneurs? a. Beyond traditional entrepreneurs, other categories have begun to crop up: i. Lifestyle entrepreneurs ii. Micropreneurs iii. Home-based entrepreneurs iv. Internet entrepreneurs v. Growth entrepreneurs vi. Intrapreneurs vii. Social entrepreneurs and social intrapreneurs viii. Serial entrepreneurs 2. What are lifestyle entrepreneurs?

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a. Lifestyle entrepreneurs look for more than profit potential; they also look for freedom from corporate bureaucracy, flexibility, or the ability to work at home.

3. What are micropreneurs? a. Micropreneurs start their own businesses but are satisfied with keeping their businesses small in an effort to achieve a balanced lifestyle.

4. What are home-based entrepreneurs? a. Home-based entrepreneurs are entrepreneurs who run their businesses out of their homes.

5. What are Internet entrepreneurs? a. Internet entrepreneurs create businesses that operate solely online.

6. What are growth entrepreneurs? a. Growth entrepreneurs strive to create fast-growing businesses and look forward to expansion. b. The companies that these types of entrepreneurs create are known as gazelles.

7. What are intrapreneurs? a. Intrapreneurs are employees who work in an entrepreneurial way within an organizational environment.

8. What are social entrepreneurs and social intrapreneurs? a. Social entrepreneurs are entrepreneurs who create innovative solutions designed to solve social problems. b. Social intrapreneurs build and develop ventures within a company that are designed to identify and solve large-scale social problems.

D. Entrepreneurial Teams 1. What if I don’t have all the skills to be an entrepreneur? a. If you have an idea and really want to make it happen, you might want to reach out to others who can do what you can’t or don’t want to do and assemble an entrepreneurial team.

2. What is an entrepreneurial team? a. An entrepreneurial team is a group of qualified individuals with varied experiences and skills who come together to form a new venture.

III.

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Buying Franchises and Existing Businesses A. Franchising Basics 1. What is a franchise? a. A franchise is a method of doing business whereby the business (the franchisor) sells a company’s products or services under the company’s name to independent third-party operators (the franchisees).

2. What kinds of business opportunities are available as franchises? a. More than 760,000 franchised businesses are in operation, employing approximately 8.3 million people and generating nearly $800 billion annually.

B. Pros and Cons of Franchising 1. What are the advantages of franchising? a. It is a proven system of operation.

i. Franchisees benefit from the collective experience of the franchising company. b. There is strength in numbers. i. Franchisees might benefit from economies of scale achieved by purchasing materials, supplies, and services at discounted group rates. c. Initial training is part of the deal. d. Marketing support is provided. e. Market research is often provided.

2. What are the disadvantages of franchising? a. Lack of control b. Start-up and ongoing costs c. Workload d. Competition e. Share common problems C. Franchising Considerations 1. What are things to watch out for when considering buying a franchise? a. Table 5.2 shows suggested questions to ask the company and other people who have bought franchises from the company before you take the plunge.

D. Buying an Existing Business 1. Are there other ways to start a business besides starting new or buying a franchise? a. Another option is to buy an existing business.

2. What are the advantages of buying an existing business? a. Ease of start-up b. Existing customer base c. Financing opportunities 3. What are the disadvantages of buying an existing business? a. High purchase price i. Although you can determine the value of the physical business and its assets, it is more difficult to determine the true value of the previous owner’s goodwill—intangible assets represented by a business’s name, customer service, employee morale, and so on that might be lost with a change in ownership. b. Inheriting the previous owner’s mistakes c. Unknowns in transition 4. What do I need to do before I buy a business? a. Perform due diligence—conducting a reasonable investigation into the business history, operating and financial records, contracts, and the valuation of the business.

IV.

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The Risks of Small Business and Where to Get Help A. Why So Many Small Businesses Fail 1. What are the risks of owning my own business? a. As Figure 5.8 shows, nearly one-fourth of all startups fail in the first year, two-thirds survive only two years, and just over half survive after five years of operation.

b. Common reasons businesses fail include: i. Too much accumulation of debt ii. Inadequate management iii. Poor planning iv. Unanticipated personal sacrifices 2. What causes excessive debt accumulation? a. Most begin a new business by borrowing funds. b. If the new business does not generate revenue quickly enough to pay back the loans, the burden of paying the debt balance plus additional interest as well as normal operating expenses can cause an owner to become further entrenched in a potentially unrecoverable situation.

3. How does poor fiscal management lead to failure? a. Many entrepreneurs and small business owners may not be great at managing the books.

4. What other types of improper management lead to failure? a. Many business owners ignore the signs of a business beginning to fail or attribute the failure to the wrong reasons. b. Good managers stay on top of all aspects of the business, remain objective, and make tough decisions when necessary.

5. How important is planning to a business’s success or failure? a. A business plan is a formal document that states the goals of the business as well as the plan for reaching those goals. b. New businesses may also fail when their new owners do not adequately anticipate the many personal sacrifices—financial time and otherwise— they are forced to make.

B. Getting Help 1. Where do small business owners go for advice? a. The Small Business Administration (SBA), an independent agency of the U.S. government, offers assistance in the legalities associated with beginning and operating a business, as well as education and training, financial assistance, disaster assistance, and counseling. b. The Service Corps of Retired Executives (SCORE) offers workshops and counseling to small businesses at no cost. c. There are other mentoring sources available, including the Entrepreneurs Organization (EO).

2. What kind of training is appropriate for small business owners? a. If you are currently in college, look for internship opportunities in your industry of interest. b. Most community colleges offer business classes for credit or noncredit community education classes that are taught by industry professionals.

3. Where can small business owners go for support services? a. Business incubators are organizations that support start-up businesses by offering administrative services, technical support, business networking, sources of financing, and so on.

4. What other options exist for small business advice and assistance?

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a. One option is to team up with partners who offer strengths that the new owner does not possess and in turn share the business’s profits and liabilities. b. Another option is forming an advisory board—a group of individuals who offer guidance to the new business owner. i. It is similar to a board of directors in a publicly held company except it generally does not have the authority to make decisions.

5. Does where I locate my business make a difference in the type of help I can get? a. In an effort to build up and resuscitate communities through the United States, governments have established enterprise zones, geographic areas targeted for economic revitalizing. i. Businesses receive generous tax benefits for locating and hiring in these enterprise zones.

V.

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Financing Considerations A. Cash and Credit 1. Where can I get the money to start a business? a. When entrepreneurs start a business with little capital, they are said to be using bootstrap financing—using their own money, borrowing funds from family or friends, trading services with customers. i. Other means of bootstrap financing include using trade credit, factoring, and leasing.

2. Is it reasonable to use crowdfunding sites to raise capital? a. A new type of start-up funding is known as crowdfunding, in which entrepreneurs put together a detailed explanation of their projects or businesses on certain websites and ask for funding. b. People who fund projects on these sites typically donate small amounts of money and are offered free products from the start-up they contribute to. c. They do not own any part of the new business and are not guaranteed that it will be successful.

3. Should I use credit cards to finance my business? a. If used wisely, a credit card can be a convenient way to finance a business’s short-term needs but only if you can pay the balance off completely every month.

B. Small Business Loans and Grants 1. What if I need more money than what I can provide myself? a. New business owners sometimes borrow against their own assets, such as the equity in their homes or against their retirement accounts. b. Roughly half of all small businesses use bank loans and lines of credit as part of their financing strategies.

2. Can I apply for grants to help start my business? a. Grants are financial awards that are usually offered by federal and state governments and some private organizations.

C. Angel and Venture Capital Financing 1. What if I need additional sources of funds through investors?

a. Angel investors i. Angel investors are wealthy individuals who are willing to put up their own money in hopes of a profit return later on. b. Venture capitalists i. Venture capitalists are the next step in funding a start-up. ii. Venture capital funding is generally sought when the business is more mature and needs large sources of capital to take the business to the next step. c. The small business investment company program i. If venture capital is not available or suitable, an alternative is a small business investment company (SBIC) program. ii. SBICs are private venture capital firms licensed by the SBA to make equity capital or long-term loans available to small companies.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity 1 Finding an Entrepreneurial Niche Activity Overview: This activity encourages students to think creatively, finding an opportunity niche at your school. Then, students should envision how they would start a small business to satisfy the current unmet need.

Time Limit: 30–60 minutes What to Do: • • • • •

Have students pair up or divide them into small groups.

Review the definition of “opportunity niche” and provide some examples of entrepreneurs and businesses that succeeded by satisfying unmet needs.

Ask students/groups to think about and discuss potential business opportunities within your school that would satisfy current unmet needs.

Have each group report to the class on their ideas.

Discuss the feasibility and potential for success of each idea.

Don’t Forget: Allow students at least 10 minutes in their groups to brainstorm potential business ideas.

Wrap-Up: Remind students that filling an opportunity niche is a great idea; a business that does so will have customers as soon as they open for business.

Supplemental In-Class Activity 2 Today’s Entrepreneurs Activity Overview: This activity allows students to participate in a class discussion that highlights entrepreneurs and the qualities that they possess.

Time Limit: 15–30 minutes What to Do: • • •

Have students volunteer the names of entrepreneurs they admire.

Write the names of each entrepreneur on the board as students say them.

After compiling a sizeable list, have students explain what they admire about each name on the board.

Don’t Forget: .

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You may need to help students, showing them that even if they are new to business studies, they know plenty of entrepreneurs. List a few examples to get them started.

Students seem to enjoy thinking about entertainment entrepreneurs such as Oprah Winfrey, Jay-Z, Michael Jordan, among others.

Wrap-Up: Compare the list of traits that students admire with the list of entrepreneurial characteristics from the chapter. There will likely be plenty of overlap, as well as additional characteristics that you can add to the chapter list.

Supplemental In-Class Activity 3: Case Study Discussion How Big Is Too Big for Small Business?

Activity Overview: This activity asks students to address how growth within a small business can bring about additional legal challenges.

Time Limit: 30 minutes What to Do: 1. In advance, assign the reading of the article by Mike Hofman, “CEO’s Notebook: Stifle Growth, the Myth of the 25th Employee” (http://www.inc.com/magazine/20000901/20132.html) 2. Divide students into groups and ask them to answer the following questions: (15 minutes) a. Do you think fears like Levin’s are justified? If so, how can an entrepreneur protect him- or herself? b. What advice would you give an entrepreneur who faces a decision about whether to hire the one additional employee who would bring the company to a new regulation threshold? c. What is the purpose of the kind of legislation mentioned in this case?

3. Once students have answered the questions, discuss the answers as a class. Make sure they include the following points: (15 minutes) a. Adherence to federal legislation, such as OSHA and EEOC, is mandatory; professional legal advice may be necessary for businesses facing this type of situation. b. Opinions will vary as to whether the business owner should hire the person (assuming the firm is already in compliance with the law and can relatively easily accommodate any additional restrictions) or whether it’s better to reorganize the workloads of existing employees to put off the hire. c. Answers will vary, but students should indicate that the purpose is to protect employees’ safety and welfare and prevent abuses in the workplace. .

Don’t Forget: Be sure to keep students on the case topic; a controversial issue such as this often invites extended discussion.

Wrap-Up: Bring the discussion to a close by asking students for examples of additional compliance issues not mentioned in the case.

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ENHANCING THE ONLINE COURSE Five Hot Innovations: Ask your students to identify the five most innovative products they can find. Be sure to have them identify what makes the products new and different.

Ask your students to send you the information via e-mail with graphics attached to illustrate the unique aspects of the products.

Benjamin Franklin List: Ask your students to list the risks involved in starting a new Internet business. Have them post these lists on the online discussion board. Once all students have responded, ask them to send another list, this time noting the possible opportunities. (Benjamin Franklin was famous for these pro and con lists.)

To Be or Not to Be: Ask students to decide if they would be a good entrepreneur based on the criteria listed in the textbook, What Does It Take to Be an Entrepreneur? Have the students explain their positions in the discussion tool or the chat room. Determine which students are really planning to open their own business and discuss the types of businesses they may be considering.

Eye on Small Business: Ask your students to choose a type of business and then investigate that industry via the Internet. They can search government sites, professional association sites, state sites, and chambers of commerce sites. Require a one- to two-page abstract of the free resources available to entrepreneurs in that industry. Be sure to leave the parameters open to all types of resources.

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ANSWERS TO END-OF-CHAPTER MATERIALS Self Test Multiple Choice 5-1

Which is a key trait of an entrepreneur? d. All of the above Learning Objective 5-2: Entrepreneurs and the American Dream AACSB: Application of knowledge

5-2 Sally started her new business venture five years ago. The business brings excess organic produce to food banks and has grown 15 percent every year.

Which type of entrepreneur best describes Sally? a. Social entrepreneur Learning Objective 5-2: Entrepreneurs and the American Dream AACSB: Application of knowledge 5-3 One of the first things someone needs to do before starting a business is to write which of the following? a. A business plan Learning Objective 5-2: Entrepreneurs and the American Dream AACSB: Application of knowledge 5-4 Which of the following is not a characteristic of a small business? d. It is considered a dominant player in its industry.

Learning Objective 5-1: Small Business: The Mainstream of the American Economy AACSB: Application of knowledge 5-5 Steven Ye wants to start a company. He has a rough draft of his business plan and some tentative funding but needs some additional advice and guidance to help him through the start-up process. The best source for Steve is b. a SCORE volunteer.

Learning Objective 5-4: The Risks of Small Businesses and Where to Get Help AACSB: Analytical thinking 5-6 Kazuto is interested in starting a new business. Which is a reason Kazuto should consider buying an existing business versus starting one from scratch? a. He will operate a tried and tested business.

Learning Objective 5-3: Buying Franchises and Existing Businesses AACSB: Analytical thinking 5-7 Wayland wants to buy a deli that is for sale, but the owner has put too high a value on the business’s goodwill. Goodwill is c. the value of the business’s reputation with the current owner.

Learning Objective 5-3: Buying Franchises and Existing Businesses .

AACSB: Analytical thinking 5-8

Rebecca has been operating a pet grooming business for several years and has already maxed out her personal credit and savings. She has designed a device that will make the pet grooming process more efficient but needs about $125,000 to take the idea further and perhaps sell it to other pet groomers.

Which is the most likely source of financing that Rebecca could use? c. Funds from an angel investor Learning Objective 5-4: The Risks of Small Businesses and Where to Get Help AACSB: Application of knowledge

5-9 Which of the following factors commonly leads to the failure of a small business? d. All of the above Learning Objective 5-4: The Risks of Small Businesses and Where to Get Help AACSB: Analytical thinking 5-10 Rashid is starting a consulting business. He needs a receptionist, a place to meet clients, and other aspects of an office. A good solution for Rashid to consider would be a(n) c. business incubator.

Learning Objective 5-4: The Risks of Small Businesses and Where to Get Help AACSB: Analytical thinking

True/False 5-11 Small businesses can have a positive impact on large businesses.  True Learning Objective 5-3: Buying Franchises and Existing Businesses AACSB: Analytical thinking 5-12 A social intrapreneur is someone who provides funding for those in Third World countries who want to begin their own businesses but have no capital with which to do so.  False Learning Objective 5-2: Entrepreneurs and the American Dream AACSB: Analytical thinking 5-13 Although most small businesses have annual revenues less than $39 million, there is no specific revenue limit set by the SBA for small businesses.

False Learning Objective 5-1: Small Business: The Mainstream of the American Economy AACSB: Analytical thinking 5-14 A franchisee is usually required to pay the franchiser an ongoing fee.  True .

Learning Objective 5-3: Buying Franchises and Existing Businesses AACSB: Application of knowledge 5-15 Crowdfunding is putting a request for funds on your Facebook page.  False Learning Objective 5-4: The Risks of Small Businesses and Where to Get Help AACSB: Application of knowledge Critical Thinking Questions: Suggested Answers 5-16 Companies that encouraged their employees to pursue entrepreneurial activities within an existing business created products such as Post-It Notes and Sony PlayStation. What aspects of the corporate environment promote intrapreneurial activities?

Answers will vary but students should include fostering creativity, rewarding/ acknowledging employee’s ideas and innovations, and providing time and space within the company for employees to work on new ideas.

Learning Objective 5-2: Entrepreneurs and the American Dream AACSB: Application of knowledge 5-17 Discuss how social media has affected small businesses at all stages of their development, such as financing, marketing, and communications.

Small businesses are finding that social networks, blogs, and mobile devices are more cost-effective ways than traditional advertising to interact with, market to, and keep abreast of their customers. Using mobile-device apps consumers can access coupons, discounts, and special offers from small businesses A business has to be careful to monitor social media to insure its reputation stays intact and quickly deal with any social media issues. A well-thought-out technology and social media plan is an important aspect of any business’s overall strategy.

Learning Objective 5-1: Small Business: The Mainstream of the American Economy AACSB: Application of knowledge 5-18 Compare the different sources of funding available to small business owners. What types of funding are better at the beginning stages of a business? What types of funding may be better once the business is better established and is looking to expand?

Bootstrap financing which includes using your own money, borrowing funds from family and friends, and possibly trading services and products with vendors or .

clients is often used when starting a business. Friends and family generally do not require high rates of return on the money they have invested or demand the business turn a quick profit.

Crowdfunding may also be used by entrepreneurs who have put together a detailed explanation of their projects or businesses on sites (for example, Kickstarter and Indiegogo) that ask for funding. People who fund projects on these sites typically donate small amounts of money and are offered free products from the startups they contribute to—perhaps the chance to purchase a product in a special edition or color or meet with the product’s designer.

Credit cards offer a convenient way to obtain funds quickly, especially with some of the 0 percent financing options available. If the credit card is not paid off in FULL at the end of the month, interest rates on the unpaid balance can be exorbitant.

Options for established businesses include: Small Business loans and grants, outside investors, such as angel investors, venture capital, or small business investment companies.

Learning Objective 5-4: The Risks of Small Businesses and Where to Get Help AACSB: Application of knowledge

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Team Time Starting a Business: Brainstorming 5-19 Students’ answers will vary.

Ethics and Corporate Social Responsibility Social Entrepreneurship: Start Some Good Answers will vary depending on the school, the surrounding community, and the causes that are important to students. Areas of interest can include children and youth, arts and culture, education, the environment, health, or human rights. Key points that students should cover include understanding the community, defining the project, setting funding goals, and creating a promotion plan.

Learning Objective 5-2: Entrepreneurs and the American Dream AACSB: Application of knowledge Web Exercises 5-20 Do You Have What It Takes to Be an Entrepreneur?

Students’ answers will vary, depending upon the entrepreneurial quiz selected and the aspect(s) of the students’ personalities that they choose to discuss.

Learning Objective 5-2: Entrepreneurs and the American Dream AACSB: Reflective thinking 5-21 Franchise Owner Students’ answers will vary, depending upon the franchise opportunities selected.

Learning Objective 5-3: Buying Franchises and Existing Businesses AACSB: Application of knowledge 5-22 Angel Investor for a Day Students’ answers will vary, depending upon the businesses chosen.

Learning Objective 5-4: The Risks of Small Businesses and Where to Get Help AACSB: Application of knowledge 5-23 Build a Business with a Conscience The “New Heroes” game engages students to determine if they have what it takes to create a viable business with a social conscience. Students’ answers will vary, depending upon their experience with the game.

Learning Objective 5-2: Entrepreneurs and the American Dream AACSB: Reflective thinking 5-24 Small Business Owners: Where to Go for Help

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Students’ answers will vary, depending upon the service site selected. SBDC resources may include a listing of workshops scheduled in the area, a link to connect with local business mentors and counselors, a link to learn how to sell to the government, details about SBA programs, services and local partners, and business resources to help start or grow a business in the area (i.e., links to state offices).

Learning Objective 5-4: The Risks of Small Businesses and Where to Get Help AACSB: Application of knowledge MyBizLab: Suggested Answers 5-25 Why would someone want to buy an existing business rather than start a business from scratch? What are the drawbacks of buying an existing business?

Advantages of buying an existing business: • Ease of start-up.

• Existing customer base.

• Financing opportunities.

Drawbacks of buying an existing business: • High purchase price • Inheriting the previous owner’s mistakes • Unknowns in transition.

5-26 Discuss the benefits of using an incubator when beginning a small business.

Business incubators are organizations that support start-up businesses by offering administrative services, technical support, business networking, sources of financing, and more that a group of start-up companies share.

Incubators create a synergistic environment where companies can act as peer-to-peer mentors, sharing both successes and failures. Incubators also lend legitimacy to a beginning company as well as a more professional atmosphere than someone’s home office.

Are there drawbacks to using an incubator?

Answers will vary.

Learning Objective 5-4: The Risks of Small Businesses and Where to Get Help AACSB: Application of knowledge

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CHAPTER 6: FORMS OF BUSINESS OWNERSHIP CHAPTER OPENER Chapter 6 introduces students to the different forms of business ownership that entrepreneurs can choose when starting a business—sole proprietorships, partnerships, and corporations—including the advantages and disadvantages of each. The chapter also discusses not-for-profit organizations and cooperatives.

The conclusion of the chapter examines how companies add to their product lines, enter into different geographic areas, or seek to gain a competitive advantage through different types of mergers and acquisitions.

DETAILED LECTURE OUTLINE I.

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Sole Proprietorships A. Why Is Sole Proprietorship a Popular Form of Business Ownership?

1. A sole proprietorship is a business owned (and usually controlled) by a single individual.

2. Other characteristics of a sole proprietorship are listed in Figure 6.1.

B. Starting a Sole Proprietorship 1. How do I start a sole proprietorship? a. There are no special forms to fill out, and there are no special filing requirements with state and federal governments. b. You might need to obtain a local license or permits.

C. Advantages and Disadvantages 1. Are there advantages of being a sole proprietor? a. Ease of formation b. Control and considerable flexibility to act quickly c. No specific corporate records to keep or reports to file, including tax reporting d. No separate tax return 2. Why wouldn’t I want to begin my business as a sole proprietorship? a. The biggest disadvantage is exposure to personal liability. i. A liability is the obligation to pay a debt, such as an account payable or a loan. ii. Unlimited liability means that, if business assets aren’t enough to pay business debts, then sole proprietor’s personal assets can be used to pay the balance.

3. Are there other things to consider with running a sole proprietorship? a. Financing/investment—It can make it more difficult to borrow money. b. Taxes—Your business income and expenses are included on your personal return. c. Selling—It is much more difficult to sell a sole proprietorship.

d. Financial sacrifices—The owner is often the last person to get paid, after employees, suppliers, and other creditors. e. Spreading yourself thin—All management duties fall on one person.

II.

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Partnerships A. Advantages and Disadvantages of Partnerships 1. When is it good to bring in a partner? a. A partnership is a type of business structure in which two or more entities (or partners) share the ownership and the profits and losses of the business. b. Advantages include: i. Sharing the costs of starting and running a business ii. Sharing management responsibilities and workload iii. Having a partner whose skills complement your own iv. Coming up with new ideas and projects and discussing major decisions 2. Are there disadvantages to adding partners? a. Adding partners means sharing profits and control. b. Partners may have different work habits, styles, and goals.

3. As a business form, how does a partnership compare to a sole proprietorship? a. The biggest difference between a partnership and a sole proprietorship is the number of people contributing resources and sharing the profits and liabilities. b. The government does not require any special forms or reports. c. Like a sole proprietorship, partnerships do not file a separate tax return.

B. Elements of a Partnership Agreement 1. What goes into a partnership agreement? a. Although no formal documents are required, a partnership agreement formalizes the relationship between partners. b. The following items should always be included: i. Capital contributions a.) The amount of capital (money), equipment, supplies or other tangible things of value that each partnership contributes to begin the business. ii. Responsibilities of each partner iii. Decision-making process iv. Shares of profits or losses (see Figure 6.4) v. Departure of partners vi. Addition of partners C. Types of Partnerships 1. Are there different types of partnerships? a. There are two common types: general partnerships and limited partnerships.

2. What is a general partnership? a. In a general partnership, each partner has unlimited liability for the debts and obligations of the partnership and each is liable for his or her own

actions, as well as the actions of the other partners and the actions of any employees.

3. What is a limited partnership? a. In a limited partnership, there are two types of partners: i. General partners are full owners, are responsible for day-to-day business decisions, and remain liable for all debts and obligations of the business. ii. Limited partners are involved as investors, do not actively participate in day-to-day business decisions, and are personally liable only up to the amount of their investment. b. A master limited partnership (MLP) combines the tax benefits of a limited partnership but is publicly traded on a securities exchange.

4. Will partnerships work well when liability is a concern? a. Neither a sole proprietorship nor a partnership will protect the owner(s) from unlimited risk.

III.

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Corporations A. What is a corporation?

1. A corporation is a specific form of business organization that is legally formed under state laws.

2. Most corporations are structured as a C corporation, which refers to Subchapter C of the Internal Revenue Code by which it is governed. a. Figure 6.5 lists characteristics of a C corporation.

B. Advantages of Incorporation 1. When does it make sense to form a business as a corporation? a. Forming under a corporate structure provides many advantages other business structures don’t.

2. How can a business owner protect his or her personal assets? a. C corporations are legal entities and are responsible for their own debts, obligations, and liabilities; the owners are not personally liable for the business’s debts.

3. What happens to a corporation when an owner leaves? a. Shares of ownership are easily exchanged, so the corporation will continue to exist should an owner die or wish to sell his or her interest in the business.

4. Is it easier for corporations to get funding and to raise capital? a. Corporations can raise money by selling shares of ownership to a specified group of individuals. b. Or, when it has reached a significant size, it can extend its ownership by “going public”—selling shares of ownership to the general public. c. Lenders are more likely to loan money to an incorporated business because they are not limited to the credit profile of a sole proprietor or general partners.

5. Are corporations taxed the same as other types of businesses? a. Corporations have separate tax rates.

6. Does it matter where a business is incorporated? a. If you have a corporation with fewer than five shareholders or members, it’s usually much easier and often less expensive to incorporate in the state where your business has a physical presence. b. For some larger businesses, it may be more advantageous to incorporate in a state that is historically more favorable to businesses.

C. Structure of a Corporation 1. How is a corporation structured? a. It is composed of shareholders, a board of directors, corporate officers, first-line managers, and employees, as shown in Figure 6.6. i. Shareholders a.) Whether or not a corporation is privately owned or publicly owned, it has shareholders (or stockholders) who have an ownership interest in the company. b.) A publicly owned corporation is a corporation regulated by the Securities and Exchange Commission (SEC) because the shares of ownership can be traded on public stock exchanges. c.) Privately held (or closed) corporations are owned, in most cases, by the company’s founders, a management team or a group of private investors, and shares are not traded on public stock exchanges. ii. Directors a.) The shareholders elect the board of directors, and the members of the board select and hire the business’s management team of corporate officers. b.) Major financing and business decisions are also made by the board of directors. iii. Officers and line managers a.) The primary lineup of officers elected by a corporation’s board of directors includes the firm’s CEO, CFO, and COO. b.) The chief executive officer (CEO) is typically responsible for the entire operations of the corporation and reports directly to the board of directors. c.) The chief financial officer (CFO) reports directly to the CEO and is responsible for analyzing and reviewing the financial data, reporting financial performance, preparing budgets, and monitoring expenditures and costs. d.) The chief operating officer (COO) is responsible for the day-today operations of the organization and reports directly to the CEO. e.) In large companies, the responsibilities of each officer are demanding enough that first-line managers, people who directly supervise lower-level employees, help run the business.

D. Disadvantages of Incorporation 1. Are there disadvantages of structuring a business as a corporation? .

a. Forming a corporation is a more cumbersome process than forming a sole proprietorship or partnership (see Figure 6.7). b. Another disadvantage is double taxation, which occurs when taxes are paid on the same asset twice. i. A corporation is first taxed on its net income (profit) and distributes that income to shareholders in the form of dividends. ii. Individual shareholders must then pay taxes on the dividends, which have already been taxed at the corporate level.

2. Can a business have the protection of a corporation but not pay corporate taxes? a. There are other forms of business structures in which owners can protect themselves from personal liability and have the income of their businesses flow through to their individual tax returns so they don’t face double taxation: the S corporation and the limited liability company.

E. S Corporations 1. What is an S corporation? a. An S corporation is a regular corporation (a C corporation) that has elected to be taxed under a special section of the Internal Revenue Code called Subchapter S. 2. How is an S corporation different from a C corporation? a. S corporations do not pay corporate income taxes. b. Shareholders owe income taxes based on their proportionate share of the business profits they receive and pay taxes through their own individual tax returns. c. Other characteristics of an S corporation are shown in Figure 6-8.

3. How does an S corporation handle personal liability? a. The corporate structure provides some limitations on personal liability of the owners, although it does not assume liability for an owner’s personal wrongdoings. b. This is true for any corporate structure—whether it is a C corporation, an S corporation, or a limited liability company.

4. Can any business elect to be an S corporation? a. There are certain qualification requirements, including: i. The company must not have more than 100 shareholders. ii. Shareholders must be U.S. citizens or residents. iii. The company must issue only one class of stock. iv. The company must proportionately distribute profits/losses to each shareholder based on each one’s interest in the business.

F. Limited Liability Companies 1. What is a limited liability company? a. A limited liability company (LLC) is a distinct type of business that combines the corporate advantages of limited liability with the tax advantages of sole proprietorships and partnerships.

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b. LLCs do not issue stock; rather, each member’s ownership is determined by the value of his or her capital account (the member’s contributions to the LLC). c. See Figure 6-9 for characteristics of an LLC. 2. What’s the difference between an LLC and an S corporation? a. Ownership i. S corporations are restricted as to the number of owners the company can have. ii. LLCs can have an unlimited number of owners (called members) and members are not subject to other ownership restrictions imposed on S corporations. b. Perpetual life—When a member leaves an LLC, the LLC must dissolve. c. Stock transfer i. Stock in an S corporation is freely transferable. ii. Ownership interest in an LLC generally requires the approval of other members. d. Profit and loss distributions i. An LLC may allocate profits in whatever manner best suits the members. ii. Profits of an S corporation are allocated in proportion to a shareholder’s interest. e. Owner and employee benefits i. An S corporation may offer fringe benefits to its owners. ii. LLCs are limited in the benefits their members can be offered.

3. What kinds of businesses are best suited as an LLC? a. LLCs may be a good choice for start-up businesses, not only for the tax benefits but also because it is easier to obtain financing because the number of investors (owners) is not restricted.

G. Comparing Forms of Ownership 1. Which form of ownership is best? a. There is no one entity that works for everyone. b. Figure 6-10 shows how the most common forms of ownership stack up to one another.

IV.

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Not-for-Profit and Cooperatives A. Not-for-Profit Organizations 1. What is a not-for-profit organization? a. A not-for-profit organization (or nonprofit organization) is a business that does not seek a profit. b. After paying normal operating expenses, it uses remaining revenue for the business’s declared cause and mission rather than paying stockholders.

2. Can not-for-profit organizations act like corporations? a. Not-for-profit organizations are incorporated and are subject to most of the laws that govern for-profit corporations.

b. Not-for-profit organizations do not issue shares of stock, and their members (or owners) may not receive personal financial benefit from the organization’s profits (other than salary as an employee).

3. Are there advantages to being tax-exempt? a. It is exempt from paying most federal and/or state corporate income taxes and may also be exempt from state sales and property taxes.

B. Cooperatives 1. What structure would be best for groups of businesses with common goals? a. A cooperative is a business not owned by investors but rather governed by members who use or benefit from the products or services provided by the organization.

2. How are cooperatives structured? a. Members buy shares to help finance the cooperative, elect directors to manage it, and create and amend the by-laws that govern it.

3. Are cooperatives not-for-profits? a. Any profits made by a cooperative are reinvested in the organization to maintain it and improve its functioning, or profits are returned to members in proportion to their use of the cooperative, not their investment or their ownership share.

4. What are the advantages of cooperatives? a. By uniting, the members of a cooperative have more bargaining power to negotiate within the marketplace and thus enjoy reduced costs.

V.

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Mergers and Acquisitions A. Mergers versus Acquisitions 1. What is the difference between a merger and an acquisition? a. A merger takes place when two companies come together cooperatively to form one company. b. An acquisition occurs when one company completely buys out another company.

2. Are all mergers and acquisitions mutually desired by both companies? a. Often, acquisitions are friendly, although some acquisitions are “unfriendly.” i. An unfriendly acquisition occurs when one company tries to purchase another company against the wishes of its shareholders or managers. a.) These are referred to as hostile takeovers. b.) The acquiring firm makes a tender offer, an offer to buy the target company’s stock at a price higher than its current value in order to persuade the shareholders of the target company to sell their stock. ii. Another method of acquiring a company against its wishes is through a proxy fight, in which the acquiring company tries to persuade the shareholders of the target company to vote out the firm’s existing managers and replace them with managers who are sympathetic to the goals of the acquiring company.

iii. A leveraged buyout (LBO) occurs when the acquiring group in a takeover borrows the funds necessary for the acquisition, using the assets of the acquired company of collateral.

B. Advantages of Mergers and Acquisitions 1. Why do mergers and acquisitions occur? a. Synergy is the effect achieved when two companies combine, in which the result is better than each company could achieve individually. b. It is achieved by combining resources that could not have been created independently by either party.

2. Is competition a driving force for mergers and acquisitions? a. Achieving a greater competitive advantage is another reason. b. Often, companies join to become a more dominant force in their market.

3. Do companies add value to their product line by merging? a. Larger companies may acquire smaller companies for their innovativeness. b. A smaller company may agree to merge or be acquired if it feels it wouldn’t have the opportunity to go public and couldn’t survive alone otherwise.

C. Types of Mergers 1. Are there different types of mergers? a. Horizontal merger—A merger in which two companies sell the same types of products and are in direct competition with each other b. Vertical merger—A merger between two companies that have a company/customer relationship or a company/supplier relationship c. Product extension merger—A merger between two companies selling different but related products in the same market d. Market extension merger—A merger between two companies that sell the same products in different markets e. Conglomeration—A merger between two companies that have no common business areas merge to obtain diversification D. Disadvantages of Mergers 1. Are there disadvantages with mergers? a. More than one-half of all mergers fail completely or don’t live up to financial expectations. b. The primary culprit is poor integration following the transaction. c. Additionally, corporate cultures of the organizations may clash.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity 1 The Match Game Activity Overview: This activity allows students to practice identifying the advantages and disadvantages of each of the business ownership structures.

Time Limit: 60 minutes What to Do: • •

• • • •

Create several sets of note cards that list the business ownership structures of Sole Proprietorship, Partnership, Corporation, and LLC. Create several sets of note cards that list the advantages and disadvantages of each of the business ownership structures. (Use Figures 6.2, 6.4, 6.6, 6.9, and 6.10, along with Table 6.11 of the textbook to create these cards, or go to http://sba.gov/smallbusinessplanner/start/chooseastructure/START_FORMS_OW NERSHIP.html, which gives the SBA view on business structures, listing the advantages and disadvantages.)

For each set, shuffle the note cards, and then place them in an envelope.

Divide students into the same number of groups as the envelopes you have.

Have each group put Sole Proprietorship, Partnership, Corporation, and LLC on top from left to right.

Each group should put every note card under the correct heading of Sole Proprietorship, Partnership, Corporation, or LLC, without referring to their text.

Don’t Forget: This activity might seem as if it would be easy and quick, but students will have to organize the cards and debate where each belongs, so the activity will likely take a full hour.

Wrap-Up: After all groups have finished, show them the solution, so that they may check their note cards and ask questions any were misplaced.

Supplemental In-Class Activity 2 Who’s Next?

Activity Overview: This activity gives students an opportunity to use their knowledge of mergers and acquisitions by listing companies that would achieve synergy through either a merger or acquisition.

Time Limit: 30–60 minutes What to Do: .

• • •

Divide students into groups or allow them to pair up.

Ask them to think of companies that would be great candidates for merging or acquiring one another.

Have each group explain their best merger or acquisition idea, why it is a good idea, and whether it would be a merger or acquisition.

Don’t Forget: • •

Allow plenty of time for brainstorming possible mergers and acquisitions.

Encourage students to think creatively, instead of just listing possible merger or acquisition candidates they have heard of on the news.

Wrap-Up: After each merger or acquisition has been presented, have the entire class comment on the synergy created by the two companies becoming one and whether, as shareholders, they would agree to the deal.

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ENHANCING THE ONLINE COURSE Internet Definition: Ask students to define “sole proprietorship” using the definition given in the text. Then, expand on that definition graphically, using the website of the business support organizations such as SCORE or SBA Marketing Association. How can activities on the Internet (such as items on the website) be related to the definition?

Losing Money: Ask students to create their own example of the effect of a business loss on personal income, using business activities from their own experience.

Compare and Contrast: Ask students to compare and contrast a general partnership and limited partnership. They should contrast the pros and cons of each using general business support websites.

Review Advantages of Incorporation: Have your online students identify and explain all of the benefits of incorporation. Have each student pick two states. Research various accounting websites to see if the benefits of incorporation vary from state to state.

Identify Corporate Structure: Have your students select three major corporations. Use the Internet and corporate websites to compare the structure of each organization. How are they similar? How do they differ?

Who is what?: Ask students to create a pie chart representing the percentage of companies in the United States that fall under each category—sole proprietorship, partnership, and corporation.

Mergers: Ask students to use Figure 6.14 from the textbook to recreate the chart using visuals and information from the Internet to present ideas for companies that they think should merge. Students should explain the reasons for and benefits of the possible merger before posting them on the discussion board.

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ANSWERS TO END-OF-CHAPTER MATERIALS Self Test Multiple Choice 6-1

Omar and Sam are physical therapists who work together. Their office is on the first floor of a building Omar owns. They need protection of their personal assets as well as to protect themselves from any errors their partner makes.

Which business structure would best suit their company? d. An LLC Learning Objective 6-3: Corporations AACSB: Application of knowledge

6-2

Why might a potential business owner want to establish a business as a sole proprietorship? d. The owner is not required to file legal paperwork to start up the business.

Learning Objective 6-1: Sole Proprietorships AACSB: Analytical thinking

6-3

Trudy and Yvonne have come together to run Salford Children’s Center. The center receives state and federal grants, and whatever is left over is put back into the center to improve and expand its services. Salford Children’s Center would best be described as a(n) c. not-for-profit organization.

Learning Objective 6-4: Not-for-Profit Organizations and Cooperatives AACSB: Application of knowledge

6-4

Jackson Eats is a partnership owned by Jesse and Robert Jackson. They need additional capital to expand to a new location, so they have decided to bring in Sean, who will only contribute capital. Sean would best be considered as a(n) b. limited partner.

Learning Objective 6-2: Partnerships AACSB: Application of knowledge

6-5

Which of the following is not an advantage of a C corporation? d. There is little paperwork involved.

Learning Objective 6-3: Corporations AACSB: Analytical thinking

6-6

Warren Buffet runs Berkshire Hathaway which owns companies such as GEICO insurance, Dairy Queen, Fruit of the Loom, and Helzberg Diamonds.

Berkshire Hathaway is considered to be which of the following? a. A conglomeration Learning Objective 6-5: Mergers and Acquisitions AACSB: Application of knowledge

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6-7

A group of people elected by a firm’s shareholders to oversee the operation of a corporation are b. the firm’s board of directors.

Learning Objective 6-3: Corporations AACSB: Analytical thinking

6-8

Which is a benefit of cooperatives? a. The power of the group enables them to negotiate for goods and services at favorable prices.

Learning Objective 6-4: Not-for-Profit Organizations and Cooperatives AACSB: Analytical thinking

6-9

Dad’s Camping Equipment Co. buys tents from Son’s Outdoor Tent Co. If Dad’s company merges with Son’s company to form Family Outdoor Equipment Store, which of the following best describes the type of transaction that occurred between the two companies? a. A vertical merger Learning Objective 6-5: Mergers and Acquisitions AACSB: Application of knowledge

6-10 The management team of Company A has contacted the shareholders of Company B encouraging them to replace their current managers with a new group who are more in line with the goals of Company A. Company A is launching a a. proxy fight.

Learning Objective 6-3: Corporations AACSB: Application of knowledge True/False 6-11 Any business can elect to be an S corporation.  False Learning Objective 6-3: Corporations AACSB: Analytical thinking 6-12 Liabilities include losses associated with breaches of contract or from damages.  True Learning Objective 6-1: Sole Proprietorships AACSB: Analytical thinking

6-13 A small, privately owned company can be structured as a corporation.  True .

Learning Objective 6-3: Corporations AACSB: Analytical thinking 6-14 A significant disadvantage of forming a partnership is the amount of paperwork and reporting it requires.  False Learning Objective 6-2: Partnerships AACSB: Analytical thinking 6-15 A partnership agreement should include procedures that outline how a partner’s departure from the business will be handled as well as how new partners are to be brought in.  True Learning Objective 6-2: Partnerships AACSB: Analytical thinking Critical Thinking Questions: Suggested Answers 6-16 Why might it be important to structure your business as a C corporation, even if you are the only person running the business?

Student responses to this question will vary but should include a discussion of limited liability and the myriad of financing options for a corporation.

Learning Objective 6-3: Corporations AACSB: Analytical thinking 6-17 What are the similarities and differences between a general partnership and a limited partnership?

General partners are full owners, are responsible for day-to-day business decisions, and remain liable for all debts and obligations of the business. Limited partners are involved as investors but do not actively participate in day-to-day business decisions, and are personally liable only up to the amount of their investment.

Learning Objective 6-2: Partnerships AACSB: Analytical thinking 6-18 Approximately 70 percent of all businesses are sole proprietorships. Why is sole proprietorship a popular form of business ownership? What are the circumstances when it might be important to consider a different form of ownership?

Sole proprietorships are popular because of the: ease of formation, control and considerable flexibility to act quickly, no specific corporate records to keep or reports to file, including tax reporting, and no separate tax return to file. .

A different form of business should be considered if the owner is concerned about liability issues, ability to borrow, and/or the possible sale of the sole proprietorship at a future date.

Learning Objective 6-1: Sole Proprietorships AACSB: Analytical thinking

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Team Time What’s the Plan?

This exercise requires that students select a form of business ownership for one of several different business ideas. The ideas are listed below, along with a recommended form of ownership.

1. Roofing and siding company—This should be a corporation. When participating in a business where there is a good possibility that someone will get hurt on the job, or that a dissatisfied client could sue, it is important for personal and private assets to be protected.

2. Ice cream parlor—Again, this is likely to be a corporation, although more progressive students might consider developing a cooperative.

3. Yoga instruction—Depending on the number of instructors, this could either be a limited liability corporation or possibly an S-corporation. Yoga is also an activity where people could get hurt and lawsuits could develop, but a brand-new yoga instructor who trusts her students might have a sole proprietorship to reduce paperwork and costs.

4. Lawn-mowing company—This is likely to be a sole proprietorship, especially in its early stages.

5. Clothing donation company—This should be a non-for-profit organization. This is a good place to warn students about companies that look like nonprofits, but are actually scams. In the past few years, brightly colored boxes have been springing up on sidewalks in major metropolitan areas. People are asked to donate clothes, but investigators soon discover that the “nonprofit” business is actually a front for simply selling the used clothes for a profit. (See “Behind the Green Box” on the KCBS website: http://cbs5.com/30minutes/behind.green.box.2.451581.html.)

Ethics and Corporate Social Responsibility Code of Ethics 6-19 Student responses to this question will vary depending upon the organizations chosen.

6-20

Student responses to this question will vary.

Web Exercises 6-21 Business Combinations Students’ answers will vary, depending upon the merger, takeover, or acquisition selected.

Learning Objective 6-5: Mergers and Acquisitions AACSB: Application of knowledge

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6-22 Student-Friendly Businesses Students’ answers will vary, depending upon the business ideas and forms of business ownership selected.

6-23 The Perfect Partner Students’ answers will vary, depending upon the websites they have selected to research.

For example, Inc.com has a list of seven tips for choosing the right business partner (http://www.inc.com/minda-zetlin/how-to-tell-if-youve-found-the-right-businesspartner.html). FitSmallBusiness.com has an article on how to choose the right business partner (http://fitsmallbusiness.com/business-partnerships/). There are many other resources available.

Learning Objective 6-2: Partnerships AACSB: Application of knowledge 6-24 Plan with the End in Mind Students’ answers regarding causes of business failure will vary. However, common business failures include: • Poor management • Failure to understand the market and customers • Inadequate or inappropriate financing • Lack of planning Students’ answers about an exit strategy will also vary. These strategies may include liquidating the company, an owner buyout by employees, selling the company, an acquisition by another company, or going public (an IPO). Entrepreneur has an excellent discussion of these strategies that includes pros and cons of each strategy. See: http://www.entrepreneur.com/article/78512 6-25 Cooperatives and You! Students’ answers will vary, depending upon their experiences with the games.

In the game, “Find the Co-op,” students are given clues about different businesses in a fictitious community and are asked to determine, on the basis of those clues, if the businesses are co-ops.

In the game, “You’re the Boss,” students are given situations and are asked to make decisions. Their decisions are then rated on a variety of co-op health meters, including employee satisfaction, community satisfaction, member satisfaction, and co-op finances.

Learning Objective 6-4: Not-for-Profit Organizations and Cooperatives AACSB: Application of knowledge

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MyBizLab: Suggested Answers 6-26 Discuss the various types of mergers and give examples of each.

Horizontal merger. A merger in which two companies sell the same types of products and are in direct competition with each other.

Vertical merger. A merger between two companies that have a company/customer relationship or a company/supplier relationship.

Product extension merger. A merger between two companies selling different but related products in the same market.

Market extension merger. A merger between two companies that sell the same products in different markets.

Conglomeration. A merger between two companies that have no common business areas but instead merge to obtain diversification.

The merger examples will vary.

Learning Objective 6-5: Mergers and Acquisitions AACSB: Application of knowledge 6-27 Describe a corporation’s organizational structure. What are the three basic groups, and what are their roles?

A corporation’s organizational structure is comprised of shareholders, a board of directors, corporate officers, and first-line managers.

Shareholders have an ownership interest in the company. The shareholders of a corporation elect its board of directors, and the members of the board select and hire the business’s management team of corporate officers. Major financing and business decisions for the corporation are also made by the board of directors.

Corporate officers are responsible for the firm’s overall performance and effectiveness.

They set general policies and formulate strategies, approve all significant decisions, and represent the company in dealing with stockholders, the board of directors, other businesses, and government.

First-line managers’ duties vary depending on the industry but they spend most of their time directly supervising lower-level employees.

Learning Objective 6-3: Corporations AACSB: Analytical thinking

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CHAPTER 7: BUSINESS MANAGEMENT AND ORGANIZATION CHAPTER OPENER Chapter 7 introduces students to the topic of management. Students will explore the various levels of management and the skills managers need in order to be successful. The functions of management—planning, leading, organizing, controlling/monitoring—will be discussed, along with different types of plans developed and implemented by managers—strategic plans, tactical plans, operational plans, and contingency plans.

Finally, the concept of quality as a measurement of performance in an organization will be explored.

DETAILED LECTURE OUTLINE I.

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The Foundations of Management A. Business Management 1. What exactly is management? a. Management is the process of working with people and resources to accomplish the goals of an organization.

2. What are the four functions of management? a. A manager performs four primary functions: planning, organizing, leading, and controlling/monitoring. See Figure 7.1.

B. Levels of Management 1. What are the different levels of management? a. Within a company, there are different levels of managers, each with increasing levels of responsibility. See Figure 7.2.

2. What do top managers do? a. Top managers are the corporate officers and are responsible for an organization as a whole. b. They develop the “big picture” for a company: its long-term goals and strategic vision.

3. What do middle managers do? a. Middle managers manage individual divisions or segments of an organization and are responsible for creating the specific plans to implement the strategic vision set by the firm’s top managers. b. Included in this management layer are division managers of the firm’s functions, such as finance, marketing, sales, operations, and information technology, and team leaders who are responsible for cross-functional groups of employees.

4. Are the people who supervise the day-to-day operations also managers? a. The bottom of the managerial pyramid includes first-line managers, who supervise individual employees who carry out the day-to-day operations of a company.

5. Does every company have all these different managers?

a. Not all companies have all three layers of management; some have more, and some have fewer.

C. The Skills of Successful Managers 1. What skills should a manager have? a. A successful manager needs to possess the following types of skills: i. Conceptual skills—The ability to think abstractly ii. Technical skills—The specific knowledge for the discipline iii. Time management skills—The ability to be effective and productive with one’s time iv. Interpersonal skills—The ability to motivate and communicate easily with others v. Decision-making skills—The ability to analyze options and implement the best plan of action 2. What do we mean by conceptual skills? a. Conceptual skills include the ability to think abstractly and to picture the organization as a whole and understand its relationship to the business community. b. This also includes understanding the relationships among the parts of an organization itself.

3. What technical skills do managers need? a. Technical skills include the abilities and knowledge that enable employees to carry out the specific tasks required of a discipline or a department. b. Managers must also know how to perform or at least have a good understanding of the skills required of the employees they supervise.

4. What time management skills does it take to succeed as a manager? a. Managers who possess time management skills are able to be effective and productive with their time.

5. Why are interpersonal skills important for managers? a. Interpersonal skills enable managers to interact with other people to motivate them and develop their trust and loyalty and get them to work together well.

6. Why do some people consistently make better decisions than other people? a. Decision-making skills involve the ability to identify and analyze a challenge, identify and examine the alternatives, choose and implement the best plan of action, and evaluate the results. b. When making important decisions, managers often go through a formal decision-making process similar to that shown in Figure 7.3.

II.

The Functions of Management: Planning A. Definitions 1. Planning is the process of establishing goals and objectives and determining the best ways to accomplish them.

2. Goals are broad, long-term accomplishments an organization wants to achieve within a certain time frame.

3. Objectives are short-term targets designed to help achieve the goals. .

B. Strategic Planning 1. What is the highest level of planning in an organization? a. A strategic plan is the main course of action created by top-level managers. b. A strategic plan helps to answer three questions: i. Where is the company going? ii. What should the company focus on? iii. How will the company achieve its goals?

2. How is a strategic plan developed? a. There are several steps to the process of developing a strategic plan, as shown in Figure 7.4.

C. Vision and Mission Statement 1. What helps define the direction of a business? a. A vision identifies what the business wants to be in the future.

2. What helps define the purpose of a business? a. A mission statement is a description of an organization’s current purpose, basic goals, and philosophies. b. A mission statement not only helps management remain focused but also lets employees understand the core values of the company.

3. What makes an effective mission statement? a. If employees feel an owner’s passion for the business through the mission statement, it has a positive impact.

4. What are some benefits of well-defined vision and mission statements? a. Keeping management on track by ensuring strategies are consistent with the organization’s goals b. Inspiring employees c. Giving investors insight into the values of the organization 5. Are mission statements only for businesses with a profit? a. No, mission statements are useful for not-for-profit companies as well.

6. Where can I find a company’s vision and mission statements? a. Both the vision and mission statements are usually found on an organization’s website.

D. SWOT Analysis 1. How does the management team begin to move the company toward achieving its vision? a. Once a company’s vision and mission statements have been articulated, the firm’s managers must assess the company’s strengths and weaknesses as well as its position among its competitors.

2. What is a SWOT analysis? a. The acronym SWOT stands for the following: i. Strengths ii. Weaknesses iii. Opportunities iv. Threats b. A SWOT analysis is an analysis of the strengths, weaknesses, opportunities, and threats a company is facing. See Figure 7.5. .

c. When evaluating a company’s internal strengths and weaknesses, managers have to analyze a company’s internal resources. d. To evaluate the threats and opportunities facing a company, managers assess various external elements.

3. What happens after a SWOT analysis is completed? a. After conducting a SWOT analysis, managers establish a set of goals and objectives based on the information. b. The acronym SMARTER is helpful when designing and wording goals (see Figure 7.6): i. Specific ii. Measurable iii. Acceptable iv. Realistic v. Timely vi. Extending vii. Rewarding E. Tactical and Operational Planning 1. How do managers decide how to execute the strategic plan? a. Middle managers generate tactical plans that specifically determine the resources and the actions required to implement particular aspects of a strategic plan. b. Whereas strategic plans have a long-term focus, tactical plans are made with a one- to three-year horizon in mind.

2. How is the tactical plan translated into instructions for employees? a. The specifics of carrying out tactical plans are operational plans. b. In an operational plan, first-line managers precisely determine the process by which tactical plans can be achieved.

F. Contingency Planning 1. What if unforeseen events occur? a. Contingency planning is a set of plans that ensures that an organization will run as smoothly as possible during an unexpected disruption. See Figure 7.7.

2. How can planning help companies weather such unexpected events? a. Part of contingency planning includes how a company will communicate, both internally and externally, with all of its stakeholders during a crisis. b. Contingency planning also involves determining what departments within a company are vital to the immediate needs of the organization when an unexpected crisis occurs. c. It is also important to ensure that the plans are tested and that key individuals know exactly what is expected of them.

III.

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The Functions of Management: Organizing A. Organization Structures 1. How do managers put their plans into action?

a. Organizing is the process of structuring the capital, personnel, raw materials, and other resources to carry out a company’s plans in a way that best matches the nature of the work.

2. How do companies document the structure of the organization? a. An organization chart shows how groups of employees fit into the larger organization structure. See Figure 7.9. b. The organization chart is a visual representation of several ideas that reflect the structure of the company. i. The span of control of a specific position is the number of employees being supervised by a specific person. ii. Departmentalization consists of the decisions made to structure the company into smaller groups.

3. How is power distributed in an organization? a. There are two common approaches: i. In a vertical organization (or a tall organization), the power belongs to a few, and most people are in positions in which they report to a supervisor. a.) Decision making is centralized. ii. In a horizontal organization (or a flat organization), power is distributed, with many people organized in teams or groups. a.) Decision making is decentralized and spread out across many more people. b. Figure 7-10 illustrates the basic differences between vertically structured organizations and horizontally structured organizations.

4. What are the pros and cons of vertical organization? a. Integrating functions and divisions is not always easy because communication and decisions have to travel up and down long chain-ofcommand lines. b. However, it has its benefits because there is ultimately one person in charge and a clear point of authority for decision making.

5. What are the pros and cons of horizontal organization? a. The benefit of a horizontal organization is that each team has more responsibility for the outcome of its work. b. Because there are fewer layers of managers, approvals from them can be sought and received much faster. c. Horizontal structures have been deemed the model for the knowledge age.

B. Changing Structures 1. Does a company’s organizational structure ever change? a. Yes, sometimes when companies have grown so large that their product lines, geographic regions, or manufacturing processes can become difficult to manage, so the firms restructure from a vertical organization to a horizontal one.

C. Alternative Organizational Structures 1. What is line and staff organization? a. Most companies begin with a line organization, in which one position has direct control of all the departments under it. .

b. As companies grow, they sometimes shift to an organization that creates staff departments, which interact with and advise other departments but do not have authority over them. c. This more complex set of managerial relationships is called line and staff organization.

2. What is a matrix organization? a. A matrix organization is a type of structure in which people are pooled into groups by skills and then assigned to projects as needed.

3. What is an inverted organization? a. In an inverted organization, managers must answer, or be accountable, to their employees. b. The goal of an inverted organization is to enable, encourage, and empower employees to do whatever they do best.

4. What organization works across multiple companies? a. A network organization is a collection of independent, mostly singlefunction firms that together produce a product or service, instead of one company being responsible for all functions. b. Operating with a network structure requires that companies: i. be highly flexible and innovative ii. be able to respond quickly to threats and opportunities IV.

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The Functions of Management: Controlling A. Controlling to Stay on Course 1. Why does a company need to adapt to stay on course? a. Controlling (also called monitoring) is the process by which managers measure performance and make sure the company’s plans and strategies are being or have been properly carried out.

B. Control Strategies 1. How is moving toward the corporate vision measured? a. Most companies have control systems that help measure how well the plans they put in motion are working. b. In general, the control system forms a cycle, as shown in Figure 7.11.

2. Are financial, production, and sales measures the only tools for assessing performance? a. No. Another measure of performance is quality—the goods or services a company provides must meet and exceed customer expectations. b. Many managers use total quality management (TQM), an integrated approach that focuses on quality from the beginning of the production process up through the final monitoring to detect and correct problems.

3. What are the basic tools managers use for monitoring quality? a. There are seven basic tools managers use to monitor quality-related goals: i. Check sheet—A simple sheet recording the number of times certain product defects occur. See Figure 7.12A. ii. Control chart—A graph that shows the average and fluctuations of a process being monitored to determine whether it is behaving within the limits of proper functioning. See Figure 7.12B.

iii. Histogram—A graph that displays the count of the number of times a specific event occurs. See Figure 7.12C. iv. Pareto chart—A combination bar and line graph that shows different categories of problems and the total (cumulative) number of problems.

See Figure 7.12D. v. Scatterplot—A graph that displays the values of two variables to see if there is a relationship between them. See Figure 7.12E. vi. Run chart—A graph that displays the value of some data across a specific set of dates. See Figure 7.12F. vii. Cause-and-effect diagram—Also called a fishbone diagram, this illustrates all of the contributing factors in the product design that might lead to faulty production. See Figure 7.12G. 4. What is the Six Sigma strategy for quality? a. Six Sigma is a statistically based, proactive, long-term process designed to examine the overall business process and prevent problems.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity 1 SWOT-ing Walmart Activity Overview: This activity allows the class to create a SWOT analysis for a company with which everyone is familiar. They can see how top executives begin to develop strategic plans.

Time Limit: 30 minutes What to Do: • •

• •

Divide the class into groups or allow students to pair up.

Explain to the students that they are to consider themselves top executives in charge of strategic planning for a major company with which they are all familiar, Walmart. (If students are not familiar with Walmart, use another large company such as Nike, or Coca-Cola.)

Ask each group to list and record at least four internal strengths, internal weaknesses, external opportunities, and external threats for the company chosen.

Bring the entire class back together and have each group list their best contributions to the SWOT analysis they have created. Write these contributions on the board.

Don’t Forget: It is important that you choose a company that every student knows well for this exercise.

Wrap-Up: From the SWOT analysis on the board, try to identify at least one important strength, weakness, opportunity, and threat that should be included in the strategic plan and develop a strategic goal for that item.

Supplemental In-Class Activity 2 How Do Your Goals Stack Up? Activity Overview: This activity is designed to help students understand the connection between long-term, intermediate, and short-term goals.

Time Limit: 30 minutes What to Do: 1. Ask students to write down one or two of their long-term goals, focusing on the fiveyear plus horizon. (10 minutes)

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2. Ask students to write down one or two of their intermediate goals—focusing on a one- to five-year horizon—that may help them achieve their long-term goals.

3. Ask students to identify one or two short-term goals—covering a range of less than one year—that may help them to achieve their intermediate goals.

Don’t Forget: Remind students that the achievement of short-term goals can support the achievement of intermediate goals, which can ultimately support long-term goals.

Wrap-Up: Remind students that goal setting in organizations is driven by corporate, tactical, and operational strategies; however, the process is dynamic. Organizational environments and situations can change. As a result, goals may need to be reshaped.

People, like organizations, may need to have contingency plans.

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ENHANCING THE ONLINE COURSE Database Search: Require your students to use the database resource of your institution’s online library system. Have them search for recent case studies involving planning, organization, leadership, or control issues. Ask students to share the case studies, along with their write-up of the possible solution, by posting them online. You might also have students submit the case studies for a grade.

Graphic Illustration: Have your students find an open source graphic on the Internet to illustrate each of the following: technical skills, interpersonal skills, conceptual skills, decision-making skills, and time management skills. Have them write a paragraph explaining how the graphic they have chosen illustrates the skill. Then, ask students to write a one-page paper on why all of these skills are necessary for a person to be a great manager.

Decision Model: Ask your students to create a graphic to illustrate the five stages of decision making, using their computers. Have them submit the graphic (with detailed explanation) for a grade.

Time Management PowerPoint: Have your students develop a 10-slide presentation on time management using at least the four tips discussed in the textbook, as well as other tips gleaned from Internet research. Have the students send you the project for a grade and also show the presentation to a friend. Use an evaluation form that includes the friend’s name, email, and telephone number as “proof” of the successful completion of the presentation.

Strategic Search: Have your students search the Internet for a link to the Fortune 500 company list. Ask them to search the Web to find a copy of a strategic plan from any of these companies. Students should review the strategic plan for the following: mission statement; broad direction and vision; information; format; SWOT analysis; action plans.

Each student should post their findings on a course blog, so that the information can be shared. (This is also great information for possible job hunting at a later date for your students.)

Tactical Search: Once your students have completed the Strategic Search, have them look for the tactical or operational plans from the same entity. These plans may be more difficult to find. If your students cannot locate both a tactical and operational plan, you may have them review not-for-profit institutions to find them. These public entities often post their plans more readily than profit companies. Ask students to review the plans for types of actions taken to achieve one goal in the overall strategic plan. They should list the numbers of actions required to reach even one goal and post them on the discussion board. Students will be surprised at the numerous actions and efforts needed to support one goal.

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ANSWERS TO END-OF-CHAPTER MATERIALS Self Test Multiple Choice 7-1 The four primary processes of management are b. organizing, controlling, planning, and leading.

Learning Objective 7-1: The Foundations of Management AACSB: Analytical thinking 7-2 A SWOT analysis a. is an important part of developing a strategic plan.

Learning Objective 7-2: The Functions of Management: Planning AACSB: Analytical thinking 7-3 A well-defined corporate vision benefits a company by d. All of the above Learning Objective 7-2: The Functions of Management: Planning AACSB: Analytical thinking 7-4 The mission statement is a description of an organization’s b. current purpose, basic goals, and philosophies.

Learning Objective 7-2: The Functions of Management: Planning AACSB: Application of knowledge 7-5 The focus of a strategic plan is different than a tactical plan because a. a strategic plan has a long term focus and a tactical plan looks just a few years ahead.

Learning Objective 7-2: The Functions of Management: Planning AACSB: Application of knowledge 7-6 The controlling function of management is best described as c. measuring the firm’s performance to make sure the company’s plans are on track.

Learning Objective 7-4: The Functions of Management: Controlling AACSB: Application of knowledge 7-7 The span of control of a specific position is found by a. counting the number of employees that person supervises.

Learning Objective 7-4: The Functions of Management: Controlling AACSB: Application of knowledge 7-8 The seven basic tools for monitoring a business include all of the following except b. Monte Carlo statistical simulations.

Learning Objective 7-4: The Functions of Management: Controlling AACSB: Analytical thinking .

7-9 Positions which would be considered middle managers include d. all the above.

Learning Objective 7-1: The Foundations of Management AACSB: Application of knowledge 7-10 A corporation with a matrix organizational system a. pools people into groups by skills.

Learning Objective 7-3: The Functions of Management: Organizing AACSB: Analytical thinking True/False 7-11 A company with a vertical organization cannot use an inverted organization.  False Learning Objective 7-3: The Functions of Management: Organizing AACSB: Analytical thinking 7-12 A SWOT analysis is used to determine the strategic fit between an organization and its internal and external environments.  True Learning Objective 7-2: The Functions of Management: Planning AACSB: Analytical thinking 7-13 Conceptual skills mean a person has the ability to think abstractly.  True Learning Objective 7-1: The Foundations of Management AACSB: Analytical thinking 7-14 Contingency planning helps a business weather a disruption or a crisis.  True Learning Objective 7-2: The Functions of Management: Planning AACSB: Analytical thinking 7-15 The Six Sigma initiative is focused on improving communication.  False Learning Objective 7-4: The Functions of Management: Controlling AACSB: Analytical thinking

Critical Thinking Questions: Suggested Answers 7-16 Answers will vary depending on the student’s individual work experiences.

Learning Objective 7-1: The Foundations of Management AACSB: Application of knowledge

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7-17

Answers will vary depending on the student’s individual preferences. When students are answering this question, be sure to refer them back to the fact that there is more empowerment in horizontal organizations, and each employee has more responsibility and contributes more directly to the company. However, this empowerment also removes something of a “safety net” for less-experienced employees who may not have direct supervision and as much job instruction. This concept of empowerment carries forward into inverted organizations, in which management is answerable to employees.

Learning Objective 7-3: The Functions of Management: Organizing AACSB: Analytical thinking

7-18 To answer this question students will discuss the seven basic tools to monitor quality: Check sheet. A simple sheet recording the number of times certain product defects occur Control chart. A graph that shows the average and fluctuations of a process being monitored to determine whether it is behaving within the limits of proper functioning.

Histogram. A graph that displays the count of the number of times a specific event occurs.

Pareto chart. A combination of bar and line graph that shows different categories of problems and the total (cumulative) number of problems.

Scatter plot. A graph that displays the values of two variables to see if there is a relationship between them.

Run chart. A graph that displays the value of some data across a specific set of dates. Managers can then identify problems that occur in a certain cycle.

Cause-and-effect diagram.

The answers will vary depending on the companies that the students use as examples. Some students will believe that too much data would impede decision making while other students will believe that additional data will improve the quality of decision. Most students will also probably agree that the type of problem and manager will affect the choice and use of data.

Learning Objective 7-4: The Functions of Management: Controlling AACSB: Analytical thinking

Team Time On a Mission This exercise requires that students compare mission statements from several different companies and rate the statements on how inspiring they are. As the students compare these statements, remind them that the mission statement should capture the .

organization’s purpose, basic goals, and philosophies. There are many possible responses to what makes an effective mission statement—consider these two sets of rules, for a start: A. From Inc., “5 Tips for a Useful Mission Statement”: http://www.inc.com/ss/5tips-on-developing-an-effective-mission-statement 1.

2.

3.

4.

5.

Include the four key elements: value, inspiration, plausibility, and specificity.

Keep it short and sweet.

Consider long-term vs. short-term.

Test it on your employees.

Revisit it often.

B. From “How to Write a Mission Statement in 5 Easy Steps” by Tim Berry: http://articles.bplans.com/writing-a-mission-statement/ 1.

2.

3.

4.

5.

Start with a market-defining story.

Define how your customer’s life is better because your business exists.

Consider what your business does for employees.

Add what the business does for its owners.

Discuss, digest, cut, polish, review, revise.

Learning Objective 7-2: The Functions of Management: Planning AACSB: Application of knowledge Ethics and Corporate Social Responsibility Assessing Social Responsibility In this exercise, students discuss how organizations might control their social responsibility efforts. Look for students to mention things such as monitoring the reputation of the company (outside marketing agencies often measure this) and more objective measures, such as decreases in pollution or improved living conditions in areas where the company does business. For example, Nike has stopped dealing with vendors who use child labor, which means that the organization has to conduct independent audits of their suppliers on a regular basis.

Web Exercises 7-19 Project Oxygen Answers will vary but the following websites will help students answer this question: How Google Sold Its Engineers on Management https://hbr.org/2013/12/how-google-sold-its-engineers-on-management .

Google's Project Oxygen Pumps Fresh Air Into Management - TheStreet https://www.thestreet.com/story/12328981/1/googles-project-oxygen-pumpsfresh-air-into-management.html Google's 8-Point Plan to Help Managers Improve - The New York Times http://www.nytimes.com/2011/03/13/business/13hire.html?_r=0 From the New York Times article: “ The “people analytics” teams at the company produced what might be called the Eight Habits of Highly Effective Google Managers.”……..

“People typically leave a company for one of three reasons …Managers had a much greater impact on employees’ performance and how they felt about their job than any other factor, Google found.

“The starting point was that our best managers have teams that perform better, are retained better, are happier — they do everything better,” Mr. Bock says. “So the biggest controllable factor that we could see was the quality of the manager, and how they sort of made things happen. The question we then asked was: What if every manager was that good? And then you start saying: Well, what makes them that good? And how do you do it?”

In Project Oxygen, the statisticians gathered more than 10,000 observations about managers — across more than 100 variables, from various performance reviews, feedback surveys and other reports. Then they spent time coding the comments in order to look for patterns.

Once they had some working theories, they figured out a system for interviewing managers to gather more data, and to look for evidence that supported their notions. The final step was to code and synthesize all those results — more than 400 pages of interview notes — and then they spent much of last year rolling out the results to employees and incorporating them into various training programs.”1 Based on the information collected, Google analyzed the comments and performance of its managers. After the review, Google used the information to coach and improve the performance of its managers. Based on their personal work experiences, many students will identify additional factors that “make a good manager”.

Learning Objective 7-1: The Foundations of Management AACSB: Application of knowledge 7-20

Tools for TQM

1 Google's 8-Point Plan to Help Managers Improve - The New York Times

www.nytimes.com/2011/03/13/business/13hire.html?_r=0 .

Students’ answers will vary, depending upon the online resources they used and their individual results.

Learning Objective 7-4: The Functions of Management: Controlling AACSB: Application of knowledge 7-21

How Well Do You Manage Your Time?

Students’ answers will vary, depending upon the online assessments and their individual results.

Learning Objective 7-1: The Foundations of Management AACSB: Application of knowledge

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Predictably Irrational A transcript of the video is available at http://news.rapgenius.com/Dan-ariely-arewe-in-control-of-our-own-decisions-annotated. The example of the patient and the doctor involves which treatment to recommend to a patient. Ariely’s basic argument is that we make many decisions because we pick whatever is chosen for us, that we let ourselves subconsciously be swayed away from a decision which involves more complex choices.

Students’ answers concerning business decisions where factors outside the decision-making process influence the outcome will vary.

Learning Objective 7-1: The Foundations of Management AACSB: Application of knowledge

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Get SMARTER Students’ answers will vary, depending upon the goals selected.

Learning Objective 7-3: The Functions of Management: Organizing AACSB: Application of knowledge

MyBizLab: Suggested Answers 7-24

Students’ answers concerning contingency plans will vary depending on the local business used for comparison. Students should include and elaborate on information using Figure 7.7.

Learning Objective 7-2: The Functions of Management: Planning AACSB: Application of knowledge

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Answers will vary but students should apply information from Figures 7.12 A to G when discussing the complexity of a project’s impact on quality control.

Students’ opinions will vary as to whether the software industry can achieve Six Sigma quality but most students will probably agree that the Six Sigma goal is a

worthy one as long as the expected benefit exceeds the cost.

Learning Objective 7-4: The Functions of Management: Controlling AACSB: Application of knowledge

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CHAPTER 8: MOTIVATION, LEADERSHIP, AND TEAMWORK CHAPTER OPENER Chapter 8 covers motivation, teamwork, and leadership. Students are given an overview of traditional motivation theories and are introduced to new theories under development.

Next, the application of motivation theories in the workplace is presented, including how to motivate employees using Vroom’s expectancy and strength-based management. Then, the chapter turns to the topic of leadership—in particular, exploring the traits and characteristics that make a good leader, and different leadership styles.

Finally, students are introduced to teamwork in the workplace, including: • what managers can do to create and manage effective teams • the challenges teams encounter on a regular basis • how students can be good team members DETAILED LECTURE OUTLINE I.

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Motivation A. Personal Motivation 1. What drives you to do your personal best? a. Even when pursuing their personal goals, different people retain and lose motivation for very different reasons.

2. What does it feel like to be optimally motivated? a. A state of rapt attention is known as flow—when you are completely involved and focused on what you are doing. b. Creating this sense of flow is the subject of organizational psychology— the study of how to create a workplace that fosters motivation and productivity among employees.

B. Motivating Employees 1. How motivated is the U.S. workforce? a. According to a survey administered by the Gallup Organization, 73 percent of U.S. employees are not engaged or are actively disengaged in their work. See Table 8.1.

2. How does a work environment encourage “flow”? a. There is no fixed recipe, but there are companies that have succeeded in building motivated, engaged environments that support workers and the creative experience of flow.

3. What are the benefits of keeping employees motivated? a. Both employers and employees benefit from motivated workforces. b. Employers find that workers are more productive and creative when provided with a motivating environment and motivating tasks.

C. Traditional Theories of Motivation 1. What are the traditional theories describing what motivates people? a. Maslow’s hierarchy of needs b. McClelland’s “three needs” theory

c. Herzberg’s motivator-hygiene theory 2. What is Maslow’s hierarchy of needs? a. Maslow suggests that humans have a hierarchy of needs, and that primary needs must be met first, before higher-level needs can be addressed. See Figure 8.1. b. The first needs are termed physiological needs, such as the need for water, food, sleep, and reproduction. c. Once physiological needs have been met, people strive to satisfy their safety needs, such as establishing safe and stable places to live and work. d. Once these needs have been met, people try to meet their social or belongingness needs. This includes the need to belong to a group and feel accepted by others. e. Esteem needs are the next level in the hierarchy. These are satisfied by the mastery of a skill and the attention and recognition of others. f. Self-actualization needs are at the top of the hierarchy and include the desire to maximize your own potential through education and selffulfillment as well as experiences of beauty and spirituality.

3. What is McClelland’s “three needs” theory? a. The three needs theory suggests that there are three main motivators: i. The need for achievement—to accomplish something difficult on your own ii. The need for affiliation—to form close personal relationships iii. The need for power—to be able to control the behavior of others b. Although an individual may have multiple needs, McClelland suggests that one tends to be dominant over the others.

4. How does Herzberg’s motivator-hygiene theory explain motivation? a. According to the motivator-hygiene theory (or the two-factor theory), two factors influence a person’s motivation: i. Hygiene factors include such as a safe working environment, proper pay and benefits, and positive relationships with one’s coworkers. a.) If these factors are absent or inadequate, people tend to be dissatisfied. b.) But if these factors are already in place, they are taken for granted and may not serve to motivate you. ii. Motivator factors include a sense of responsibility, recognition, promotion, and job growth.

D. Motivational Theories in the Modern Workplace 1. Do managers actually use theories of motivation? a. Theories of human motivation have given rise to several different approaches for organizing and motivating people in the workplace.

2. What can a manager do to enhance employee motivation? a. In the workplace, there are some external motivating factors that managers can control, called extrinsic motivators, such as pay, promotion, and verbal praise. b. Other factors, called intrinsic motivators, are beyond a manager’s control because they are internal to each employee. .

3. What other motivational models exist? a. Theories X, Y, and Z b. The Vroom Model c. Strength-based management 4. What are the Theory X and Theory Y models? a. The Theory X model suggests that people inherently dislike work and want to avoid it. i. Managers who subscribe to this model believe employees must be coerced and controlled to be productive. b. The Theory Y model suggests that people view work as being as natural as playing and resting. i. Theory Y managers believe that people will accept and seek out responsibility. c. See Figure 8.2.

5. How is the Theory Z model different? a. The Theory Z model is based on a Japanese management style that relied heavily on collaborative decision making. b. Theory Z style management offers long-term employment with an emphasis on individual responsibility.

6. Do any motivational models describe an individual person’s motivation? a. Expectancy theory suggests an individual’s motivation can be described by the relationship between three psychological forces: i. Expectancy is the idea that a person’s effort has an appreciable effect on a situation’s result—whether it is a success or failure. ii. Instrumentality refers to the idea that the outcome of a situation results in rewards or punishment. iii. Valence is the importance that the individual places on the expected outcome of a situation. b. According to expectancy theory, Expectancy × Instrumentality × Valence = Motivation c. Closely related to expectancy theory is equity theory—the idea that people expect to be rewarded on par with other people they feel their performance equals or else their performance will suffer.

7. What is unique in strength-based management? a. Strength-based management is a system based on the belief that, rather than improve employees’ weak skills, the best way to help them is to determine their strengths and build on them.

E. Evolution of Motivational Theories 1. Have motivational theories changed? a. During the Industrial Age, large corporations were created and researchers such as Frederick Taylor began to study ways to make workers more efficient and cost effective. i. He encouraged managers to scientifically study their employees to determine the best way for them to complete tasks and then train their employees to use these methods.

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b. By the 1920s and 1930s, a field of academic study called industrial psychological was created to further address these issues. c. Other researchers used time-motion studies to analyze factory jobs. These involved recording the actual movements and positions of workers, along with timings, as they performed common tasks. d. Elton Mayo’s study of the Hawthorne plant of Western Electric examined physical influences on the workplace (such as lighting and humidity) as well as psychological aspects (such as group pressure and working hours). i. The major finding, known as the Hawthorne effect, was that regardless of the experimental changes made, the production of the workers improved because it was based on the attention the workers were receiving.

2. What motivational theories fit the modern workplace? a. A recent motivational theory has been developed as a result of examining the open-source movement—software projects (such as Wikipedia) that are developed, tested, and maintained for free by a worldwide network of volunteers. i. These projects were created by professional people working many hours for free—outside of their regular jobs. b. According to some studies, the higher the monetary incentives were, the worse people performed. i. Researchers concluded that using economic rewards to motivate employees can lead to poorer performance when the work being done is creative or requires concentration. c. At least one additional study has shown that today’s knowledge workers value three things much more highly than money: i. Autonomy—Having some control over the key decisions in their work lives ii. Mastery—Feeling skilled and having time to develop and improve their skills iii. Purpose—Wanting their lives and work to have a higher meaning II.

Leadership A. What Is Meant by Leading?

1. Leading is the process of influencing, motivating, and enabling others to contribute to the success and effectiveness of an organization.

B. Are All Managers Leaders?

1. Managers spend their time making sure specific tasks are well done and completed on time.

2. Leadership is focused on establishing the long-term vision and strategies a company will need to survive and flourish.

C. What Styles of Leadership Exist?

1. Table 8.2 lists four of the most common leadership styles: a. Democratic b. Autocratic c. Affiliative (laissez-faire) .

d. Visionary D. What Are Democratic and Autocratic Leaders Like?

1. A democratic leader delegates authority and involves employees in the decision-making process.

2. An autocratic leader makes decisions without consulting others.

E. What Are Affiliative Leaders?

1. Affiliative (or laissez-faire) leaders are more advisory in style, encouraging employees to contribute ideas rather than specifically directing their tasks.

F. What Makes a Leader a Visionary?

1. Visionary leaders are able to inspire others, believe in their own vision, and move people toward a shared dream.

G. Traits of Leadership 1. What are the traits of great leaders? Figure 8.3 illustrates common traits shared by the best leaders. a. Great leaders challenge the process by not always accepting conventional beliefs and practices as the only way to accomplish tasks. b. They inspire a shared vision and motivate people to care about the mission and goals of an organization. c. They model the way by serving as a living example of the ideals they are asking their employees to emulate. d. They exhibit emotional intelligence—the ability to understand both one’s own and others’ emotions. e. They enable others to act by giving people access to information and empowering them to perform to their fullest potential.

2. Are there systems for measuring leadership potential? a. Many personality tests can provide information to assess leadership potential and improve leadership skills. b. Popular assessments include the Big Five, the Cattell 16 PF, and the Thematic Apperception Test.

H. Leadership and Corporate Culture 1. How does the leadership style of a firm’s managers affect the work environment? a. The collection of values, norms, and behavior shared by managers and workers in a firm defines the character, or corporate culture, of an organization.

2. How does a leader establish corporate culture? a. Tony Hsieh of Zappos.com explains in his book Delivering Happiness: A Path to Profits, Passion and Purpose how first establishing a corporate culture naturally led to the customer service levels he wanted, the profits he wanted, and the purpose he wanted in his life and the lives of his employees. b. This focus on building a corporate culture enabled Zappos to become a company with a “higher purpose of vision that is more than just about money or profits or being No. 1 in the market.” c. The staff has become renowned for outstanding customer service.

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Teamwork A. The Advantages of Teams in the Workplace 1. What is the value of using teams in the workplace? a. Although the different personalities of people have the potential to create conflict within a team, they can also produce unique ideas.

B. The Challenges of Teams in the Workplace 1. Do teams always improve the development process? a. Although teams have been shown to be effective in many situations, some people suggest that teamwork does not always result in more creativity. b. If members of a team are not carefully selected, “wanting to fit in” can lead to narrow-mindedness within the group, a phenomenon referred to as groupthink. c. Another challenge is the fact that there is now a wide mix of generations in the workforce. See Table 8.3.

2. Are generational differences really that significant? a. There are three dominant generations in the workplace today: i. Baby boomers (born between 1943 and 1960) ii. Gen-Xers (born between 1961 and 1981) iii. Millennials (born between 1982 and 2002) b. Teamwork, good behavior, and citizenship are much more important to Millennials than to earlier generations, and they see equality among different races and genders.

C. Best Practices for Teams 1. What kinds of practices set the stage for the best team performance? a. Group flow occurs when a group knows how to work together so that each individual member can achieve flow. The characteristics of such a setting are: i. Creative spatial arrangements ii. Playground design iii. Constant focus on the target group for the product iv. Visualization 2. How do managers form the best teams? a. Some aspects managers should consider include: i. Size ii. Psychological safety iii. Time frame iv. Status b. Effective teams are comprised of people with diverse skills, talents, and points of view. c. A balance of people who embody different team roles is the key to the success of a team.

3. What are cross-functional teams? a. In a cross-functional team, members are selected across a range of critical functional divisions of a business.

4. What effect does technology have on team design? a. In a virtual team, members are located in different physical locations but

work together via telecommunications technology to achieve a goal.

5. How can social media tools such as wikis help modern teams? a. Wikis are websites that support editing by multiple authors, so team members can work on one common document all at the same time, watching one another make editing changes and having a live chat window open at the same time.

6. Is designing a strong virtual team the same as creating a strong face-to-face team? a. Most successful virtual teams include some periodic face-to-face meetings.

D. Your Role on the Team 1. How can I be a valued team player? a. Preparing yourself to contribute in a team setting may be the most important thing you can do to increase your value to an organization, no matter what position you hold.

2. What habits will give me the best chance to contribute to a team? a. One model that organizes skills that you can build to enhance your success as a member of a team is the Seven Habits model. i. Be proactive. ii. Begin with the end in mind. iii. Put first things first. iv. Think win-win. v. Seek first to understand and then to be understood. vi. Synergize. vii. Sharpen the saw.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity 1 To the Moon Activity Overview: This activity helps students appreciate how teamwork leads to better results.

Time Limit: 30 minutes (10 minutes for individual work, 10 minutes for teamwork, and 10 minutes to debrief) What to Do: •

Give the following scenario to students: You are an astronaut and, in attempting to rendezvous with another space team on the moon, your spaceship encounters mechanical problems that force you to land more than 100 miles from the intended rendezvous point. Your spaceship and much of the equipment in it is damaged, and you must now leave it in an effort to make your way to the rendezvous point. Your task is to rank the items in the list―presented from 1 to 15―in terms of importance to you in your survival mission. ___ Box of matches ___ Food concentrate ___ 50 feet of nylon rope ___ Parachute silk ___ Portable heating unit ___ Two .45 caliber pistols ___ One case dehydrated milk ___ Two 100-pound tanks of oxygen ___ Stellar map (of moon’s surface) ___ Life raft ___ Magnetic compass ___ 5 gallons of water ___ Signal flares ___ First aid kit containing injection needle ___ Solar-powered FM receiver-transmitter

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Have the students complete this activity as individuals for the first 10 minutes.

Then, have the students get into groups and compare answers, adjusting their rankings, if necessary.

Show students the list that NASA compiled.

Ask them if their rankings improved after they were able to use teamwork and communicate with one another as to their choices.

NASA Solution Items below are listed in order from Number 1 (most important) to Number 15 (least important).

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Two 100 pound tanks of oxygen. Oxygen to breathe would be the most pressing need for survival.

2 Five (5) gallons of water. Water is essential to all life.

3 Stellar map (of moon’s surface). This would be your primary means of navigation.

4 Food concentrate. A good source of food and efficient way to carry food is in concentrated form.

5 Solar-powered FM receiver-transmitter. FM needs short range and line of sight. Needed to talk to mother ship.

6 Fifty (50) feet of nylon rope. This will be useful in scaling the cliffs you may cross, and if anyone is injured, it would be helpful for tying them to others or to objects for transport.

7 First aid kit containing injection needle. Used for injecting vitamins through special aperture in space suit.

8 Parachute silk. Provides protection from sun’s rays.

9 Life raft. CO2 bottle in raft may be used for propulsion.

10 Signal flares. Distress signal can be used when mother ship is sighted.

11 Two .45 caliber pistols. Possible means of propulsion.

12 One case dehydrated milk. Duplication of food concentrate, but much bulkier to carry.

13 Portable heating unit. Useless on dark side; not needed on lighted side.

14 Magnetic compass. Magnetic field on moon is not polarized; compass worthless.

15 Box of matches. No oxygen on Moon to sustain the flame; matches won’t work.

Don’t Forget: One way to determine how well both individuals and groups did on their rankings is to subtract a person’s individual ranking for an item from the NASA ranking for the item, and then take the absolute value of the difference and add these figures for every item.

For example, if someone ranked water as 15 and oxygen as 2, the formula would be 2 – 15 = –13; 1 – 2 = –1. |–13| + |–1| = 14. This person would clearly have done more poorly than someone who ranked oxygen as 2 and water as 3.

Wrap-Up: Many students resist working as a part of a team, but after completing this activity, they will usually agree that they make better decisions as part of a team than individually, especially when they lack expertise in a subject.

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Supplemental In-Class Activity 2 Intrinsic or Extrinsic?

Activity Overview: This activity allows students to list motivating factors and classify them as intrinsic or extrinsic.

Time Limit: 15 minutes What to Do: • •

Ask students to list as many motivating factors as they can in regard to attending college, earning good grades, and earning a degree.

List the motivating factors on the board.

Don’t Forget: Depending on your class, students may have a hard time thinking about what motivates them to go to school, other than to get a degree, which will lead to a job.

If the class is having problems, ask them if anyone felt any pressure from parents or other members of their family to go to school, or if anyone is totally enthused about what they are learning in their classes.

Wrap-Up: Ask students to classify each factor as intrinsic or extrinsic.

Supplemental In-Class Activity 3 What Are You Looking for in a Job? Activity Overview: This activity asks students to express their opinions about important job criteria and compare them with other classmates.

Time Limit: 40 minutes What to Do: 1. Ask students to think about what is important to them in a job, ranking the following items, with 1 being the most important and 10 being the least important. (10 minutes) • • • • • • • • • • .

Working Conditions Quality of Coworkers/Mentors Salary Benefits Location of the Job Level of Responsibility/Challenge Training Programs Offered Advancement Opportunities Job Security Job Title

2. Divide the class into four-member teams.

3. Ask each team to compare their rankings. What conclusions can they draw? While they are doing this, students could potentially go to the board or an overhead slide and mark their rankings on a table you create; this would give you an overview of the class. (10 minutes) 4. Reassemble the class as a whole and have each group share their findings with the class. (10 minutes) 5. Look at the list of items that people ranked highest in general. Talk about how companies can actually accomplish this. For example, how would a company provide ideal working conditions for its employees? (10 minutes) Don’t Forget: There is no right or wrong answer to this exercise.

Wrap-Up: Wrap up the discussion by reminding students that this is the challenge in any organization as people are motivated by different things. Business owners and managers must find ways to motivate every employee, so they have high job satisfaction.

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ENHANCING THE ONLINE COURSE Mindmap: Have your students create a “mindmap” illustrating what motivates them. A mindmap is a graphic illustration that connects several ideas together in a way that shows the relationships among the ideas. Students should use open source graphics for illustrations and link them together on the screen using lines or bars. Ask your students to submit the graphic with a written explanation about why/how each factor motivates them.

What types of tasks “get them in the flow”?

Maslow’s Pyramid: Ask your students to develop one slide (PowerPoint) to illustrate Maslow’s hierarchy of needs with explanation in the notes feature. Have them explain Maslow’s hierarchy to a friend or family member using the slide. You can require a short evaluation form or reaction from the friend as “proof” that the assignment has been presented.

Alphabet Essays: Ask your students to write three ½ page essays on the Theory X, Theory Y, and Theory Z theories of management. Once these have been posted, ask the students for one more essay—their own opinion of which theory is the most relevant.

Give the students with most thoughtful responses extra credit on their next project.

Vroom Vroom: Have your students create a graphic to represent Vroom’s model of expectancy. Have them create the model, define all the terms (expectancy, instrumentality, and valence), and explain how the model works using examples from their own perspective.

Leadership Styles: Require your students to choose six leaders (preferably leaders who are good people, not just a good leader) who are examples of each of the six categories of leaders in Table 8.4. Ask the students to write a paragraph explaining how each leader matches the characteristics discussed in Table 8. 4.

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ANSWERS TO END-OF-CHAPTER MATERIALS Self Test Multiple Choice 8-1 Which of the following are types of leadership styles? d. all the above Learning Objective 8-2: Leadership AACSB: Analytical thinking 8-2 The corporate culture is b. the values and behaviors shared by managers and workers.

Learning Objective 8-2: Leadership AACSB: Analytical thinking 8-3 Maslow’s hierarchy of needs a. is a theory of why people are motivated.

Learning Objective 8-1: Motivation AACSB: Analytical thinking 8-4 With creative and abstract work, studies find that the principal motivators are b. autonomy, mastery, and purpose.

Learning Objective 8-3: Teamwork AACSB: Analytical thinking 8-5 Teams improve creativity c. when best practices for selecting the team members and roles are followed.

Learning Objective 8-3: Teamwork AACSB: Analytical thinking 8-6 An example of Herzberg’s hygiene factors is c. safe working environment.

Learning Objective 8-1: Motivation AACSB: Application of knowledge 8-7 Theory Z is different than Theory X or Theory Y because a. it relies heavily on collaborative decision making.

Learning Objective 8-1: Motivation AACSB: Analytical thinking 8-8 Virtual teams are teams that d. work in different physical locations.

Learning Objective 8-3: Teamwork AACSB: Analytical thinking

8-9 A laissez-faire leader would .

b. take a very hands-off approach to management.

Learning Objective 8-2 Leadership AACSB: Analytical thinking 8-10 Extrinsic motivators include such things as c. knowing there is a large financial bonus for good work.

Learning Objective 8-1: Motivation AACSB: Application of knowledge True/False 8-11 Corporate culture is the set of sports and extracurricular activities promoted at work.  False Learning Objective 8-2: Leadership AACSB: Analytical thinking 8-12 Great leaders exhibit a high degree of emotional intelligence.  True Learning Objective 8-2: Leadership AACSB: Analytical thinking 8-13 Intrinsic motivators come from a sense of purpose and value in the work employees are doing.  True Learning Objective 8-1: Motivation AACSB: Analytical thinking 8-14 Strength-based management believes the best way to develop talent is to help employees add skills and knowledge that build on their existing strengths.  True Learning Objective 8-2: Leadership AACSB: Analytical thinking 8-15 Groupthink is the convergence of the group on the best idea.  False Learning Objective 8-3: Teamwork AACSB: Analytical thinking Critical Thinking Questions: Suggested Answers 8-16

Answers will vary depending on individual student’s life and work experiences.

Learning Objective 8-1: Motivation AACSB: Application of knowledge

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This will be an individualized response and will require students to have significant insight into their own personality and style.

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Learning Objective 8-2: Leadership AACSB: Application of knowledge

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This will be an individualized response. Look for an understanding of all seven habits and an authentic, honest application of these to relationships.

Learning Objective 8-3: Teamwork AACSB: Application of knowledge

Team Time Forming a Successful Team Answers will vary. There is no single solution. It is useful to clarify that this process is an exercise in teamwork. Do the findings of the team lend any insight to the efficiency and creativity of the group’s work on this project? Encourage students to really think about how they will map personality traits to the work that needs to be done—are there other characteristics that might also be effective in choosing team members―for example, skills, past experience, knowledge about specific topics or tasks.

Learning Objective 8-3: Teamwork AACSB: Application of knowledge

Ethics and Corporate Social Responsibility Ethics in Teamwork Answers to the questions for this exercise may vary, but most students will probably agree that they will speak up in this situation. Encourage a deeper understanding of the issues involved by asking students to write down their answers on a slip of paper—no names! Then, tally the responses. Read some of the different answers to the class; then ask the class to decide which ethical code might have prompted the response.

An alternative exercise might be to ask students whether or not they have ever seen someone cheat in a class. Again, call for written individual answers; then read some of the answers to the class. Ask them to define what it is about the team process that might lead someone to act in a particular way in that situation.

Learning Objective 8-3: Teamwork AACSB: Application of knowledge

Web Exercises 8-22 Testing 1, 2, 3 Students’ answers will vary, depending upon the assessment tools selected.

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Great American Leaders Students’ answers will vary, depending upon the leaders selected.

Learning Objective 8-2: Leadership AACSB: Application of knowledge 8-24

Drive and Inspiration Students’ answers will vary, depending upon their personal motivations and how they would use the ideas in Sinek’s talk. The websites for these videos are: • “Drive”—http://www.youtube.com/watch?v=u6XAPnuFjJc • “The Golden Circle”—http://www.youtube.com/watch?v=l5Tw0PGcyN0

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Too Much Collaboration?

Students’ answers will vary, depending upon the materials selected and their personal experiences with collaboration. Some resources include: • TED Talk: The Power of Introverts— http://www.ted.com/talks/susan_cain_the_power_of_introverts • Website: The Power of Introverts—http://www.thepowerofintroverts.com/ • Quiet Quiz: Are You an Introvert or an Extrovert?— http://www.thepowerofintroverts.com/about-the-book/quiet-quiz-are-you-anintrovert/ Learning Objective 8-3: Teamwork AACSB: Application of knowledge

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Measuring Your Team’s Health Students’ answers will vary, depending upon the results of the Team Effectiveness Assessment.

Learning Objective 8-3: Teamwork AACSB: Application of knowledge

MyBizLab: Suggested Answers 8-27

Answers will vary with some students arguing “great” leaders can change their style to response to shifting climate and dynamics. Other students will argue that it is better to hire the different style of leader rather than expecting someone to change his/her leadership style.

Learning Objective 8-2: Leadership AACSB: Application of knowledge

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The factors that are the most important for creating a team that works efficiently together are: size, psychological safety, time, frame, and status. Effective teams are also comprised of people with diverse skills, talents, and points of view.

Students’ answers will vary when responding to the second part of the question.

Learning Objective 8-3: Teamwork AACSB: Application of knowledge

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CHAPTER 9: HUMAN RESOURCE MANAGEMENT CHAPTER OPENER Human resource managers take care of a company’s biggest resource—its employees.

HR managers perform a wide variety of functions, including recruiting and hiring, training and evaluating, compensation and benefits, and promotions and terminations.

The chapter begins with a discussion of how a company manages its staffing needs. How does it determine how many and what kind of employees it needs? Where does it find the best candidates to interview? Students are then introduced to the hiring process and the legalities that must be considered when hiring employees.

Once the employees have been hired, HR managers’ focus shifts to retaining those employees through means such as training and development, performance appraisals, and compensation. Different types of compensation strategies will be covered, along with types of employee benefits. Other topics explored in this chapter include employee separation, including promotions, termination and retirement, and managing workplace diversity.

Finally, labor and union issues are discussed.

DETAILED LECTURE OUTLINE I.

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Human Resource Management A. What Is Human Resource Management?

1. Human resource management (HRM) is the organizational function that deals with the firm’s employees.

2. It encompasses every aspect of the “human” in a business, including the hiring, training, motivating, evaluating, and compensating of personnel. See Figure 9.1.

B. Managing Staffing Needs 1. How does planning for staffing needs change as a company evolves? a. A key part of human resources planning includes: i. Determining the optimal number of employees a business needs ii. Clearly identifying the exact job positions and the requirements of those positions 2. How does a company determine whether it has the correct number of employees? a. The process begins with gathering information on a firm’s current workforce and on the future demand for workers within the company. b. The current supply of employees is determined by developing a workforce profile, a personnel inventory that includes information about each employee, such as his or her age, education, training, experience, specialized skills, and current and previous positions held within the company.

c. The future demand for employees is determined by a process called forecasting.

3. How do companies identify the exact jobs they need to staff? a. The HR department also completes a job analysis, which defines in detail the duties and requirements of the tasks an employee is required to perform. It includes: i. A job description—a formal statement that summarizes what the employee will do in that role. ii. Job specifications—the knowledge, skills, education, experience, personal attributes, and physical requirements that a person needs to successfully do the job. b. Figure 9.2 shows a job analysis with a sample job description and the job specifications.

4. Once a job is well defined, how does HR find the best candidates to interview? a. Recruitment is the process of finding, screening, and selecting people for a specific job. i. Internal recruiting is the filling of job vacancies with existing employees from within a business. a.) Internal recruitment can be a morale booster and the risk of filling a position with an unsuitable candidate is lessened. b.) It is also generally quicker and less costly, but it also has disadvantages, such as inbreeding and creating internal vacancies. ii. External recruiting is the process of searching outside of a firm to fill job vacancies. a.) Figure 9-3 lists various resources HR staff use when recruiting externally. b.) Depending on the type of position, employment agencies and/or recruitment consultants may also be used.

5. How do social networking sites impact recruiting? a. Social media sites specific to the professional community include LinkedIn, Data.com, Connect, and Spoke. b. Most people would like to hire or work with someone they know, and LinkedIn can provide helpful colleague and customer recommendations.

6. Does technology help or complicate recruiting? a. Compared to older methods of recruiting, candidates can be recruited much more quickly, and different types of candidates—often those who are technologically savvy—are more likely to be recruited. b. The drawback is online job postings yield many responses and a large pool of candidates, so sifting through responses to find the right person for the job can be time-consuming for HR professionals. c. HR managers must know how to skillfully use technology. d. HR departments are also using software systems to scan résumés and help screen applicants to weed out those who are unqualified.

C. Hiring 1. What happens in the hiring process? .

a. As shown in Figure 9.4, hiring is a multistep process. b. Some firms use applicant-tracking system software to screen résumés and track applicants’ progress through the hiring process. c. Once a candidate is selected, a conditional offer will be made. i. If the candidate accepts, the company completes thorough background and reference checks and drug and medical tests if the firm requires them.

2. What legalities must be considered before hiring? a. Several federal laws must be observed during the hiring process: i. Federal Equal Employment Opportunity a.) The Equal Employment Opportunity Commission (EEOC) enforces federal legislation prohibiting employment discrimination. ii. Civil Rights Act of 1964 prohibits discriminating based on a person’s race, color, gender, religion, and national origin. iii. Americans with Disabilities Act (ADA) prohibits discrimination based on disabilities (or perceived disabilities). iv. Age Discrimination in Employment Act (ADEA) makes it unlawful to discriminate against a person because of his/her age with respect to employment. v. Fair Labor Standards Act (FLSA) establishes minimum wage, how overtime pay must be calculated, and governs the use of child labor.

II.

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Training and Evaluating Employees A. Training Methods and Requirements 1. What kind of training do new employees receive? a. When an employee is hired, an organization uses an orientation program to integrate a new employee into the company. See Table 9.1.

2. What other training is required of new and present employees? a. Training should teach employees new skills or ways to improve their existing skills. b. With on-the-job training, employees learn skills by performing them. c. In an apprentice training program, people go through classroom or formal instruction and get on-the-job training. d. In a programmed learning approach, an employee is asked to perform step-by-step instructions or respond to questions, often in the form of computerized multiple-choice tests that provide immediate feedback.

3. What kind of impact does technology have on training? a. Improvements in technology provide companies with other training options, such as simulated training and interactive multimedia training. b. Gamification is the application of game design concepts to nongame settings. c. Simulation training provides employees with realistic experiences they would face on the job without having to worry about the catastrophic consequences that would result by making a wrong move.

d. Online training allows employees to get training on the Internet either delivered live or at their own convenience. e. Electronic Performance Support Systems (EPSSs) contain online modules employees can access when they need training instead of attending formal training sessions disconnected from their daily work.

4. Do managers need training? a. Yes, but because of their roles in the organization, managers require different types of training. b. Management development programs prepare managerial trainees to become managers. c. These programs may include: i. Job rotation, in which an employee rotates through different departments to learn the various aspects of the business. ii. A coaching/understudy program, in which an employee works directly with the company’s senior managers to learn how to plan, lead, and make decisions at the corporate level. iii. With action learning, trainees work alone or together on teams to analyze real-time corporate problems that extend beyond their areas of expertise. d. Some companies use off-the-job training and development techniques that require employees to participate in outside seminars, universityconducted programs, and corporate universities.

5. How are experienced managers developed? a. Senior managers often use executive coaches to further develop their effectiveness. b. Companies also use mentors, employees with more experience who take a less-experienced coworker under his or her wing. c. In a new practice named reverse mentoring, older employees are trained by younger ones on how to use technology and on new trends in the marketplace.

B. Performance Appraisals and Alternatives 1. Why are performance appraisals necessary? a. A performance appraisal is a formal evaluation, usually done annually or biannually, that provides an employee with feedback about how well he or she is doing on the job. See Figure 9.5. b. The performance appraisal process includes three aspects: i. Evaluating the performance of an employee relative to the job’s performance standards ii. Providing feedback to reduce and eliminate poor performance and improve or enhance positive performance iii. Setting goals toward which employees should aim in their work 2. Are there problems with performance appraisals? a. Many managers shy away from them because they are uncomfortable delivering negative comments.

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b. Managers also sometimes have a difficult time objectively appraising the performance of employees because they often do not see all of the aspects of the employees’ performance. c. The use of a 360-degree appraisal can help because input for the appraisal is solicited, usually anonymously, not from just a person’s manager but also from coworkers, customers, and subordinates.

3. What alternatives exist for performance appraisals? a. Performance management is an approach that combines goal setting, performance appraisals, and training and development into a unified and ongoing process. See Table 9.2.

III.

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Compensation, Scheduling, Promoting, and Terminating Employees A. Compensation Strategies 1. Are all employees paid in the same way? a. There are many ways to pay workers: i. Compensation, payment for work performed, is generally offered in the form of: a.) Fixed salaries (annual pay for a specific job) b.) Wages (payment for hourly work) ii. Incentive-based payment structures are better compensation strategies for some positions, such as those in sales. a.) A salesperson typically has a lower base salary, which can be enhanced with commissions based on the employee’s sales levels or performance. b.) Bonuses—compensation based on total corporate profits 2. What types of retirement plans do companies offer employees? a. The most popular retirement plan offered today is the 401(k) plan, a retirement plan in which an employee invests pretax dollars in a bundle of investments generally managed by an outside investment company. i. In some cases, a company will match a portion of the employee’s contribution to the account. ii. It is referred to as a defined contribution plan because the amount an employee receives at retirement depends on the amount of the contributions and the fund’s investment earnings. b. An employer that has a pension plan regularly contributes a certain amount of money to a retirement fund for its employees. i. A pension plan is a defined benefit plan because employees know ahead of time how much pension they will receive when they retire. ii. These plans are not popular with employers because they entirely fund them and take on financial risks if the fund’s investments do not perform as expected. c. A profit sharing plan is a term used for a range of different types of compensation options. i. If the company hits certain profit targets, then there is a bonus structure for employees.

ii. Sometimes the term profit sharing is used for company contributions to an employee retirement plan.

3. What other financial incentives do companies offer as compensation? a. Stock option agreements allow an employee to purchase a specific number of shares of stock at a specific price but only at a specific point in time. b. Employee stock purchase plans allow employees to buy company stock at a discount. c. Employee stock ownership plans (ESOPs) are plans whereby employees are given stock in a company based on the amount of time they have worked for it. i. The stock is held in the ESOP’s trust fund until the employees either retire or leave the company.

B. Benefits 1. What are non-cash forms of compensation? a. Employee benefits are indirect financial and nonfinancial rewards employers provide their employees to supplement their wages and salaries. i. Some benefits are mandated by law; other benefits are voluntarily provided by employers. b. Some companies offer flexible benefit plans (or cafeteria plans) that allow an employee to pick from a menu of several choices of taxable and nontaxable forms of compensation.

2. What are work/life benefits? a. Work/life benefits are benefits that help employees achieve a balance between the demands of life both inside and outside the workplace.

3. What are some trends in employee benefits? a. Domestic partner benefits have become increasingly common components of compensation packages. b. The Family and Medical Leave Act states that companies with more than 50 employees must allow all eligible employees to take up to 12 weeks of unpaid time off to be with family because of medical issues, births, or adoptions. c. A rising trend is for employers to provide employees with a fixed amount of money to purchase health care on their own in the marketplace instead of providing a choice of specific plans.

C. Alternative Scheduling and Work Arrangements 1. What work arrangements are possible outside of the traditional workday? a. The most popular flexible work arrangements include: i. Telecommuting allows employees to work in the office part-time and work from home part-time, or to work completely from home and make only occasional visits to the office. ii. Alternative scheduling plans (flextime), in which management specifies a core set of hours that define the workday and is flexible with the starting and ending times employees can work.

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iii. A compressed workweek allows employees to work four 10-hour days instead of five 8-hour days each week, or 9 days instead of 10 in a two-week schedule for a total 80 hours. iv. Job sharing is an arrangement in which two employees work parttime to share one full-time job. v. Permanent part-time employees are hired on a permanent basis to work a part-time week.

2. What benefits do employers see from supporting alternative work schedules? a. Employers can expect positive bottom-line results due to increases in employee satisfaction, decreases in absenteeism, and increases in worker productivity.

D. Contingent Workers 1. Why does a company hire contingent workers? a. Contingent workers are people who are hired on an as-needed basis and lack status as regular, full-time employees. b. Independent contractors and consultants are examples of contingent workers who are generally self-employed.

2. Is temporary work a common situation for people? a. The U.S. Bureau of Labor Statistics estimates that the temporary workforce accounts for more than 2 percent of the U.S. workforce.

E. Promotions 1. How can employees increase their levels of responsibility in a company? a. After performing successfully in a position, many employees look to increase their responsibility levels and pay in a company or a department by seeking a promotion.

2. Do promotions always move you into management positions? a. Some companies provide two career paths: one toward management and the other for “individual contributors” with no management aspirations.

F. Terminating Employees 1. Why do companies lay off workers? a. Termination refers to the act of permanently laying off workers due to poor performance or a discontinued need for their services. b. Most states support employment at will, a legal doctrine that states that an employer can fire an employee for any reason at any time. i. Likewise, an employee is equally free to resign at any time for any reason.

2. How does a manager prepare to terminate an employee? a. Managers must take steps to avoid a wrongful discharge lawsuit, including maintaining solid records so that they can build a documented case for dismissal that is legally defendable.

G. Retirement 1. Is there a set age when employees retire? a. Retirement is the point in one’s life where one stops participating fulltime in a career.

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b. To encourage older workers to retire, some companies offer worker buyouts (or golden parachutes), which are one-time payments to leave a company. c. Phased employment is another option, in which longtime employees are moved to part-time basis for a period of time and then shifted into retirement.

IV.

Managing Workplace Diversity A. Benefits and Challenges of Diversity 1. Why has the modern workplace become so diverse? a. The changing demographics of the United States is a major reason why the workplace is becoming more diverse. b. Advancements in technology have also made it possible for businesses to operate with relative ease on a global basis. c. Hiring patterns are adding to the diversity of the workforce as U.S.-based companies hire workers who have emigrated from other countries. d. More women are now in the workforce than in decades past.

2. How is a diverse workforce beneficial? a. For many companies, hiring to diversify the workforce initially meant fulfilling an affirmative action requirement by filling positions with a certain number of women, Hispanics, or African Americans. i. Over time, many companies have come to embrace the idea of diversity beyond just satisfying a requirement. b. A diverse workforce helps companies offer a broad range of viewpoints that are necessary to compete in a world that is more globalized. c. Products and services need to be tailored to customers and clients with diverse backgrounds, so it’s vital to have a workforce that understands the cultural needs of different customers.

3. What issues do companies face while managing diversity? a. A diverse workforce can pose challenges, including: i. A wider variety of religious beliefs and practices, with more employees trying to integrate their religious practices into their workday. ii. Women are still battling sexism, salary inequities, and sexual harassment. iii. Compared with younger workers in the same position, older workers often expect higher salaries and better benefits.

4. How can employees improve their understanding of one another’s differences? a. It is important that employers provide effective diversity training for their employees. b. It is also important for employees to learn to look at situations from perspectives that are different than their own.

V.

Labor and Union Issues A. Definitions

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1. A strike occurs when workers agree to stop work until certain demands are met.

B. Organized Labor 1. What is a labor union? a. A labor union is a legally recognized group dedicated to protecting the interests of workers.

2. What are the objectives of organized labor? a. Labor unions were formed to protect workers from injustices employers inflicted on their workers during the U.S. Industrial Revolution. b. The American Federation of Labor (AFL) was founded in 1886 to protect skilled workers. c. The Congress of Industrial Organizations (CIO) was formed in 1935 to represent entire industries rather than specific workers’ groups. i. In 1955, the two were reunited to form the AFL-CIO, which is still in effect today as a federation comprised of 56 member unions.

3. How are labor unions structured? a. To form a union, a group of workers must either have their employer voluntarily recognize them as a group or have a majority of workers form a bargaining unit for union representation. i. A bargaining unit is a group of employees that negotiates with an employer for better working conditions or pay. ii. So that unions can better represent specific interests, union locals are created by workers of the same industry, company, region, or business sector.

C. Collective Bargaining 1. What is the collective bargaining process? a. Collective bargaining is the process that occurs when a union negotiates with an employer.

2. What happens if an agreement cannot be reached through collective bargaining? a. If negotiating does not produce a collective bargaining agreement, and both parties seem to be at an impasse, then other methods are used to settle their differences before workers go on strike. i. Mediation is a process in which a neutral third party helps the two parties reach an agreement. ii. Another method is arbitration, whereby a dispute is sent to an arbitrator to resolve.

3. What happens when negotiations break down? a. When negotiations reach an impasse, union workers have several ways to persuade a firm to accept their demands. i. A boycott occurs when people refuse to buy or distribute a company’s products or services. b. Companies can use a lockout, in which union members are not allowed to enter the firm’s premises. c. Union workers may vote to go on strike and agree to stop working.

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d. Workers may picket a workplace by walking outside a company’s entrances with signs that reflect the employees’ grievances. e. Strikers might be replaced by a firm temporarily or permanently with workers known as strikebreakers or scabs.

D. The State of Labor Unions 1. Are labor unions still effective today? a. In the United States, the role of labor unions is declining; only a little more than 10 percent of the nation’s workers are unionized. b. However, despite their declining numbers, labor unions continue to be influential in many industries, as well as in other countries.

2. What is the future of unions and labor-management relations? a. U.S. unions have begun to build alliances with unions in other countries. b. Immigration is another issue affecting unions, because immigrant workers are crossing borders and threaten to take jobs traditionally done by members of labor unions.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity 1 Mopping the Floor Activity Overview: Students prepare a job description for the position of janitor.

Time Limit: 30 minutes What to Do: • • •

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Divide students into groups of four or five.

Refer students back to the definition of job description.

They are managers working for a small business in need of hiring a new janitor.

They have been given the responsibility of developing a job description. Have them discuss what information they should include on the job description. (15 minutes) Have groups discuss results with class. (15 minutes)

Don’t Forget: Students should cover the key job functions and skills required for the position, education and/or training requirements, work hours and work conditions, salary, and so on.

Wrap-Up: Have groups discuss their job descriptions and also discuss what they found difficult in completing this assignment.

Supplemental Homework/In-Class Activity 2 Résumé Workshop Activity Overview: Students prepare and give feedback on résumés.

Time Limit: 20 minutes What to Do: • • •

Place students into groups of two. If you have an odd number of students in your class, a group of three is okay.

Students should exchange résumés and provide feedback on the organization and appearance, as well as content of the résumé.

Remind students that spelling, grammar, punctuation, and capitalization are particularly important on a résumé.

Don’t Forget: Students will need to prepare a résumé in advance. You can select a job that you think might interest most students. Some instructors clip employment advertisements from the local newspaper. .

Wrap-Up: Remind students that employers often decide who to interview based on the content and appearance of their résumé.

Supplemental In-Class Activity 3 Organize or Die Activity Overview: Debate on the pros and cons of joining a union.

Time Limit: 25 minutes What to Do: • • • •

Divide the class into groups of four or six.

Tell the group that the president of the AFL-CIO, John J. Sweeney, repeatedly told his followers that they had to “organize or die.”

Have half of the groups discuss the pros of joining a union. Have the remaining groups list the cons of joining a union. (10 minutes). Do unions have a place in today’s workplace?

Have groups discuss answers with class. (15 minutes)

Don’t Forget: Remind students how unions are established and discuss the collective bargaining process and what happens when collective bargaining fails.

Wrap-Up: Discuss the impact unions have had in establishing work place standards. At this point, you may want to mention some of the laws related to union organization. The National Labor Relations Act (also called the Wagner Act) specifies that unions are legal and created the National Labor Relations Board. The Labor-Management Relations Act (also known as the Taft-Hartley Act) protects management from unfair practices by unions, and allows workers to decertify (dissolve) a union if they choose. Finally, the Labor-Management Reporting and Disclosure Act (or the Landrum-Griffin Act) implemented controls on union dues and required unions to report financial statements, in an effort to eliminate corruption within unions.

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ENHANCING THE ONLINE COURSE HR Challenge: Have your students create a graphic illustrating the functions of human resources (planning, staffing, recruiting, training, motivating, evaluation, compensation, termination, and repositioning). The graphic can utilize photographs, illustrations, or any other visual technique using open source materials. Have the students define each function and explain the needs of the function in words. Ask students to post their graphics in the HR Gallery―a blog space online.

Description vs. Analysis: Require your students to differentiate between a job description and a job analysis. Ask them to provide examples of each; to discuss the differences between the two; and to explain the reasons for using each one. Have the students post this project on the discussion board.

Resources Scavenger Hunt: Ask students to create a list (a resource sheet) of the hiring resources in their location. This should cover all the resources listed in the text, as well as others gleaned from the Internet. The specific names, addresses, websites, telephone numbers, and other associated links should be submitted by the student. This project will be invaluable to the student later on when he/she is looking for employment. Have the students submit this as a graded project to be sure they complete it.

Technology Pros and Cons: Ask your students to elaborate on the pros and cons of using technology as a recruiting tool, as discussed in the text. What other alternatives might be more effective? Have your students post their results on the discussion board.

Hiring Hierarchy: Have your students create a model of the six-part hiring process; be sure to require that they explain each step fully. Ask them to describe a situation in which they were seeking employment. Did the company representative go through all the steps?

Was it a large or small company? What steps did the company use in hiring? Was the student actually hired? If not, why does the student believe he/she was not hired? Have the students submit this as a project for a grade.

Practice Interview: Have your students search the Internet for a job announcement/ad for which they would like to be hired in the future (their “dream” job). Have them answer (in writing) all the questions listed in the text under interview questions. Ask them to submit these to you for a grade.

Hiring Laws: Have your students create a chart reflecting all laws that affect hiring. The column headings should be: Law; Date; Prohibition; Hiring Implication. Have them submit the final chart to you for a grade.

Training Types: Have your students list and define each type of training, including diversity training. Post the results on the discussion board.

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ANSWERS TO END-OF-CHAPTER MATERIALS Self Test Multiple Choice 9-1

Human resource management requires expertise in d. All of the above.

Learning Objective 9-1: Human Resource Management AACSB: Analytical thinking

9-2 A company that gives employees an amount of stock based on the time the person has worked there is running a(n) a. ESOP Learning Objective 9-3: Compensating, Scheduling, Promoting, and Terminating Employees AACSB: Analytical thinking 9-3 Types of training required in some careers include d. All of the above.

Learning Objective 9-2: Training and Evaluating Employees AACSB: Analytical thinking 9-4 The performance review process often includes all of the following except a. an evaluation of the employee’s social standing in the work environment.

Learning Objective 9-3: Compensating, Scheduling, Promoting, and Terminating Employees AACSB: Analytical thinking 9-5 Amit Patel, as part of his compensation package, was offered an opportunity to purchase his company’s stock at a later date at its current, lower price. Which of the following was Amit given? a. A stock option Learning Objective 9-3: Compensating, Scheduling, Promoting, and Terminating Employees AACSB: Application of knowledge 9-6 James Rodriguez wants to spend more time at home with his two-year-old granddaughter and is considering leaving his company. He could receive three months’ pay and the same retirement package he will be eligible for in three years’ time if he leaves now. This type of offer is called a(n) b. worker buyout.

Learning Objective 9-3: Compensating, Scheduling, Promoting, and Terminating Employees AACSB: Application of knowledge

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9-7 Which one of the following is not a good reason to hire a contingent worker? b. Keeping employees for shorter periods of time keeps salary costs low Learning Objective 9-3: Compensating, Scheduling, Promoting, and Terminating Employees AACSB: Analytical thinking 9-8 Which of the following are benefits that companies experience by employing a diverse workforce? d. All of the above.

Learning Objective 9-4: Managing Workplace Diversity AACSB: Analytical thinking 9-9 The AFL-CIO, the UAW, and the Teamsters are examples of b. labor unions.

Learning Objective 9-5: Labor and Union Issues AACSB: Analytical thinking 9-10 A bargaining unit d. negotiates with employers for better working conditions.

Learning Objective 9-5: Labor and Union Issues AACSB: Analytical thinking

True/False 9-11 Internal recruiting means an open position will be filled by friends or family first.  False Learning Objective 9-1: Human Resource Management AACSB: Analytical thinking 9-12 Profit sharing could mean that in a good year, employees get bonuses, or it could refer to the company’s contributions to an employee retirement plan.  True Learning Objective 9-3: Compensating, Scheduling, Promoting, and Terminating Employees AACSB: Analytical thinking 9-13 Some companies use 360-degree appraisal of employees, gathering input from both their managers and their subordinates.  True Learning Objective 9-2: Training and Evaluating Employees AACSB: Analytical thinking 9-14 Employment at will means workers have increased job security.  False Learning Objective 9-3: Compensating, Scheduling, Promoting, and Terminating .

Employees AACSB: Analytical thinking 9-15 A diversified workforce adds creativity and a variety of viewpoints to the workforce, which often helps improve a company’s competitiveness and its bottom line.  True Learning Objective 9-4: Managing Workplace Diversity AACSB: Analytical thinking

Critical Thinking Questions: Suggested Answers 9-16

Answers will vary depending on the student’s opinions, but when discussing performance management compared to traditional performance appraisal, they should reference Table 9.2 which summarizes several aspects of the performance management process.

Learning Objective 9-2: Training and Evaluating Employees AACSB: Application of knowledge

9-17 Electronically collecting and evaluating résumés, compared to older methods of recruiting candidates, permits candidates to be recruited much more quickly.

Additionally, different types of candidates—often those who are technologically savvy—are more likely to be recruited. HR departments are using software systems to scan résumés and help screen applicants to weed out those who are unqualified. The software program Unicru is used by many retail stores to screen candidates for dependability, honesty, and other qualities. Some firms have successfully reduced their employee turnover rates using electronic screening methods.

Job seekers who do not fit job profiles programmed into the software or who do not use words in their résumés that the software is searching for can also get eliminated.

Learning Objective 9-1: Human Resource Management AACSB: Application of knowledge 9-18

Answers will vary depending on the student’s opinions, but when discussing benefits, student answers should mention that “good” benefits include health and disability insurance, vacation and sick pay, and retirement plans. In addition, some students might feel that it is important to address work/life benefits such as flexible hours, ability to work from home, and on-site child care.

Learning Objective 9-3: Compensating, Scheduling, Promoting, and Terminating AACSB: Application of knowledge

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Team Time Seeing Both Sides Walmart has had a number of class action lawsuits involving sex and wage discrimination in the last five years. In addition, there have been issues about hiring illegal immigrants, unfair wages paid to overseas workers, lack of employee benefits, unpaid overtime employment, and even locking employees into stores at the end of their shifts.

On the other hand, Walmart has also hired hundreds of HR employees to support store workers, and they are implementing technology to improve communication between employees and managers. Employee satisfaction surveys are conducted regularly, and managers work to improve the results.

Ethics and Corporate Social Responsibility The Ethics of Interviewing When students discuss their answers to the questions presented in the case, ask them to consider why an employer might be asking “suspect” questions. For example, many employers ask about children because of the assumption that if someone is a parent, they are likely to miss more workdays than someone who is a non-parent. Asking for the information you really want, in the form of an experiential question, such as “How many days did you miss of work over the past year, and for what reason?”, is going to get at the question directly, and provide better interview results, as well.

Web Exercises 9-19 Analyzing Annual Reports Students’ answers will vary depending upon the companies selected.

9-20

Social Media and HR Students’ answers will vary depending upon how much online information they have posted about themselves and their opinions about privacy issues in hiring practices.

9-21

Battle of the Superstores Students’ answers will vary depending upon the information students are able to obtain about salaries, wages, and benefits at these stores. Students may be able to find information on websites such as www.glassdoor.com and www.careerbliss.com. Another source students may find useful is: http://money.cnn.com/2013/08/06/news/economy/costco-fast-food-strikes/.

Learning Objective 9-3: Compensating, Scheduling, Promoting, and Terminating AACSB: Application of knowledge

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9-22

Benefits Packages Students’ answers will vary depending upon the companies selected and the benefits that students believe are important in employee retention.

Learning Objective 9-3: Compensating, Scheduling, Promoting, and Terminating AACSB: Application of knowledge

9-23

A Student and an Employee Students’ answers will vary depending upon the colleges/universities selected.

MyBizLab: Suggested Answers 9-24

Job analysis and development of a workforce profile complement each other. A company will perform a job analysis to determine the duties and tasks for a given job and the workforce profile is a personnel inventory that includes information about each employee, such as his or her age, education, training, experience, specialized skills, and current and previous positions held within the company.

Once a company performs a job analysis, it can review its workforce profile to determine if there are internal candidates who could perform the duties or the company may need to recruit externally.

An HR department that is constantly reviewing its staffing needs can create a well- developed recruiting plan to respond quickly when recruiting even in a dynamic, changing industry.

Learning Objective 9-1: Human Resource Management AACSB: Application of knowledge

9-25

Answers to the first part of the question will vary depending on students’ perspectives, backgrounds, and experiences with labor unions. Students should mention that labor unions typically negotiate various employment terms, such as the salaries, health benefits, and work hours that may benefit all employees including those who are not in the union.

Learning Objective 9-5: Labor and Union Issues AACSB: Application of knowledge

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CHAPTER 10: ONLINE BUSINESS AND TECHNOLOGY CHAPTER OPENER Chapter 10 introduces students to the basics of business technology. Students will explore: • what the online environment offers to help market a business • the types of business transactions that are supported by online commerce • the roles of the chief information officer (CIO) and the information technology (IT) departments in organizations • how businesses transform data into useful business intelligence • the new security challenges that have arisen as a result of the increased use of business technology • the impact of new advances in social networking and mobile technologies

DETAILED LECTURE OUTLINE I.

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Online Business A. Growth of Online Business 1. Has online shopping hit its peak? a. By 2017, 60 percent of U.S. retail sales will involve the Web in some way, and $100 billion of those sales will be made on mobile devices alone.

B. Marketing Online 1. How does the online environment support marketing efforts? a. In today’s world, a marketing department must consider the Internet as a tool for both collecting information about its consumers and distributing information about its products and services.

2. How does having an online presence change a firm’s marketing strategies? a. Online advertising refers to any form of advertising that uses the Internet to market its message to customers. b. Programs such as Google’s AdWords service are successfully generating revenues for companies with pay-per-click advertising, in which advertisers pay only for the number of times a Web surfer clicks on their ads. c. With contextual advertising, ads are automatically generated by the content on a specific site.

3. Are there any drawbacks to online advertising? a. Table 10.1 summarizes the pros and cons of online advertising.

4. How does technology change marketing in a global marketplace? a. Internet technology allows every company with a website to advertise to anyone in the world with Internet access. However, i. the site must support multiple languages; and ii. content for different countries must be culturally customized.

5. What is viral marketing?

a. Viral marketing is a practice that involves using social networks, e-mail, and websites to spread the awareness of a particular brand. b. A viral campaign is dependent on the user to be an active participant in spreading a message.

C. Types of Online Business Transactions 1. What types of business transactions occur online? a. The most common modes of transactions are business to business (B2B), business to consumer (B2C), and consumer to consumer (C2C).

2. What is the focus of B2B transactions? a. Business-to-business (B2B) transactions involve the exchange of products, services, and information among businesses on the Internet. b. B2B websites can be classified as follows: i. Company websites that target other companies and their employees ii. E-procurement—the online purchase and sale of products and services between businesses iii. Procurement exchanges—marketplaces where companies can buy and sell goods or services at lower prices iv. Specialized industry portals—online gateways to major sources of information, discussion forums, and product listings v. Brokering sites—third-party sites that act as liaisons between providers and potential buyers of goods and services vi. Information sites (also called an infomediary)—information sites that give businesses information about current standards and developments in a particular industry 3. What is the focus of B2C transactions? a. Business-to-consumer (B2C) transactions refer to e-commerce that takes place directly between businesses and consumers. b. Some models that have accelerated B2C e-commerce include: i. Online intermediaries are businesses such as Travelocity and Amazon.com that are not direct producers of products but instead buy goods and/or services and sell them to customers ii. Advertising-based models rely on banner ads on other websites to attract customers. a.) The high-traffic approach is designed to reach a wide audience, with ads placed on popular sites, such as Yahoo! b.) The niche approach best serves companies that target a small, specific audience. iii. Community-based models allow users with similar interests to interact with one another worldwide. iv. Fee-based models require users to pay a subscription fee to view their content.

4. What is the focus of C2C transactions? a. Transactions that take place among individual consumers, sometimes with the involvement of third parties, are called consumer-to-consumer (C2C) transactions. i. A popular C2C marketplace with an intermediary is eBay. .

ii. File and music sharing are types of C2C exchanges, sometimes referred to as P2P or peer-to-peer. See Table 10.2.

D. Challenges of E-Commerce 1. How are taxes applied to e-commerce sales? a. Most Internet sales are tax free, which causes major problems for states that rely on sales taxes to fund their public institutions. b. Online sales tax requirements also vary depending on the business. i. For example, if an e-business also has a physical presence, such as a store, office, or warehouse in a state, the state might require it to impose a sales tax on customers.

2. Who has legal jurisdiction over an online business? a. Jurisdiction is the authority of a government to legislate and enforce its many laws. b. It is usually territorial, but because the Internet has a geographic territory that is too broad to define, it is difficult to address legal jurisdiction issues for online-only businesses.

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Technology in Business A. The Information Technology Organization 1. Who is in charge of business technology? a. Information technology (IT) is the design and implementation of computer-based information systems. b. The person responsible for such technology in an organization is its chief information officer (CIO).

2. What is a typical decision a CIO has to make? a. The CIO must manage a budget that balances the benefits of technology against the ever-rising costs of upgrading to the latest systems.

3. What happens in an IT department? a. The IT department is responsible for everything from hardware components and software programs to networking strategies. b. Members of this department are also responsible for security, in response to both computer virus attacks and emergency recovery from power outages and system failures. c. The IT department manages the design of a company’s networks and databases and sometimes must create custom software to bridge the gaps between the software available on the market and the needs of a firm.

B. Information Systems 1. What’s an information system? a. The main difference between an IT system and an information system (IS), also called a management information system (MIS), is that an MIS is focused on applying IT to solve business and economic problems.

2. What is the difference between data and information? a. Data are representations of a fact or idea; it can consist of numbers, words, images, or sounds. b. Information is data that have been organized or arranged in a way that makes the data useful. See Figure 10.3.

3. What are databases? a. Database programs allow businesses to quickly enter data, filter and sort information, and generate reports.

4. As the amount of data grows, how is it managed? a. Data are stored in database management systems (DBMs), collections of tables of data that organize the data and allow people to analyze and run reports on those data. b. As companies begin to store data in database systems separate from their production databases, data warehouses that can hold huge amounts of transaction data are created. c. Sometimes, smaller sets of data called data marts are created to isolate one product or one department. d. Exploring and analyzing the data mart to uncover relationships and patterns that can help a business is referred to as data mining.

5. What is “Big Data”? a. The availability of gigantic data sets for analysis to improve business has only recently become inexpensive and reliable. b. The use of very large data sets and special software tools that can extra information from them is named Big Data analysis.

6. Does Big Data create threats to our privacy? a. Now that very large data sets can produce useful information, there is new value in collecting the billions of clicks, purchases, and behaviors of consumers. b. Data brokers are companies that gather and sell this kind of information. c. There is growing concern about the impact of this trade in information and how to best protect the kind of data people want to keep private, such as medical status or credit standing.

7. What kinds of tools are used to analyze business data? a. A decision support system (DSS) is a software system that enables companies to analyze collected data so they can predict the impact of business decisions. b. An executive information system (EIS) is a software system that is specially designed for the needs of management. c. An online analysis package (OLAP) is a software application designed to help people combine multiple pieces of information to get a clear picture of the state of a business.

8. What kinds of questions can business intelligence software answer? a. Business intelligence software can further assist managers by helping them analyze not only the financial state of the firm but also answer other questions about customers, vendors, inventory, and productivity.

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Security A. Threats to Online Business 1. What special security threats do online businesses face? a. Online businesses are vulnerable to threats such as security breaches and viruses.

b. Adware is any software application that displays banner ads or pop-up ads while a program is running. i. At worst, the software installs spyware, which tracks your personal information and passes it on to a third party without your knowledge.

2. Can a business protect its online identity? a. Phishing is a common way to trick online users into sending their personal information, such as credit card numbers, to hackers. b. These types of threats force online businesses to keep their networks protected with the latest technology and take extra precautions to protect customers.

3. What risks does a breach of security pose for management? a. Hackers are individuals who gain unauthorized entry into a computer system. b. Their goal may be to disrupt the operation of the system or gain access to protected data. c. Blackouts of vital services, such as internal e-mail or customer access to a corporate website, can damage a company’s reputation and value.

4. Can technology also be used to support ethical conduct? a. Part of the Sarbanes-Oxley Act of 2002 mandates that all public companies have procedures for handling the concerns of whistle-blowers. b. Several corporations now use their intranet to allow whistle-blowers to make anonymous reports.

B. Privacy 1. How has technology impacted employees? a. The increasing volume of e-mail can contribute to a breakdown in communication as fewer personal exchanges take place. b. The boundary between work and home has also blurred because of the increase of technology.

2. How does technology affect employee privacy? a. Electronic monitoring is commonly used to track employees’ keystrokes and e-mails, examine their Internet browsing histories, and even monitor their mobile phones and text and instant messages. b. Electronic surveillance is also generally legal as long as employers inform their workers they are being monitored. c. However, if the monitoring is extensive, employees can begin to feel stifled to the point where they no longer do their best work.

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Impact of Social and Mobile Technology A. Social Networking 1. How is social networking changing businesses? a. Firms are using social networks to communicate throughout their organizations, and managers and marketing professionals use social networks to generate interest in their firms’ products and increase their revenues.

2. Are social media apps used within businesses?

a. Enterprise social networking refers to the application of products such as Facebook in a corporate setting.

3. How are companies using social media to monitor their business? a. Social media monitoring—keeping watch on the external messages and information being spread about their products in cyberspace—is critical and a relatively new activity for businesses.

4. What new jobs have been created with the rise of social media? a. Firms large and small are now hiring social media managers, who are also sometimes called social media marketing specialists. b. A person in a position such as this is responsible for monitoring social networks and generating “buzz” on them about a company and its products. c. Other social media-related jobs include social media strategists, social media copywriters, and search engine optimization specialists.

5. Can social media provide information that is directly useful to a business? a. Using information solicited from people on social media and the Internet to help make a decision is referred to as crowdsourcing.

6. How can social media help with technical support services? a. Companies can use social media to head off potential technical problems that might turn into public disaster.

7. How is social media helping people start and fund new businesses? a. Social networking is becoming a mechanism for funding start-ups in a variety of business arenas. b. Crowdsourced funding (crowdfunding) allows a great number of people who believe in a company or a product to contribute a small amount of money to help a company get started. i. In most cases, the company gives them something back in return—a free copy of the product or a signed card from the founder.

B. Mobile Devices 1. How do businesses use mobile devices? a. Most business organizations today find it critical to have a mobile component to both support their employees and to attract and serve customers.

2. How does a business select which mobile devices to purchase? a. There are a number of issues a firm has to consider, including: i. What kind of mobile devices—phones, tablets, and so forth—should the firm have, and what brand? What employees should use them? ii. What kind of devices are customers using? iii. Should employees be able to use their personal mobile phones for work? iv. How easily can the devices be rolled out to the entire company? How do they integrate with existing mail systems?

3. What kinds of mobile apps are useful for businesses? a. For business, many useful apps focus on communications, task management, and managing data. .

b. Mobile apps for the sales force organize new leads and customer requests, help manage expense reports, or handle invoicing right from the phone.

4. How has cloud computing helped grow the mobile device market? a. Cloud computing refers to the practice of storing and retrieving information, resources, and software on remote servers accessed via the Internet, rather than a local server or personal computer. b. Using cloud computing, online backup systems can work through a “cloud” so that files are automatically backed up and made available instantly to a whole set of users.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity 1: Ice Breaker IT Devices Activity Overview: This activity asks students to create a list of technological devices that reflect the many ways in which the class―as a whole―creates, stores, exchanges, and uses information.

Time Limit: 20 minutes What to Do: 1. Ask the class as a whole to brainstorm, coming up with a list of technological devices that they use in their personal lives, at work, or at school to create, store, exchange, and use information.

2. Ask the class to comment on these questions: a. Do students (in the class as a whole) use more or fewer devices than what they expected prior to brainstorming? b. In what way(s) do you see your individual use of these devices changing in the coming year? c. In what way(s) have these devices impacted your personal lives, such as school, at the bank, while shopping, and so on? d. What problems have you encountered when using new technologies for communication purposes?

Don’t Forget: Some people are more technologically savvy than others. Many students will say they take advantage of every gadget possible, whereas others do not have Internet access at home. One major problem faced by both employers and students is bridging the gap in people’s knowledge of and comfort with technology.

Wrap-Up: Bring the activity to a close by reminding students that new technologies are always looming on the horizon and that no one can accurately predict how much IT will change and how this will affect our lives in the future.

Supplemental Homework/In-Class Activity 2 The Art and Science of Point-and-Click Research Activity Overview: Students learn how to use the Web to conduct research more effectively.

Time Limit: 1 hour What to Do: .

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Have students get together in groups of three and decide on a business-related research topic. They should choose a topic that interests them, for example: o Business Implications of the War in Iraq o Labor Disputes in Professional Sports o Marketing Music Lessons to Parents of Young Children Have students research their topics using the following websites (each group member should use two sites): o Dogpile (www.dogpile.com) o Excite (www.excite.com) o Ask (www.ask.com) o Google (www.google.com) o Yahoo! (www.yahoo.com) o Bing (www.bing.com) Working as a group, answer the following questions about your collective searches.

1. Which sites were easiest to use?

2. Which sites offered the most helpful results? What specific factors made these sites better than the others?

3. Which sites offered the least helpful results? What were the problems?

4. Go to http://lib.berkeley.edu/TeachingLib/Guides/Internet/SearchEngines.html.

Which search engine was recommended by the librarians at UC Berkeley?

How did the librarians’ recommendations compare with your findings?

Compare group results in class.

Wrap-Up: Close the activity with a detailed look at the UC Berkeley website shown above. It offers a good overview of the different search engines, and identifies the difference between a search engine and a subject engine.

Supplemental In-Class Activity 3 Website Review Activity Overview: In this activity, students will identify merchandising websites that appear to work well; then, they will create a list of characteristics for good websites.

Time Limit: 30 minutes What to Do: •

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Break the class into pairs of students. If there are an odd number of students, use one group of three.

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Instruct students to find at least three good merchandising websites. (Remind students that a merchandising site is one that sells products to the general public: www.dell.com or www.ibm.com can be good places to start.)

Have students look through the sites and create a list of characteristics of good merchandising sites.

During the last 10 minutes of the activity, ask each group to identify a spokesperson. Go around the classroom and have students identify the characteristics of a good merchandising website.

Don’t Forget: This activity will need to occur in a computer lab or in a classroom setting with at least one computer for every two students. Alternatively, this activity can easily be adapted to a discussion board format. You can ask students to find two merchandising websites—one that is very good and one that is very bad. Students should provide a link to the site and describe why the site works well or poorly.

Wrap-Up: Remind students that, to some extent, the quality of a website depends on the type of equipment being used to access that website. If someone has a dial-up connection, and is trying to access a website that is graphics-heavy, the experience might be unsatisfactory. For someone with a faster connection, the site could be just fine.

Supplemental In-Class Activity 4 Whose Business Is It, Anyway?

Activity Overview: In this activity, students debate employee privacy issues.

Time Limit: 30 minutes What to Do: • •

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Divide the class into six teams of no more than ten people per team. If you are teaching a large lecture section, have the remaining students choose the “winners” of each debate.

Each team will be responsible for taking one side for one of the three topics below: o Should employers be allowed to use GPS devices to keep track of their employees’ whereabouts during work hours? (Such devices are currently available.) o Should employers routinely screen their employees’ e-mail? o Should an employer routinely record telephone conversations held by employees during work hours?

Have the teams pair off and debate each other, while the other students in the class determine the winners of each debate.

Don’t Forget: Students may not realize that these practices are routine in businesses today.

Wrap-Up: Conversation on these topics should be animated, but you can encourage additional discussion by getting students to talk about their perceptions of the situations that would require monitoring (for example, debt collection calls), and those where monitoring may be inappropriate (for example, a doctor talking with a patient).

Encourage students to think about the types of rules employers might create for each of the areas, and how those rules could be enforced.

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ENHANCING THE ONLINE COURSE Online Business: Ask your students to research examples of viral marketing and post an example of a successful viral marketing campaign to a discussion board.

CIO Article: Ask your students to identify one CIO that has been interviewed recently in the media. (A good source for such interviews would be trade publications in the technology area which can be accessed through your online library.) Have the students review the interview for issues that fall under the different functions of a CIO as discussed in the text.

CIO Interview: Have your students identify one piece of new technology which could possibly benefit your institution. Have the students conduct online interviews with the CIO of your institution. (Be sure to get his/her permission first.)

Information Systems: Have students define: information systems; management information systems; decision support systems; executive information systems; database management systems; data mining; and data warehousing. Ask students to find examples from organizations’ websites which are used as part of these technology-based systems.

Security: Ask your students to research the legality of employee monitoring in their state(s) and post to the discussion board, answering the following: Is it legal for employers to monitor employee e-mails? Can an employer monitor employees’ telephone calls? Can the employer post video cameras in the workplace? Are there limitations placed on certain types of electronic monitoring? In your students’ opinions, are these limitations too much, too little, or just enough?

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ANSWERS TO END-OF-CHAPTER MATERIALS Self-Test Multiple Choice 10-1 A database management system (DBMS) b. is a set of tables of data.

Learning Objective 10-2: Technology in Business AACSB: Analytical thinking 10-2 MIS differs from IT because a. MIS focuses on applying IT to solve business problems.

Learning Objective 10-2: Technology in Business AACSB: Analytical thinking 10-3 DSSs are used most often by a. managers who make decisions based on current data.

Learning Objective 10-2: Technology in Business AACSB: Analytical thinking 10-4 Data warehousing is a. the storing of terabytes of transaction data.

Learning Objective 10-2: Technology in Business AACSB: Analytical thinking 10-5 Tools used to analyze data include b. DSSs, OLAPs, and executive information systems.

Learning Objective 10-2: Technology in Business AACSB: Analytical thinking 10-6 Pay-per-click advertising d. All of the above.

Learning Objective 10-1: Online Business AACSB: Analytical thinking 10-7 Social media monitoring is best described as c. staying aware of the messages posted about your products in cyberspace.

Learning Objective 10-4: Impact of Social Media and Mobile Technology AACSB: Analytical thinking 10-8 Phishing can be used to b. steal identity information from unsuspecting clients.

Learning Objective 10-3: Security AACSB: Analytical thinking

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10-9

Business-to-business transactions include d. Both a and c.

Learning Objective 10-1: Online Business AACSB: Analytical thinking

10-10 Technology has forced businesses to focus on security issues like d. All of the above.

Learning Objective 10-3: Security AACSB: Analytical thinking True/False 10-11 Contextual advertising means that the advertisement is related to the search just made.  True Learning Objective 10-1: Online Business AACSB: Analytical thinking 10-12 Business intelligence software supports decision making by presenting visual, interactive views of the state of a business.  True Learning Objective 10-2: Technology in Business AACSB: Analytical thinking 10-13 Viral marketing can be prevented by using the proper spyware.  False Learning Objective10-1: Online Business AACSB: Analytical thinking 10-14 Enterprise social networking is the application of social network tools to education.  False Learning Objective 10-4: Impact of Social Media and Mobile Technology AACSB: Analytical thinking 10-15 Crowdsourced funding is the use of social networking to acquire capital for a new venture.  True Learning Objective 10-4: Impact of Social Media and Mobile Technology AACSB: Analytical thinking

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Critical Thinking Questions: Suggested Answers 10-16 Students’ answers and opinions will vary based on what they have read or personally experienced in regard to data breaches.

Learning Objective 10-3: Security AACSB: Application of knowledge 10-17 Students’ answers and opinions will vary. There is no easy formula for identifying potential threats. For example, although many perpetrators of violence (such as Seung-Hui Cho, the shooter at Virginia Tech, or James Holmes, the shooter at the theatre in Aurora, CO) share certain characteristics such as being withdrawn, paranoid, or unwilling to follow rules, those behaviors are also exhibited by a number of people who do not commit violent crimes, and these characteristics cannot be used to predict violence ahead of time. In terms of the college’s responsibility if a threatening message is discovered, you may wish to point out that many colleges and universities have created “threat assessment teams” to identify, assess, and manage persons who come to their attention as a possible threat. Team members on these threat assessment teams usually include leaders from campus security, student life, counseling services, and legal and public affairs. However, these teams face a number of challenges, because assessing what is threatening or suspicious behavior can be at times a matter of perception.

Universities and colleges always have an IT policy that dictates control and ownership of computer resources on campus. E-mails that are sent using the college network are property of the college and can be provided to police or employers.

Learning Objective 10-3: Security AACSB: Application of knowledge 10-18 Students’ answers about whether Amazon.com has promoted an interest in reading will vary. Brick-and-mortar bookstores have been severely impacted by online shopping. During the past five years, Borders closed its doors. Barnes & Noble’s retail group announced in 2012 that the company is planning to shrink its store footprint over the next decade. However, the American Booksellers Association, which represents independent bookstores, says its membership increased by 6.2 percent in 2013, and nationwide there are more independent bookstores opening than closing. It appears to be smaller bookstores that partner with other retailers, such as art galleries, or bookstores that use their space to host events and be a part of a local community that may survive.

Source: http://www.washingtonpost.com/local/independent-bookstores-turn-anew-page-on-brick-and-mortar-retailing/2013/12/15/2ed615d8-636a-11e3-aa81e1dab1360323_story.html Learning Objective 10-3: Security AACSB: Application of knowledge .

Team Time The Winds of Change This exercise requires that students work together in teams to determine what innovation in business technology will have the most impact in the next year, five years, or ten years.

Each group is likely to take a different approach to the problem, but it is useful to make clear that the process itself is an exercise in teamwork and to see if the findings of the team lend any insight as to the efficiency and creativity of the group. Teams should feel free to share the resources they used to collect specific data on the questions raised in part 2.

Ethics and Corporate Social Responsibility Computer Hacking: A High Price to Pay 10-19 Lowe’s is responsible for maintaining the security of the personal information of their customers, but customers must also take responsibility for guarding their personal information and monitoring their credit on a regular basis. In today’s world, credit card companies also assume some responsibility for the safety of credit card information, because they are the ones who must absorb the cost of goods purchased with stolen credit card numbers.

Learning Objective 10-3: Security ACSB: Analytical thinking 10-20 Consumers have to monitor their own statements and credit reports, but they also rely on notification from stores, credit card companies, and/or credit agencies, to see if their card has been misused. When shopping online, customers should check to be sure they are on a secure website, as designated by a lock in the toolbar and a URL starting with https instead of http.

Learning Objective 10-3: Security ACSB: Analytical thinking 10-21 Students will have different responses to this question. You might want to ask if there is anyone in the class who has had their identity stolen, and if there is anyone who hacks on a regular basis. Ask them to debate this question. Note that there is not enough detail given in the case to determine why each hacker got such a different sentence.

Learning Objective 10-3: Security ACSB: Analytical thinking Web Exercises 10-22 WikiLeaks Students’ answers will vary depending upon the leaks selected from the WikiLeaks website.

Learning Objective 10-3: Security .

AACSB: Application of knowledge 10-23 To Censor or Not to Censor As noted, in 2010 Google reversed its previous position and stopped allowing the Chinese government to censor search engine results. Google said that Chinese hackers had tapped into the Gmail accounts of Chinese human rights activists.

Although China denied the claims, the situation caused Google to stop censoring its results in China unless some kind of new agreement could be arranged between Google and China. As of July 2014, authorities in China made Google’s services largely inaccessible.

In 2011, Microsoft signed a deal with Baidu, the biggest search engine in China, to provide English-language search results, but they will be censored to meet the Chinese government’s demands.

Note: This situation is dynamic, so the instructor may wish to do some current research.

Sources: http://www.theguardian.com/technology/2011/jul/04/microsoft-baidu-chinasearch-engines http://www.nytimes.com/2014/06/03/business/chinas-battle-against-google-heatsup.html?_r=0 10-24 Online Business Is Global Business Students’ answers will vary, depending upon the countries selected.

Learning Objective 10-1: Online Business AACSB: Application of knowledge 10-25 After the Data Breach The FBI notified the Maricopa County Community District in April 2013 that a website advertising personal data from the district’s information technology system was for sale. The website was taken down that day and stayed down for several days before being restored in stages. However, the district waited 7 months to notify 2.4 million current and former students and employees that their academic or personal data were compromised. According to an article in SC Magazine, costs associated with the data breach had reached $20 million by May 2014, and the governing board had approved an additional $2.3 million to be allocated to the law firm handling two class action lawsuits filed over the incident.

Students’ answers regarding the actions required of the district’s IT department to reestablish confidence in the department and the college itself will vary.

Source: http://www.scmagazine.com/maricopa-county-data-breach-costsreaching-the-20-million-mark/article/347678/ Learning Objective 10-3: Security .

AACSB: Application of knowledge 10-26 The Power of Your Likes Students’ answers will vary.

Learning Objective 10-4: Impact of Social Media and Mobile Technology AACSB: Application of knowledge MyBizLab: Suggested Answers 10-27 Students’ answers will vary, depending upon the countries selected. Suggested websites include: www.internetworldstats.com/links10.htm; www.sciencedirect.com/science/article/pii/S0264999316301444

Learning Objective 10-1: Online Business AACSB: Application of knowledge 10-28 Students’ answers will vary but the most obvious business function that could benefit from input from consumers would be marketing including: advertising and promotion, marketing research, product development. Students will probably identify other business functions that could also benefit from consumer input.

Their ideas for collecting data will also vary.

Learning Objective 10-1: Online Business AACSB: Application of knowledge

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CHAPTER 11: PRODUCTION, OPERATIONS, AND SUPPLY CHAIN MANAGEMENT CHAPTER OPENER Chapter 11 introduces students to the processes an organization uses to manage operations. These processes have a huge impact on the overall quality of the company’s products. Students will explore: • the importance of manufacturing in both the United States and the global economy • common production processes and techniques • the role of operations management in the service sector • how technology influences the production process • supply chain management • methods used by firms to improve quality, including SPC, TQM, and Six Sigma Students learn the importance of choosing manufacturing locations based on transportation, human, and physical factors and to develop production plans that include a quality control component.

DETAILED LECTURE OUTLINE I.

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The Production of Goods and Services A. Definitions 1. Production is the process of getting a good or a service to the customer; it is a series of related activities, with value being added as each activity or stage is completed.

B. The Importance of Production 1. Why is production a critical component of any business? a. To increase their profits and decrease production costs, businesses must find the most efficient production process possible. b. They need to continue to improve their operations and production processes to become more customer focused, quality driven, economically efficient, and technologically savvy.

2. How important is manufacturing in the United States? a. Manufacturing remains a fundamental component of the U.S. economy; in fact, it was the largest contributor to the U.S. real gross domestic product (GDP) in 2012.

C. Moving to a Service-Based Economy 1. How important are services to the U.S. economy? a. Services make up nearly three-fourths of the U.S. GDP, and more than 75 percent of jobs are in the service sector.

D. The Global Production Landscape 1. How does U.S. manufacturing compete globally?

a. Although the United States is the world’s largest importer, it is also the third largest exporter.

2. How does manufacturing affect the global economy? a. Outsourcing has contributed to the decline in U.S. manufacturing and the increase in unemployment. b. However, on a global basis, offshoring to Third World countries has helped to improve their standards of living and contributed to the world’s economic growth.

3. What changes in production will keep the United States competitive? a. To produce better products more economically and faster, U.S. manufacturers are utilizing newer practices such as enterprise resource planning, computer integrated manufacturing, flexible manufacturing, and lean manufacturing.

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Production Management A. Definitions 1. Production management refers to the planning, implementation, and control measures used in the process to convert resources into finished products.

B. The Make-or-Buy Decision 1. What is a make-or-buy decision? a. A make-or-buy decision is determining if the company will make the entire product or if the product will be assembled from a combination of parts manufactured in-house and parts manufactured or purchased outside the organization.

C. Common Production Processes and Techniques 1. What production processes are used by businesses? a. The assembly line concept introduced by Henry Ford utilized continuous flow production, a method that produces discrete units of products in large numbers, continuously and rapidly. b. With intermittent processes, production runs are shorter, so machinery can be changed over between them to accommodate product changes. c. Some common production processes and techniques are listed in Figure 11-1.

2. How are large quantities of goods produced? a. Producing large quantities of goods at a low cost is referred to as mass production. b. An assembly line is a mass production process.

3. What production process is best when customization is desired? a. Mass customization is the production of goods or services tailored to meet customers’ individual needs cost effectively.

4. How is mass customization achieved? a. A flexible manufacturing system (FMS) enables manufacturers to produce large quantities of customized products. b. In an FMS system, several machines are linked together by one central computer, and all machines in the system can process different part types simultaneously.

5. Can mass customization be used in service industries? a. The technologies of mass customization have also enabled many servicebased organizations to meet the individual needs of their customers. i. For example, Burger King is famous for its “Have It Your Way” method of production, which allows customers to “tweak” their hamburger toppings to meet their specific tastes.

6. What type of production focuses on efficiency? a. Lean production is a set of principles concerned with reducing waste and improving flow.

D. Social Media and Manufacturing 1. How does the manufacturing industry use social media? a. Using social media tools, such as blogs, Web videos, and podcasts, as well as social networking sites, consumers can design their own products and also have direct influence on what companies develop and produce.

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Operations Planning and Management A. Definitions 1. Operations management is the administration and planning of business operations to produce and distribute goods as efficiently as possible.

B. Capacity Planning 1. How big should a facility be? a. Capacity planning is the process of determining how much of a product an organization can produce to meet its demand. b. Capacity planning requires balancing the maximum amount of product an organization is capable of producing and the quantity of the good or service demanded by its customers.

C. Facility Location 1. Where do businesses decide to locate their facilities? a. Beyond the cost and availability of a location, several other factors have to be looked at: i. Proximity to market ii. Proximity to raw materials iii. Proximity to utilities iv. Proximity to hazardous waste disposal 2. How does labor affect location decisions? a. Companies need to hire employees to maintain their operations, but they also need to be aware of how the communities they locate in affect their ability to attract employees. Factors include: i. Skilled labor—finding an area with an abundance of workers who possess the necessary skills ii. Affordable labor—finding employees who are both highly skilled and affordable iii. Living conditions a.) A business brings opportunities to a community by creating jobs, and this can result in a higher standard of living.

b.) It can also have negative effects by exploiting workers, consuming limited resources, or increasing local traffic. iv. Tax incentives a.) Many U.S. state and local governments offer cash grants, tax credits, tax abatements, and other incentives to entice companies to locate to the area. v. Laws and regulations—these may vary by state or country.

D. Facility Layouts 1. Why is facility layout important? a. Facility layout refers to the physical arrangement of resources and people in the production process and how they interact. b. It is important to maximize efficiency and depends greatly on the processes or tasks to be performed.

2. How does facility layout affect production? a. A facility layout should be able to handle materials efficiently to ensure a smooth flow of production and to maximize the efficiency of employee flow throughout the facility.

3. What are the different types of facility layouts? a. Process layout—used mostly to produce low-volume, or batches, of customized products b. Product layout—used mostly for high-volume, standardized products made sequentially on an assembly line c. Cellular layout—small teams of workers are grouped together in work stations and handle all aspects of assembly of a product d. Fixed position layout—used to manufacture large items, the product stays in one place, and the workers move around the product to complete its assembly E. Production Technology 1. What is the role of technology in the production process? a. Up-to-date technologies can improve any or all aspects of the production process by increasing productivity and the quality and variety of products and reducing costs.

2. What has helped automate the production process? a. Industrial robots can work around the clock, with accuracy, and in potentially hazardous conditions. b. Industrial robots may eliminate some production-related jobs, but the technology has also created many new jobs for technicians and engineers.

3. How does technology improve the design process? a. Computer-aided design (CAD) refers to using a computer and software to create two-dimensional or three-dimensional models of parts or products. b. By programming a simple design change into a CAD system, a manufacturer can produce custom-designed products.

4. How is CAD information incorporated into the manufacturing process?

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a. Once a design is approved, computer-aided manufacturing (CAM) uses the design data to control the machinery used in the manufacturing process. b. The integration of CAD and CAM systems with the various aspects of a firm’s production process is referred to as simultaneous engineering.

5. Can an entire production facility be automated? a. Computer-integrated manufacturing (CIM) systems combine design and manufacturing functions with other automated functions, such as order taking, shipment, and billing for the complete automation of a manufacturing plant.

6. What effect has automation had on overall productivity? a. CAD, CAM, and CIM have drastically improved the process of producing goods by reducing the time between design and manufacturing, thus making a significant impact on productivity.

IV. Operations Control A. Production Process Control 1. How does scheduling shape the production process? a. Scheduling refers to the efficient organization of equipment, facilities, labor, and materials. b. There are two different types of scheduling: forward and backward. i. With forward scheduling, you start with the date that materials are available, create the most efficient production schedule, and then determine a shipping date based on that schedule. ii. Backward scheduling is the exact opposite.

2. What tools are available to help with scheduling? a. Two major components go into making an effective schedule: i. Loading is assigning a job to a specific machine or an entire work center. ii. Sequencing is assigning the order in which jobs are processed.

3. How are the individual tasks of a process tracked? a. One method for keeping tabs on the progress of a given project is a Gantt chart. See Figure 11.2. b. It is used to lay out each project task, the order in which each task must be completed, and how long each task should take.

4. What is a PERT chart? a. The program evaluation and review technique (PERT) maps out the various steps involved in a project, differentiating tasks that must be completed in a certain order from tasks that may be completed simultaneously. See Figure 11.3. b. A PERT chart identifies the critical path, or the path of sequential tasks that will take the most time to complete.

B. Purchasing and Inventory Control 1. How are materials used in the production process acquired? a. Purchasing is the task of acquiring the materials and services needed in the production process.

2. How does a company maintain inventory control? .

a. Inventory control includes the receiving, storing, handling, and tracking of everything in a company’s stock, including raw materials, unfinished products, finished products, and consumables.

3. What methods are used to manage inventory? a. No single method works best for every business, and sometimes multiple methods are used to manage different types of inventory. Methods include: i. Visual assessment a.) When the supply is low, it’s time to reorder. ii. Stock book solution a.) The stock on hand is tallied along with what has been ordered and what has been sold. iii. Reserve stock system a.) Stock is set aside in reserve so that it cannot be used. b.) When the company has to dip into the reserve stock, it knows it is time to reorder that item.

4. What inventory system is most efficient for large companies? a. With just-in-time (JIT) inventory management, a firm keeps the smallest amount possible of inventory possible, with inventory being ordered as it is actually needed.

5. How is technology used to streamline inventory control? a. Many organizations rely on a computerized inventory system that uses a barcode or radio frequency identification (RFID) tag on each item, allowing a computer to keep track of the status and quantity of each item.

6. What is materials requirement planning (MRP)? a. Materials requirement planning (MRP) is a computer-based program used for inventory control and production planning.

7. What is enterprise resource planning? a. Enterprise resource planning (ERP) systems manage the same inventory control and process scheduling that MRP systems manage, but they can integrate these functions with other aspects of the business, such as finance, marketing, and human resources.

C. Quality Management 1. Has quality control always been part of the operations control process? a. The techniques, activities, and processes used to guarantee that a certain good or service meets a specified level of quality is referred to as quality control.

2. What methods are used to improve quality? a. The total quality management (TQM) approach involves everyone involved in the production process, including management, customers, employees, and suppliers.

3. How is TQM carried out? a. TQM involves ongoing improvement of products, services, and processes, which can be accomplished by undertaking a plan-do-check-act (PDCA) cycle. See Figure 11.4.

4. What is needed to implement TQM? .

5.

6.

7.

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a. Statistical quality control (SQC) describes the set of statistical tools used to analyze each stage of the production process to ensure that quality standards are being met. b. Statistical process control (SPC) inspects a random sampling of products at every phase of production to show any variations that need to be corrected throughout the process.

How does TQM cater to the customer? a. A company may adhere to a TQM approach by giving its customers the final say in determining whether a product meets their requirements of high-quality standards.

Is there another quality control method? a. Six Sigma seeks to virtually eliminate defects by implementing a quality focus in every aspect of the organization. It strives for continuous improvement. b. A company with Six Sigma quality produces at a low defect rate of just 3.4 defects per 1 million opportunities.

Are there global quality standards? a. The International Organization for Standardization (ISO) is an organization dedicated to creating worldwide standards of quality for goods and services. b. The ISO standards apply not to the products themselves but to the production methods and systems used to manufacture them, as well as to other areas, such as communication within the company and leadership. c. ISO 9001 implements a quality management system. d. ISO 14001 implements an environmental management system.

What is the ISO certification process? a. Certification is usually done by a third-party registrar that conducts an assessment of a company’s quality-assurance manuals and practices. b. After certification, the registrar returns to the company twice a year to make sure the company is still in compliance with ISO standards.

What are the benefits of ISO certification? a. Companies that have successfully gone through the ISO certification process have indicated significant benefits, including improved customer satisfaction and international recognition.

Suppliers and Supply Chain Management A. How Does a Company Decide Which Supplier to Use? 1. A vast collection of resources is available to help businesses connect with suppliers, such as the Better Business Bureau, local chambers of commerce, exhibitions, trade magazines, the Internet, and recommendations from friends and business acquaintances.

B. What Is a Supply Chain?

1. A supply chain consists of all of the suppliers, business partners, service providers, as well as sourced manufacturers, distributors, retailers, and transporters that take part in producing a product and delivering it to the customer.

C. Why Is Supply Chain Management Important?

1. Supply chain management is the management of activities from all organizations involved in the production process to maximize value and achieve a sustainable competitive advantage. See Figure 11.5.

D. Is Supply Chain Management only for Manufacturing Companies?

1. Supply chains also exist in service organizations, and the goal is the same: to maximize value in the delivery process to achieve a competitive advantage. a. Instead of managing “things,” service chain management manages the time and actions of the labor force required to perform the service.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity 1: Ice Breaker Are You Getting What You Paid For? Activity Overview: This activity is designed to get students to think about the components of service quality.

Time Limit: 25 minutes What to Do: 1. Divide the class into groups of two to four members and ask each group to think of three services, such as cell phone service, restaurants, a barber or hair salon, insurance agent, or various repair services. (5 minutes) 2. Ask groups to think of ways in which buyers of those services measure the level of service quality they are getting. (10 minutes) 3. Reassemble the class and have each group reveal what they discussed. (10 minutes) Don’t Forget: Measuring the quality of manufactured goods—often through durability, functionality, sturdiness, and so on—is often easier and provides more consistency than measuring service quality. Not everyone measures service quality in the same way.

Wrap-Up: Remind students that service quality is often measured by the tangible evidence of the service—such as a manicured lawn and a tailored suit. However, service quality can also be measured by examining the characteristics of the service performer.

These characteristics might include reliability, assurance, responsiveness, and so on.

Supplemental In-Class Activity 2 Creating a Better Design for Subway Activity Overview: Students will graphically represent the facility design for a Subway sandwich shop and make recommendations about how to improve it.

Time Limit: 30 minutes What to Do: • • •

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Break students into small groups. Three to five students are usually ideal.

Begin by having students draw the facility design for the local Subway sandwich shop on a piece of flip chart pad paper (approx. 34” x 27”). (If there is not a Subway in your area, have students select a similar fast food restaurant.)

After drawing the current design, students should try to improve on the facility layout (not appearance) and draw the new layout on the second sheet of paper.

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Students should be prepared to share their design with the class and explain how it will help Subway reach its goals.

Don’t Forget: You will need to bring two to four flip chart pad sheets of paper and markers for each group, along with tape for posting student work.

Wrap-Up: After each group has shared their new design, have the class vote for the best.

Supplemental In-Class Activity 3: Case Study Discussion JIT: Too Much of a Good Thing?

Activity Overview: This activity asks students to apply the concepts of lean manufacturing to a case study.

Time Limit: 30 minutes What to Do: 1. In advance, assign the reading of the article by Peter Galuszka and Stephanie ForestAnderson, “Just-in-Time Manufacturing Is Working Overtime” (found online and in BusinessWeek, November 9, 1999, 36).

2. Divide students into groups and ask them to answer the following questions in their small groups. (15 minutes) (a) Why do you think some firms have had difficulty keeping up with demand? Do you think it is possible to take lean manufacturing methods too far? Why or why not? (b) Why don’t manufacturers experiencing the kinds of problems described in the case build their production capacity back up as a solution? (c) What effect do you think running factories and facilities around the clock have on employees? How does employee response to continued overtime affect the firm?

3. Once students have answered the questions, discuss their answers as a class. As students discuss their answers, make sure they include the following points: (15 minutes) (a) Global demand can be especially difficult to predict. Firms have probably underestimated demand, trimmed production capacity too much, or both. It would take an exceptionally nimble production and operations management system to meet the spikes in demand some firms have experienced without difficulty. (b) Building capacity back up takes several years and poses a risk that demand will have slowed again by the time it is in place. It is also quite costly. (c) Employees burn out and eventually leave, creating high turnover that costs the firm in recruiting and training costs (both time and money). In addition, the firm .

can experience higher retention costs to keep employees on staff, such as overtime, bonuses, and extra time off.

Don’t Forget: Remind students to consider the companies in the case when answering the questions; answers could vary if other company or industry examples are used.

Wrap-Up: Bring the discussion to a close by reminding students that certain production systems work more efficiently in some industries than in others. In industries with extremely volatile external environments, businesses tend to be more reactive to change; reacting to sudden changes in demand is an everyday occurrence. (5 minutes)

Supplemental In-Class Activity 4 Using Gantt Charts Activity Overview: Students will create a Gantt chart that identifies the path to their college degree.

Time Limit: 30 minutes What to Do: Ask students to create a Gantt chart that will identify the path to their college degree. Across the top of the Gantt chart, students will identify semesters. Along the side, they will list the courses needed to complete their degree. Students should be careful to consider prerequisites associated with courses as well as planning a reasonable course load.

Don’t Forget: Students will need print or online access to degree requirements. It may be helpful to have an advisor or two in attendance to help answer questions.

Wrap-Up: Whether planning how to earn a college degree or produce a product, planning is the key.

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ENHANCING THE ONLINE COURSE Effects Essay: Have each student write a one page report on the current effects of technology on production. Ask them to find at least five sources via the online library and to feature as many new technological features as possible. Ask students to post the results on the course blog. Be sure to ask some subsequent questions on the discussion board.

CAD/CAM: Ask your students to research and define CAD/CAM. Ask them to search the Internet for CAD/CAM images that show a three-dimensional representation or model of some type of facility or other production image. Have them write a paragraph or two on their reaction to the three-dimensional model.

Location Mindmap: Have your students create a mindmap (see chapter write-ups for previous chapters) illustrating the factors to consider when choosing a location for a production facility. Be sure the students define each of the different factors and provide an example (verbal or graphic) of each.

Layout Effects: Ask your students to write a ½ page essay on how the layout of a facility may impact both the production process and the employees. Post the best essays on the course blog and provide extra credit for the most thoughtful essays.

Supplier Mindmap: Have your students create a mindmap representing the different steps in the process for selecting suppliers. Are these steps hierarchical? Why or why not?

Inventory Improvement: Ask your students to list the different ways in which technological advances may help a company to maintain and control its inventory. Be sure to include: just-in-time inventory, radio frequency identification, materials requirement planning, enterprise resource planning. Students should list and define each of these topics and include at least one example of how this would be used.

TQM: A History: Have your students write a report on the history of the TQM movement and trace its development from post-World War II to the present. Using the Internet, students should define TQM and discuss how technology has created advances.

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ANSWERS TO END-OF CHAPTER MATERIALS Self Test Multiple Choice 11-1 Which is a consideration when picking the best location for a company d. all of the above.

Learning Objective 11-3: Operations Planning and Management AACSB: Analytical thinking 11-2

Mass customization is achieved by using which type of system? a. Flexible manufacturing system Learning Objective 11-2: Production Management AACSB: Analytical thinking

11-3

Which production process strives to reduce waste and improve production flow? c. Lean production Learning Objective 11-2: Production Management AACSB: Analytical thinking

11-4

If the Ford Motor Company wants to understand the aerodynamics of a new auto body, which of the following would be used to create a virtual threedimensional model of the auto body? a. CAD Learning Objective 11-3: Operations Planning and Management AACSB: Analytical thinking

11-5

Which of the following is a set of environmental quality standards that can be applied to any organization? b. ISO 14001 Learning Objective 11-4: Operations Control AACSB: Analytical thinking

11-6

An inventory system that keeps the smallest amount of inventory on hand is called a. a just-in-time system.

Learning Objective 11-4: Operations Control AACSB: Analytical thinking

11-7

Which feature distinguishes a PERT chart from a Gantt chart? c. A PERT chart identifies the critical path of tasks in a project.

Learning Objective 11-4: Operations Control AACSB: Analytical thinking

11-8

Radio frequency identification is used to a. keep track of the status and quantity of each inventory item.

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Learning Objective 11-4: Operations Control AACSB: Analytical thinking 11-9

Which type of facility layout would be best used for the production of custom-designed bicycles? c. Cellular layout Learning Objective 11-3: Operations Planning and Management AACSB: Application of knowledge

11-10 A distinction between Six Sigma and TQM is: d. obtaining near perfection through continuous improvement Learning Objective 11-4: Operations Control AACSB: Analytical thinking

True/False 11-11 Robots can work around the clock with good accuracy and in potentially hazardous conditions.  True Learning Objective 11-3: Operations Planning and Management AACSB: Analytical thinking 11-12 CIM refers to using computer software to create two- or three-dimensional models of parts or devices.  False Learning Objective 11-3: Operations Planning and Management AACSB: Analytical thinking 11-13 Supply chain management refers to the process of delivering the supplies necessary for manufacturing.  False Learning Objective 11-5: Suppliers and Supply Chain Management AACSB: Analytical thinking 11-14 The make-or-buy decision determines what part of the production process needs to outsourced.  True Learning Objective 11-1: The Production of Goods and Services AACSB: Analytical thinking 11-15 Because the United States is more of a service-based economy, manufacturing is not a contributor to the GDP.  False Learning Objective 11-1: The Production of Goods and Services AACSB: Analytical thinking

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Critical Thinking Questions: Suggested Answers 11-16

Students’ answers will vary, depending upon their college, their personal college experiences, and the type of course they are taking: in-person, online, hybrid, etc.

Learning Objective 11-5: Suppliers and Supply Chain Management AACSB: Application of knowledge

11-17 Students’ answers will vary, depending upon the businesses chosen.

Learning Objective 11-4: Operations Control AACSB: Application of knowledge 11-18 Students’ answers will vary but factors to be considered include: the cost of production versus purchasing the grips, time involved to add the grip production line, can the quality be duplicated in-house?, how would making the grip “in-house” be perceived on social media?, etc.

Learning Objective 11-2: Production Management AACSB: Application of knowledge

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Team Time To Outsource or Not to Outsource …That Is the Question The make-or-buy decision hinges on cost and quality factors. Given the information in the scenario, it appears that quality will not be sacrificed by making the springs in-house.

It is also stated that producing the springs themselves will be lower in cost—at least in the short run. The key is whether the additional costs over time associated with altering the current production process, adding new machines, and adding new technicians to operate and maintain the machines will drive costs up more than continuing to outsource the springs.

Employee morale and relations can be positive or negative depending on the decision to make or buy the springs. Perhaps, adding the springs to the current production process will enhance employee morale and relations by adding new jobs and new challenges for existing workers.

Learning Objective 11-1: The Production of Goods and Services AACSB: Application of knowledge

Ethics and Corporate Social Responsibility Environmental Shipping Concerns 11-19 Answers may vary and will depend on the delicate balancing act between valuing the environment and valuing profits, and the extent to which profits would fall and the environment is improved. The decision should take into account longterm impacts as well. It may be possible for the company to switch to shipping by sea; this could actually drive profits up over time if this environmentally conscious act is valued by customers and translates into a higher demand for the product.

11-20 Answers may vary and depend on the extent to which one values the environment and the extent to which it may cost the individual in lower pay.

11-21 This would depend on how large the company is in relation to the shipping industry.

Web Exercises 11-22 Have It Your Way Students’ answers will vary, depending upon the companies chosen.

Learning Objective: 11-2: Production Management AACSB: Application of knowledge

11-23 Greening America Students’ answers will vary. .

Learning Objective 11-1: The Production of Goods and Services AACSB: Application of knowledge 11-24 Radio Frequency Identification Students’ answers will vary, depending upon the options researched.

Learning Objective 11-3: Operations Planning and Management AACSB: Application of knowledge 11-25 How Everyday Things Are Made Students’ answers will vary, depending upon the video selected and the results of their online assessments.

Learning Objective11-1: The Production of Goods and Services AACSB: Application of knowledge 11-26 Award-Winning Quality Providers Students’ answers will vary, depending upon the two companies and their quality initiatives that the students have researched and discussed.

Learning Objective11-11-4: Operations Control AACSB: Application of knowledge

MyBizLab: Suggested Answers 11-27 A flexible manufacturing system (FMS) enables manufacturers to produce large quantities of customized products. In an FMS system, several machines are linked together by one central computer. All the machines in the system can process different part types simultaneously. Unlike a mass production system, an FMS can adapt to changes in schedules and product specifications.

In mass production large quantities can be produced more quickly and at a lower cost but it is much more inflexible. Once a production line is established it is difficult to change or alter the process. With mass customization, a manufacturer can more readily meet a customer’s specific needs and it does not need to manufacture and store all of its products.

Learning Objective: 11-2: Production Management AACSB: Application of knowledge

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11-28 Answers will vary depending on the type of restaurant selected, fast food, casual dining, fine dining, etc. Students’ answers should focus on the quality of the food produced and the service.

Objective 11-4: Operations Control AACSB: Application of knowledge

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CHAPTER 12: MARKETING AND CONSUMER BEHAVIOR CHAPTER OPENER Chapter 12 introduces students to the fundamentals of marketing. It covers how organizations develop their marketing strategies and the external forces that influence marketing approaches.

Students learn about how the concept of marketing has evolved over the years, as well as the benefits of marketing to customers, sellers, investors, employees, and the society at large. This chapter also discusses development of a target market based on market research and the four elements of a good marketing plan. In conjunction with this, the chapter investigates the basics of consumer behavior, including the ways in which consumers make their buying decisions. Finally, the chapter explores the differences between consumer markets and business-to-business (B2B) markets.

DETAILED LECTURE OUTLINE I. Marketing Fundamentals A. Definitions 1. Marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.

B. What Does a Marketing Department Do? 1. Marketing departments serve a variety of functions, including keeping an eye on what people want and then communicating these desires to the rest of the organization. See Figure 12.1.

2. Marketing departments help develop pricing strategies and persuade customers that their firms’ products are the best.

3. Marketing departments are also responsible for distributing products to customers at places and times most suitable to them.

C. The Evolution of Marketing 1. How has marketing evolved over time? a. The nature of marketing has evolved over five general eras (see Figure 12.2): i. The production era ii. The sales era iii. The marketing era iv. The societal marketing era v. The customer relationship era 2. What was the production era? a. From the Industrial Revolution until the 1920s, most companies focused solely on production—thus the production concept era evolved.

3. What was the sales era?

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a. When supply exceeded demand for most products and competition for customers became more intense, businesses focused on selling existing products and used aggressive sales tactics to “push” them. b. Companies also began advertising heavily in all available forms of media.

4. What was the marketing era? a. The marketing era changed the focus from finding the right customer for a product to producing the right product for a customer and doing it better than the competition. b. It also focuses on aligning all functions of the organization to meet or exceed the customer’s need by providing superior products and customer service and satisfying customers over the long term. See Figure 12.3.

5. Does marketing also take into consideration what’s best for society? a. Societal marketing, which began in the late 1960s and early 1970s, challenged companies to work for the benefit of both consumers and society.

6. Is there a marketing philosophy that encourages customer loyalty? a. In the late 1990s, the customer relationship era began, and organizations began focusing on continuing to satisfy customers over the long term by pleasing them after the sale. b. Customer relationship management (CRM) is the process of establishing long-term relationships with individual customers to foster loyalty and repeat business. See Figure 12.4. c. It combines customer service and marketing communications to retain customers in order to stimulate further sales of similar or supplementary products.

D. Marketing for Not-for-Profits and Others 1. How do not-for-profit organizations market their products? a. Rather than a product or a service, these organizations market an event, a cause, a place, or a person.

2. Is it possible to market a person? a. Political parties market candidates for elected office, and we market ourselves when we interview for a job. b. Regardless of what is being marketed, the essence of marketing remains the same: delivering value to customers and managing customer relationships.

E. Benefits of Marketing 1. How do sellers benefit from marketing? a. A company also benefits by successful marketing because it sells more products, and profits enable the organization not only to sustain itself but also to prosper and continue to provide value to customers.

2. How does society benefit from marketing? a. Society benefits from successful marketing because scarce resources are more efficiently allocated or channeled into the production of those goods and services most desired by society.

3. How do investors and employees benefit from marketing?

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a. Investors receive financial rewards for investing in successful organizations. b. Employees benefit from successful marketing because their jobs and livelihoods are more secure.

4. How does marketing benefit consumers? a. Marketers respond to needs in an effort to satisfy them, but sometimes they also can create needs. b. When needs are satisfied, utility is created.

5. Are there different types of utility? a. There are five kinds of utility that marketing provides to customers (see Figure 12.5): i. Form utility—when a company produces a product from raw materials, the product takes on a form that pleases the customer ii. Task utility—when someone performs a service for someone else iii. Time utility—when a business makes a product available at a time when it is most needed iv. Place utility—when the product is made available for purchase at a place that is convenient for buyers v. Ownership utility—when a store transfers ownership to the customer 6. How is a product’s value measured? a. The value of a product equals the ratio of a product’s benefits to its costs.

F. Criticisms of Marketing 1. What are the criticisms of marketing? a. Misuse of personal information i. Marketing often involves the collection of customers’ personal information, and many feel violated when this information is not adequately protected or resold without permission. b. Hidden fees i. Many of us feel taken advantage of when we must pay hidden fees and charges not included in the advertised price. c. Consequences of purchase i. Unscrupulous marketers sometimes take advantage of people who are not knowledgeable about certain features of a product.

II.

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Marketing Tactics A. Marketing Strategy: The Four Ps of Marketing 1. What is a marketing strategy? a. A marketing strategy consists of two major elements: i. The target market—a specific group of potential customers on which a firm focuses its marketing efforts. ii. The marketing mix—the combination of controllable elements of a product’s marketing plan designed to serve the target market.

2. What elements are included in the marketing mix? a. Traditionally, there have been four elements in the marketing mix, known as the four Ps: product, price, promotion, and place. See Figure 12-6. b. Some feel there is a fifth P that should be added: people.

i. Product a.) The perfect product is one that provides value for the customer. b.) Product differentiation is the creation of a real or perceived difference in a product designed to attract customers. ii. Price a.) The price has to be high enough for a firm to profit from it but low enough to appeal to customers. iii. Promotion a.) Promotion consists of all the methods used to inform customers about a product’s benefits and persuade them to buy it. b.) Promotions are also used to build positive customer relationships. iv. Place a.) The place (or distribution) component of the marketing mix refers to all the methods involved in getting a product into the hands of customers. b.) Many goods go through a distribution channel—a series of firms or individuals that participate in the flow of a product from the manufacturer to the consumer. c.) These middle players are sometimes called distributors or wholesalers.

B. The Four Cs of Marketing: Marketing from the Consumer’s Perspective 1. Can the marketing mix be represented in a different way? a. A more recent revision to the four Ps model looks at marketing from the consumer’s perspective. See Figure 12.7. i. Customer replaces product. ii. Cost replaces pricing. iii. Convenience replaces place. iv. Communication replaces promotion.

C. The Marketing Process 1. How does the marketing process work? a. Figure 12-8 shows the five steps in the marketing process: i. Identify a market need. ii. Conduct market research and develop a marketing plan. iii. Identify target customers. iv. Implement the marketing mix. v. Maintain good customer relationships.

III.

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The Marketing Environment A. Definitions 1. The marketing environment includes environmental influences beyond a firm’s control that constrain its ability to manipulate its marketing mix. a. These influences include the competitive, economic, technological, and sociocultural environments as well as the global, political, and regulatory environments shown in Figure 12-9.

2. One of the key responsibilities of managers is to undertake environmental scanning, the process of surveying the marketing environment to assess external threats and opportunities.

B. The Competitive Environment 1. Why is analyzing the competition important? a. The degree of competition impacts a firm’s marketing strategies. b. A company operating in a monopolistic competitive environment will have a different marketing strategy than one operating in an oligopoly.

C. The Economic Environment 1. How does the economic environment affect a marketing strategy? a. The economic environment, including inflation, interest rates, unemployment, economic growth rates, and consumer confidence levels, can affect a firm’s marketing strategies in many ways. b. Because of globalization, prudent firms follow global economic trends as well.

D. The Technological Environment 1. How does technology affect marketing? a. Advances in communication technologies may be some of the most influential factors to affect modern marketing. b. Manufacturing innovations have also enabled firms to customize their products to meet individual needs and offer them at prices to satisfy the varying tastes of targeted customers.

E. The Social and Cultural Environment 1. How do cultural and social trends affect marketing? a. Demographic shifts—such as age, gender, ethnicity, and marital status— and changing values can signal opportunities for businesses.

F. The Political, Legal, and Regulatory Environments 1. How do politics and legislation affect marketing? a. Businesses try to influence the laws and regulations affecting them by making contributions to political parties, individual candidates, and political action committees. b. A variety of regulatory agencies enforce laws and regulations, constraining the marketing efforts firms can engage in.

G. The Global Environment 1. How does the global environment affect marketing? a. Marketers need to be aware of cultural and social differences before launching their products and their marketing campaigns. b. Political landscapes with differing policies and regulations can also affect how a company does business in another country.

IV.

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Marketing Research and Planning A. The Marketing Research Process 1. What is market research and what are the steps involved in the process? a. Market research is the process of gathering and analyzing market information for making marketing decisions. b. The basic process is shown in Figure 12.10.

2. Why is it important to define the marketing needs or opportunity? a. The first step in conducting marketing research is to define the problem, which may involve more research to further identify or enhance the perceived need or opportunity. b. Marketing managers and researchers work together to determine what kind of data need to be gathered and how.

3. What kind of data should be collected? a. Two general types of data exist: primary and secondary. i. Primary data are raw data collected by a researcher, through observation, surveys, focus groups, interviews, customer feedback, samples, and controlled experiments. a.) A focus group is typically a group of eight to ten potential customers who are asked for feedback on a good or service, an advertisement, an idea, or a packaging style. ii. Secondary data are data that have already been collected and processed. b. Examples of primary and secondary data sources are summarized in Table 12-1.

4. How are social media used in market research? a. Not only can companies find out what is being said about their products, but they can also find out what is being said about the competition. See Figure 12.11.

5. How are the data analyzed and interpreted? a. Once the data have been collected, they must be assembled into a format that can be easily analyzed and interpreted. b. The ultimate goal is to conduct careful analyses that will lead to conclusions about what marketing strategies to implement.

6. What happens when the research is completed? a. It is usually presented in an organized manner to decision makers. b. The purpose of marketing research is to help managers make better marketing decisions.

B. The Marketing Plan 1. What is a marketing plan? a. A marketing plan is a written document that specifies the marketing activities that will take place to achieve organizational objectives.

2. What are the elements of a good marketing plan? a. A clearly written marketing objective b. A situational analysis c. The target market d. A description of how the marketing mix will be implemented, evaluated, and controlled 3. Why is a marketing objective necessary? a. A marketing objective is a clearly stated goal to be achieved through marketing activities. b. It should be realistic, quantifiable, and time specific.

4. What is a situational analysis? .

a. It is similar to a SWOT analysis in that it includes an evaluation of internal strengths and weaknesses, as well as the opportunities and threats found in the external environment; however, it focuses on marketing only, rather than on the entire organization.

5. What do we mean by internal strengths? a. In terms of marketing, a company’s internal strengths refer to the competitive advantages or core competencies it has at its disposal to meet a specified marketing objective.

6. How does a company assess its weaknesses? a. Assessing internal weaknesses means that a company must perform an audit of current managerial expertise, manufacturing and financing capabilities, and an organization’s execution of the marketing mix.

7. Why look to the external environment? a. The dynamic and ever-changing external environment offers many opportunities and creates many threats. b. Changes in the degree of competition facing firms, the economy, technology, and sociocultural forces, as well as changes in the global, political, and regulatory environments, have caused some firms to thrive while others suffer.

8. Are there other ways to perform a situational analysis? a. Another useful tool for conducting a situational analysis is by analyzing the factors shown in Figure 12-12.

C. Target Markets 1. How are target markets determined? a. Determining a target market begins with market segmentation, the process of separating the broader market into smaller market segments. b. A market segment is a subgroup of potential customers who share similar characteristics and therefore have similar product needs and preferences. c. Niche markets are even more narrowly defined. d. The process of developing a unique marketing mix that best satisfies a target market is known as positioning.

2. How are consumer markets segmented? a. Consumer markets can be segmented based on many variables or characteristics of customers. b. Four of the most common market segmentation classifications are geographic, demographic, psychographic, and behavioral, summarized in Table 12-2.

3. How are markets defined by location or region? a. Segmenting markets according to geographic characteristics is called geographic segmentation.

4. How are markets defined by different population characteristics? a. Demographic segmentation is market segmentation according to age, race, religion, gender, ethnic background, and other demographics.

5. Can a market be segmented based on opinions or interests? a. Market segmentation based on lifestyles, personality traits, motives, and values is called psychographic segmentation. .

6. How can consumer behaviors define a market segment? a. Behavioral segmentation is market segmentation based on certain consumer behavior characteristics, such as brand loyalty, price sensitivity, benefits sought by a product, occasions that stimulate purchases, and ways in which a product is used. b. Brand loyalty is another kind of behavioral segmentation. c. Finally, knowing how a product is actually used can help companies develop packages that appeal to customers.

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Consumer Behavior A. Definitions 1. The term consumer behavior refers to the ways individuals or organizations search for, evaluate, purchase, use, and dispose of goods and services.

2. In business-to-consumer (B2C) markets, individuals purchase goods and services for personal consumptions.

3. In business-to-business (B2B markets), businesses purchase goods and services from other businesses.

B. B2C Markets 1. Why study consumer behavior? a. Knowledge of consumer behavior helps marketers select the most profitable target markets and guides the implementation, evaluation, and control of the marketing mix for selected targeted markets. b. The consumer buying process involves five steps: i. Need recognition ii. Information search iii. Evaluation of alternatives iv. Purchase or no purchase decision v. Post purchase evaluation 2. What influences consumer decision making? a. The consumer decision-making process is part of a broader environmental context that influences each step. These environmental forces are shown in Figure 12-13.

3. How does culture affect a person’s buying behavior? a. Culture is the set of learned attitudes, beliefs, and ways of life that are unique to a society and are handed down from generation to generation. b. A buyer’s culture, subculture, social class, family, and peers compose the sociocultural influences that affect buying decisions. c. Social class refers to a combination of factors, such as education, income, wealth, and occupation, common to a group of people.

4. What unique personal influences shape buying behaviors? a. Personal influences on a buyer’s consumption are often shaped by age, gender, economic situation, lifestyle, and personality.

5. How do attitudes affect buying decisions? a. Psychological influences include differences in a buyer’s motivation, perception, attitudes, and learning.

6. Can temporary conditions affect how buyers behave?

a. Situational influences include the physical surroundings, the social surroundings, and the type of product purchased, and all of these can influence how a buyer behaves.

7. How does the marketing mix influence purchases? a. Marketing mix influences include putting forth a product that buyers want at an affordable price, promoting awareness of the attributes of that product, and placing the good or service in a timely and convenient location for consumers to buy.

C. B2B Markets 1. What are the differences between B2C markets and B2B markets? a. The difference hinges on who’s doing the buying. b. If a good or a service is purchased in a B2B market, it is purchased by a business for further processing, for resale, or to facilitate general business activity.

2. What are the characteristics of a B2B market? a. B2B markets are generally more relationship driven than product driven.

See Table 12.3. b. Some other characteristics of B2B markets are as follows: i. A few buyers that purchase in large quantities ii. Highly trained buyers iii. Group purchasing decision iv. Strong customer relationship v. Geographically concentrated buyers vi. Direct purchasing 3. How does a business make a buying decision, and what influences that decision? a. Business purchases are generally more rational, reasoned, objective decisions based on various influences, such as the state of the economy, technological factors, the degree of competition, political regulatory concerns, and organizational objectives, policies, and procedures.

4. Is the marketing process different for B2B markets? a. The marketing process remains the same for all markets.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity 1: Case Study Discussion Khakis to Go, Please Activity Overview: This activity asks students to apply the marketing mix concepts to a case study.

Time Limit: 30 minutes What to Do: 1. In advance, assign the reading of the article by Joan Oleck, “Banana Republic Storms the Office,” (found online and in BusinessWeek, September 11, 2000, Issue 14) and Abby Ellin’s “Going to Work to Sell Business Casual” (found online and in the New York Times, November 5, 2000, BU 6).

2. Divide students into groups and ask them to answer the following questions in their small groups. (15 minutes) a. Was Banana Republic offering a product, a service, or both? b. Which elements of the marketing mix did the Banana Republic’s temporary store illustrate? c. The employees targeted by the at-work stores are usually those earning annual salaries in the high five or six figures. Why do you think retailers would offer them discounts if they can afford the products?

3. Once students have answered the questions, discuss their answers as a class. As students discuss their answers, make sure they include the following points: (15 minutes) a. Banana Republic was offering both a product (apparel) and services (fashion advice, shipping, and alterations). b. Banana Republic’s temporary store illustrated all the elements of the marketing mix: It sold clothes (product); offered discounts (price); extended the discount for a short period of time (promotion); and brought products to customers’ offices (place). c. Discounts are a good way of getting customers’ attention and inducing them to try something that they have not used before.

Don’t Forget: Be sure to distinguish between a product and a service.

Wrap-Up: A good way to bring this activity to a close is to ask students for other examples of products and services being combined as in the Banana Republic scenario.

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Supplemental In-Class Activity 2 Data Mining Activity Overview: In this activity, students consider how marketers might use the information routinely provided by people who have social networking accounts.

Time Limit: 20 minutes What to Do: 1. Divide students into small groups, and provide each small group with a piece of paper that contains the following list of variables.

First and Last Names Country State Postal Code Date of Birth Gender Interests Friends Blog Website Interests Details Schools Companies 2. Ask students to review the list above and determine how they could use this information to develop a marketing segment for one of the following products: a new clothing line, a new beverage or food product, or a new type of car. Ask them to combine at least three different groups to try and develop a truly niche market for their particular product. For example, they might decide to market organic dog biscuits to women from age 14 to 22 who are interested in dogs and live in downtown L.A. 3. Have the class vote on the most interesting and/or innovative marketing strategy.

Don’t Forget:

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You will need to print out the list of variables or post them on a slide in order for students to do this exercise.

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The small groups will need a way to present their ideas to the class—you can either use large sheets of chart pad paper and markers or give each group its own bit of blackboard space.

Wrap-Up:

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Ask students how much of the above information they have freely distributed.

(This list comes from the MySpace profile page.) What advertisements have they gotten recently that they think were based on a knowledge of their personal information? What are the benefits and drawbacks of using data mining from a personal and corporate perspective?

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Ask students if any of them have ever falsified information about themselves on a networking website in order to protect their privacy. How much of an impact do they think this type of action has on the ability of an organization to do data mining?

ENHANCING THE ONLINE COURSE Marketing Timeline: Have your students create a visual timeline representing the eras of marketing by using actual ads from the various time periods to illustrate the differences in business philosophy of each era. Your institution’s online library should have resources from which to glean sample ads. Have students post the final timelines (with visuals) to the course blog or discussion board.

Marketing Utility: Ask your students to create and post one slide for each of the types of utility, using photographs from open sources to illustrate the concepts. Include the written definitions. Have the students post these on the discussion board.

Marketing Benefits: Using their software, have your students create a pie chart to illustrate the different benefits that society gains from marketing. Ask them to comment on each benefit. Before the activity starts, you might ask students’ opinions of marketing and marketers. Do they equate “marketer” with “salesperson”? If so, why? After reading the chapter and doing this assignment, has their opinion changed?

Marketing Problems: Ask your students to list and define all of the problems associated with marketing. What are the current criticisms? Ask students to search their online resources to see if they can identify any problems not covered in the textbook. Post these on the discussion board and be sure to ask follow-up questions based on the comments.

Marketing Process Flow: Ask each student to create a marketing process flow chart that highlights each step of the marketing process: target market needs; research/plan; identification of customs; implementation of the four Ps; nurturing of relationships. Post the best three charts on the site and give extra credit for them.

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ANSWERS TO END-OF-CHAPTER MATERIALS Self Test Multiple Choice 12-1 Which marketing era occurred during the Great Depression when manufacturers almost had to force consumers to purchase their products? b. Sales era Learning Objective 12-1: Marketing Fundamentals AACSB: Analytical thinking 12-2 When a car is purchased, time utility refers to the value customers receive from c. ensuring the car is available when the customer wants it.

Learning Objective 12-1: Marketing Fundamentals AACSB: Application of knowledge 12-3 Which of the following would not normally appear in a marketing plan? b. an outline of sales goals and objectives Learning Objective 12-4: Marketing Research and Planning AACSB: Application of knowledge 12-4 Tenitia Reynolds opened a small community bookstore several years ago.

When a new book comes out, Tenitia e-mails clients she thinks will enjoy it based on their past purchases. Which part of the marketing process does Tenitia’s actions reflect? d. Nurturing customer relationships Learning Objective 12-5: Consumer Behavior AACSB: Application of knowledge 12-5 Bill Wertz runs a transportation service that caters exclusively to the residents of retirement communities. Bill’s business is taking advantage of which of the following marketing environments? b. The sociocultural environment Learning Objective 12-3: The Marketing Environment AACSB: Application of knowledge 12-6 Which of the following does not define a B2B market? a. The market consists of small-volume purchases in a geographically dispersed area.

Learning Objective 12-5: Consumer Behavior AACSB: Application of knowledge 12-7 Market segmentation based on lifestyles, personality traits, motives, and values is called c. psychographic segmentation.

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Learning Objective 12-4: Marketing Research and Planning AACSB: Analytical thinking 12-8 Which of the following represents a shift from the four Ps to the four Cs of marketing? d. All of the above Learning Objective 12-2: Marketing Tactics AACSB: Analytical thinking 12-9 Identifying the internal strengths and weaknesses as well as the opportunities and threats found in the external environment with regard to the marketing functions of an organization is known as a. a situational analysis.

Learning Objective 12-4: Marketing Research and Planning AACSB: Analytical thinking 12-10 Which is not an example of secondary data? d. Data collected from company sales reports Learning Objective 12-4: Marketing Research and Planning AACSB: Analytical thinking True/False 12-11 The main difference between the B2B and B2C markets is that B2B markets have fewer buyers that purchase many more individual quantities.  False Learning Objective 12-5: Consumer Behavior AACSB: Analytical thinking 12-12 Purpose is one of the four Ps in the marketing mix.  False Learning Objective 12-2: Marketing Tactics AACSB: Analytical thinking 12-13 A market niche is a narrowly defined market segment.  True Learning Objective 12-4: Marketing Research and Planning AACSB: Analytical thinking 12-14 Employees can benefit from successful marketing because new job opportunities may be created as production expands to satisfy the growing demand for highly valued products.  True Learning Objective 12-1: Marketing Fundamentals AACSB: Analytical thinking 12-15 Societal marketing began after the Great Depression when the economy was .

improving and most of society wanted to spend.  False Learning Objective 12-1: Marketing Fundamentals AACSB: Application of knowledge Critical Thinking Questions: Suggested Answers 12-16 Students’ answers will vary, depending upon the company or organization chosen.

Learning Objective 12-5: Consumer Behavior AACSB: Application of knowledge 12-17

Students’ answers will vary, depending upon the company or organization chosen.

Learning Objective 12-5: Consumer Behavior AACSB: Application of knowledge

12-18 Remember, you need to visualize your ideal customer. Think about what he or she wants, and use this image as a “base” for your marketing decisions. So, although answers may vary, students might consider the following samples: 1. iPhone campaign • 74% older than the age of 25 (Age) • 78% have income of more than $25,000 (Income) • 46% have children (Family status) • Half prefer the mobile Web (Lifestyle) Source of data: http://blog.admob.com/2009/06/16/new-research-on-thedemographics-and-behavioral-characteristics-of-iphone-and-ipod-touchusers-from-admob-and-comscore/ 2. Toyota Prius • Green-oriented (Motives) • Higher income ($100,000) (Income) • Average age closer to 50 (Age) • Higher level of education (Education) Source of data: http://www.hybridcars.com/hybrid-drivers/profile-ofhybrid-drivers.html 3. Vacation package to a luxury spa in Arizona • Higher income (Income) • Like to be pampered (Benefit sought) • Concerned with appearance (Values) • Enjoy warm weather (Benefit sought)

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Learning Objective 12-4: Marketing Research and Planning AACSB: Application of knowledge Team Time Brand Analysis This exercise asks students to pick a sports drink (such as Gatorade) or a flavored water product (such as Vitamin Water), determine the target market, discuss the marketing mix for the product, discuss the specific elements and tactics the company uses to communicate the brand’s message to both prospective and current buyers, and conduct a brief situational analysis for the brand.

Answers will depend on the product selected by the team but the summary of findings should include elements such as: • What is the target market, and what segmentation approaches appear to have been used? o Does the product appear to target younger people (demographic segmentation), athletes (psychographic segmentation), health-conscious individuals (psychographic or behavioral segmentation)?

• What is the marketing mix for the product? o This discussion should include all four Ps—product, price, promotion, and place (distribution).

• What elements and tactics does the company use to communicate the brand’s message to prospective and current buyers? o This may include print advertising, television or radio commercials, social media, and so on.

• A brief situational analysis would include a listing of the company’s internal strengths (e.g., strong brand name) and weaknesses (e.g., poor product distribution) and the opportunities (e.g., growing market for the product) and threats (e.g., emerging competitors) found in the external environment.

Remember, this will focus only on marketing, not the entire organization.

Learning Objective 12-4: Marketing Research and Planning AACSB: Application of knowledge

Ethics and Corporate Social Responsibility Patagonia and Common Threads Partnership 12-19 Patagonia’s “Responsible Economy” campaign calls on consumers and businesses alike to rethink disposability for more effective resource allocation. It challenges the assumption that an economy based on growth and increased consumption is tantamount to prosperity and notes that every year humans use the earth’s resources at a rate nearly 1.5 times faster than nature can replace essential “services” such as clean water and clean air. The campaign is designed to promote the concept that everyone must learn to consume less and use resources far more productively.

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12-20 Patagonia’s mission statement is to “Build the best product, cause no unnecessary harm, and use business to inspire and implement solutions to the environmental crisis.” The company uses environmentally sensitive materials and sponsors/participates in many environmental initiatives. Its ads even feature the line, “Reduce what you buy” and they encourage customers to reduce, repair, reuse, and recycle their clothing and equipment. Customers who identify with these values are often loyal to Patagonia, as they receive not just a functional but a strong emotional benefit from Patagonia products.

12-21 Students’ answers will vary, depending upon the company or organization chosen.

Web Exercises 12-22 Apple’s Marketing Mix Students’ answers will vary. Apple’s website for the iPad is extensive. It includes information about the iPad Air, iPad mini, links to compare iPad models, links to online support, discussions, workshops, and more.

Learning Objective 12-2: Marketing Tactics AACSB: Application of knowledge 12-23 Mobile Marketing Students’ answers will vary. Starbucks’ mobile app is the most used digital payment app in America. About 10 million customers pay with the app, making more than 5 million transactions per week. Not only does the app let Starbucks customers pay with their iPhones, but it also enables them to refill their Starbucks loyalty accounts, offers instant discounts for free coffee or food, and links directly to Starbucks’ reward program in real time. It also gives the company an exclusive, direct marketing link to customers. To keep its customers checking the inbox, Starbucks uses it to deliver digital “goodies” like free iTunes songs, e-books, and apps weekly.

Source: http://www.forbes.com/sites/stevenbertoni/2014/02/21/how-do-you-winthe-mobile-wallet-war-be-like-starbucks/ Learning Objective 12-3: The Marketing Environment AACSB: Application of knowledge 12-24 Organic Differences Students’ answers will vary, depending upon which aspects of the companies’ websites they focus on and which marketing techniques they recognize.

Learning Objective 12-4: Marketing Research and Planning AACSB: Application of knowledge

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12-25 Daily Deals Students’ answers will vary, depending upon the websites chosen.

Learning Objective 12-4: Marketing Research and Planning AACSB: Application of knowledge 12-26 The Jeep Experience Students’ answers will vary, depending upon the events selected by students.

Learning Objective 12-3: The Marketing Environment AACSB: Application of knowledge MyBizLab 12-27 Answers will vary but should include: The competitive, economic, social and cultural, political, legal, and regulatory environments.

Learning Objective 12-3: The Marketing Environment AACSB: Application of knowledge 12-28 Students’ answers will vary, depending upon the company or organization chosen.

Learning Objective 12-5: Consumer Behavior AACSB: Application of knowledge

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CHAPTER 13: PRODUCT DEVELOPMENT, BRANDING, AND PRICING STRATEGIES CHAPTER OPENER Marketing is one of the most interesting topics to students, perhaps because we see advertisements and other aspects of marketing every day. It is easy to study magazines and newspapers to talk about new products being introduced (and old ones being extended or repositioned), categories of goods and services, and pricing strategies. This chapter introduces students to techniques for developing goods and services, creating product brands, the role of packaging, developing products, and pricing goods and services.

DETAILED LECTURE OUTLINE I.

New Product Development A. New Product Development Process 1. What is involved in new product development? a. The process of developing new, high-quality products involves several steps (Figure 13.1): i. Idea generation ii. Idea screening iii. Product analysis iv. Concept development and testing v. Product and marketing mix development vi. Market testing vii. Commercialization B. The Product Life Cycle 1. What is a product life cycle? a. A product life cycle is a theoretical model describing a product’s sales and profits over the course of its lifetime.

2. How do marketing decisions affect the product’s life cycle? a. Figure 13.2 summarizes the characteristics, marketing objectives, and strategies for each stage of the product life cycle.

3. How can a product’s life be extended? a. Lowering the price b. Creating a new one c. Finding a new market d. Relabeling or repackaging the product e. Creating a new vision

II.

Modifying Existing Products and Product Lines A. The Total Product Offer 1. What is the total product offer? a. A product is any good or service that might satisfy a want or a need.

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b. The total product offer consists of all the benefits associated with a product that impacts a consumer’s purchasing decision. c. When marketers plan a total product offering, they think about the product on three levels: the core product, the actual product, and the augmented product. i. Figure 13-3 summarizes the three levels of a product.

2. What is the core product? a. The core product is the primary benefit or service that satisfies the basic need or want that motivates a consumer’s purchase.

3. What is the actual product? a. The actual product is the tangible aspect of the purchase that you can touch, see, hear, smell, or taste. It provides core benefits when it is used.

4. What is the augmented product? a. The augmented product consists of the core product and the actual product plus other real or perceived benefits that provide additional value to a customer’s purchase.

B. Product Differentiation 1. How important is product differentiation? a. Product differentiation is the process of distinguishing a product from its competition in real or perceived terms to attract customers. b. It is critical for a product’s success.

2. How does consumer input affect product development? a. Companies rely on customer input to help shape their products. b. Consumer input often provides information that prompts companies to divide a large market and focus on narrow defined, targeted customers.

C. Product Lines and the Product Mix 1. What are a product line and a product mix? a. A product line is a group of similar products marketed to one general market. b. A product mix is the combination of all product lines offered for sale by a company.

2. Does it matter how many products are in a product line? a. Product line length is the number of items in any given product line. b. Product mix width refers to the number of different product lines a company offers. c. Product line length and product mix width are the result of companies striving to offer differentiated products to satisfy targeted customers.

D. Consumer Products and Business-to-Business Products 1. What’s the difference between consumer products and business-to-business products? a. Consumer products are goods and services purchased by households for personal consumption. b. Business-to-business (B2B) products (sometimes called industrial products) are goods and services that are purchased by businesses for further processing or resale or for use in facilitating business operations.

E. Consumer Product Classifications

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1. What are the different consumer product classifications? a. Consumer products can be divided into four categories. See Figure 13.5. i. Convenience goods and services ii. Shopping goods and services iii. Specialty goods and services iv. Unsought goods and services 2. What constitutes a convenience product? a. Convenience goods and services are those products that customers purchase frequently, immediately, and effortlessly. b. Because they are normally consumed quickly, they are also referred to as nondurable goods.

3. How are less frequently purchased products classified? a. Shopping goods and services require more effort and time for comparison and are typically purchased less frequently than consumer goods. b. These are typically durable good—goods that can be used repeatedly over a long period of time.

4. What if a consumer is very particular about the type of product he or she wants? a. Unique or specialized products for which buyers are willing to spend a considerable amount of time and effort searching are known as specialty goods and services.

5. What about products that are purchased only when a special need arises? a. Unsought goods and services are products buyers don’t usually think about buying, don’t know exist, or buy only when a specific problem arises.

F. B2B Classifications 1. What are the different B2B product classifications? a. B2B products can be divided into five categories. See Figure 13.6. i. Equipment ii. Maintenance, repair, operating (MRO) products iii. Raw and processed materials iv. Component parts v. Specialized professional services 2. What is considered equipment? a. Equipment, also known as capital items, includes all the physical facilities of a business. b. These physical items are further defined as production goods (factories, warehouses, and office buildings; heavy equipment) and support goods (computers, printers, and copiers).

3. How do you classify operating supplies? a. Products that facilitate production and operations but do not become a part of the finished product are classified as MRO products.

4. How are products that are used to make other products classified?

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a. Unprocessed materials that are sold in their original form before being processed for use in other products are examples of raw and processed materials.

5. How are parts used in an assembly process classified? a. Component parts are assembled portions of the finished product.

6. Do specialized services have a separate classification? a. Specialized professional services help support a firm’s operations. b. These services include advertising, management consulting, legal, accounting, and information technology services.

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Branding A. Branding Benefits 1. What are the benefits of branding? a. A brand is a name, a term, a symbol, or a design that distinguishes a company and its products from all others. i. Branding also helps sellers highlight the special qualities of their products, which can lead to repeat purchases as well as new sales at higher prices. b. Marketing a product using the same brand name but in a different product category is known as brand extension. c. A trademark is a legally protected brand; it can benefit sellers by distinguishing their brands from the competitors’ knockoff brands, which are illegal copies or cheap imitations.

2. Can a company’s trademark legally be put on another company’s product? a. A brand license is an agreement between the owner of a brand and another company or individual who pays a royalty to use the brand in association with a new product.

3. How does a logo help to build a brand? a. A logo is a graphic representation or symbol of a company name, trademark, or abbreviation. b. They help make a company stand out from the competition, build trust and confidence about the brand, and increase customer loyalty.

B. Brand Loyalty and Brand Equity 1. Can branding promote customer preference? a. Brand loyalty, the degree to which customers consistently prefer one brand to other brands, is a major benefit of branding. b. Companies hope that customers recognize their brands by their attributes, such as the logo, slogan, or colors (brand recognition), and prefer them regardless of convenience or price (brand preference) and then eventually insist on them, not accepting a substitute or generic product in its place (brand insistence).

2. What is brand equity? a. Brand equity is the overall value of a brand’s strength in the market. b. In addition to brand loyalty, perceptions of quality contribute significantly to brand equity.

3. What also contributes to brand equity?

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a. Brand awareness is the extent to which a particular brand name is familiar within a particular product category. b. Brand association involves connecting a brand with other positive attributes.

C. Branding Strategies 1. What strategies are used to brand products? a. There are several different branding strategies a firm can use, depending on how it wants to portray its products. See Figure 13.7. i. Manufacturer’s brands ii. Family brands iii. Individual brands iv. Private brands v. Co-brands vi. Generic brands 2. What is a manufacturer’s brand? a. A manufacturer’s brand is a brand created by producers; these are also known as national brands, even though they may be distributed globally. b. There are two types of manufacturer’s brands: family brands and individual brands.

3. What is a family brand? a. A family brand is a brand that markets several different products under the same brand name.

4. What is an individual brand? a. An individual brand is a brand assigned to each product within a company’s product mix.

5. What is a private brand? a. A private brand is a brand created by a distributor, or a middleman. b. Private brands are also called distributor, wholesaler, dealer, store, or retail brands. c. The key characteristic of a private brand is that the manufacturer is not identified on the product.

6. What is a co-brand? a. A co-brand is using one or more brands affiliated with a single product.

7. What is a generic brand? a. A generic brand is a product that has no brand at all.

D. Packaging 1. How does packaging help promote a product? a. Because it’s the first thing they see when looking for a product, packaging often is the first criteria consumers use to make their purchasing decisions. b. The package design, shape, color, and texture all influence buyers’ perceptions and buying behavior.

2. How does packaging protect a product? a. Packaging is intended to preserve and protect a product. b. Additionally, packaging must protect a product from tampering.

3. Why is convenient packaging so important? a. Sellers want packages that are easy to ship, store, and stock on shelves.

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b. Consumers want products that handle easily, open, reseal, and store conveniently and that, for perishable items, have a long shelf life.

4. How does packaging affect the environment? a. A growing concern among many consumers is whether a product and its package are environmentally sound. b. Some packaging, especially single-serve packages, can be considered wasteful and environmentally unfriendly.

E. The Importance of Labels 1. Why is labeling important to establishing a brand image? a. Labels are also used to promote and persuade customers to buy a product.

2. What does the government have to say about product labels? a. The Fair Packaging and Labeling Act of 1966 requires that companies communicate specific information about their products to consumers. b. The Consumer Product Safety Commission (CPSC) has also established guidelines to ensure that manufacturers warn consumers about the hazards of various products. i. The CPSC also requires that products have tracking labels so that, if the product is defective or contaminated, the manufacturer can track the source of the problem to more quickly correct it. c. The Nutrition Labeling and Education Act of 1990 requires that all nutrient content claims and health claims are consistent with agency regulations.

3. How are digital media and the Internet affecting branding strategies? a. More companies are incorporating digital media into their branding strategies by advertising online, creating blogs, providing customer chats, and using social networking.

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Pricing Goods and Services A. Product Pricing and Pricing Objectives 1. Why is a product’s price an important component in the marketing mix? a. From the seller’s perspective, the price is the only revenue-generating component of the marketing mix. b. The price can also serve as a marketing tool and is often used in promotional campaigns.

2. How does value affect price? a. The price is what customers actually pay for a product, but value is the derived benefit of the entire product offering.

3. What are some pricing objectives? a. Maximizing profits b. Achieving greater market share c. Maximizing sales d. Building traffic e. Matching the status quo prices f. Covering costs to survive g. Creating an image h. Ensuring affordability to all Page 6

4. How do you choose the right pricing objective? a. The ideal pricing objective is determined by considering the business and financial goals of a product or company.

5. Why is a product’s price an important component in the marketing mix? a. A product’s price represents what consumers must pay to acquire it. b. From the seller’s perspective, the price is the only revenue-generating component of the marketing mix. c. The price can also serve as a marketing tool and is often used in promotional campaigns.

6. How does value affect a product’s price? a. The price is what customers actually pay for a product, but the value is the derived benefit of the entire product offering B. Pricing Strategies and Price Perceptions 1. What are the major pricing strategies? a. After determining the pricing objective, choosing the best pricing strategy to achieve that objective is chosen next. b. The most common pricing strategies (Figure 13.8) include: i. cost-based pricing ii. demand-based pricing iii. competition-based pricing iv. everyday low pricing 2. What is cost-based pricing? a. Cost-based pricing (also known as cost-plus pricing) is based on covering costs and providing for a set profit.

3. How does product demand impact pricing? a. Demand-based pricing (sometimes called value-based pricing) is pricing based on the demand for a product or its perceived value. b. It can be defined further by other pricing strategies: i. Target costing estimates the value customers receive from a product and the price they are willing to pay and then subtracts an acceptable profit margin to obtain an estimated cost for the product. ii. Price discrimination occurs when a business charges different customers for an identical good or service, for reasons not associated with costs. iii. Competition-based pricing is a pricing strategy based on what the competition is charging. Markets can be categorized based on their degree of competition: a.) A perfectly competitive market is one with many suppliers and homogenous products. b.) A monopolistically competitive market is a market in which there are many firms, but they have the ability to differentiate their products somewhat and can therefore charge different prices for them. c.) An oligopoly is a market in which there are only a few sellers. d.) A monopoly is a market supplied by a single firm.

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i.) Sometimes monopolists capture their markets by using predatory pricing, the practice of charging very low prices with the intent of destroying the competition. ii.) Predatory pricing is illegal, but that hasn’t prevented it from occurring.

4. What pricing strategy offers low prices all the time? a. Everyday low pricing is a strategy of rarely putting individual products on sale.

5. Are there pricing strategies that work better with certain phases of the product life cycle? a. When launching a new product, companies may need to use a different type of pricing strategy than they would use for an existing product (refer back to Figure 13.8). i. Price skimming involves charging a high price for a product initially and then lowering the price over time. ii. Penetration pricing involves charging the lowest possible price for a new product to quickly build market share for a product.

6. What are some strategies used to impact people’s price perceptions? a. Prestige pricing (also known as premium pricing) is the practice of charging a high price to invoke perceptions of high quality and privilege. i. Some people have called this the snob effect. b. Psychological pricing (sometimes called odd or fractional pricing) is the practice of charging a price just below a whole number to give the appearance of a significantly lower price. c. Loss leader is a product that is priced below its costs. i. Stores use loss leaders to attract customers into the store and then motivate them to buy more expensive items as well. d. Reference pricing refers to listing an inflated price (the regular retail price or the manufacturer’s suggested retail price) that is then discounted to appear as if it is a good value.

7. How might production be affected by pricing strategies? a. A breakeven analysis determines the production level for which total revenue is just enough to cover total costs. b. There are two types of costs that make up the total product cost: fixed costs and variable costs. i. Fixed costs (sometimes called overhead costs) are any costs that do not vary with the production level, such as salaries, rent, insurance, and loan repayments. ii. Variable costs are costs that vary with the production level, such as wages, raw materials, and energy costs. iii. Average variable costs (or per unit variable costs) equal total variable costs divided by the production level.

C. Adjusting Prices 1. What are common types of price adjustments? a. Several tactics are used, as shown in Figure 13-9.

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b. One way is to use discounts, a deduction from the regular price charged.

Discounts come in many forms: i. Cash discounts ii. Quantity discounts iii. Seasonal discounts iv. Forms of allowance, such as a trade-in allowance c. Rebates are partial refunds on what a customer has already paid for a product. d. With bundling, two or more products that usually complement one another are combined and sold at a single price. e. In dynamic pricing, prices can change quickly at any time, depending on the interaction of buyers and sellers.

2. Can you determine the effect a change in price will have on demand? a. The degree to which demand for a product will be affected by price changes is what economists refer to as the price elasticity of demand, or simply price elasticity. i. Elastic goods usually will see a drop in demand when their prices rise. ii. If a price increase is being proposed, it’s better if the demand for the product is relatively inelastic, because the demand for it will fall less.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity 1: Ice Breaker You Deserve a Break Today Activity Overview: A quick test to show students the power of advertising.

Time Limit: 5 minutes What to Do: •

Post the following slogans on the chalkboard, an overhead, or a PowerPoint slide: 1. You deserve a break today 2. Be all that you can be 3. M’m! M’m! Good!

4. That was easy 5. It’s the real thing 6. I'm lovin it 7. The un-cola 8. You’re in good hands.

9. Just do it.

10. Finger lickin’ good 11. Think outside the bun.

12. Impossible is nothing 13. The quicker picker upper 14. It’s everywhere you want to be 15. Betcha can’t eat just one.

•

Ask students to write down the names of the companies associated with the above advertising slogans. The first student who thinks he or she has all of the names should hold up their paper to be checked. If it is not right, go to the second student, and so on until you have a winner or until five minutes runs out.

Award a prize to the student who gets the most slogans correct.

•

Answers: 1. McDonalds 2. Army 3. Campbell’s Soup 4. Staples 5. Coke 6. McDonalds 7. 7-Up 8. Allstate Insurance 9. Nike 10. KFC 11. Taco Bell .

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12. Adidas 13. Bounty 14. Visa 15. Lay’s Potato Chips Don’t Forget: To bring a prize for the winner of the contest. (Maybe a can of Campbell's Chicken Noodle Soup, or better yet, an Easy Button from Staples!)

Wrap-Up: Ask students which slogans work best for them and why. Then ask the same questions about the slogans that don’t work. For a professional’s take on this exercise, see http://goodsloganbadslogan.blogspot.com/. A fun way to conclude the exercise might be to ask students about slogans that work too well. Are there some slogans that the students remember, but find that they can’t recall what was being advertised? (“That’s a spicy meatball” might be one of those!)

Supplemental In-Class Activity 2 Sunday Sales Activity Overview: Identify branding strategies using the Sunday newspaper sales flyers.

Time Limit: 15–20 minutes What to Do: Save the Sunday newspaper sales inserts from one or more Sundays depending on the size of your class. Pass the sales flyers out to individual students (or pairs of students) and ask them to make a list of generic, manufacturer’s, private, family, individual, and co-brands. The students can write them under category titles on the board or call them out for you to write in the categories.

Don’t Forget: Bring in enough sales flyers from department stores to allow each student or pair of students to have one. Flyers from stores such as Sears, JCPenneys, or Kohls are useful for private brands. Stores such as Kmart, Walmart, Toys R Us, and Target are good for manufacturer’s brands plus others. Try to find at least one example from each category.

Wrap-Up: This exercise helps to solidify the different types of brands discussed in the text. Students will be able to relate the definitions to specific products and images.

Supplemental In-Class Activity 3 Setting a Reasonable Price Activity Overview: This activity gives students practice in using cost-based pricing, target costing, and competitive pricing to price a product.

Time Limit: 15–30 minutes

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What to Do: Provide the students with the following information: Your business provides a service to local residents. Your fixed costs are $2,000 per month, and you expect 40 customers per month. The variable cost associated with each service is $35.

1. Using cost-based pricing and a markup of 20%, what should the price be? Show calculations.

2. Using breakeven analysis, what should the breakeven volume of production be?

Show calculations.

3. Using target costing, a price you think is acceptable to customers ($99) and an acceptable profit margin (20%), what should the price be? Show calculations.

4. If your nearest competitor charges $95, what should the price be? Explain.

5. With all this information and the results you calculated for parts 1–4, what do you think your price should be?

Answers: 1. Total cost = $2,000 + (40) ($35) = $3,400 Average total cost per unit = $3,400 / 40 = $85 To achieve a mark-up of 20%, you must charge this much over the average unit cost: $85 x 0.20 = $17 Total price = $85 + $17 = $102 Checking your work: At $102 sales price, the total revenue for 40 units is (40) x ($102) = $4,080 At 40 units in total, the total cost is $2,000 + (40) x ($35) = $3,400 The mark-up is ($4,080 – $3,400) / $3,400 = $680 / $3,400 = 0.20 or 20% The calculations are verified.

2. Breakeven volume = Total fixed costs / (Price – Average variable cost) This formula needs to be manipulated algebraically to be able to solve for price: • Multiply both sides of the equation by (price – average variable cost): Breakeven volume (Price – average variable cost) = total fixed costs • Multiply out breakeven costs times the variables in parentheses: (Breakeven volume × price) – (breakeven volume × average variable costs) = total fixed costs • Add the second part of the left side of the equation to both sides: (Breakeven volume × price) = total fixed costs + (breakeven volume × average variable costs) • Divide both sides of the equation by breakeven volume: Price = [total fixed costs + (breakeven volume × average variable costs)] / breakeven volume .

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•

Now, solve for price using the numbers given: Price = [$2,000 + (40)($35)] / 40 = $3,400 / 40 = $85 per unit

•

Checking your work: Breakeven volume = Total fixed costs / (Price – Average variable cost) 40 = $2,000 / ($85 – $35) > 40 = $2,000 / $50 > 40 = 40

At $85 selling price, revenue for 40 units will equal the total cost (fixed + variable).

3. Target cost = cost customers are willing to pay – acceptable profit margin to obtain the desired cost $99 – (0.20)($99) = $99 – $19.80 = $79.20 Total cost per unit is currently $85 (see Part 1) so you must look for ways to reduce your total per unit cost $5.80 ($85 – $79.20).

4. Answers will vary, but should fall around $95. Students may remember that strong product differentiation will allow a higher price when compared to the competition.

5. Answers will vary. With values for the selling price at $102, $85, $99, and $95 from the different parts, students should be able to support a price around this using information from the text.

Don’t Forget: You may need to provide the students with the re-arranged formula for Part 2.

Wrap-Up: As the text states, “the pricing component of the marketing mix is one of the most difficult for marketers to grapple with.” This exercise points out some of the different options to review when deciding on a price. And there is always the option of providing discounts or other price adjustments.

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ENHANCING THE ONLINE COURSE Classy Products: Have your students create one slide for each of the classifications of products, using both definitions and photographs to illustrate the different types. Post them online on the course blog or a special “products” gallery.

Business Products: Have your students create one slide for each of the classifications of business products, using both definitions and photographs to illustrate the different types.

Post them online on the course blog or a special “products” gallery.

Brand Scavenger Hunt: Ask your students to list the benefits of using brands and then to link to the websites of their 15 favorite brands. (NOTE: They probably cannot copy these graphics because the brands will be protected by trademark licenses.) Ask them to discuss what distinguishes these brands in their minds.

Branding Chart: Have your students create a chart with the names and definitions of the types of brands. Include at least two examples of companies that use that type of brand.

Post the results on the course blog or another page for viewing.

Cool Packages: Ask your students to take photos of at least five unusual packages to post on the course blog or Web page. Ideas could include cosmetic bottles, promotional items such as t-shirts compressed into shapes, and holiday packaging.

Pricing Objectives: Ask your students to define the eight types of pricing objectives.

Have them make a list of eight businesses which use these eight different types of pricing objectives. The students might want to take a trip to the nearest mall to get ideas. You may want them to submit their products by posting photographs on the course blog, or you may just ask them to describe the products and the reasons why they think these companies are using the pricing strategies. What pricing objective would they use for their project under New Product Contest?

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ANSWERS TO END-OF CHAPTER MATERIALS Self Test Multiple Choice 13-1 When you order take-out pizza which represents the actual product? b. crust with tomato sauce and cheese.

Learning Objective 13-1: New Product Development AACSB: Analytical thinking 13-2

Which of the following is not an example of a product line length? c. Honda Civic, Honda lawn mower, and Honda marine engine Learning Objective 13-2: Modifying Existing Products and Product Lines AACSB: Analytical thinking

13-3 When companies compete aggressively on the basis of price, quality, and brand-name image because consumers carefully compare brands, these businesses are most likely selling ______________ goods and services. b. shopping Learning Objective 13-2: Modifying Existing Products and Product Lines AACSB: Analytical thinking 13-4 When businesses hire celebrities to endorse their products and connect their brands with positive attributes, they are focusing on enhancing their brand c. association.

Learning Objective 13-3: Branding AACSB: Analytical thinking 13-5 A brand that markets several different products under the same brand name is a b. family brand.

Learning Objective 13-3: Branding AACSB: Analytical thinking 13-6 Siobhan Clark just bought a Chicago Cubs jersey with player Jon Lester’s name and number on the back, as well as a hat and jacket that display the Cubs logo. The type of branding strategy used for these products is d. brand licensing.

Learning Objective 13-3: Branding AACSB: Application of knowledge 13-7 In what stage in the product life cycle would you consider Tesla automobiles to be? b. Growth Learning Objective 13-1: New Product Development AACSB: Application of knowledge

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13-8 Stephanie Ling has been asked to conduct a breakeven analysis. In which category would she put the cost of rent for the manufacturing facility? a. Fixed cost Learning Objective 13-4: Pricing Goods and Services AACSB: Application of knowledge 13-9 Rocco Valentino shops only at Walmart because Rocco believes he will receive the lowest price without further hassles. This type of pricing strategy is known as ______________ pricing. b. everyday low Learning Objective 13-4: Pricing Goods and Services AACSB: Application of knowledge 13-10 Sally and Brian only go shopping on Tuesdays because they can get the senior discount. Which pricing strategy are they taking advantage of? b. Price discrimination Learning Objective 13-4: Pricing Goods and Services AACSB: Analytical thinking True/False 13-11 The augmented product provides additional value to a customer’s purchase.  True Learning Objective 13-1: New Product Development AACSB: Analytical thinking 13-12 A local pizza joint increased its prices, so now you buy pizza elsewhere. Pizza is therefore an inelastic good.  False Learning Objective 13-4: Pricing Goods and Services AACSB: Analytical thinking 13-13 The local small appliance store has microwave ovens for sale at a price of $149.95. The price tag notes that the manufacturer’s suggested retail price is $160. This type of pricing is referred to as a loss leader.  False Learning Objective 13-4: Pricing Goods and Services AACSB: Analytical thinking 13-14 MRO B2B products are marketed much like consumer convenience goods and services.  True Learning Objective 13-2: Modifying Existing Products and Product Lines AACSB: Analytical thinking

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13-15 A product’s packaging is used only to provide protection of the good’s contents.  False Learning Objective 13-3: Branding AACSB: Analytical thinking Critical Thinking Questions: Suggested Answers 13-16 Answers will vary but should reflect critical thought and the concept of creating pricing strategy based on customer’s perceptions.

Learning Objective 13-4: Pricing Goods and Services AACSB: Analytical thinking 13-17 Student answers may vary based on perception.

Learning Objective 13-1: New Product Development AACSB: Application of knowledge

13-18 Answers will vary but should reflect a thorough understanding of how pricing objectives and strategies are interwoven with a company selecting a target market and creating a price perception by using the appropriate strategy.

Learning Objective 13-4: Pricing Goods and Services AACSB: Analytical thinking

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Team Time Developing a Product Answers will vary. However, idea generation focuses on unmet customer needs to develop an entirely new product or an improved version of an existing product. Ideas often come to businesses as a result of listening carefully to customers. Idea screening attempts to eliminate unsound concepts. Product analysis estimates costs of production, selling price, sales volume, and profitability. Product development and testing determines if the product idea will ever commercialize. Prototypes are often produced, tested, and evaluated by consumers. Commercialization is the decision to market the product.

Learning Objective 13-1: New Product Development AACSB: Application of knowledge

Ethics and Corporate Social Responsibility The Ethics of Rx 13-19 Answers will vary but should reflect critical thought. As with many ethical issues, any decision depends on balancing the interests of the many parties involved.

13-20 Answers will vary. However, ethical decisions typically involve a tradeoff in order to address or meet the needs/desires of interested parties.

13-21 Answers will vary. But, a compromise may be possible by charging a price that is high enough on the skin-condition drug to afford the funding of the other drug at a later time.

Web Exercises 13-22 The iPhone as a Product Students’ answers will vary, depending upon the newest iPhone introduction and its success and/or failure. For an interesting perspective, reference the article “Apple Chiefs Discuss Strategy, Market Share—and the New iPhones” in Bloomberg BusinessWeek: http://www.businessweek.com/articles/2013-0919/cook-ive-and-federighi-on-the-new-iphone-and-apples-once-and-futurestrategy 13-23 Organic Coke Students’ answers will vary, depending upon the organic beverages and sodas researched and students’ preferences about organic products.

13-24 Research a Brand Students’ answers will vary, depending upon the products selected.

Learning Objective 13-3: Branding AACSB: Application of knowledge

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13-25 Toothpaste Differential Students’ answers will vary, depending upon the products selected.

Learning Objective 13-2: Modifying Existing Products and Product Lines AACSB: Application of knowledge 13-26 Comparison Shopping Websites Students’ answers will vary, depending upon the products selected.

Learning Objective 13-4: Pricing Goods and Services AACSB: Application of knowledge MyBizLab: Suggested Answers 13-27 Marketers need to consider all the tangible and intangible benefits associated with a good, a service, or an idea that affects a consumer’s purchasing decision.

The core product satisfies the motivation for purchasing the product, while the actual product when used provides core benefits. The augmented product consists of the core and actual product plus other real or perceived benefits that enhance the value to the customer.

Learning Objective 13-2: Modifying Existing Products and Product Lines AACSB: Application of knowledge

13-28 Answers will vary but most students will think that energy drinks are in the growth or maturity stage of the product life cycle.

Learning Objective 13-1: New Product Development AACSB: Application of knowledge

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CHAPTER 14: PROMOTION AND DISTRIBUTION CHAPTER OPENER This chapter gives students a greater understanding of the last two Ps in the marketing mix—promotion and place (distribution). Starting with the steps in the promotional campaign, the chapter explores a variety of promotional techniques including: • advertising • public relations • personal selling • sales promotions The chapter ends with information about distribution—both the types of distribution channels and the methods of distribution.

DETAILED LECTURE OUTLINE I.

Promotion and the Promotional Mix A. Promotion 1. What is promotion? a. Promotion involves all the techniques marketers use to inform targeted customers of the benefits of a product and persuade them to purchase it.

2. What are the most popular tools marketers use to promote a product? a. The four basic promotional tools used to promote a good or a service are: i. Advertising ii. Public relations iii. Personal selling iv. Sales promotion b. The promotional mix is the strategic combination of these promotional tools used to reach targeted customers to achieve marketing objectives.

See Figure 14.1.

3. What are the steps involved in a promotional campaign? a. Identify the target market. b. Determine marketing objectives. c. Determine the budget. d. Design the message. e. Implement the promotional mix. i. Integrated marketing communication (IMC) is a strategy to deliver a clear, consistent, and unified message about a company and its products to customers at all contact points. f. Evaluate and adjust as needed.

II.

Advertising and Public Relations A. Definitions

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1. Advertising is paid, impersonal mass communication from an identified sponsor to persuade or influence a targeted audience.

B. The Role of Advertising 1. What role does advertising play in business? a. Businesses use advertising to: i. Help build mass brand awareness and brand association. ii. Emphasize a product’s differences. iii. Build brand loyalty and brand equity. iv. Inform consumers of the value inherent in products and educate the public in their uses. v. Lead to lower prices for consumers.

2. What’s the economic impact of advertising? a. Advertising impacts the economy because of the huge sums of money spent on it.

3. What is an advertising agency? a. Advertising agencies are hired to help create, plan, and handle advertising (or other forms of promotion).

C. Types of Advertising 1. What are the different types of advertising? a. There are many different types of advertising media to choose from; some of the more common types of advertising are reflected in Figure 14.2.

D. Advertising Media 1. What are the different types of advertising media? a. Some of the more traditional media include television, newspapers, the Internet, and outdoor media. b. Direct mail advertising still remains one of the largest forms of advertising.

2. What are the advantages and disadvantages of the different types of advertising media? a. Table 14.1 lists some of the advantages and disadvantages of each major medium.

E. Internet Advertising 1. How does advertising take place online? a. Internet advertising includes spam (junk e-mail), pop-ups, banner ads, and other links found at websites to attract potential customers to a company’s Web page.

2. What is the benefit of online advertising? a. The Internet has become a fast-growing advertising medium, in part because it allows firms to focus their advertising dollars on targeted customers.

F. Social Media 1. How is social media being used in advertising? a. Companies create blogs and tweets to announce new products or corporate developments, post help tutorials and product demonstration videos on YouTube, and create fan pages on Facebook that prompt interactions with their customers. .

G. Mobile Marketing 1. How is mobile marketing being used? a. Companies are embracing technologies such as QR codes, text messages, and mobile app platforms to connect with their customer base 24/7.

H. Product Placement 1. What is product placement? a. Product placement is a promotional technique in which a company pays for its product to be prominently displayed in television shows, movies, and video games where they will be seen by potential customers.

I. Infomercials 1. How are infomercials useful as an advertising technique? a. Infomercials (also known as paid programming) appear to be actual television programs, often in the form of talk shows, with little direct reference to the fact that they are actually ads. b. They are designed to elicit a specific, direct, and quantifiable response from viewers.

J. Global Advertisements 1. How has advertising gone global? a. Like products, some advertising campaigns can be exported intact to other countries, whereas others have to be modified. b. Marketers have to carefully consider the interpretations of their messages in the underlying cultural context of the foreign market.

K. Public Relations 1. What is public relations? a. Public relations is the process of establishing and maintaining mutually beneficial relationships between an organization and its stakeholders.

2. What steps are involved in developing public relations plans? a. There are three steps to a good public relations program: i. Consider public opinion. ii. Change the policies and procedures. iii. Inform public of actions planned or taken.

3. What are some common public relations tools? a. Controlled messages include corporate (or institutional) advertising, advocacy advertising, and public service advertising. b. Semicontrolled messages are placed on websites, in chat rooms, and on blogs, and what people say about a company in these forums is not strictly regulated. c. Uncontrolled messages generally take the form of publicity.

4. How is publicity helpful? a. Publicity is information about an individual, an organization, or a product transmitted through mass media at no charge. b. It has two advantages over advertising: i. It is free. ii. It is more believable because it is often presented as a news story. c. Publicity can be shaped by an organization but not controlled by it.

5. How does a company respond to negative publicity? .

a. Damage control is a company’s effort to minimize the harmful effects of a negative event.

III.

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Personal Selling and Sales Promotion A. Personal Selling 1. What is personal selling? a. Personal selling is direct communication between a firm’s sales force and potential buyers to make a sale and build good customer relationships.

2. Why is personal selling important? a. A company’s salesperson is often the first contact point for many customers.

3. What are the advantages and disadvantages of having a sales force? a. Personal selling is the most expensive part of the promotional mix for most companies. b. However, personal selling is preferred over advertising when selling a high-value, custom-made, or technically complex product.

4. What other different sales roles are there in organizations? a. There are four general roles taken on by salespeople: i. An order getter is a salesperson who increases a company’s sales by selling to new customers and increasing sales to existing customers. ii. An order taker is a salesperson who handles repeat sales and ensures that buyers have sufficient quantities of products when and where they are needed. iii. Order influencers are not engaged in direct selling; rather, they concentrate on selling activities that target people who influence purchases made by the final customer. iv. Support personnel may obtain new customers but focus on assisting current customers with technical matters.

5. What are the steps in the selling process? a. The six-step personal selling procedure is outlined in Figure 14.3.

6. How are customers identified? a. The first step in the personal selling process is prospecting—identifying qualified potential customers.

7. What is the best way to approach a prospect? a. The second step of the personal selling process involves two parts: the preapproach and the actual approach. i. The preapproach involves salespeople learning as much as possible about their potential customers to determine their likely needs and think about how they might be able to satisfy those needs. ii. When it comes to approaching a potential customer, the idea is to meet, greet, and put the prospect at ease.

8. How are the details of the product explained? a. The next step in the personal selling process is the actual presentation of the product to the prospective customer.

9. What happens if the prospect has an objection? a. Good salespeople anticipate objections and are prepared to counter them.

10. How is the sale finalized? a. After overcoming objections, the next step is to close the sale and ask the buyer for an order.

11. What happens after the sale is made? a. To ensure a long-term relationship and repeat business, the salesperson must follow up with the customer to ensure that he or she is happy with his or her new product.

B. Sales Promotion 1. What is a sales promotion? a. A sales promotion is a short-term activity that targets consumers and other businesses for the purpose of generating interest in a product and selling it.

2. What are the two general types of sales promotions? a. Incentives to push a product through the distribution system to final consumers are called trade (or B2B) sales promotions. i. These incentives encourage wholesalers (middlemen) to push their products through to end users. b. Consumer sales promotions are incentives designed to increase final consumer demand for a product.

3. What are some consumer sales promotional tools? a. Some of the most common consumer promotional tools are listed in Figure 14-4.

4. What are some trade sales promotional tools? a. Some of the specific tools used to promote a product to other businesses are listed in Figure 14-5.

C. Social Media Promotions 1. How is social media used to promote products? a. In essence, social media are today’s form of word-of-mouth communication. b. The term viral marketing (viral advertising or marketing buzz) refers to using social media tools and techniques to spread a marketing message quickly.

2. What are the advantages and disadvantages of the promotional mix? a. Table 14-2 summarizes some of these key advantages and disadvantages.

IV.

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Distribution: Marketing Intermediaries A. Definitions 1. Distribution is the process that makes products available to consumers when and where the consumers want them.

B. Distribution Channels and Marketing Intermediaries 1. What is a channel of distribution? a. A distribution channel is a set of marketing intermediaries who buy, sell, or transfer title (or ownership) of products as they are passed from producer to consumer or business user.

2. What are marketing intermediaries?

a. A marketing intermediary (formerly known as a middleman or reseller) is a business or person that moves goods and services between producers and consumers (in a B2C environment) or between business users (in a B2B environment).

3. What are the different types of marketing intermediaries? a. There are three main types of marketing intermediaries: i. Wholesalers buy and resell products to other wholesalers, retailers, and industrial users. ii. Agents/brokers facilitate negotiations between buyers and sellers of goods and services but never take title (ownership) of the products traded. iii. Retailers sell products directly to consumers.

4. Why are marketing intermediaries needed? a. Intermediaries’ added value is efficiency. See Figure 14-6.

5. What are the different types of distribution channels? a. The type of distribution channel needed depends on the type of product being brought to the consumer. See Figure 14-7.

C. Wholesalers, Agents, and Brokers 1. What services do wholesalers provide? a. Wholesalers are intermediaries that buy and resell products to retailers, other wholesalers, and industrial users. See Table 14.3.

2. What are the different types of wholesalers? a. Wholesalers include full-service wholesalers and limited-service wholesalers. i. Full-service wholesalers provide a full line of services: carrying stock, maintaining a sales force, offering credit, making deliveries, and helping them price, market, and sell products. a.) There are two types of full-service wholesalers: i.) Wholesale merchants sell primarily to retailers. ii.) Specialty distributors sell to manufacturers and institutions. ii. Limited-service wholesalers offer fewer services than full-service wholesalers. The major types of limited-wholesalers include: a.) Cash-and-carry wholesalers carry a limited line of fast-moving goods and sell to small retailers for cash. b.) Truck wholesalers (or truck jobbers) sell and deliver directly from their trucks. c.) Drop shippers don’t carry inventory or handle products. On receiving an order, they select a manufacturer who ships the merchandise directly to the customer. d.) Rack jobbers serve grocery stores and drug retailers, mostly in nonfood items.

3. What are some common types of agents? a. Agents and brokers do not take title to the products traded; they merely facilitate the buying and selling of products and earn a commission on the selling price. b. Three common types of agents are: .

i. Manufacturers’ agents are independent contractors who sell products for more than one manufacturer. ii. Selling agents have contractual authority to sell a manufacturer’s entire product line. iii. Purchasing agents generally have long-term relationships with buyers and make purchases for them.

D. Retailers 1. What are the important retail strategies? a. Retailers primarily sell products to the final consumer. b. Companies can choose to sell either through all available retail outlets or only through a more selective distribution. See Figure 14-8. i. Intensive distribution is used by companies that want their products to obtain the widest exposure in the market and so strive to make these products convenient for purchase in as many locations as possible. ii. A selective distribution strategy uses only a portion of the many possible retail outlets for selling products. iii. An exclusive distribution strategy uses only one outlet in a geographic area.

2. What are the different types of retailers? a. There are two main types of retailers: in-store retailers and nonstore retailers. b. Table 14-4 describes the major types of retail stores and lists some examples of each.

3. What kinds of in-store retail organizations are there? a. In-store retail organizations consist of corporate chain stores, individually owned retail stores, cooperatives, and franchises. i. Corporate chain stores are two or more retail outlets owned by a single corporation. ii. Individually owned retail stores, sometimes referred to as “mom-andpop” stores are prevalent. iii. Cooperatives are formed when independent companies voluntarily band together and buy in bulk to experience economies of scale that reduce costs. iv. Franchises are a distribution system where a franchiser sells a proven method of doing business to a franchisee for a fee and a percentage of sales or profits.

4. What is nonstore retailing? a. Nonstore retailing is a form of retailing in which consumer contact occurs outside the confines of a traditional brick-and-mortar retail store. b. Examples include vending machines, kiosks, and carts. Other examples: i. Telemarketers sell products over the phone. ii. Direct sellers sell goods and services door-to-door at people’s homes and offices or at temporary or mobile locations. a.) Direct selling is also known as multilevel marketing (MLM) because of the marketing structure that defines the corporate strategy of many of these organizations. .

iii. Direct marketers are those retailing a good or a service and bypassing intermediaries, such as catalog sales, direct mail, and infomercials.

5. How has the Internet impacted retailing? a. Electronic retailing, or the selling of consumer goods and services over the Internet, is a subset of e-commerce. b. The Internet has also enabled consumers to access data and information about products and competitors quickly. c. Stores are also keenly aware of other factors that can potentially turn customers away, such as long lines or insufficient store inventory.

E. Distribution Logistics Process 1. What do we mean by distribution logistics? a. Logistics refers to managing the flow of materials, information, and processes that are involved in getting a product from its initial raw stages to the point of consumption. See Figure 14.9. i. Inbound logistics is bringing raw materials, supplies, information, and so on, from suppliers to the producer. ii. Managing the movement of resources throughout the production process is materials handling and operations control. iii. Managing the physical distribution of produced products to customers is outbound logistics. iv. If part of the process is outsourced, managing that process is called third-party logistics.

F. The Benefits and Costs of Transportation Modes 1. What are the benefits and costs of various transportation modes? a. To keep costs as low as possible, a company looks for the most economical mode of transportation; however, companies also have to consider other factors beyond cost—such as speed, dependability, flexibility in product handling, frequency of shipments, and accessibility to markets. b. Table 14.5 outlines the benefits and costs of the five major modes of transportation.

2. How does a company determine the transportation method? a. Routing is simply the way in which goods are transported to a client.

G. Warehousing and Inventory Control 1. How important is warehousing? a. Warehousing, or storing products at convenient locations so they are ready for customers when they are needed, is critical for customer service. b. There are two types of warehouses: i. Storage warehouses store goods from moderate to long periods of time. ii. Distribution warehouses (or distribution centers) are designed to gather and move goods quickly to consumers.

2. How is inventory tracked? a. Companies use bar codes, or Universal Product Codes, on almost all products to help identify and track products.

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b. RFID tags are intelligent bar codes, and companies use them to help reduce inventory costs by generating information on a real-time basis, thus providing accurate stocking information and reordering information.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity 1: Ice Breaker Promote Your School Activity Overview: Students get insight about promoting their college from a professional.

Time Limit: 45 minutes What to Do: •

• •

Ask students to create promotional campaigns for your college or university. In particular, get them to focus on how the school should be advertised, the best public relations strategy for the school, and what, if any, sales promotions should be used to attract new students to the school.

Invite one of the managers in your school’s promotions office to come and speak to your class.

Have the manager compare the way the school is really promoted with suggestions from the students.

Don’t Forget: Students can develop their promotional campaigns either in class or outside class.

Wrap-Up: Ask students what surprised them about the school’s promotional campaigns.

What did they expect, and what was unexpected?

Supplemental In-Class Activity 2 Find the Ads Activity Overview: Students find examples of different types of advertising in magazines.

Time Limit: 15–20 minutes What to Do: Have the students look through magazines for the different types of advertising. See if they can find all the types (except Interactive and Internet; if you have a computer in the classroom, students can find these, too). If possible, have them rip the advertisement pages out of the magazines and create a display on the whiteboard or wall by taping up the advertisements under headings of each type. Put all the advertisements in a notebook after class for students to review (or to use for a future class).

Don’t Forget: Save up a variety of magazines to have on hand.

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Wrap-Up: Discuss the wide variety of advertisements we see and respond to each day— not just in magazines. Re-emphasize the different types as described in the text.

Supplemental In-Class Activity 3 Marketing a Product Activity Overview: This summary exercise uses student skills from Chapters 12, 13, and 14.

Time Limit: 20–30 minutes What to Do: •

Before class, determine approximately how many groups you will have for a group activity assuming four students in each group. Find that number of items from around your office and home (plus a few more just in case). The items should fit in a paper lunch bag. Some suggestions include new types of canned beverages, a licensed product, and so on.

•

For class, have each group pick a bag. Hand out a sheet with these questions for them to answer about the item in their bag.

1. How would your product’s features be impacted by the following environmental factors? Give one example for each category.

• • • • •

Political and legal Social and cultural Technological Economic Competitive

2. What would be a likely target market for your product? Explain using geographic, demographic, and psychographic variables.

3. What phase of the product life cycle do you think your product is in? Why did you pick this phase?

4. Do you think it is a national brand, licensed brand, or private brand product?

Why? 5. Ascertain the price for your product. Why did you choose that price?

6. What are the two best distribution channels for your product? Explain each one.

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7. What promotional mix will you use to promote your product? (List at least three promotional tools.) How will these tools reach your target market at the right stage of their buying process?

Don’t Forget: The bags may not be necessary depending on your class. They just help create a perception of fairness.

Wrap-Up: Review the answers in class or look them over between classes and then discuss the responses with the class. Other students will have suggestions, too. This is an excellent summary tool for the three chapters on marketing topics.

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ENHANCING THE ONLINE COURSE Promotion Pie: Ask your students to create a pie-chart representing the four parts of the promotion mix. Be sure to have them define each of the terms. Use this for discussion credit.

Promo Flow: Have your students create a flow chart with their computer graphics tools to represent the six steps of developing a promotion campaign. Be sure to have them define each step and discuss how the steps relate to one another in a summary at the bottom of the chart.

Integration Sensation: Ask your students to identify an example of at least one company which is currently using an Integrated Marketing Communications Program in the media.

Students should find an example of several media and take digital photos to post. Ask the students if they like the campaign. Do they think the campaign is effective? Why or why not?

To Advertise or Not to Advertise: Assign a one page essay to your students on the topic of the role of advertising in a global economy. Have them discuss the good and bad consequences of advertising. Is advertising bad for society? Good for society? Why or why not? Post the essays on the course blog and be sure to ask follow-up questions on the discussion board.

Advertising Mindmap: Have your students create a mindmap using all types of advertising (see Figure 14.2). Be sure to have them define all the types and post it to an assignments page or course blog.

Media Montage: Have your students create a graphic that shows the advantages and disadvantages of the different media (such as shown in Table 14.1 of the textbook). Ask students to go a step further and add graphics or verbal descriptions of different products for which those media would be good choices.

Advertising Trends: Ask your students to search online for examples of the recent trends in advertising mentioned in the text. Students should create a page of website links to accompany a definition of each trend.

PR Interview: Have your students choose a Fortune 500 company in their town or city and call them to get information about the company. Students should try to get a contact person’s name and address as well as any materials the company is willing to send, any references to Web pages, blogs, and so on. Have the students report on who they talked to and what types of materials were received. Did any students receive all of the categories of PR material?

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ANSWERS TO END-OF-CHAPTER MATERIALS Self Test Multiple Choice 14-1 Which of the following is a step involved in a promotional campaign? d. All of the above Learning Objective 14-1: Promotion and the Promotional Mix AACSB: Analytical thinking 14-2 McDonald’s advertises that any size coffee is $0.99 all day. This is an example of ______________ advertising. a. product Learning Objective 14-2: Advertising and Public Relations AACSB: Analytical thinking 14-3 Your college professors take on what kind of sales role when they select books for their class? b. Order influencer Learning Objective 14- 3: Personal Selling and Sales Promotion AACSB: Application of knowledge 14-4 Bosch tools are sold in stores such as Home Depot and Lowe’s. What kind of distribution strategy is being used? c. Selective Learning Objective 14-4: Distribution: Marketing Intermediaries AACSB: Application of knowledge 14-5 Your grocery store most likely purchases Oreos and other Nabisco products from a a. wholesaler.

Learning Objective 14-4: Distribution: Marketing Intermediaries AACSB: Analytical thinking 14-6

Which type of logistics is involved in bringing raw materials, supplies, and information from suppliers to the producer? a. Inbound Learning Objective 14-4: Distribution: Marketing Intermediaries AACSB: Analytical thinking

14-7 Which is not an example of a nonstore retail outlet? c. A factory outlet Learning Objective 14-4: Distribution: Marketing Intermediaries AACSB: Application of knowledge 14-8

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American Idol judges often have on their desks tall glasses embossed with Coca-Cola’s logo. This advertising strategy is known as

a. product placement.

Learning Objective 14-2: Advertising and Public Relations AACSB: Application of knowledge 14-9

Which of the following is a consumer sales promotion tool? d. All of the above Learning Objective 14-3: Personal Selling and Sales Promotion AACSB: Analytical thinking

14-10 QR codes, text messages, and apps are part of what kind of promotional strategy? c. Mobile marketing Learning Objective 14-1: Promotion and the Promotional Mix AACSB: Analytical thinking True/False 14-11 The product itself can be considered part of the promotional mix because samples of it can be given away to demonstrate its features.  True Learning Objective 14-1: Promotion and the Promotional Mix AACSB: Analytical thinking 14-12 Finding the best way to communicate the benefits of a product and persuade customers to buy it is a critical job of marketers.  True Learning Objective 14-1: Promotion and the Promotional Mix AACSB: Analytical thinking 14-13 Personal selling is the least expensive part of the promotional mix, and therefore should always be used.  False Learning Objective 14-3: Personal Selling and Sales Promotion AACSB: Analytical thinking 14-14 Using marketing intermediaries often adds efficiency to the supply chain.  True Learning Objective 14-4: Distribution: Marketing Intermediaries AACSB: Analytical thinking 14-15 The last step in the selling process is closing the sale.  False Learning Objective 14-3: Personal Selling and Sales Promotion AACSB: Analytical thinking

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Critical Thinking Questions: Suggested Answers 14-16 Answers will vary but mobile marketing is good for immediate recognition, is low cost, and permits the advertiser to easily reach the target market because most consumers have a cell phone. Thus it is a convenient route to connect to customers.

Learning Objective 14-1: Promotion and the Promotional Mix AACSB: Analytical thinking 14-17 Answers will vary as to the appropriateness to use the various sales promotional techniques.

Learning Objective 14-3: Personal Selling and Sales Promotion AACSB: Analytical thinking 14-18 Laundry detergent, Snickers candy bars and cigarettes: intensive distribution Students should discuss target market and the fact that these products are convenience goods that need the widest possible distribution.

Mercedes sports cars: exclusive distribution which is an appropriate strategy for specialty goods that are considered prestigious.

Learning Objective 14-4: Distribution: Marketing Intermediaries AACSB: Analytical thinking Team Time Developing a Promotional Mix Answers will vary. However, all promotional campaigns begin with an understanding of the targeted market and the marketing objectives. This is followed by designing the message, determining the budget, and then implementing the promotional mix. Evaluate and adjust as needed.

One the key aspects of the advertising campaign will be to focus consumer attention on how your product is different from other health bars. This will incorporate product advertising and comparative advertising. One would have to weigh the many advantages of each mode of advertising. For FitFoods’ breakfast bar, television, newspaper, magazines, and radio media would certainly be considered. The healthy lifestyle associated with the breakfast bars should be stressed as part of its public relations tools and its pitch. Generating a newsworthy story centering on the healthy nature of the breakfast bar would be good positive publicity. This might be accomplished by providing free samples to school-age children in various local communities. Many sales promotions are possible. These include coupons, rebates, frequent-user incentives, point-of-purchase displays, free samples, contests, sweepstakes, and various other advertising specialties, including sponsoring special events and lotteries.

Learning Objective 14-1: Promotion and the Promotional Mix AACSB: Application of knowledge .

Ethics and Corporate Social Responsibility Just What the Doctor Ordered?

14-19 Answers will vary. They will likely depend on the extent to which consumers are viewed as being rational, educated, and reasonably able to determine for themselves what is in their best self-interest, as opposed to being vulnerable and subject to sophisticated marketing campaigns that may misinform or mislead consumers.

14-20 Answers will vary. Arguments could go either way. Everyone should be careful not to make snap judgments about another student’s rationale supporting their opinion.

14-21 Answers will vary. However, some people have argued that these advertisements promise a quick-fix for conditions that are very complicated, and that these drugs are being hyped and oversold to desperate people who are being taken advantage of. Others argue that the drug companies are empowering people with information so they can make more informed medical decisions for themselves; this allows people to be advocates for their own health.

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Web Exercises 14-24 Personal Selling Students’ answers will vary, depending upon their career aspirations and preferences.

14-25 Multilevel Marketing Students’ answers will vary, depending upon the company selected.

14-26 Distribution Logistics Students’ answers will vary, depending upon the products selected.

Learning Objective 14-4: Distribution: Marketing Intermediaries AACSB: Application of knowledge

MyBizLab: Suggested Answers 14-27 Students’ answers will vary.

Learning Objective 14-1: Promotion and the Promotional Mix AACSB: Analytical thinking 14-28 Answers will vary but students should reference the information in Figure 14-6 including: Bulk breaking, Financing, Management service and advice, Market information, Risk bearing, Selling and promoting, Transportation, and Warehousing.

Learning Objective 14-4: Distribution: Marketing Intermediaries AACSB: Application of knowledge

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CHAPTER 15: FINANCING AND ACCOUNTING FOR BUSINESS OPERATIONS CHAPTER OPENER Producing, marketing, and distributing a product are important aspects of generating a profit. However, equally important is the company’s ability to manage the financial resources required to accomplish these tasks. This chapter provides insight into and exposure to: • the roles of financial managers and accountants • financing small business activities • how businesses raise the funding they need to operate The chapter closes with a look at the accounting function, including the types of accounting, financial statements, and key ratios to assess a company’s financial health.

DETAILED LECTURE OUTLINE I.

Financial Management A. The Financial Manager 1. What is financial management? a. Financial management involves the strategic planning and budgeting of funds for a firm’s short-term needs (one year or less) and long-term needs (more than one year).

2. What is the role of the financial manager? a. A financial manager oversees the financial health of a company. See Figure 15.1.

B. Planning for a Firm’s Financial Needs 1. How does the financial manager plan for a firm’s financial needs? a. Because a company’s financial needs are both short term and long term in nature, a financial manager must plan for both by developing a financial plan.

2. What is involved in planning for and managing a firm’s financial needs? a. Good financial management begins with a financial plan. See Figure 15.2.

3. How does a company know it has enough resources to meet its forecasted needs? a. The accounting area generates financial statements, including the income statement, the balance sheet, and the statement of cash flows. b. A financial manager develops a budget: a management tool that outlines a company’s planned cash flows, expected operating expenses, and anticipated revenues. c. An operating (master) budget includes all the operating costs for an entire organization, including its inventory, sales, purchases, manufacturing, marketing, and operating expenses. o .

4. How are funds obtained for large projects? a. The capital budget outlines the financial needs for significant purchases, such as real estate, manufacturing equipment, plant expansions, or technology, as part of a company’s long-range plans. i. A company’s actual capital expenditures are often outlined in its annual report. b. Sometimes a project budget is prepared to identify the costs needed to accomplish a project—an endeavor that has a specific start and end date, such as installing and upgrading a computer system or renovating an existing building.

C. Addressing Cash Flow and the Budget 1. What is cash flow? a. Cash flow is the amount of money a company actually receives and spends over a specific period. b. The cash flow budget is an estimate of a company’s short-term cash inflows and outflows and identifies any cash flow gaps for the business.

See Figure 15.3.

2. Why is monitoring cash flow important? a. Cash flow specifically measures whether there are sufficient funds to pay a firm’s outstanding bills.

3. How does a company know if it is staying on budget? a. After a budget is developed, it must be compared periodically to a company’s actual performance. b. Ideally, this happens every month.

4. What must financial managers consider when seeking outside funds? a. The financial manager must assess several criteria, including how much and how quickly the money is needed, how long the financing is needed, the cost of the financing, and the risk of the project being financed. b. Larger, more established companies that need to finance growth or expansion may need to determine whether it is best to finance by raising equity—ownership interest in the form of stocks—or issuing debt.

II.

Financing Small Business Activities A. Short-Term Financing Options 1. How are the short-term financing needs of a small business met? a. Short-term financing is any type of financing repaid within a year or less. b. It is used to finance day-to-day operations, such as payroll, inventory purchases, and overhead (utilities, rent leases, and so forth).

2. What are some common sources of short-term working capital financing? a. When a company’s cash reserves won’t cover its short-term expenses, small business owners often turn to the following sources of short-term financing: i. Self-financing/family/friends ii. Credit cards 3. Can suppliers help by providing credit? o .

a. Trade credit is the ability to purchase from the supplier goods and services on credit without paying interest. b. Suppliers will typically request payment within 30, 60, or 90 days and give a discount for early payments. c. If a firm doesn’t pay on time, delinquency penalties are charged.

4. Can businesses turn accounts receivable into cash? a. Factoring is the process of selling accounts receivable for cash instead of using them as collateral for a loan. b. The factoring company pays the value of the company’s invoices, less a fee.

B. Short-Term Loans and Grants 1. How do commercial banks help with financial management? a. Commercial banks are financial institutions, credit unions, and savings and loan institutions that raise funds from businesses and individuals in the form of checking and savings accounts and use those funds to make loans to businesses and individuals. i. Checking and savings accounts are a form of demand deposit, funds that can be withdrawn (or demanded) at any time without prior notice. ii. As a business develops and is able to establish a good relationship with a bank, the business owner may seek to open a line of credit. a.) A business line of credit is credit that a manager can access at any time up to an amount agreed upon between the bank and the company. i.) The funds can be withdrawn all at once or in multiple withdrawals during the stated period. b. Will banks lend money to small businesses? i. In many cases, banks require collateral, which is an additional form of security that assures a lender that the borrower has another way of repaying the loan. ii. Loans that require collateral are secured loans. iii. If the firm has an excellent credit history and a solid relationship with the lending institution, it may get an unsecured loan, which does not require collateral.

2. Are there other short-term loan options? a. Nonbank lenders are financial institutions that extend credit or loans but do not hold deposits. i. These lenders will take on loans commercial banks view as too risky. ii. However, there is a price associated with this flexibility and availability: higher interest rates. b. Microloans are small, short-term loans specific to small businesses. i. The Small Business Administration (SBA) created the microloan program in the early 1990s to increase the availability of funds to small business borrowers. ii. Microloans are available through local nonprofit community-based intermediaries.

3. Are grants available to finance small business operations? o .

a. Although most small business grants are targeted for specific research and development projects, grants can be found to help small businesses finance their ongoing operations.

C. Social Funding 1. Is there a way to obtain loans without involving financial institutions? a. Peer-to-peer lending is the process of individuals lending to one another. i. Similar to eBay, where individuals sell their goods to other individuals, sites such as Prosper.com and LendingClub.com facilitate lending among individuals. See Figure 15-5. b. Crowdfunding is a way to generate funds via donations or, more recently, investments from individuals. i. Some rely on donors who receive products, perks, or other rewards from the companies. ii. Other crowdfunding companies offer both donation-based and investment crowdfunding opportunities.

III.

Financing Big Business Activities: Debt and Equity A. Short-Term Financing Options 1. Commercial paper is unsecured, short-term debt that matures in 270 days (nine months) or less.

B. Long-Term Financing Options 1. Why do large companies need long-term financing solutions? a. Some expansion projects cost millions of dollars and may take years to complete. b. Long-term financing is needed because it provides funds for a period greater than one year.

2. What are the different types of long-term financing? a. For large capital-intensive projects or general expansion, business owners can use securities—investment instruments such as bonds (debt) or stock (equity). b. Debt financing occurs when a company borrows money that it is legally obligated to repay, with interest, by a specified time. c. Equity financing occurs when funds are generated by the owners of a company rather than borrowed from outside lenders.

3. How do companies choose between debt and equity financing? a. Most companies use debt (loans or bonds) to finance large projects, such as the purchase of real estate, equipment, or building constructions. b. Equity is often used to provide funds for ongoing expansion and growth. c. Table 15-1 summarizes the factors that come into play when the firm is deciding to finance with debt or equity.

C. Financing with Bonds 1. Why finance with bonds? a. A company’s financing needs may grow beyond what common lenders can provide and companies may use bonds to acquire the needed funds. b. Bonds are debt instruments issued by companies or governments with the purpose of raising capital to finance a large project. o .

2. What are the advantages of financing with bonds? a. Financing with bonds allows a company to use money from investors to create or obtain business assets. b. Using debt increases a company’s leverage—the practice of borrowing to finance an investment with the expectation that the profits from it will be far greater than the interest you will have to pay on the money. i. A company that borrows considerably more money than it has in assets is considered to be highly leveraged. c. Unlike stocks, financing with bonds does not dilute the ownership of a company.

3. What must financial managers consider before choosing to finance with bonds? a. The cost of the loan—the interest rate the lender will demand—is an important consideration. b. A financial manager must also consider how the additional debt affects the overall financial health of a company.

4. How are bond rates determined? a. Bond interest rates are determined by a combination of several factors, including issuer risk and the length of the bond term. i. Issuer risk is a measure of a company’s ability to pay back the loan. ii. Firms that issue bonds often buy bond insurance to help lower the risk of the bonds and therefore the interest rates they have to pay on them.

5. How do companies pay back their bond debt? a. Bond investors receive two types of payments: principal and interest. b. Most bondholders periodically receive interest payments in amounts and at the times specified in their bond agreements. c. To ensure that there is enough money at the end of the loan period to pay back the principal, companies set aside money annually in a sinking fund—a type of savings fund into which companies deposit money regularly. d. Figure 15.6 explains the payment cycle of a bond issue.

D. Financing with Equity 1. What kinds of equity financing are available? a. Using retained earnings (or accumulated profits) is an ideal way to fund long-term projects because it saves companies from paying interest on loans or underwriting fees on bonds. b. Unfortunately, not all companies have enough retained earnings to fund large projects.

2. What kind of private equity financing is available? a. Venture capital is an investment in the company by a group of outside investors, called venture capitalists, who take an active role in a company’s management decisions. b. Venture capitalists seek their return in the form of equity, or ownership, in a company.

3. Why finance with stock? o .

a. Instead of relying on venture capital or bonds, which are generally used to fund short-term projects rather than ongoing operations, a company might choose to issue stock (referred to as equity). b. Stock is a unit of ownership in a company. c. A stock certificate is a document that represents the ownership of stock and includes details such as the issuing company’s name, the number of shares the certificate represents, and the type of stock being issued. d. When a company first sells stock to the public, the event is referred to as an initial public offering.

4. Are there disadvantages to financing with stock? a. The biggest disadvantage of financing with stock is the dilution of the ownership of a business. b. Stockholders become owners of the company, and although they do not have direct control over the day-to-day management of a company, they do have a say in the composition of its board of directors.

5. What are the advantages to financing with stock? a. Unlike bonds and other forms of debt, equity financing does not need to be repaid, even if a company goes bankrupt, so no assets need to be pledged as collateral. b. Financing with equity also enables a company to retain its cash and profits rather than using the funds to make interest and principal payments.

6. How does a company choose between debt and equity? a. The decision depends on many factors, including the maturity, the size and financial worthiness of the company, the number of assets and liabilities a company has, and the size and nature of the project being financed. b. Owners must also decide if they are willing to compromise the vision they have for their companies by allowing stockholders to have a way in the management of their companies. c. The company must also consider external factors at the time of financing, such as the state of the bond or stock market, the economy, and the anticipated interest of the investors.

IV.

Accounting Functions A. Accounting Fundamentals 1. What is accounting? a. Accounting is the process of tracking a business’s income and expenses by recording its financial transactions.

B. Types of Accounting 1. Are there different types of accounting? a. A multitude of specialty areas reside under the accounting umbrella, including: i. Corporate accounting (including managerial and financial accounting) ii. Auditing, government, and not-for-profit accounting iii. Tax accounting b. See Figure 15.7.

2. What is corporate accounting? o .

a. Corporate accounting is the part of an organization’s finance department responsible for gathering and assembling data required for key financial statements. b. It has two separate functions: managerial accounting and financial accounting.

3. What is managerial accounting? a. Managerial accounting provides information and analyses to managers within an organization so they can make informed business decisions. b. Managerial accountants also prepare short-term reports that help managers with the day-to-day operations of the business and analyze which business activities are most profitable and least profitable.

4. What is financial accounting? a. Financial accounting is an area of accounting that produces financial documents to aid investors and creditors. i. Managerial accounting is used by managers inside a company to make decisions, whereas interested parties outside a company depend on financial accounting. See Figure 15-8. ii. Prospective and current investors and creditors rely on financial accounting information contained in key documents such as annual reports to help them evaluate a company’s performance and profitability. iii. Some companies employ private accountants to perform financial accounting tasks in-house, whereas other companies hire public accountants external to the firm to do these tasks. iv. Public and private accountants who have passed a series of examinations given by the American Institute of Certified Public Accountants and who have also met state requirements are given the designation of certified public accountant.

5. What is auditing? a. Auditing is the area of accounting responsible for reviewing and evaluating the accuracy of financial reports.

6. What accounting do governments and not-for-profit corporations use? a. Government and not-for-profit accounting refers to the accounting required for organizations such as legislative bodies and charities that are not focused on generating profits.

7. Are there accountants who focus just on taxes? a. Tax accounting involves preparing taxes and giving people advice on tax strategies. b. Table 15.2 outlines the many different types of accountants.

C. Accounting Standards and Processes 1. Are there specific standards accountants must adhere to? a. Accountants in the United States follow a set of generally acceptable accounting principles (GAAP), which are standard accounting rules defined by the Financial Accounting Standard Board (FASB). b. In 2002, Congress passed the Sarbanes-Oxley Act (SOX), which was created to protect investors from corporate accounting fraud. o .

i. The act established the Public Company Accounting Oversight Board (PCAOB), which is responsible for overseeing the financial audits of public companies. c. Congress also passed The Dodd-Frank Wall Street Reform and Consumer Protection Act. i. One provision of this act gives the PCAOB the power to oversee auditors of brokers and dealers in securities markets.

2. Do all countries have the same accounting standards? a. Outside the United States, other countries have their own accounting standards, which may differ from U.S. GAAP. b. Most other countries are beginning to accept a common set of countryneutral accounting standards which are known as International Financial Reporting Standards.

3. What is the accounting process? a. The systematic recording of financial transactions is bookkeeping. b. It centers on the fundamental accounting equation—what a company owns (its assets) must equal what it owes to creditors (its liabilities) plus what it owes to its owners (owners’ equity). i. Assets = Liabilities + Owners’ Equity ii. See Figure 15.9.

4. Does the accounting equation always stay in balance? a. Double entry bookkeeping recognizes that, for every transaction that affects an asset, an equal transaction must also affect either a liability or owners’ equity. See Figures 15.10 and 15.11.

V.

Financial Statements A. Definitions 1. Financial statements are the formal reports of a business’s financial transactions that accountants prepare periodically. See Figure 15-12. a. A balance sheet shows what a company owns and what it has borrowed (owes) along with the net worth of a business. b. An income statement shows how much revenue the company generated in the period and how much money it spent. The difference between the two is the company’s profit or loss. c. A statement of cash flows shows the exchanges of money between a company and everyone else it dealt with during the period.

B. The Balance Sheet 1. What is the balance sheet used for? a. A balance sheet is a snapshot of a business’s financial condition at a specific moment in time. b. It reflects what a company owns (assets), what it owes to outside parties (liabilities), and what it owes to its owners (owners’ equity). See Figure 15.13.

2. What does a balance sheet track? a. Balance sheets are based on the fundamental accounting equation.

C. Assets o .

1. Assets are things a company owns, including cash, investments, buildings, furniture, and equipment. a. On a balance sheet, assets are organized into three categories: current, fixed, and intangible.

2. These categories are listed on the balance sheet in order of their liquidity— the speed at which they can be turned into cash. a. Current assets are those assets that can be turned into cash within a year. b. Fixed assets are assets that have more long-term use. a.) To reflect decreases in the value of a fixed asset over time due to usage or obsolescence, accountants use depreciation to spread out the costs over the asset over their useful lives. c. Intangible assets do not have physical characteristics but they have value nonetheless. a.) Trademarks, patents, and copyrights are examples of intangible assets. b.) So are strong brand recognition and excellent customer or employee relations, which are otherwise known as goodwill.

D. Liabilities 1. Liabilities are all debts and obligations owed by a business to outside creditors, suppliers, or other vendors.

2. Liabilities are listed on the balance sheet in the order in which they will come due. a. Short-term liabilities, also known as current liabilities, are obligations a company is responsible for paying within a year or less. i. These consist of accounts payable, accrued expenses, and short-term financing. a.) Accounts payable are obligations a company owes to its vendors and creditors. b.) Accrued expenses include payroll, commissions, and benefits earned but not paid to employees. c.) Short-term financing includes trade credit and commercial paper. b. Long-term liabilities include debts and obligations owed by a company that are due in more than one year.

E. Owners’ Equity 1. Owners’ equity is what is left over after you have accounted for all of your assets and taken away all that you owe. a. For small businesses, owners’ equity is literally the amount the owners of a business can call their own. b. For publicly owned companies, it is the value of stock issued as part of the owners’ (shareholders’) investment in the business plus retained earnings (which are the accumulated profits a business has held onto for reinvestment in the company).

F. Analyzing a Balance Sheet 1. What information is important on a balance sheet? a. Inventory is the merchandise that a business owns but has not sold. o .

b. Other important features include how efficiently a company handles its current assets and current liabilities, and whether a company is carrying too much long-term debt.

G. Balance Sheet Ratios 1. How do I compare data from two companies? a. A ratio analysis is used to compare current data to data from previous years, competitors’ data, or industry averages. b. There are three main ratios one can use with information from a balance sheet to determine a company’s financial health and liquidity: i. Working capital (Current Assets – Current Liabilities) ii. Current ratio (Current Assets  Current Liabilities) iii. Debt-to-Equity Ratio (Total Liabilities  Owners’ Equity) 2. What measures how financially efficient a company is? a. Working capital tells you what is left over if a company pays off its short-term liabilities with its short-term assets. b. Working Capital = Current Assets – Current Liabilities 3. What measures whether a company can pay its bills? a. The current ratio (sometimes called liquidity ratio) is a measurement used to determine the extent to which a company can meet its current financial obligations. b. Current Ratio = Current Assets  Current Liabilities 4. Can a company have too much debt? a. The debt-to-equity ratio indicates the proportion of equity and debt the company is using to finance its assets. b. Debt-to-Equity Ratio = Total Liabilities  Owners’ Equity H. Income Statements 1. What information does an income statement show? a. An income statement reflects the profitability of a company by showing how much it takes in versus how much it spends. b. The difference between the two is the profit (or loss) and is referred to as net income.

2. What are the components of an income statement? a. Income statements are based on the equation: Revenue – Expenses =Net Income (or loss) b. See Figure 15.14.

I. Revenue 1. Revenue is the total income of a business. a. For some businesses, revenue is generated just from selling goods or performing services. b. Some companies also generate revenue from investments or licensing arrangements.

J. Cost of Goods Sold 1. Cost of goods sold comprises the expenses a company incurs to manufacture and sell a product, including the price of raw materials used in creating the good along with the labor costs used to produce and sell the items. o .

2. When you subtract a firm’s cost of goods sold from its revenue, the result is its gross profit (gross margin). a. Gross profit tells you how much money a company makes just from the sale of its products and how efficiently its managers control costs of goods. b. Analysts also use gross profit to calculate one of the most fundamental performance ratios used to compare the profitability of companies: gross profit margin.

K. Operating Expenses 1. Operating expenses are the overhead costs incurred when running a business. a. These include sales, general, and administrative expenses, such as rent, salaries, wages, utilities, depreciation, and insurance. b. Unlike the cost of goods sold, operating expenses do not vary with sales or production levels and are constant, or “fixed.”. c. The amount of profit realized from a business’s operations (operating income, or net income before taxes) is determined by subtracting the company’s operating expenses from its gross profit.

2. Is operating income adjusted further? a. Additional income the firm earns, such as earnings from its investments must be added to its operating income. b. Additional expenses, such as interest payments on its outstanding debt, must be subtracted. c. Finally, taxes paid to local and federal governments must also be subtracted. d. What’s left over after doing so is the firm’s net income after taxes. i. It is usually stated on the very last line of an income statement, which is why it is often referred to as the firm’s “bottom line.”.

L. Analyzing Income Statements 1. How do I analyze an income statement? a. You should also look at a firm’s income statement to get a sense of its revenue growth over time. b. Equally as important are efforts to maintain and control the firm’s expenses, but no so much as to hurt its growth.

M. Income Statement Ratios 1. A number of ratios specific to the income statement can also be used to put the company’s performance into perspective relative to its industry and competitors. a. Gross profit margin = (Revenue – COGS)  Revenue b. Operating profit margin = (Gross Profit – Operating Expenses)  Revenue c. Earnings per share (EPS) = Net Income  Outstanding Shares 2. How can I determine a company’s overall profitability? a. The gross profit margin determines the company’s profitability of production. i. Gross profit margin = (Revenue – COGS)  Revenue o .

b. The operating profit margin determines a company’s profitability of operations. See Table 15.4. i. Operating margin = (Gross Profit – Operating Expenses)  Revenue 3. How much of a company’s profit belongs to its shareholders? a. The portion of a company’s profit allocated to stockholders on a per-share basis is determined by calculating earnings per share (EPS). i. Earnings per share (EPS) = Net Income  Outstanding Shares N. Statement of Cash Flows 1. What is the statement of cash flows? a. The statement of cash flows (or cash flow statement) organizes cash generated by three business activities: operating, investing, and financing.

See Figure 15.15. i. Operating activities measures the cash used or provided by the company’s actual operations. ii. Investing activities shows how the company is building its capital through the purchase of property, plants (factories), equipment, and other investments. iii. Financing activities shows the cash exchanged between a company and its owners (or shareholders) and creditors, including dividend payments and debt service.

O. Components of a Statement of Cash Flows 1. Why is the statement of cash flows important? a. Cash flow information is useful to creditors who are interested in gauging a company’s short-term health, particularly its ability to pay its bills. b. It also signals to investors whether the business is generating enough money to buy new inventory and make investments in the business.

P. Analyzing Statement of Cash Flows 1. How is a statement of cash flow analyzed? a. The total cash flow from operating activities should be positive. b. The investing section shows what the company is doing with the assets used to run the business. c. The financing section shows what the company has done over the past year to raise money. d. The net change in cash and cash equivalents reflects the overall change in a company’s cash position. e. See Figure 15.16.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental Homework/In-Class Activity Not Exactly Child’s Play Activity Overview: This activity asks students to think about the value of an audit as well as special accounting issues faced by firms that conduct international business.

Time Limit: 30 minutes What to Do: 1. In advance, ask students to research and read articles about the auditing scandal surrounding husband-and-wife team Ronald Weinberg and Micheline Charest, the founders of Cinar, a distributor of foreign films in the late 1970s.

2. Divide students into groups and ask them to answer the accompanying questions within their groups. (15 minutes) a. What role did the audit play in the investigation of Cinar’s financial irregularities?

Why did the auditors resign? b. How can shareholders protect their interests in a firm’s financial well-being?

What evidence in the case suggests how Cinar’s shareholders are watching the company’s actions now? c. What special accounting issues do you think firms face that conduct international operations?

3. Once students have answered the questions, discuss their answers as a class. Make sure they bring up the following points: (10 minutes) a. The audit was undertaken to determine whether the company’s financial reporting was accurate. Because the company could not ensure the accuracy of statements with regard to any illegal acts, the auditors could not complete the audit and resigned. b. Shareholders can examine company information, such as press releases, quarterly and annual statements, and other data; they can exercise their voting rights; and they can ask relevant questions. Apparently, there is a shareholder rights group for Cinar’s shareholders. c. Accounting rules and regulations vary by country, as well as ethical standards.

Don’t Forget: This activity can also be assigned as a debate or as homework.

Wrap-Up: Bring the activity to a close by reviewing the purpose of an audit and describe how shareholders can watch for and protect the interests of the firm’s financial wellbeing. o .

ENHANCING THE ONLINE COURSE CFO Interview: Ask your students to find an interview with a CFO of a major company through the online library at your institution. Have students review the article to determine the trends the CFO believes are important in Financial Management. Ask students to develop a short abstract that summarizes the key points and post these on the course blog.

Forecasting Chart: Have your students discuss the actions necessary for sound financial management: forecasting future financial needs; developing budgets; establishing controls. Have the students define and discuss each segment and then create a graphic that illustrates the process step-by-step.

Budget Differentiation: Ask your students to differentiate between a capital budget and a cash flow budget. Why is each necessary? Have your students search the Internet to find examples of each.

Short Term Resources: Have your students search the Internet for companies which provide short-term financing. Be sure to have the students look for each type of financing discussed in the text. Can any students identify solutions other than those discussed in the text? Which of these options seems good to the students? Why are they good or not good?

Long Term Resources: Have your students find websites of providers of long-term financing options—both debt financing and equity financing. Have students define the difference between the two. Then ask students to post a page of links, but tell them to save a copy for later (in case they become entrepreneurs).

Accounting Chart: Have students create a chart that shows the six different types of accounting—with definitions. How is the overall financial health of the company affected by each one? Have the students post the charts.

Ethics Essay: Ask your students to look up the Sarbanes-Oxley Act (2002) on the Web. Ask them to describe the major events that led to the development of this act and then write a one page essay on the importance of SOX on businesses today. Give extra points to the student with the most thoughtful essay.

Accounting Equation: Have your students create a graphic illustration of the Fundamental Accounting Equation. Students should define each part of the equation and relate each segment to one of the three major types of Financial Statements. Post the equations on the course blog.

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ANSWERS TO END-OF-CHAPTER MATERIALS Self- Test Multiple Choice 15-1 Which formula is the fundamental accounting equation? b. Assets = liabilities + owners’ equity Learning Objective 15-4: Accounting Functions AACSB: Analytical thinking 15-2 The role of a financial manager can best be described as d. All of the above.

Learning Objective 15-1: Financial Management AACSB: Analytical thinking 15-3 Ted White owns Soup & Salad Café. The terms of his last order for produce were 3/15 net 60. The total amount of the order is $1,500. How much will Ted pay if he pays within two weeks? c. $1,455.

Learning Objective 15-2: Financing Small Business Activities AACSB: Application of knowledge 15-4 Gormley Paper Products, Inc., is a privately held company with no intentions of going public or being managed by an outside group. It is looking to build a new manufacturing facility in another state. It is considering all of its financing options. Which would be a viable possibility for raising the necessary funds for the long-range project? a. Issuing bonds Learning Objective 15-3: Financing Big Business Activities: Debt and Equity AACSB: Application of knowledge 15-5 Cash flow management is important for which business? d. All of the above Learning Objective 15-1: Financial Management AACSB: Analytical thinking 15-6 Financial accounting is the process of b. producing financial documents for outside investors.

Learning Objective 15-4: Accounting Functions AACSB: Analytical thinking 15-7 Which is not measured in a statement of cash flows? a. Cash Flow from Sales Learning Objective 15-5: Financial Statements AACSB: Analytical thinking

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Hunter Wentworth is reviewing last quarter’s financial statements and realizes that there has been an increase in working capital. The most likely cause for an increase in working capital is a(n) b. increase in current assets and a decrease in current liabilities.

Learning Objective 15-5: Financial Statements AACSB: Analytical thinking

15-9 Which of the following reflects a company’s financial leverage? c. Debt-to-equity ratio Learning Objective 15-5: Financial Statements AACSB: Analytical thinking 15-10 Maureen found an old barn that would be a perfect location for her restaurant and catering business. She opened a Kickstarter account to begin to raise funds for the business. Maureen is taking advantage of a. crowdfunding.

Learning Objective 15-2: Financing Small Business Activities AACSB: Application of knowledge True/False 15-11 Factoring can be a good source of cash by selling accounts receivable.  True Learning Objective 15-2: Financing Small Business Activities AACSB: Application of knowledge 15-12 A risk of using credit cards to finance business activities for a sole proprietor is that a default could ruin the owner’s personal credit.  True Learning Objective 15-2: Financing Small Business Activities AACSB: Application of knowledge 15-13 A project budget includes all the costs necessary to operate an organization, including inventory, sales, manufacturing, marketing, and operating expenses.  False Learning Objective 15-1: Financial Management AACSB: Analytical thinking 15-14 A ratio analysis can be used to better compare companies of different sizes.  True Learning Objective 15-5: Financial Statements AACSB: Analytical thinking

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15-15 The statement of cash flows is analogous to a checkbook register because it records the cash generated by a business.  False Learning Objective 15-5: Financial Statements AACSB: Analytical thinking Critical Thinking Questions: Suggested Answers 15-16 Students’ answers will vary but the methods of financing that students should consider include: self-financing/family/friends, credit cards, commercial banks, line of credit, microloans, and social funding including peer-to-peer lending and crowdfunding. b. What information will Jason need to help make his decision?

Jason will need to forecast future financial needs including cash flow needs, update his budgets, and establish controls to keep expenses in line. c. Again answers will vary but students should cite the increased cost of operating two businesses and the increased resources and cash flow requirements for an additional store. Jason also needs to consider more long-term financing versus short-term and intermediate sources of funds.

Learning Objective 15-2: Financing Small Business Activities AACSB: Application of knowledge 15-17 The three key financial statements are the balance sheet, income statement, and statement of cash flows. The balance sheet is a snapshot of a business’s financial condition at a specific time. It reflects the business’s assets, liabilities, and owners’ equity. The income statement reflects the profitability of a company by showing its revenue and operating expenses.

The difference between the two is the firm’s profit or loss. The income statement shows how well a company minimizes its expenses while maximizing its profits.

A statement of cash flows is like a checkbook register and involves cash transactions only. It reveals important information about a company’s ability to meet its cash obligations, such as salaries and accounts payable.

Shareholders would find the balance sheet and income statements the most useful because the two statements provide the necessary information to calculate liquidity ratios, profitability, and debt-to-net worth ratios. These ratios help potential and current investors determine the potential return on their investment.

Independent contractors would want to examine the balance sheet to determine the company’s liquidity to insure the company has enough liquid assets to pay its bills. o .

Learning Objective 15-5: Financial Statements AACSB: Application of knowledge 15-18 Students’ answers will vary depending on their research and the three ratios that they select.

Learning Objective 15-5: Financial Statements AACSB: Application of knowledge Team Time Industry Analysis Group analyses will vary; however, all groups should include balance sheets, income statements, and cash flows in their assessment of the organization. Based on the information in these financial statements, students will be able to calculate: 1) Working capital 2) Current ratio 3) Debt-to-equity ratio 4) Gross profit margin 5) Operating profit margin Be sure to discuss the students’ answers to the following questions: 1) What is the company’s ability to meet current obligations out of current assets?

2) Is the company likely to be able to repay debts in future years?

3) What might be the size of the dividend that the firm can pay shareholders?

Don’t Forget: Information needed to calculate the above figures should be present in any financial statement. You may want to bring a supply of annual reports in case students can’t get to them, or make it clear that many companies post annual reports online so students can access the information they need on the Web. Learning Objective 15-5: Financial Statements AACSB: Application of knowledge Ethics and Corporate Social Responsibility Getting to the Bottom of the Sarbanes-Oxley Act 15-19 The Sarbanes-Oxley Act of 2002 (often shortened to SOX) is legislation enacted in response to the high-profile Enron and WorldCom financial scandals to protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise.

The Sarbanes-Oxley Act requires public companies to set up an audit committee of the board of directors. Senior management cannot control members of such committees. CEOs and CFOs of public companies are required to certify personally the accuracy of various financial reports, with significant criminal penalties for false certifications. Additionally, public companies have stronger o .

disclosure requirements, so that management must disclose in annual and quarterly financial reports all significant off-balance sheet transactions or special purpose entities.

Learning Objective 15-4: Accounting Functions AACSB: Application of knowledge 15-20 Students’ answers will vary, depending upon their research and their perspectives.

Learning Objective 15-4: Accounting Functions AACSB: Application of knowledge

Web Exercises 15-21 Balancing a Budget Students should be advised to use the game based on 2009 budget numbers. It is available at: http://www.gothamgazette.com/index.php/economy/130-fix-thebudget. According to the game, the mayor has released his 2010 budget proposal, filling a yawning $4 billion gap, and it is now the student’s turn to make the city’s budget balance. Students can add or reduce spending (or taxes) but must deal with angry cries from officials, groups, and citizens. Students’ answers will vary, depending upon their experience with playing the game and the choices they made.

Learning Objective 15-1: Financial Management AACSB: Application of knowledge 15-22 Successful Social Funding Students’ answers will vary, depending upon the crowdfunding sites selected.

Learning Objective 15-2: Financing Small Business Activities AACSB: Application of knowledge 15-23 Exploring Career Possibilities Students’ answers will vary, depending upon the jobs selected and their interest in these careers.

Learning Objective 15-4: Accounting Functions AACSB: Application of knowledge 15-24 Securing Financing Students’ answers will vary, depending upon the bank chosen.

Learning Objective 15-2: Financing Small Business Activities AACSB: Application of knowledge o .

15-25 Analyzing the Competition Using Ratios Students’ answers will vary, depending upon the industry and companies chosen.

Learning Objective 15-5: Financial Statements AACSB: Application of knowledge MyBizLab: Suggested Answers 15-26 Independent auditors provide a company with an accountant’s opinion that attests to the accuracy and quality of a company’s financial report. Independent auditors are not otherwise affiliated with companies for which they offer opinions.

Independent auditors have come under scrutiny by the government because of the failure to identify fraudulent accounting practices that ultimately led to the collapse of a number of a number of publicly traded companies.

Learning Objective 15-5: Financial Statements AACSB: Application of knowledge

15-27 Answers will vary but Sally might consider microloans, crowdfunding, and credit cards. Since time is of the essence, she should also consider approaching her suppliers and ask them to consider trade credit so she can purchase her raw materials and other supplies.

Learning Objective 15-2: Financing Small Business Activities AACSB: Application of knowledge

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CHAPTER 16: INVESTMENT OPPORTUNITIES IN THE SECURITIES MARKETS CHAPTER OPENER This chapter gives students an overview of the ways in which they can invest their money, including stocks, bonds, mutual funds, and other investments. It discusses the risks and rewards of savings and investing, as well as the risk–return relationship and the value of diversification and asset allocation.

DETAILED LECTURE OUTLINE I.

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Investment Fundamentals A. The Risks and Rewards of Saving and Investing 1. Why is it important to put money into a savings account? a. Depositing funds into a bank and earning interest on the funds is a good way to get your money to make more money for you. b. Compound interest is earned interest added to the principal investment so that interest continues to earn interest.

2. Why isn’t saving enough? a. Depending on the amount and timing of your long-term needs, the amount your money will earn in a savings account might not be enough to reach your goals.

B. Investment Risk 1. Isn’t investing too risky? a. Investing is buying or otherwise obtaining an asset with the expectation of achieving a future profit. b. There is a direct relationship between risk and return for all securities (the risk–return relationship), with the least risky investments offering the lowest amount of return and vice versa. See Figure 16.1. c. There is also a more general risk associated with the overall market, known as market risk. i. Events such as wars and other political turmoil, changes in interest rates, terrorist attacks, recessions, and natural disasters will cause a decline in the market as a whole.

2. How do I know my risk tolerance? a. Your current behavior with money and other situations are indications of whether you are conservative, moderate, aggressive, or in between. b. Another way to figure out your risk tolerance is by asking yourself this question: “Are my investments going to keep me awake at night with worry?” i. If the answer is yes, you need to reduce the risk level of your investments and perhaps lower your expectations accordingly.

3. How do I start investing?

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a. Depending on how much money you have to invest, you might start investing by purchasing stock in one or two companies or by investing in a mutual fund. b. Two strategies will help minimize risk: diversification and asset allocation.

How do I make money investing in stocks? a. There are two ways to earn money by investing in stocks. i. Most investors hope to make money through capital appreciation, or buying a stock at one price and then later selling the stock at a higher price. i.) When this happens, the investor incurs a capital gain. ii.) If there is a decrease in value between the purchase price and the selling price, the investor incurs a capital loss. ii. Investors can also make money by receiving dividends, though not all companies pay dividends.

What is diversification? a. Diversification is having a variety of investments in your portfolio, such as different types of companies in different industries. b. Keep in mind that diversification does not protect against market risks that affect the overall market.

What is asset allocation? a. Asset allocation refers to how you structure your portfolio with different types of assets (stocks, bonds, mutual funds, real estate, etc.) to reduce the risks associated with these broad types of investments. See Figure 16.2.

Are there rules and regulations that govern investing? a. The Securities and Exchange Commission (SEC) is a U.S. federal agency created to protect investors and maintain a fair and orderly market. b. It governs the securities exchanges, the people who issue, trade, and deal securities, and those who offer investment advice. c. It also establishes regulations that govern how companies disclose information to the investing public as well as the investment banks creating the investment products the public buys. d. It prohibits fraudulent activity such as insider trading, the buying and selling of securities based on information that has not been disclosed to the public.

Investing in Stocks A. Primary and Secondary Security Markets 1. How are stocks issued into the primary market? a. Securities transactions take place in the capital market, an arena where companies and governments raise long-term funds by selling stocks and bonds and other securities. i. The primary market is a part of the capital market that deals specifically with new bond and stock issues. b. The first sale of stock to the public by a company is called an initial public offering (IPO).

i. Before the sale of the stock, investment bankers, specialists who assist in the sale of new securities, prepare financial documents that must be filed with the SEC, such as the prospectus. a.) A prospectus is a formal legal document that provides details about an investment. c. The initial buyers of an IPO are mostly large institutional buyers, such as insurance companies and large corporate pension plans, and a few highprofile individuals. i. A very small portion of the IPO is actually available to individual investors.

2. How are stocks exchanged after the IPO? a. The secondary market refers to the market in which investors purchase securities from other investors rather than directly from an issuing company.

B. Types of Stocks 1. Are all stocks the same? a. There are two main types of stocks that companies issue: common and preferred. i. Common stock is a class of ownership in which the stockholders have the right to elect a board of directors and vote on corporate policy. a.) They are also entitled to a share of any dividends—a distribution of a portion of the company’s earnings, as determined by the board of directors. ii. Preferred stock is a class of ownership in which the preferred stockholders have a claim to assets before common stockholders if a firm goes out of business. b. Stocks can also be categorized based on the type of company and expected growth and return of the investment, as illustrated in Figure 16.3. i. Income stocks are issued by companies that pay large dividends. ii. Blue chip stocks are issued by companies that have a long history of consistent growth and stability. iii. Growth stocks are issued by companies that are expected to generate revenues and earnings that increase at a faster rate than the average company’s does. iv. Value stocks are those stocks that are viewed as being priced lower than what they should be based on the earnings and financial performance of the companies that issue them. v. Cyclical stocks are issued by companies that produce goods or services that are affected by economic trends. vi. Defensive stocks are issued by companies that produce staples such as food, drugs, and insurance products and usually maintain their value regardless of the state of the economy.

2. How do I choose which stocks to invest in? a. The answer to this question begins with determining your investment goals and objectives, the time in which you have to achieve your goals and objectives, and your risk tolerance. See Figure 16.4. .

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b. You should consider a stock’s basic fundamentals, past performance, published analyses, as well as the economy in general and how I could affect the stock. i. Fundamentals—earnings, financial statements, and key ratios. ii. Past performance—how a company and its stock have performed in the past iii. Publishes analyses—the opinions of industry analysts who independently research and analyze the investment potential of companies iv. Economy—current events and changes in economic conditions Why is it important to set goals before investing? a. You need to determine what kind of company meets your investment goals and objectives. i. Younger investors are often investing to meet long-term goals, such as buying a house or funding a retirement account. ii. Someone who is 55 is probably nearing retirement and can’t endure the possibility of “starting over” if his or her portfolio does very poorly. iii. Older investors often invest in companies that are less risky, and that pay high dividends to earn income to help fund their retirement years.

Where are stocks bought and sold? a. Before the Internet, people could buy stocks only with a stockbroker (or broker), a professional who buys and sells securities on behalf of investors. b. Today, people can buy and sell stocks directly on the Internet for a small fee through discount brokers. c. The process of buying stock is done through a stock exchange, an organization that facilitates the exchange of stocks and other securities between brokers and traders. i. One of the largest and most dominant stock exchanges is the New York Stock Exchange (NYSE), which merged in 2007 with Euronext and is now operated by the combined organization NYSE Euronext. ii. The NASDAQ was the world’s first electronic stock exchange and is the world’s second largest stock exchange. d. Securities too small to meet the requirements to be traded on a formal exchange are referred to as over-the-counter (OTC) stocks and are traded directly between investment professionals.

How are stocks traded? a. There are two ways securities are traded: on the exchange floor and electronically. i. A typical trade with a broker on the NYSE exchange floor is illustrated in Figure 16-5. ii. Figure 16-6 shows the steps involved with an electronic stock trade.

How is a broker selected? a. The process of selecting a broker can be complicated. The SEC recommends that you:

i. Think about your financial objectives. ii. Speak with potential brokers at several firms. iii. Inquire about the history of the brokerage firm. iv. Understand how brokers are paid. v. Ask if the firm is a member of the Securities Investor Protection Corporation (SIPC) 7. Is investing in foreign companies possible? a. Investing is not limited to U.S. companies only. b. Investing in foreign companies is a recommended strategy for increasing portfolio diversification and possibly obtaining higher returns.

8. Can I buy stocks if I don’t have enough cash on hand? a. By buying on margin, stock can be bought with borrowed funds from a broker.

C. Changing Stock Prices 1. What causes stock prices to change? a. There are many reasons why stock prices change. See Figure 16.7. b. Similar stock movements are most likely due to overall market variations. c. There are also some variations particular to the company or the industry. d. Ultimately, though, a stock’s price is derived from the forces of supply and demand.

2. What influences investor behavior? a. Most investors will invest if a stock’s price reflects what they think a company is worth or will be worth. b. Often, investors look not only at how a company is currently performing but also consider a company’s expected future growth in anticipation of increased earnings or profits. See Figure 16.8.

3. What else influences stock prices? a. Stock prices also change in reaction to broader news based on economic forecasts, industry or sector concerns, or global events.

4. How do you know how the overall market is doing? a. Investors pay attention to stock market indexes, such as Standard & Poor’s 500 Composite Index (S&P 500), the DJIA, and the NASDAQ 100. i. An index tracks and measures the combined value of a large group of stocks. b. The S&P 500 and the DJIA are the two most widely watched stock indexes and are important because what they measure reflects the state of the U.S. economy. i. A bull market indicates increasing investor confidence as the market continues to increase in value. ii. A bear market indicates decreasing investor confidence as the market continues to decline in value.

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Investing in Bonds A. Different Types of Bonds 1. How do companies issue bonds?

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a. A financial advisory firm prepares the documentation that must be filed with the SEC prior to the bonds being issued. b. The financial advisory firm also consults with rating agencies that assesses the issuer’s creditworthiness.

What are the characteristics of a bond? a. The maturity date of a bond is the date on which the bond matures and the investor’s principal is repaid. b. The Par (face) value is the amount of money the bondholder will get back once a bond reaches maturity. c. The coupon is the bond’s interest rate.

Are there different types of bonds? a. Bonds are categorized primarily by the type of entity issuing the bonds, such as government bonds, corporate bonds, and municipal bonds. See Figure 16.9.

What are corporate bonds? a. Corporate bonds are debt securities issued by corporations. There are several types. i. Secured bonds are backed by collateral. a.) Mortgage-backed securities are special secured bonds that are backed by real property owned by a corporation. ii. Debenture bonds are unsecured bonds, backed only by a corporation’s promise to pay. iii. Convertible bonds give a bondholder the right (but not the obligation) to convert the bond into a predetermined number of shares of the company’s stock.

What are government bonds? a. Government bonds are debt securities issued by national governments.

They are divided into several categories based on their maturity: i. Treasury bills (or T-bills) are bonds with maturities ranging from 4 weeks to 52 weeks. ii. Treasury notes (or T-notes) are bonds that mature in 2, 3, 5, 7, and 10 years. iii. Treasury Inflation-Protected Securities (TIPS) protect investors from inflation. A TIPS’s principal is adjusted to the U.S. Consumer Price Index (CPI). iv. Treasury bonds are bonds that mature in 30 years and pay interest semiannually. v. Floating rate notes (FRNs) are debt instruments issued for a term of two years. a.) Interest payments are variable and are based on discount rates for 13-week T-bills. vi. U.S. savings bonds can be purchased only electronically. There are two types: a.) Series EE bonds have a 20-year maturity but will pay interest up to a total of 30 years.

b.) Series I bonds have an interest rate that is part fixed and part variable that is reset to the inflation rate.

6. What are municipal bonds? a. Municipal bonds (or munis) are bonds issues by state or local governments or governmental agencies. There are two varieties: i. General obligation bonds are supported by the taxing power of the issuer. ii. Revenue bonds are supported by the income generated by the project they finance.

7. What are serial bonds? a. Serial bonds have a series of dates on which portions of the total bond mature, unlike traditional bonds, which are paid back to the investors all at once on one date.

8. What are callable bonds? a. With callable bonds, the issuer can either repay their investors at the maturity date or choose to retire the issue early and repay investors at the “callable date.”

9. Are bonds a risky investment? a. Relative to stocks, bonds are viewed as a conservative investment. b. However, bonds are not entirely risk free; there are different types of risk that affect bonds. See Figure 16.10.

10. How is bond risk determined? a. Before bonds are issued, the creditworthiness of the bond issue is evaluated by a rating agency and later assigned an investment grade. See Table 16.1. b. Bonds with the lowest ratings—and the most risk—are known as junk bonds.

11. Do I have to hold a bond to maturity? a. Just like stocks, after they are issued, bonds are bought and sold on the secondary market. i. The exceptions are U.S. savings bonds, which are not sold on the secondary market.

IV.

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Investing in Mutual Funds and Other Opportunities A. Mutual Funds 1. What is a mutual fund? a. A mutual fund is a means by which a group of investors pools money together to invest in a diversified set of investments.

2. Why are mutual funds so popular? a. Reasons include: i. Diversification—They offer a cost-effective way to invest in many different types of companies and investment products. ii. Professional management—They are managed by a professional whose job depends upon their success. iii. Liquidity—It is easy to sell mutual funds. iv. Cost—It takes as little as $1,000 to invest in most mutual funds.

B. Risk-and-Return Relationships of Different Types of Mutual Funds 1. Are there different types of mutual funds? a. Each mutual fund has an investment objective that dictates the types of investments the fund can hold. b. There are three broad groupings of mutual funds: money market funds, fixed-income funds (bonds), and equity funds (stocks). c. Figure 16.11 categorizes the different types of mutual funds, relative to their risks and returns.

2. What are money market funds? a. Money market funds are the least risky because they invest in short-term debt obligations such as Treasury bills and CDs. b. You can also invest in a money market savings account through a savings bank and the account is insured by the FDIC up to $250,000.

3. What are bond mutual funds? a. Bond mutual funds consist solely of bonds. b. Some bond funds are categorized by the type of bond; others are categorized by maturity. See Figure 16.2.

4. What are stock mutual funds? a. Stock mutual funds (sometimes referred to as equity funds) are broken down into various categories based on the types of companies they invest in. See Table 16-3. i. Growth funds invest primarily in companies that are in the growth phase. ii. Value funds invest in stocks considered to have lower prices relative to the overall value of the companies that issued them. iii. Large-cap funds invest in large companies. iv. Mid-cap funds invest in medium-size companies. v. Small-cap funds invest in small companies.

5. Are there funds that invest in both stocks and bonds? a. Blend (or balanced) funds invest in stocks, bonds, and sometimes money market funds to offer a mixture of safety, income, and modest appreciation. i. Life cycle funds invest in mutual funds from the same mutual fund family, and the mix of investments is managed to become more conservative as the fund approaches a target date, which often closely matches an investor’s anticipated retirement date.

6. What are index funds? a. Index funds have a portfolio that consists of investments that closely match the components of a market index, such as the S&P 500.

7. How do I make money investing in mutual funds? a. You can make money investing in mutual funds through dividends, interest, capital gains, and fund appreciation. b. The measure of the value of the individual holdings of a mutual fund is known as its net asset value (NAV), which is calculated at the end of each trading day. i. It consists of the combined closing values of the stocks in the fund. .

8. What do I need to watch out for when investing in mutual funds? a. Some mutual funds, referred to as load funds, have additional costs (loads) that cover marketing and other fund expenses. b. A no-load fund is a mutual fund that does not charge a fee for buying into the fund and selling out of it. c. In addition to the loads, you should also look at the ongoing expenses that funds charge investors. i. These expenses are comprised of management fees, administrative costs, and 12B-1 (advertising) fees represented by the expense ratio. d. It’s also important to have a good understanding about who is managing the fund and the person’s success record.

9. What are exchange-traded funds? a. An exchange-traded fund (ETF) is a fund that holds a collection of investments like a mutual fund does but trades on an exchange like stocks do.

C. Other Investment Opportunities 1. Besides stocks, bonds, and mutual funds, what else can I invest in? a. There are alternative investments such as options, futures, commodities, real estate, and precious metals. b. These are often complicated and can carry additional risk.

2. What is an option? a. An option is a contract that gives a buyer the right (but not an obligation) to buy (call) or sell (put) a particular security at a specific price on or before a certain date.

3. What are futures? a. A futures contract is an agreement between a buyer and a seller to receive (or deliver) an asset sometime in the future at a specific price agreed on today.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity 1: Case Study 16-1 How Much Is That Violin in the Window?

Activity Overview: This activity familiarizes students with investments other than securities that share some similar “features.”

Time Limit: 30 minutes What to Do: 1. In advance, assign the reading of the article by Susan Elliott, “Investment Opportunity. Strings Attached” (found online and in the New York Times, February 6, 2001, E1, E8). The website is: http://www.nytimes.com/2001/02/06/arts/investmentopportunity-strings-attached-musician-15-partners-join-forces-acquire.html 2. Divide students into groups and ask them to answer the questions in their small groups. (15 minutes) a) How is the 1735 de Ges Partners’ investment different from a traditional investment in securities such as stocks or bonds? How is it the same? b) How much of a risk do you think the investors are taking? What do you think they hope to get back for their money? c) Can you think of any other applications for this model of investing?

3. Once students have answered the questions, discuss their answers as a class. As students discuss their answers, make sure they bring up the following points: a) It is different in that it is a partnership; it is an investment in a rare object; and it is also, in part, an investment in the violinist’s career, which has intangible returns.

It is the same in that it is for a specified time limit and entails both risk and the opportunity for monetary return. b) Students’ views of the risk will vary. The investors hope to get back their money and a considerable profit; those who are close to Mr. McDuffie also hope to further his career. c) Answers will vary, but students will mention various investment options that are not included in securities markets.

Don’t Forget: There are many forms of investments whose market values fluctuate based on a variety of factors.

Wrap-Up: Wrap up the activity by mentioning that each student’s assessment of the risk inherent in this case will vary, just as investing in market securities.

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ENHANCING THE ONLINE COURSE SEC Search: Have your students locate the official SEC site online and report to you on what information they can glean from the site. How will this site be useful to them in their future business careers? What is especially important to the students regarding this site?

Prospectus Search: Ask your students to search the Internet to find an example of a prospectus from a Fortune 500 company and from a smaller business. In what ways are the two reports different? In what ways are they alike? Have your students do a quick analysis of both reports for content, type of information, persuasive style, financial information, strategic information.

To Invest or Not to Invest: Have your students create PowerPoint slides explaining the pros and cons of investing. Once all the slides are posted, ask students to follow up with their thoughts on their own future investing.

Risk Essay: Ask your students to write a one page essay on the personal risks. Do they consider themselves risk adverse or risk tolerant? Why or why not? Post the essays on the discussion board.

Stock Options: Have your students choose five companies in which they might be willing to invest (at some point in the future). Their research should focus on financial media such as online newspapers, magazines, or financial sites. Have the students identify the types of stocks offered based on the information in the media. Then, ask students to create a chart listing the different types of stocks, bonds, and so on, offered by these companies.

Investment Surfing: Have your students look up sites for NYSE-Euronext and NASDAQ. What information is listed there? Why are these sites important for investors? Have the responses posted on the discussion board.

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ANSWERS TO END-OF-CHAPTER MATERIALS Self Test Multiple Choice 16-1 Mason recently bought a $10,000 government bond with a 3.5 percent interest rate. For the first two years, his semiannual interest payments were $175, $175, $200, and $200. What kind of government bond would Mason most likely have purchased? c. TIPS Learning Objective 16-3: Investing in Bonds AACSB: Application of knowledge 16-2 Which of the following could cause a stock price to change for Sunny Orange Growers, Inc.? d. All of the above.

Learning Objective 16-2: Investing in Stocks AACSB: Analytical thinking 16-3 What document must companies prepare and make available to investors when issuing stocks for the first time? b. An initial public offering Learning Objective 16-2: Investing in Stocks AACSB: Analytical thinking 16-4 Tracy Quinn feels she has a great investment portfolio. She has investments in technology stocks, banking stocks, and consumer goods stocks. Which type of investment should she use if she is striving for greater asset allocation? c. Municipal bond fund Learning Objective 16-4: Mutual Funds and Other Investment Opportunities AACSB: Application of knowledge 16-5 Jose Fernandez is saving toward retirement and has an investment portfolio that reflects his risk tolerance. It was carefully put together by a trusted investment adviser. Unfortunately, the returns on the portfolio are not projected to generate the type of savings Jose desires. What should Jose do? b. Lower his retirement expectations.

Learning Objective 16-1: Investment Fundamentals AACSB: Analytical thinking 16-6 Jeremy wants to invest in companies that have a long history of consistent growth and stability. He should invest in which of the following? a. Blue-chip stocks Learning Objective 16-2: Investing in Stocks AACSB: Application of knowledge

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16-7 Which of the following describes a security issued by a local government agency? b. Souderton County Water Authority bond Learning Objective 16-3: Investing in Bonds AACSB: Application of knowledge 16-8 If you own a $5,000 bond that has a coupon of 4 percent and pays interest semiannually, how much interest would you receive? d. $100 twice a year Learning Objective 16-3: Investing in Bonds AACSB: Application of knowledge 16-9 Which is not an advantage of investing in mutual funds? a. Mutual funds have less price variability than stocks or bonds.

Learning Objective 16-4: Mutual Funds and Other Investment Opportunities AACSB: Analytical thinking 16-10 An ETF is d. an investment that holds a collection of investments and trades like a stock.

Learning Objective 16-4: Mutual Funds and Other Investment Opportunities AACSB: Analytical thinking True/False 16-11 A person’s risk tolerance might change with more investment knowledge or greater wealth.  True Learning Objective 16-1: Investment Fundamentals AACSB: Analytical thinking 16-12 Five years ago, Jerome bought 100 shares of Kodak at $60 per share. Last month, he sold the 100 shares at $55 per share. Jerome has a capital gain from the sale.  False Learning Objective 16-2: Investing in Stocks AACSB: Application of knowledge 16-13 Treasury notes are bonds that mature in 2, 3, 5, 7, and 10 years.  False Learning Objective 16-3: Investing in Bonds AACSB: Analytical thinking 16-14 Common stockholders get paid before preferred stockholders if a firm goes out of business.  False Learning Objective 16-2: Investing in Stocks AACSB: Analytical thinking .

16-15 Asset allocation is an investment strategy that suggests you structure your portfolio with stocks from different sectors.  False Learning Objective 16-2: Investing in Stocks AACSB: Analytical thinking Critical Thinking Questions: Suggested Answers 16-16 Students’ answers will vary but students should consider their current behavior with money and other situations which indicates whether you are conservative, moderate, aggressive, or in between. Students should also consider other factors to determine their risk tolerance and the possibility of its change.

Those factors should include: changing knowledge level about investments and a change in financial situation.

Learning Objective 16-1: Investment Fundamentals AACSB: Analytical thinking 16-17

Students’ answers will vary depending on their current age, personal situation, and the time to reach each goal. Students should reference Figure 16.4 when answering this question.

Learning Objective 16-1: Investment Fundamentals AACSB: Analytical thinking

16-18 Students’ answers will vary depending on their definition of the term blue chip and their research.

Learning Objective 16-2: Investing in Stocks ACSB: Analytical thinking

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Team Time Take this $50,000 and Invest It! Answers will vary. However, teams should be able to come up with a good blend of stocks, bonds, and different types of mutual funds. Students may want to visit the Beginners’ Guide to Asset Allocation, Diversification, and Balancing page of the SEC website (www.sec.gov) to come up with some ideas about asset allocation.

Learning Objective 16-1: Investment Fundamentals AACSB: Application of knowledge Ethics and Corporate Social Responsibility Can Investments Be Socially Responsible and Lucrative?

Student responses will, of course, vary, depending on which organizations they choose for their reports. There is a fair and balanced overview of the pros and cons of socially responsible investing on the Money pages of the AARP website (www.aarp.org). When discussing student answers with the class, be sure to discuss the topic of investment fees.

These are usually much higher for socially responsible funds than for index funds or even for other types of managed funds.

Web Exercises 16-19 Financial blogs Students’ answers will vary, depending upon the blogs and articles chosen.

Learning Objective 16-1: Investment Fundamentals AACSB: Application of knowledge 16-20 Getting the Most for Your Savings Students’ answers will vary, depending upon their location and the current rates available.

Learning Objective 16-1: Investment Fundamentals AACSB: Application of knowledge 16-21 Dogs of the Dow Dogs of the Dow is a stock picking strategy devoted to selecting the highest dividend paying Dow stocks. See www.dogsofthedow.com. Students’ answers on whether or not this would be a good investment strategy for them will vary, depending upon their risk tolerance and investment goals.

Learning Objective 16-1: Investment Fundamentals AACSB: Application of knowledge 16-22 Dollar Cost Averaging Dollar cost averaging (DCA) is an investment technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share .

price. It is also referred to as a “constant dollar plan.” More shares are purchased when prices are low, and fewer shares are bought when prices are high.

Eventually, the average cost per share of the security will become smaller and smaller. Dollar cost average lessens the risk of investing a large amount in a single investment at the wrong time. Students’ answers regarding the advantages and disadvantages will vary, depending upon their risk tolerance and investment goals.

Source: http://www.investopedia.com/terms/d/dollarcostaveraging.asp Learning Objective 16-1: Investment Fundamentals AACSB: Application of knowledge 16-23 Municipal Bonds: Paving Roads and Building Schools Students’ answers will vary, depending upon the states in which they live and the municipal bond projects chosen.

Learning Objective 16-3: Investing in Bonds AACSB: Application of knowledge MyBizLab: Suggested Answers 16-24 Students’ answers will vary but students should discuss how “instant millionaires” are often created when a company such as Facebook goes public. Additionally, the IPO process can be very distracting to a company and its employees.

Learning Objective 16-1: Investment Fundamentals AACSB: Application of knowledge 16-25 Students’ answers will vary but they should recognize that each mutual fund has an investment objective that dictates the types of investments the fund can hold and thus a comparison to the S&P 500 is not necessarily valid given the difference in the different investment objectives. Students should use the information in Figure 16.11 which categorizes the different types of mutual funds, relative to their risks and returns.

Learning Objective 16-2: Investing in Stocks AACSB: Application of knowledge

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MINI CHAPTER 1: BUSINESS LAW CHAPTER OPENER Mini Chapter 1 reviews the impact of laws and regulations on businesses. It provides an overview of the legal system in the United States, examines how laws affect businesses, and explores different types of law, including tort law, intellectual property law, and contract law.

DETAILED LECTURE OUTLINE I.

The U.S. Legal System A. The United States is a federalist system, meaning there is government authority at both national and state levels.

B. Sources of Law 1. There are four sources of law: a. Constitutional law—The written text of the U.S. Constitution and the Bill of Rights are the foundation of United States law. i. All laws are subordinate to the laws in these two documents. b. Statutory laws are passed by the legislative branch of the government. c. The executive and legislative branches of the federal or state government also establish regulatory bodies (such as the Securities and Exchange Commission and the Federal Trade Commission). i. These regulatory bodies have the power to pass administrative laws—rules and regulations within their areas of authority. d. The judicial branches of the government also create laws when their decisions become precedent for decisions in future cases. i. This type of unwritten but applied law is considered common law, also known as case law.

II.

How Laws Affect Businesses A. Business law consists of laws that directly affect business activities.

B. Running a Business: Essential Concepts of Business Law 1. Contract law a. A contract is an agreement between two parties. b. Elements of a contract include: i. An offer is made and accepted by competent parties. ii. Terms of offer must be defined and understood and of legal purpose. iii. Consideration is defined and exchanged. c. Breach of contract occurs when a party fails to uphold his or her stated obligation under a contract.

2. Tort law a. A tort is a wrongful act resulting in injury or damages. b. It differs from a breach of contract in that a tort is a violation of a right given by law, not violation of a right acquired by contract.

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c. There are different types of torts: i. Intentional torts are actions designed to injure another person or person’s property such as battery, assault, fraud, and so on. ii. Negligence is a failure to exercise reasonable care to avoid causing harm to others. It is not intentional. iii. Strict liability (or absolute liability) is the legal responsibility for damages, or injury, even if the person found liable was not at fault or negligent. a.) Strict liability is usually associated with defectively manufactured products, known as product liability. b.) Sometimes, when product deficiencies affect many individuals, the group will come together and file a class action lawsuit, in which the group of injured individuals (referred to as the class) is jointly represented and acts as one claimant.

3. Intellectual property laws a. Intellectual property laws are put in place to protect intellectual property—creations of the mind such as ideas, inventions, and literary and artistic works, as well as symbols, names, images, and designs used in commerce. i. Patents—A patent is a property right granted by the U.S. Patent and Trademark Office on a new and useful invention. a.) A patent grants the patent holder the exclusive right to his or her invention, excluding others from using, making, or selling the same invention for 14 or 20 years, depending on the type of patent issued. b.) There are three types of patents: i.) Utility patents protect inventions for processes, machinery, manufactures, or composites of a matter. ii.) Design patents protect the appearance of an object rather than its functionality. iii.) Plant patents protect new, reproducible plants (organic matter). ii. Trademarks—A trademark is any word, name, symbol, or device (or combination) used to identify and distinguish a good. a.) A service mark is a similar device but used to identify a service. b.) Trademarks and service marks are often referred to as “brands” or “brand names.” iii. Copyrights—A copyright is a form of protection provided to authors of original works of authorship for a limited period of time. iv. Trade secrets—A trade secret is information that companies keep undisclosed to give them a competitive advantage. a.) Trade secrets can be any formula, pattern, physical device, idea, process, or compilation of information. v. Digital rights—Digital intellectual property is the digital (or electronic) representation of an individual’s intellect that holds value on the commercial market.

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a.) In 1998, the United States passed the Digital Millennium Copyright Act (DMCA) to try to prevent digitized works from being illegally reproduced and distributed.

4. Sales law a. The most comprehensive of laws that govern the sales of goods is the Uniform Commercial Code (UCC), a set of model laws that governs businesses selling goods within the United States and its territories. i. The UCC covers the sale of goods, how they are legally transferred from one owner to another, leases, contracts, securities, and how money can be borrowed. See Table M1.1.

5. Antitrust laws a. Antitrust laws are designed to prevent companies from unfairly stifling competition in their markets. i. The Sherman Act of 1890 was created to prevent large, powerful companies from coming together as “trusts” and dominating industries. ii. The Clayton Antitrust Act of 1914 added further substance to antitrust legislation. b. The FTC’s Bureau of Competition reviews and analyzes potential mergers and other agreements to prevent anticompetitive conduct and ensure that competition is maintained. i. Mergers—The FTC monitors mergers to ensure that a combination of two or more businesses would not result in market dominance by the newly formed, bigger company. ii. Price collusion—The FTC also watches out for companies that collude on price-related matters that then might either make it difficult for others to enter a market or would artificially raise prices to the consumer. iii. Manufacturer/dealer agreements—The FTC monitors any agreements between manufacturers and product dealers.

6. Environmental laws a. To protect the environment for future generations, in the 1960s and 1970s, U.S. laws were passed to regulate air and water quality, and the Environmental Protection Agency (EPA) was established. i. The EPA is responsible for maintaining and enforcing national environmental standards, as well as conducting research and providing education on environmental issues.

C. Laws for Consumers and Employees 1. Advertising laws a. The FTC regulates all forms of business advertising. i. Truth-in-advertising rules help to ensure advertisements are truthful and nondeceptive, that there is sufficient evidence to support the claims they make, and that the advertisements are not unfair. ii. Product labeling laws include laws that mandate that food products have specific nutritional and product information on their labels, and so on. .

2. Employment and labor law a. Employment laws mandate that companies in their hiring practices do not discriminate against a job applicant or candidate based on his or her disabilities, age, race, religion, sexual orientation, or nationality. b. Employee laws ensure that all workers and employees are treated fairly with respect to wages, workplace conditions, medical care due to a workplace injury, and employee benefits. i. See Table M1.2 D. Laws that Govern Closing a Business 1. Bankruptcy a. Bankruptcy is the legal status of an insolvent person or organization by which their debts are relieved through court action. b. There are three types of bankruptcy: i. Chapter 7—All business (and sometimes personal) assets are liquidated and outstanding debts are paid off. ii. Chapter 11—The business is allowed to continue operating and develops a reorganization plan to pay its creditors over time. iii. Chapter 13—This allows an individual to use proceeds from the sale of some assets and pay off remaining debts with operating income by following a 3- to 5-year repayment plan.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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MINI CHAPTER 2: CONSTRUCTING AN EFFECTIVE BUSINESS PLAN CHAPTER OPENER Business plans are essential for guiding the work of organizations, acquiring funding, and attracting both employees and investors to the organization. This chapter teaches students how to write a business plan.

DETAILED LECTURE OUTLINE I. The Purpose of a Plan A. What Is a Business Plan?

1. A business plan is a written document that details a proposed or existing venture, describing the vision, current status, the markets in which it operates, and the current and projected results of a business.

B. Three Purposes of a Business Plan 1. Development—Writing down your business plan solidifies and defines your intentions.

2. Management—A business plan should summarize how a business opportunity will translate into profits.

3. Communication—A business plan is often used to attract investors or obtain loans.

C. Business Plan Competitions 1. Many top business schools and colleges in the United States offer business plan competitions with cash prizes that range from $10,000 to $100,000.

D. Before the Business Plan: Finding the Right Fit 1. Before you begin to think about writing a business plan, you should do some soul searching to determine if your goals and objectives match those of the business that you’ve imagined.

II. Components of a Business Plan A. The Cover Sheet and Table of Contents 1. The cover sheet provides the first impression of the plan and the business.

2. It should contain the following (see Figure M2.3): a. Basic company information b. Company logo c. Contact information d. Month and year business plan was created e. Name(s) of those who prepared the plan f. Unique record number for tracking plan distribution.

3. The table of contents follows the cover sheet.

B. Executive Summary 1. An executive summary is a clear and concise (abbreviated) form of the entire business plan, generally no more than two or three pages long.

2. After reading the executive summary, a person should understand the business’s purpose, value, operating methods, and profitability outlook. .

C. The Company and Management Team 1. This section presents the “big picture” and defines the company and its purpose. It should include: a. Mission and vision statements i. The mission and vision statements should spell out what the founder ultimately envisions the business to be with respect to growth, values, and contributions to society. b. Industry profile i. The industry profile describes the context in which the business will operate. c. Company profile and strategy i. The company profile provides details regarding how the business works and why it has a unique chance to impact the industry. ii. The company strategy summarizes the company’s plans for growth and profits. d. Anticipated challenges and planned responses i. This section discusses potential vulnerabilities from competition, suppliers, resources, industry, or economic situations. e. Management team i. This section should list the members of the management team and the pertinent experience, knowledge, or creative ability that each member brings to the team.

D. Market Analysis 1. The market analysis section identifies who your customers are and explains how you will reach them. a. The main purpose of this section is to explain the benefits of your product.

2. This section should include an assessment of the general market and: a. Market research—an analysis of the market to determine whether enough customers exist and will continue to exist b. Assessment of the competition E. The Product 1. Product description a. This should include any testing you’ve conducted and approvals you’ve received as well as trademarks, copyrights, or patents. b. It is also important to discuss ongoing service aspects, such as warranties and repairs.

2. How product will be produced 3. Pricing strategy a. Detail aspects that require a higher price. b. Conduct a thorough analysis of what the competition is charging. c. List what you expect customers will be willing to pay for your product.

F. Sales and Promotion 1. This section should describe approaches you’ll take to promote the product.

2. It should also describe your selling approach.

G. Financials

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1. This section includes financial statements, including the income statement, balance sheet, and the cash flow statement.

2. You should cover the financial history of the company and have different forecasts and scenarios projecting the anticipated performance of the business.

3. You should put your financials through a stress test by showing how you expect the business to perform under worst-case, expected-case, and best-case scenarios.

H. Appendices 1. Any additional information that adds to the credibility of your business, the management team, or the industry, such as: a. Resumes of key managers b. Pictures of product, facilities, production, and so on c. Letters of recommendations, professional references d. Published information e. Contracts and agreements, copies of patents, copyrights, trademarks f. Media, articles

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class/Homework Activity 1 Venture Capitalist PowerPoint Presentation Activity Overview: This exercise gets students to pare down a business plan into just 10 slides—an “elevator speech” for venture capitalists, if you will.

Time Limit: 20–30 minutes What to Do: •

Tell students that they are being given the opportunity to spend 10 minutes, and only 10 minutes, with a venture capitalist. In that time, they will have to present a sales pitch for their new business idea. Fortunately, the students will have the equipment they need to give a PowerPoint presentation, but the presentation can be no longer than 10 slides, maximum.

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Suggest that students construct their presentations as follows: Slide 1: Slide 2: Slide 3: Slide 4:

Contact information, such as that found on the cover sheet.

Mission statement.

Team members and key background information.

Describe the nature of the problem you address. Try not to get into how the product solves the problem on this slide. Include how dire a problem this is and solutions introduced currently by competing products.

Slide 5: Introduce the product and benefits.

Slide 6: Elaborate on how the product resolves problems introduced on slide 4, and any relevant technology/methodology used.

Slide 7: Present customer testimonials, product successes, positive media reactions.

Slide 8: Sales strategy. How do you intend on reaching the customer?

Slide 9: Who are your competitors? What is the market size? How do you think competitors will react to your product?

Slide 10: Key financial information (may need to slip in a few extra slides to handle this).

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Have students present their final plan to the class for review.

Don’t Forget: Constructing a business plan, even this slide outline, is difficult for many introductory business students. Giving lots of guidance or doing this together may be helpful to create a broad understanding of what is required in planning a new business.

Wrap-Up: Have the class critique the business plans as they are presented. Ask them whether or not they would fund the project, and why. Then ask them to discuss how well .

each team incorporated material from the various chapters of the text into their presentation.

Supplemental In-Class/Homework Activity 2 Business Plan Review http://www.businessplans.org/businessplans.html Activity Overview: Students locate an actual business plan and critically review it.

Time Limit: 30–45 minutes What to Do: Students can work alone or in groups. As homework, have students go to: http://www.businessplans.org/businessplans.html and look at the business plans that are presented there. Then, students should assume the role of a venture capitalist. Would they invest their money in this venture? Why or why not? What areas of the business plan help promote the business? What areas of the business plan need further refining?

Don’t Forget: Note that although the business plans presented on this website are the “best of the best,” investors may still not want to finance them, due to economic or other considerations. Students should be prepared to discuss the rationale behind their decisions.

Wrap-Up: After providing sufficient time for students to go through the business plan, come together to discuss student’s findings. What areas of the business plan need improvement and why? What areas of the business plan were really helpful? Why?

Supplemental Homework Activity 1 SCORE!!

Activity Overview: Students explore the SCORE website.

Time Limit: 5–20 minutes What to Do: Ask students to visit the SCORE website at www.score.org and write a brief report on how SCORE can help entrepreneurs and small business owners get started. Encourage them to click on “About SCORE” and “How Score Can Help You.” Other places of interest include: “How to” articles and “business templates” and “StartUp Business Plan,” which contains a template for creating a business plan.

Don’t Forget: The idea is to let students know that starting a business is within reach.

Wrap-Up: Anyone who is interested in starting a business can get help from SCORE. There are many Small Business Association offices located near most people. Help can .

also be found from local colleges and universities, if they have a small business development center, and from local Chambers of Commerce.

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ENHANCING THE ONLINE COURSE SBA Review: Have your students access the information at the website for the Small Business Administration at www.sba.gov. Ask your students to provide an outline on the discussion board of the major points of information required/recommended by the SBA for a business plan.

Business Plan Rally: Have your students search the Internet for at least three examples of business plans published online by companies (large, well-known companies, if possible). Ask your students to “audit” the business plans by comparing them to the example in the mini chapter. Do these plans have the comprehensive information outlined in the text? What is missing?

On a Mission: Ask your students to identify examples of mission statements of three Fortune 500 companies as posted online. Ask your students to comment on what is unique about the mission statements. Are your students surprised at the overall direction of these companies as stated in the mission statements? Are the stated goals (via the mission statements) commensurate with the public images of the companies? Have your students post their assessments on the discussion board.

To Market: Have your students examine the business plans of at least three companies as posted online. Ask your students to review the market analyses of the business plans. Do your students think the companies have done a good job in assessing the markets? Are the online postings lacking in detail? Is it possible that the companies have posted shorter versions of the analyses? Do the analyses seem to be comprehensive, with usable data that can be relied on to make decisions?

Financial Review: Using the same companies that the students have previously identified, have your students review the financial data included in the business plan. Ask them to audit the financial data to determine: (1) the investment the company will need for startup or to continue business; (2) outside sources for the investment; (3) outstanding expenditures or investments (such as capital projects) that are included in the business plan; (4) timeframe in which return on investment is predicted.

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THE BUSINESS PLAN PROJECT: Instructor Notes Assigning the Business Plan: An Overview The business plan project is a great learning experience for students. Many students will enter your classroom with the dream of owning their own business. This project is often the starting point for making that dream come true. As a result, this project will have a high level of authenticity for these students. The project also serves as an exceptional assessment tool, helping you identify how well students have mastered the course material. More importantly, the business plan project stimulates higher-level thinking that a learner can take into any profession. During this assignment, students will consider the many aspects of the world of business and demonstrate an ability to “connect the dots.”

Assigning Part 1: Introduction Assignment Overview The first section of the business plan requires that the student generate an idea for a new business. Students will usually fall into one of two categories. The first are those students who may never have thought about starting their own business, and may be terrified at the prospect of creating this type of comprehensive document. These students often need the most help in generating an idea for their starting point. For students who need a helpful nudge, you may wish to suggest starting a business that the student finds familiar.

This could be a business in which they are currently employed, for example. The familiarity will lessen their anxiety about the project, and makes the first step a positive one. The second type of student is the learner who already has a dream of owning a business. This project is especially rewarding for these students, but they still may be concerned about completing a document of this size and therefore may also appreciate some intermittent guidance.

Files to Provide Students Because this is the first part of the business plan, provide students with a copy of the Business Plan Student FAQs. It is located in this chapter of the Instructor’s Manual (see following pages) as well as on www.mybizlab.com. Give students ample explanation of the project, your expectations for how it should be completed, and due dates.

For this part of the project, students will be asked to complete Part 1: Introduction of the Business Plan Project Appendix.

Estimated At-Home Completion Time Completion time will vary based on what students bring to the class. Students who already have a business idea will have a head start on those who do not. During the early stages of the project, it’s a good idea to devote adequate classroom time for feedback.

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Homework Assignment Deliverable from Students Each business plan is a unique document, so some variance in response length is expected. For example, a student who demonstrates higher-level thinking may write 20 to 25 pages during this project, whereas other students may produce 10 to 15 pages. The length will also be affected by the business chosen. As a result, you may wish to designate a range of pages for this assignment rather than a set minimum length. For Part 1, expect a range of 1 to 3 pages.

Assigning Part 2: The Company and Management Team Assignment Overview This section is quite comprehensive and features several challenging tasks that require students to examine internal and external aspects of a business. The first task involves creating a mission statement, which includes establishing the business’s position with respect to ethics and social responsibility. Next, the student is asked to describe the industry and sector in which the company operates and to outline potential opportunities and threats presented by external factors such as macroeconomic matters, technological changes, legislation, and the like. This is often quite challenging for many students because it requires them to think with a broader viewpoint. Be prepared to offer feedback and encouragement. Then, looking internally, students are asked to define the company profile and business strategy by establishing goals and then evaluating the company’s strengths and weaknesses. Lastly, the student describes the key players in the organization and creates an organizational chart.

Files to Provide Students For this part of the project, students will be asked to complete Part 2: The Company and Management Team of the Business Plan Project Appendix.

Estimated At-Home Completion Time If done thoughtfully, this part of the plan will require a minimum of 4 to 6 hours to complete. Students may struggle with completing the industry analysis, especially identifying the external threats and opportunities. You may wish to use class time during each section to respond to questions.

Homework Assignment Deliverable from Students The length of student response in this section will again vary depending on the complexity and size of the proposed business. For Part 2, expect a range of 4 to 6 pages.

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Assigning Part 3: Marketing Assignment Overview This part of the project asks students to create a marketing plan, identifying their target market and their competitors, discussing their product, and explaining how they will attempt to attract the target market. Because they use their creativity, students often enjoy completing this part of the business plan.

Files to Provide Students For this part of the project, students will be asked to complete Part 3: Marketing of the Business Plan Project Appendix.

Estimated At-Home Completion Time A well-constructed explanation of the Marketing section will require 3 to 5 hours.

Instructor feedback will improve the quality of responses so you may wish to use class time during each section.

Homework Assignment Deliverable from Students The length of student response will range from 4 to 6 pages, but could be as many as 8 to 10 pages.

Assigning Part 4: The Financials Assignment Overview In this section, students will begin to determine if their business is truly viable. The student’s responses to questions about the costs of doing business will be used as a starting point for the financial reports. Remind students that all of their submitted values are estimates, and there is no sure-fire method for accurately measuring how a business may perform. Many students will have trouble estimating their costs. Some assistance is shown on the student template, and you may want to create a class list of resources that students would find helpful.

The business plan provides Excel templates for students to use in this section. These Excel spreadsheet templates include built-in formulas so that calculations are automatic based on student input—the student only has to “drop in” his or her numbers. The Excel templates are located on www.mybizlab.com. If your students cannot access these Excel documents, there are free templates available through SCORE’s website at www.score.org/template_gallery.html.

The section concludes by asking students to evaluate all of the costs that are necessary to get the business off the ground. Once students are aware of those costs, they must determine how to get funding for their business.

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Files to Provide Students For this part of the project, students will be asked to complete Part 4: The Financials of the Business Plan Project Appendix.

Estimated At-Home Completion Time A well-constructed explanation of this section will require a minimum of 4 to 6 hours.

Instructor feedback is absolutely critical in this section, as most students will need some direction in gathering information that will help answer the questions related to costs.

Homework Assignment Deliverable from Students Expect some uniformity of response length in this area, because students will be filling in their templates. Most students will complete 4 to 5 pages within this section, including the templates.

Assigning Part 5: The Finishing Touches Assignment Overview In this final section, students create an executive summary, summarizing the key aspects of the entire plan, which they then insert in the front of the plan. Encourage students to be concise, as an investor would look at the executive summary before reading the details of the plan. Finally, the student is expected to create a table of contents and cover sheet for the business plan.

Files to Provide Students For this part of the project, students will be asked to complete Part 5: The Finishing Touches of the Business Plan Project Appendix.

Estimated At-Home Completion Time Although this section asks students to restate what they have already thought through and written, it can be the most difficult part of the business plan to do right. Most students can complete this section in 1 to 3 hours, depending on their writing skills.

Homework Assignment Deliverable from Students Expect some uniformity, as most of the work will take the form of a 1- to 2-page executive summary and 1 page each for the cover sheet and table of contents. Encourage brevity in the summary, but emphasize that this is what you’ll be reading first—and it must capture your attention to entice you to read further.

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Business Plan Project Sample Syllabus Overview The business plan project is divided into parts that roughly coordinate with the parts and chapters in the text. Therefore, you can assign the project in parts after students complete each section of the book. Alternatively, you may wish to assign this project as a capstone project at the end of the semester. Although the project is designed to be completed individually, you might also consider grouping students together to provide additional support and to exchange ideas as they complete their projects. If this project is being assigned in an online course, it might be best to have one discussion forum dedicated to students’ questions for this project, so that everyone can ask and respond to one another’s questions.

Part 1: Introduction This part of the business plan asks students to come up with an idea for their business, creating an identity and forming a concrete notion of what the business will do as well as to identify what makes their product or service unique. The first part of the plan also asks students to identify the type of ownership the business will take and briefly describe who the firm’s ideal customers are.

Assign this part of the business plan after completing Chapters 1 through 6.

Suggested 12-week quarter due date: Suggested 16-week semester due date:

End of week four End of week six

Part 2: The Company and Management Team This part of the plan first asks students to create a mission statement and look at how the business will interact with the community and demonstrate social responsibility. Students are also asked to think about goals of their business, to describe the industry in which the business will operate, and determine some internal and external factors affecting the business. Finally, students will examine the organizational structure of the business. As part of the assignment, students will also create an organizational chart to show the framework of the business.

Assign this part of the business plan after completing Chapters 7 through 11.

Suggested 12-week quarter due date: Suggested 16-week semester due date:

End of week seven End of week nine

Part 3: Marketing This part of the business plan asks students to think about marketing’s “Four Ps”— product, price, place (distribution), and promotion—and how they apply to their business. Students will list features and benefits as well as the points of difference for their product or service. After describing the product, students must connect those described features and benefits to a targeted buyer. Once the targeted buyer has been named, students will describe advertising and promotional efforts to get the buyer’s attention. .

Assign this part of the business plan after completing Chapters 12 through 14.

Suggested 12-week quarter due date: Suggested 16-week semester due date:

End of week ten End of week eleven

Part 4: The Financials This part of the business plan asks students to think about their business in terms of financial needs and costs. Students are asked to decide how much of their product they expect to sell and to identify the costs of doing business. Students will complete a balance sheet and income statement for their businesses.

NOTE: To keep things simple, we have addressed only fees associated with broadband access. (There is a line in the P&L sheet for telephone/Internet expense.) Depending on the business the student is planning, they can put in website development and maintenance in the “other” category or add a separate line, if necessary.

Finally, students will need to identify how much funding they will need to start up their business and to identify source(s) of that funding.

Assign this part of the business plan after completing Chapters 15 and 16.

Suggested 12-week quarter due date: Suggested 16-week semester due date:

End of week eleven End of week thirteen

Part 5: The Finishing Touches This part of the business plan asks students to create an executive summary, table of contents, and cover sheet for their plan.

Assign this part of the business plan approximately one week before the due date.

Suggested 12-week quarter due date: Suggested 16-week semester due date:

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End of week twelve End of week fifteen

Student FAQs for the Business Plan Project 1. Where do I begin?

This project will challenge you to think about all of the parts that are necessary for a business to succeed. You should start by thinking of a business that you would like to begin. Do not use a product that already exists, such as Coca-Cola, but rather choose a business that is fairly simple in concept such as an ice cream shop or a bookstore. It would be best if you also choose a business that is of interest to you. Learning comes through the process of using your own ideas. Each section of the business plan connects with the information that is discussed in class and in the textbook.

2. What should my business plan look like?

First, you will need the Business Plan Project Appendix found at the back of the book or online at www.mybizlab.com. Answer the questions in the order that they are shown.

Note that the project includes hints that will help you answer each question.

Note that the business plan project is also fully explained in the Student Instructions (see following pages).

You may also use the Sample Business Plan as a guide (see following pages). Note that your plan does not have to look exactly like the sample, but you need to show good organizational skills.

3. What do I do with my assignment?

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

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

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

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

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The Business Plan Project: Student Instructions Completing Part 1: Introduction In Chapter 5 and in the Business Plan Mini Chapter, we discuss how the starting point for virtually every new business is a business plan. Business plans describe the business strategy for any new business and explain how that strategy will be implemented. One important benefit of a business plan is that in the act of preparing it, would-be entrepreneurs must develop their business idea on paper and firm up their thinking about how to launch and run their business before investing precious time and money. In this exercise, you’ll get started on creating your own business plan by completing Part 1 of the Business Plan.

Exercise Background: Part 1 of the Business Plan Before you even begin your business plan, you need to have a “great idea” for a business.

This might be a business that you’ve already considered setting up or something you decide on now. What are some businesses that you come into contact with on a regular basis? Restaurants, childcare services, and specialty retail stores are just a few examples to consider. You may also wish to create a business connected to a talent or interest you have, such as cooking or car repair. It’s important that for the purposes of the plan, you create a company from “scratch” rather than using a company that already exists. You’ll learn more if you use your own ideas.

Once you have your business idea, your next step is to create an “identity” for your business. This includes determining a business name and an idea of what your business will do. It also includes identifying the type of ownership your business will take, topics we discuss in Chapters 5 and 6. The first part of the business plan also briefly looks at who your ideal customers are.

After you have completed Part 1, take a quick look through the rest of the business plan project to get a feel for the type of information you will need as you complete the plan.

Your Assignment Step 1 To complete this assignment, go to the Business Plan Project Appendix in the back of your textbook or online at www.mybizlab.com. For this assignment, you will answer the questions in Part 1 of the plan.

Step 2 Once you have the Business Plan Project Appendix, answer the questions in Part 1.

Introduction. Note: Include the question heading for each answer, so your business plan looks more professional. See the Sample Business Plan for examples. Once you have answered the questions, be sure to save your Word document—you’ll be adding your answers from each following part to the same Word document to create your final Business Plan.

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Completing Part 2: The Company and Management Team In Part 1 of the Business Plan project, you formulated the story of your business. Part 2 of the Business Plan project asks you to think about goals of your business, some internal and external factors affecting the business, as well as the organizational structure of the business.

Exercise Background: Part 2 of the Business Plan As you learned in Chapter 7, every business sets goals (accomplishments that it hopes and plans to achieve) and objectives—the short-term targets that are designed to achieve these goals. Businesses then make decisions about what actions will help them to achieve these goals. In effect, goals and objectives are the means by which businesses measure their success or failure. In this part of the plan, you’ll define some of the goals for your business. But first, you’ll be asked to articulate your company’s mission statement. A mission statement spells out what you ultimately envision your business to be with respect to growth and sometimes includes a snapshot of your strategy to achieve such growth. In addition, a mission statement reflects the overall values of the company and its owners, and the company’s intended contributions to society.

Part 2 of the Business Plan also asks you to analyze the internal and external factors that affect your business. These external and internal factors are the fundamental parts of a traditional SWOT analysis. As you’ll recall from Chapter 7, a SWOT analysis looks at the business’s strengths, weaknesses, opportunities, and threats.

To begin, you will analyze the industry in which your company will operate, and articulate the external opportunities and threats that face your company. The opportunities and threats are generally external factors that affect the business: Sociocultural forces Economic forces Technological forces Competitive forces Political-legal forces

Will changes in population or culture help your business?

Will changes in the economy help your business, or hurt it?

Will changes in technology help your business, or hurt it?

Does your business face much competition, or very little?

Will changes in laws help your business, or hurt it?

A positive change in one of these forces is considered an opportunity. A change that hurts the business is considered a threat. Each of these forces will affect different businesses in different ways, and some of these may not apply to your business at all. In some situations, an opportunity for one business may be a threat for another.

You will also be asked to look internally, and identify the strengths and weaknesses of your business, including global, quality, and technology issues. The strengths and weaknesses are internal factors—things that the business can control. What does the business do well (what are its strengths)? What may the business NOT do so well (what are its potential weaknesses)?

Additionally, you will be asked to outline any challenges you anticipate encountering as well as the ways in which you plan to respond to those challenges. It is important to have a plan in place for those unwanted, but sometimes unavoidable, situations.

Part 2 of the plan also asks you to determine how the business is to be run. Part of this will require you to briefly describe your managers and what contribution they will bring .

to the organization. In addition, you will create an organizational chart to get you thinking about the different tasks needed for a successful business. You’ll also examine various factors relating to operating your business.

Your Assignment Step 1 Open the saved Business Plan file you began working on in Part 1. You will continue to work from the same file you started working on in Part 1.

Step 2 For the purposes of this assignment, you will answer the questions in Part 2: The Company and Management Team. Note: Once you have answered the questions, be sure to save your Word document. You’ll be answering additional questions in the next part.

Completing Part 3: Marketing So far, your business has an identity, you’ve described the factors that will affect your business, and you’ve examined your management team and how it will be organized. Part 3 of the Business Plan project asks you to consider your marketing plan.

Exercise Background: Part 3 of the Business Plan In Part 1, you briefly described what your business will do and who your ideal customer would be. In this part of the plan, you’ll describe your ideal buyer, or target market, in more detail, listing their income level, educational level, lifestyle, age, and so forth.

You’ll also describe your main competitors and your plans to respond to their market presence.

In addition, this part of the plan asks you to describe more fully the product you are planning to sell. Once you create a clear picture of the product, you’ll describe how it will stand out in the marketplace—that is, how it will differentiate itself. This part of the project also asks you to discuss the price of your product.

Finally, you’ll examine how your business will get the attention and interest of the buyer through its promotional mix—advertising, personal selling, sales promotions, and publicity and public relations.

This part of the business plan encourages you to be creative. Have fun! Provide as many details as you possibly can, as this reflects an understanding of your product and buyer.

Marketing is all about finding a need and filling it. Does your product do this?

Your Assignment Step 1 Open the Business Plan file you began working on in Parts 1 and 2.

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Step 2 For the purposes of this assignment, you will answer the questions in Part 3: Market Analysis. Note: Once you have answered the questions, be sure to save your Word document. You’ll be answering additional questions in the next part.

Completing Part 4: The Financials Now that you’ve had fun with your marketing ideas, it’s time to think about the financial needs of your business.

Exercise Background: Part 4 of the Business Plan This part of the business plan asks you to consider the costs of doing business, such as salaries, rent, and utilities. You’ll also complete the following financial statements: •

The Balance Sheet: The balance sheet is a foundation for financial reporting.

This report identifies the valued items of the business (its assets) as well as the debts that it owes (its liabilities). This information gives the owner and potential investors a “snapshot” into the health of the business.

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The Income Statement: This is the focus of the financial plan. This document will show you what it takes to be profitable and successful as a business owner for your first year.

After you have identified the costs of doing business, as well as how much revenue that you expect to earn in one year, you will articulate how much you will need to get the business started, what kind of funding you will be seeking, and how you will use the funds.

Your Assignment Step 1 Open the Business Plan file you began working on in Parts 1–3.

Step 2 For the purposes of this assignment, you will answer the questions in Part 4: The Financials. Note: Once you have answered the questions, be sure to save your Word document. You’ll be answering additional questions in the next part.

Completing Part 5: The Finishing Touches It’s now time to add some finishing touches to your plan.

Exercise Background: Part 5 of the Business Plan Before you turn in your plan, you need to create a cover sheet and table of contents for your plan. You’ll then conclude the project by creating an executive summary. The purpose of the executive summary is to give the reader a quick snapshot into your .

proposed business. If written well, it will encourage the reader to continue to read the rest of the business plan. Although this exercise comes at the end of the project, once you’re done writing it, you’ll place the cover sheet, table of contents, and executive summary at the beginning of your completed business plan.

Your Assignment Step 1 Open the Business Plan file you began working on in Parts 1–4.

Step 2 For the purposes of this assignment, you will answer the questions in Part 5: The Finishing Touches.

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Sample Business Plan

By Roger Miller Prepared September 2012

The Vault Grill 135 High Street ❖ Mainland, PA 12345

Steven Samulson, Owner 234 First Street, Bellview, PA 12498 610-484-2323 ssamulson@thevault.com Roger Miller, Owner 7901 Deerfield Blvd. Hillside, PA 12234 610-293-1234 rmiller@thevault.com

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Joe Mesland, Owner 24 Oak Ave, Lakeside, PA 12377 610-555-1239 jmesland@thevault.com

Table of Contents Executive Summary .........................................................................................................................3 Part I: Introduction ...........................................................................................................................4 Part 2: The Company and Management...........................................................................................5 The Mission Statement .............................................................................................................5 Industry Profile .........................................................................................................................5 Company Profile and Strategy..................................................................................................6 Anticipated Challenges and Planned Responses ......................................................................7 The Management Team ............................................................................................................7 Part 3: Marketing .............................................................................................................................9 Market Analysis........................................................................................................................9 The Product or Service .............................................................................................................9 Sales and Promotion ...............................................................................................................10 Part 4: The Financials ....................................................................................................................11

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Executive Summary The Vault Grill will be located in the town of Mainland, Pennsylvania, a city of approximately 20,000 people. The restaurant will offer a friendly casual dining atmosphere for people of all ages. We will serve a large variety of meals and desserts, but our specialty will be our grilled of fish, steaks, and burgers.

The mission of The Vault Grill is to provide a quality product at a quality price served by quality people. We will demonstrate our devotion to the community through customer service and community relations.

Our ideal customers are those who are looking for a fun and casual place to have a great and affordable meal. We will be located in the downtown area, in a renovated bank building, so we plan to cater to business men and women during the lunch hour and in the after-work hours. Additionally, because there is a small college nearby, we also expect many of our customers will be students and faculty members.

Customers will visit us for several reasons. First are our grilled entrees. They will be the main appeal for their flavor because Joe Mesland, the grill master, has several special rubs and sauces that offer a unique flavor to any meat or fish entree. Customers can select how they would like their entrée prepared by selecting a dry rub or sauce of varying spiciness. Second, we offer a fun and casual atmosphere that encourages people to relax and enjoy their time spent at the restaurant.

The Vault Grill is also part of the local history. It is located toward the end of town in the former National Bank building. The original bank offers a unique atmosphere with vaulted ceilings, marble floors, and unique windows in the upper areas. We are planning on keeping the original vault and some of the other fittings to preserve the historical nature of the building.

Our business will be a limited liability company. We have structured the business as a LLC for personal protection because we will also be serving liquor.

All partners are well qualified to run this restaurant. Steven Samulson has a degree in Hospitality Management. He has managed several successful restaurants, including Henry’s Meat House and The Funky Kitchen. Roger Miller has a degree in business management, and in addition to a strong background in financial management, was recently a partner in a local steak house franchise. Joe Mesland, our grill master, was the head chef at the Cajun Grill for the last ten years and won the prestigious 2007 Silver Spoon award.

Our business will thrive for a number of reasons. First, the city of Mainland has a stable population, with a number of healthy industries and a neighboring college.

Second, the local population is upstream middle class. We believe that this segment of the population will have the desire and income to eat out on a regular basis.

Our skills and knowledge in food service, combined with our connections to the community, will make this business a sound investment.

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PART 1. INTRODUCTION BUSINESS NAME The Vault Grill DESCRIPTION OF BUSINESS The Vault Grill will be located in the town of Mainland. The restaurant will offer a friendly casual dining atmosphere for people of all ages. We will serve a large variety of great meals and desserts, but our specialty will be our grilled of fish, steaks, and burgers.

FORM OF BUSINESS OWNERSHIP The business will be a limited liability corporation with three primary partners. Each partner has special skills that they bring to the business.

IDEAL CUSTOMER Our ideal customers are those who are looking for a fun and casual place to have a great and affordable meal. We plan to cater to business men and women during the lunch hour and in the after-work hours as well as to the students and faculty of the nearby college.

We will have special promotions focused on each of these two groups that will be discussed later.

COMPANY ADVANTAGES Our grilled entrees will define our customer’s experience and persuade them to choose The Vault Grill over the other restaurant choices in the area. The main appeal of the grilled entrees is the flavor, because Joe Mesland, the grill master, has several special rubs and sauces that offer a unique taste to any meat or fish entrée. Customers can select how they would like their entrée prepared by selecting a dry rub or sauce of varying spiciness. Second, we offer a fun and casual atmosphere that encourages people to relax and enjoy their time spent at the restaurant.

The Vault Grill is also part of the local history. It is located toward the end of town in the former National Bank building. The original bank offers a unique atmosphere with vaulted ceilings, marble floors, and unique windows in the upper areas. We are planning to make the original vault a visible part of the decoration and will be restructuring the original teller area as the bar. Finally, we will preserve as many of the other fittings as possible to maintain the historical nature of the building.

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PART 2. THE COMPANY AND MANAGEMENT TEAM THE MISSION STATEMENT MISSION STATEMENT Our company aims: • to sell delicious and remarkable food and drinks that meet the highest standards of quality, freshness, and seasonality and that combine both modern-creative and traditional grilled styles of cooking, • to consistently provide our customers with impeccable service by demonstrating warmth, graciousness, efficiency, knowledge, professionalism, and integrity in our work, • to have every customer who comes through our doors leave impressed by The Vault Grill and excited to come back again, • to create and maintain a restaurant that is comprehensive and exceptional in its attention to every detail of operation, • to provide all who work with us a friendly, cooperative, and rewarding environment, which encourages long-term, satisfying employment, and • to be a giving member of the Mainland community and to use our restaurant to improve the quality of life in the area.

ETHICAL ISSUES Our integrity means more than profit; service, quality, and sanitation mean more than volume; and honesty is the basis of sales and service. Therefore, our code of ethics is as follows.

We will: • ensure that our food and drink meet the highest standards of quality and freshness before and after they are prepared, • ensure our pricing and performance are done with honesty and integrity, • ensure our business practices meet the highest standards of service, quality, and sanitation, and • ensure our employees are treated fairly at all times.

SOCIAL RESPONSIBILITY The Vault Grill, as an integral part of the Mainland community, will donate any edible and unused foods to the local food bank and will donate meals to needy families throughout the year, especially at holidays. We recognize that our responsibility to society goes beyond food; therefore, we will also have a strong environmental policy and recycle whatever we can, and sponsor events to promote healthy lifestyles.

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INDUSTRY PROFILE INDUSTRY DESCRIPTION The Restaurant sector is in the Services industry. There are many types of restaurants fighting for the same potential customer base. Fast food giants, smaller take-out places, to more sophisticated high-end restaurants are all part of the Restaurant sector.

Additionally, cafes, tearooms, and restaurants with ethnic themes such as Italian, Mexican, Chinese, and Thai are all potential threats to our customer base. The Vault Grill sees itself positioned in the middle—offering quality meals in a sit-down environment at an affordable price. There are very few restaurants in the local region that fall into this type of category.

OPPORTUNITIES AND THREATS Mainland is a vibrant community that has attracted a variety of businesses, and is also the home of Newburg College. Although a declining economy may deter some individuals from spending money eating out, because The Vault Grill charges reasonable prices and caters to businesses, the potential negative impact of a bad economy is reduced. The opportunity exists to expand our current customer base beyond the business and college crowd in Mainland.

In addition to economic strains, other possible threats include severe weather in areas that supply the produce, which could affect the availability or price of produce.

Similarly, an issue affecting the quality or availability of meat, fish, or poultry (such as mad-cow disease and mercury in fish) is another possible threat. Non-smoking restrictions have been put in place for all restaurants in the county. Because this restriction has been made prior to our opening, we do not believe this will have any impact on our business.

COMPANY PROFILE AND STRATEGY BUSINESS GOALS First-year business goals: 1. To break even 2. To build a strong customer base 3. To minimize employee turnover Intermediate to long-term business goals: 1. To begin a carry-out and catering service within three years 2. To earn net profits of $500,000 within five years COMPANY STRENGTHS Foremost, we have a highly motivated management team with expertise in the restaurant business from a management and business perspective. In addition, the chef is an award-winning specialist who has been responsible for grilled food preparation for over 15 years. Our business is community-oriented and intends to ensure that we meet the dining and entertainment needs of our customers. .

RAW MATERIALS AND SUPPLIES The Vault Grill will need the following initial inventory. Prices listed reflect new equipment and furniture. We are looking for used equipment and furniture to help reduce overall costs.

15 Tables @ $350 each ..................................................................................................$5,250 60 Chairs @ $100 each ....................................................................................................6,000 15 Barstools @ $150 each ...............................................................................................2,250 2 Cash Registers @ $225 each ............................................................................................450 Squirrel POS System........................................................................................................1,500 Char-Grill Oven Unit .......................................................................................................1,000 Viking 8-Burner Stove .....................................................................................................3,500 3 Microwave Ovens @ $150 each ......................................................................................450 Deep Fryer .......................................................................................................................2,500 Refrigeration Unit ............................................................................................................2,000 Freezer..............................................................................................................................4,000 Ice Maker .........................................................................................................................1,000 Dishwashing Unit.............................................................................................................2,000 3 Prep-Tables @ $200 each ................................................................................................600 Table Linens and Napkins ..................................................................................................500 100 Small Glasses @ $1.00 each ........................................................................................100 100 Large Glasses @ $1.25 each ........................................................................................125 60 Wine tumblers @ $2.00 each ......................................................................................1,200 100 Sets Plates, Bowls, Mugs @ $10.00 each .................................................................1,000 100 Sets Silverware @ $12 per set ..................................................................................1,200 Miscellaneous Kitchen and Bar Supplies ........................................................................2,000 Table and Restaurant Decorations ...................................................................................1,375 Total ............................................................................................................................$40,000 In addition to the above, we anticipate renovation costs of approximately $200,000 to convert the existing bank to a restaurant and kitchen facility. We will need to stock our bar with liquor, wine, and beer and our pantry with basic cooking staples such as canned products, spices, and condiments. We anticipate initial bar and food stocking costs to be approximately $8,000. Most of our bread and dessert offerings will be made fresh on site. All other food items will be purchased from local distributors on a weekly basis. Local in-season produce will be used as much as possible.

Our inventories will not be significantly affected by change in seasons or holidays.

We plan to be open from 11 a.m. to 10 p.m., Monday through Thursday, 11 a.m. to midnight Friday and Saturday. We will be closed on Sundays, Thanksgiving, Christmas, and New Year’s.

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ANTICIPATED CHALLENGES AND PLANNED RESPONSES ANTICIPATED CHALLENGES We have two major anticipated challenges: 1. We must obtain sufficient funds to start the venture.

2. There is a rumored opening of a steakhouse chain restaurant in a new mall opening up just outside the Mainland border.

PLANNED RESPONSES We plan to respond to these two major anticipated challenges as follows: 1. The three initial partners are planning to personally contribute nearly half the anticipated funds needed to start the venture. In addition, we have made contact with a restaurant that is upgrading its furnishings and equipment. We anticipate that we can purchase many of the furnishings and kitchen equipment that they are replacing, thus driving down the level of our initial funding requirements.

2. Although the rumored opening of the steakhouse chain may initially hurt us, we are confident that we can win over customers with our signature grilledpreparation, customer-focused service, reasonably priced menu, and proximity to local businesses and the college.

THE MANAGEMENT TEAM MANAGEMENT There is one level of management in the restaurant, with three different types of managers as follows: • Floor Manager • Grill Manager • Accounting Manager All managers are also co-owners.

ORGANIZATIONAL CHART The organizational chart for The Vault Bar and Grill Cafe is quite simple given that it contains only one level of management. As the business grows, further levels of management and more employees may need to be added.

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Owner/ Grill Manager

Owner/

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Floor Manager

Owner/Business Manager

Servers

Cooks

Bartenders

Dishwashers

Hosts

Bussers

PART 3. MARKETING MARKET ANALYSIS MARKET RESEARCH The Vault Grill will have two markets.

The first target market is the business men and women who work in Mainland and surrounding areas. These individuals are college educated, in their 30s, 40s, 50s, and 60s, middle class, and will be looking for quick, reasonably priced lunches in a nice atmosphere in which to entertain business associates and clients. We also anticipate that younger professionals in their 20s and early 30s will be looking for a fun, casual, and reasonable place to meet after work for dinner or a few drinks.

The second target market is the college community. Although we do not expect that many of our regular customers will be students, we do anticipate that faculty members, administrators, parents of students, and some students on special occasions will frequent The Vault Grill. The demographics of this second target market vary quite widely but are held together by their connection to the college. The second target market will be more seasonal in nature, as the college year runs primarily from September through May. ASSESSMENT OF THE COMPETITION Several competitors exist in the area, ranging from the fast food giants of McDonalds and Burger King to other smaller take-out convenience places to more sophisticated high-end restaurants. There are also a handful of cafes and tearooms, and a few ethnic restaurants. The Vault Grill sees itself positioned in the middle—offering quality meals in a sit-down environment at an affordable price. There are very few restaurants in the local region that fall into this type of category. Specifically, there is the Mainland Diner, Winston’s, and The Country Restaurant.

THE PRODUCT OR SERVICE PRODUCT FEATURES AND BENEFITS The Vault Grill’s featured menu item will be its grilled entrées. Our grill master has several special rubs and sauces that offer a unique flavor to any meat or fish entrée.

Customers can select how they would like their entrée prepared by selecting a dry rub or sauce of varying spiciness. For those who are not fans of grilled meat, poultry, and fish, we will offer other methods of preparation, pasta dishes, and meal-portioned salads. Another signature product will be our warm breads and creamy flavored butters placed at each table after diners are seated. We will strive to present a total product offer that includes warm and friendly service, a delicious, reasonably priced meal, and a relaxing ambience.

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PRODUCT DIFFERENTIATION People have many choices when it comes to dining out. We know that we have to offer a product that stands out from the competition. We will have two major differences from our local competitors. The first is the grilled preparation of our food as well as the fresh, high-quality produce and bakery goods. Diners will place the highest importance on the meal itself, and so will we. However, the food is only part of the dining experience. We will pay close attention to ensure our wait staff is well trained, customer focused, clean, and friendly. The details of customer service from attire and grooming to efficiency and friendliness will constantly be monitored.

Finally, because a significant part of our business will be coming from serving business lunches, we will strive to ensure our customers with time constraints receive extra quick and attentive service.

PRICING Our pricing strategy is fairly simple. We plan to position our menu offerings and their prices to reflect our quality products but not too high to give the impression that we are a higher-end restaurant. Although we will have opening week specials, we will not pursue penetration pricing or price skimming as we do not wish to cause discontent among customers when we inevitably raise our prices to secure a profit later.

SALES AND PROMOTION PLACE (DISTRIBUTION) ISSUES Mainland, with its business and collegiate communities, offers the type of customer base we are seeking. We foresee no distribution issues. In the future, we hope to expand The Vault Grill services to offer catering and take-out.

ADVERTISING Although we have two target markets, we will have primarily one advertising approach to attract both business and collegiate customers initially, but will rely on word-of-mouth recommendations as our best ongoing advertising strategy.

Initially, we plan to distribute brochures with sample menus to all local businesses and to college faculty and administration. These advertisements will include coupons for discounts on our lunch menu. Coupons will also allow us to track the success of the advertising.

We will also be listed in the local phone book and will have a small site on the Internet.

In opening week, we will run ads in the local newspaper and college newspaper to advertise our presence.

These ideas are fairly inexpensive ways to get our message out to our target markets.

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PROMOTION We will have several opening week and ongoing promotions.

During opening week, we will feature buy one get one free lunches and a free appetizer with purchase of two entrées after 6 pm. These specials will last only opening week and will seek to generate initial foot traffic in the restaurant.

We will also have several ongoing promotions. At lunchtime, when many customers are under pressure to return to their office within an hour, we will guarantee meals will be served within 20 minutes of ordering or customers get their lunch free.

Similarly, to entice those who might stop in for a drink after work to stay for dinner, we will be offering discounts on meals ordered prior to 6:00. Finally, for college students who might need an evening break, we will offer half-priced appetizers after 9 pm on Monday through Thursday nights.

We will also have promotions during the fall, when Mainland has its street festival.

This festival attracts visitors from outside our community. These promotions will build attention (and word of mouth) from those who live in Mainland, as well as nearby towns.

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PART 4: THE FINANCIALS EXPECTED REVENUE We believe that we can average 100 customers per day, with approximately 65 at the lunch hour and 35 at dinner.

We believe that the average lunch bill will be approximately $8.50 per customer, and that the average dinner bill will be approximately $17.50 per customer.

This will provide our restaurant with revenues of approximately $550 at lunch and $600 at dinner for total average daily revenue of $1,150.

Although The Vault Grill will experience different traffic and therefore revenues for each day of the week, this will lead to yearly food revenues of approximately $345,000.

Additionally, we believe we will average 50 customers a day at the bar, Monday through Thursday, with an average bar bill of approximately $4 per person.

On Fridays and Saturdays, we expect more bar customers who will also stay longer at the bar.

Therefore, we expect about 100 bar customers a day on Fridays with an average bar bill of approximately $10 per person, and 75 bar customers a day on Saturdays with an average bar bill of approximately $10 per person.

We anticipate bar revenues of approximately $122,400.

Total bar and food revenue is anticipated to be approximately $467,400 per year.

We plan to be closed on Sundays, Christmas, New Years, and Thanksgiving.

COST OF DOING BUSINESS Expected Monthly Cost

Expected Yearly Cost

Rent

1,500

18,000

Salaries and Wages

10,000

120,000

Supplies Advertising and Other Promotions Utilities: Heat, Electricity, etc.

500

6,000

250

3,000

800

9,600

Utilities: Telephone and Internet

100

1,200

Insurance

1,650

7800

Total

14,800

165,600

Expenses

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STARTUP COSTS We anticipate needing $200,000 for building renovation, $35,000 for decorations, furnishings, and equipment and supplies for the kitchen and bar, and $8,000 for initial stocking costs bringing our startup costs to total $243,000.

FINANCING The three managers will each put a total of $25,000 into the startup of this business. The remaining $168,000 is the amount that we are requesting for bank financing.

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January

February

March

April

May

June

July

August

Septembe r

October

Novembe r

Decembe r

YEARLY

12-Month Income Statement The Vault Grill 2012

28,75 0 10,20 0 38,95 0

28,75 0 10,20 0 38,95 0

28,75 0 10,20 0 38,95 0

28,75 0 10,20 0 38,95 0

28,75 0 10,20 0 38,95 0

28,75 0 10,20 0 38,95 0

28,75 0 10,20 0 38,95 0

28,75 0 10,20 0 38,95 0

28,75 0 10,20 0 38,95 0

28,75 0 10,20 0 38,95 0

28,75 0 10,20 0 38,95 0

28,75 0 10,20 0 38,95 0

345,00 0 122,40 0 467,40 0

Total Cost of Goods Sold

8,000 2,000 10,00 0

8,000 2,000 10,00 0

8,000 2,000 10,00 0

8,000 2,000 10,00 0

8,000 2,000 10,00 0

8,000 2,000 10,00 0

8,000 2,000 10,00 0

8,000 2,000 10,00 0

8,000 2,000 10,00 0

8,000 2,000 10,00 0

8,000 2,000 10,00 0

8,000 2,000 10,00 0

96,000 24,000 120,00 0

Gross Profit

28,95 0

28,95 0

28,95 0

28,95 0

28,95 0

28,95 0

28,95 0

28,95 0

28,95 0

28,95 0

28,95 0

28,95 0

347,40 0

1,500 10,00 0 500 250 800 100 1,650 1050

1,500 10,00 0 500 250 800 100 1,650 1050

1,500 10,00 0 500 250 800 100 1,650 1050

1,500 10,00 0 500 250 800 100 1,650 1050

1,500 10,00 0 500 250 800 100 1,650 1050

1,500 10,00 0 500 250 800 100 1,650 1050

1,500 10,00 0 500 250 800 100 1,650 1050

1,500 10,00 0 500 250 800 100 1,650 1050

1,500 10,00 0 500 250 800 100 1,650 1050

1,500 10,00 0 500 250 800 100 1,650 1050

1,500 10,00 0 500 250 800 100 1,650 1050

1,500 10,00 0 500 250 800 100 1,650 1050

18,000 120,00 0 6,000 3,000 9,600 1,200 19,800 12,600

Revenue (Sales) Food Sales Bar Sales Total Revenue (Sales) Cost of Goods Sold Food Purchases Alcohol Purchases

Operating Expenses Rent Expense Salary/Wage Expense Supplies Expense Advertising Expense Utilities Expense Telephone/Internet Expense Insurance Expense Interest from Loans (if .

applicable) Breakage Replacement

.

Total Expenses

100 15,95 0

100 15,95 0

100 15,95 0

100 15,95 0

100 15,95 0

100 15,95 0

100 15,95 0

100 15,95 0

100 15,95 0

100 15,95 0

100 15,95 0

100 15,95 0

1,200 191,40 0

Net Profit

13,00 0

13,00 0

13,00 0

13,00 0

13,00 0

13,00 0

13,00 0

13,00 0

13,00 0

13,00 0

13,00 0

13,00 0

156,00 0

Balance Sheet As of June 2012 Assets Current Assets Cash in Bank Inventory Prepaid Expenses (6-mo. insurance) Total Current Assets Fixed Assets Machinery & Equipment Furniture & Fixtures Real Estate / Buildings Total Fixed Assets Total Assets

$100,000 $8,000 $8,600 $116,600

$19,000 $21,000 $40,000 $156,600

Liabilities & Net Worth Current Liabilities Accounts Payable Taxes Payable Notes Payable (due within 12 months) Total Current Liabilities Long-Term Liabilities Bank Loans Payable (greater than 12 months) Less: Short-Term Portion

.

$3,000 $10,000 $1,000 $14,000

$125,000

Total Long-Term Liabilities

$125,000

Total Liabilities

$139,000

Owners’ Equity (Net Worth)

$17,600

Total Liabilities & Net Worth

$156,600

MINI CHAPTER 3: BUSINESS COMMUNICATIONS CHAPTER OPENER Communication is one of the most important skills a manager can have, and it is often one of the most overlooked. This chapter provides students with background information on written and oral communication, showing under what circumstances each should be used. In addition, the chapter explores the impact of technology on communication in the form of e-mail, instant messaging, texting, video conferencing, wikis, blogs, and podcasts.

DETAILED LECTURE OUTLINE I.

Improving Your Presentation Skills A. Persuade, Educate, and Inform a Group About Your Ideas 1. Oral communication skills a. Speak loudly and clearly. b. Change your voice intonation to add interest. c. Engage the audience by looking directly at them. d. Relax and smile.

B. PowerPoint Tips 1. Keep it simple. a. Limit animations and special effects.

2. Follow the 6 x 6 x 24 rule. a. Put only key words on slides. b. Six words to a bullet point, six bullet points to a slide, and not less than a 24 point font.

3. Use graphics and media to convey ideas.

4. Use color sparingly but effectively.

5. Edit and proofread.

6. Practice.

II.

Improving Your Writing Skills A. Business Letters 1. As shown in Figure M3.1, a traditional business letter has a specific format that includes: a. the date at the top b. the address of the person receiving the letter c. a formal salutation B. Memos 1. As shown in Figure M3.2, memos have a standard heading format that contains: a. the date b. the person(s) to whom the memo is addressed (the To: line) c. the name of anyone else receiving a copy (the Cc: line)

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d. the name of the sender (the From: line) e. a concise statement of the memo’s topic (Subject: or Re:) 2. Memo writing tips a. Be concise. b. Use headings, bullets, and/or numbered lists to highlight key points. c. Keep each paragraph short and focused on one main idea. d. Always proofread carefully. Check all facts for accuracy e. Identify any attachments so they don’t go unnoticed. f. Closings are unnecessary. The “From” line eliminates the need. g. Remember that memos should be professional in tone and appearance.

III.

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What Form of Communication Should You Use? A. There Are Many Options for Your Message 1. Oral communication a. Advantages: i. Allows participants to assess the meanings of the speaker’s words and voice intonations. ii. The speaker can assess the receiver’s attentiveness. b. However, it is important to offer clear, unbiased language and avoid clichés, negative metaphors, and culturally specific references.

2. Written communication a. Advantages: i. Has more permanency than oral communication ii. Can be revised before sending iii. Receiver has more time to analyze the content before responding. b. Disadvantages: i. Sender has no control over when the recipient chooses to read the message. ii. Sender does not receive immediate feedback; lacks face-to-face communication clues.

B. E-Mail 1. Tips on writing effective business e-mail a. Use a meaningful subject line. b. Watch slang and offensive or potentially damaging content. c. Proofread and edit. d. Keep it brief and focused. e. Consider the format of attachments and their sizes. f. Include previous messages in a reply. g. Use a signature line.

2. Apply caution when using e-mail because it is not as private as a regular letter.

3. Companies are beginning to recognize the problems erupting from the high volume of e-mail employees receive daily. a. A number of companies are adopting “no e-mail” days in an effort to reduce the e-mail overload and encourage employees to get out from

behind their digital devices and actually talk to their colleagues and customers.

C. Texting 1. As a means of exchanging quick messages via a cell phone, texting can be useful.

2. Advertisers are also finding text messaging a convenient way to alert users to new product information.

3. Texting should not be used to communicate confrontational, sensitive, or confidential information.

4. However, avoid using informal texting abbreviations in business texts.

IV. Using Collaborative Communication Tools A. Videoconferencing 1. Videoconferencing uses two-way video and audio technology to allow two or more locations to interact simultaneously.

2. Most mobile devices now support videoconferencing.

3. Online meeting software, such as WebEx, allows users to run and archive meetings with users from any location.

B. Collaborative Editing 1. Collaborative based editing allows users to create, add, edit, or remove Web content using any Web browser. See Figure M3.3.

2. Because all versions of documents are saved, users can refer or revert back to a previous version of a document, as well as track all edits and who made the edits.

C. Blogs 1. A blog is a Web log that is usually authored by an individual and cannot be changed or edited by visitors. a. Visitors can add comments to the original content, and these can be unflattering.

2. A blog affords companies with an opportunity to reach a wide audience and elicit feedback via commenting sections.

3. They are also a good way to promote a company and its products.

D. Podcasts 1. Podcasts are audio or video files stored on the Internet that customers can download and listen to whenever they want.

2. Podcasts are unique in that customers can subscribe to programs they are interested in and have them automatically downloaded to their computers every time new content is available.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity 1 PBJ IMPORTANT: MANY STUDENTS HAVE SEVERE ALLERGIC REACTIONS TO PEANUTS. BEFORE DOING THIS EXERCISE, ASK THE CLASS IF ANYONE IS ALLERGIC TO PEANUTS. IF SO, MODIFY THIS EXERCISE TO USE A DIFFERENT SANDWICH FILLING OR DO NOT DO THE EXERCISE. Activity Overview: This exercise shows students the difficulties that can arise in the communication process.

Time Limit: 45 minutes (15 minutes to write instructions, 15 minutes to complete activity, and 15 minutes to discuss.)

What to Do: •

Show students the tools they will be given to make PBJs. (See list below.)

•

Have students write down step-by-step instructions for making a peanut butter and jelly (PBJ) sandwich. Ideally, they will do this as a homework assignment.

•

Bring all of the ingredients needed to make PBJ sandwiches to class. This means that you will need to assemble in advance: o o o o o

Disposable containers filled with peanut butter (one for each student in class) Disposable containers filled with jelly (one for each student in the class) Bread (two slices per student in the class) Plastic knives (one per student) Napkins (one or two per student)

If you are a kind and loving teacher, you will also bring enough milk and disposable glasses so that each student can have a glass of milk with his or her sandwich. If not, it’s fun to just watch the students try to eat the PBJs without having anything to drink.

•

Have students exchange the instructions they have written with another student.

Don’t Forget: This exercise requires a considerable amount of preplanning. Give yourself a couple of days to pull everything together.

Wrap-Up: Have the class critique the instructions they received. What went well? What didn’t go so well? You may also want to ask students what role grammar played in making the instructions they received more or less understandable.

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Supplemental In-Class Activity 2 Written Instructions Activity Activity Overview: In this activity, students see how easily people can filter out or ignore important information—even in a written document.

Time Limit: 20 minutes What to Do: •

Copy one “Written Instructions Activity” handout for each student. The handout can be found on the following page.

•

Pass out the document face down to each student—they will all turn them over at the same time at instructor’s direction. Inform the students that they are not to discuss the content of the document at all. The only instruction given is to read the document and proceed as directed in the document. When students are done, they can turn over their sheet and wait for further instruction.

Don’t Forget: Copy the handout before class so that your students can do the exercise.

Wrap-Up: Discuss the outcome of the exercise—how many students wasted time by not reading the instructions carefully before starting? Acknowledge that this is a simulation, and ask students to share stories where they could have saved themselves time by completely reading instructions first (usually these stories will involve assembling furniture, toys, and so on, or using electronic equipment).

Ask students why they don’t read instructions. Answers will probably include already knowing what the instructions say, the fact that most instructions don’t give useful information, and saving time. Point out that these concerns are similar to the reasons people give for not listening to others. Learning to read instructions carefully is like learning to be an active listener—it takes time and effort, but it is very profitable in the end.

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Supplemental In-Class Activity 2 Handout Written Instructions Activity Follow these directions in order.

1. First, read each item below carefully before starting.

2. Write your name in the top left corner of this page.

3. Write your date of birth in the lower right corner.

4. Count the number of people in the room.

5. Write the number of people in the room on the back of this sheet.

6. Count to ten quietly to yourself.

7. Write the numbers eight and nine three times here. ____________________________________ 8. Write the name of the person on your right here. _______________________________________ 9. Write the names of your family on the back of this sheet.

10. Write the numbers 2, 4, 8, 10 in the upper right corner of this sheet.

11. Draw four lines on the back of this page on the bottom.

12. Now that you have read all the items, skip items 2–11 and write on the back of this sheet what you think is your biggest problem in communicating well with others.

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ENHANCING THE ONLINE COURSE PowerPoint Tips: Assign your students a short PowerPoint project in which each student will prepare five PowerPoint slides related to a business topic of his/her choice. Ask the students to review the slides according to the PowerPoint tips presented in the chapter.

Students can post the slides to the assignments page for a grade.

Business Letter: Ask your students to identify one well written business letter that is posted online. Ask the students if they can identify a letter that follows the criteria described in the mini chapter and has been written and signed electronically. Have the students forward the letters to the discussion board.

Business Memo: Have your students write a business memo regarding their projects (any other project you have assigned) and ask them to post it to the assignment board, and to sign it or initial it electronically. Be sure to tell them it must follow the guidelines described in the mini chapter for completeness, clarity, and so on.

E-Mail Review: After three weeks of class (at minimum), identify at least two e-mails written by each of your students (preferably e-mails which DO NOT follow the e-mail guidelines discussed in the mini chapter). Send the e-mails back to the students and have the students review the e-mails for problems; then, rewrite them. Students can post them to you individually. This exercise will go a long way to help correct problems with e-mails for your students.

E-Mail Discussion: Ask your students to read the section in the mini chapter on tips for controlling the e-mails. Ask your students to respond by writing a two paragraph essay on why or why not such a system might work for them. Ask your students to describe their “e-mail dilemmas” and to identify parts of the text which might be of help on specific e-mail issues. Have your students post their responses on the discussion board.

E-Mail Free: Ask your students to read the section in the mini chapter on e-mail free days. Ask your students to respond by writing a two paragraph essay on why or why not such a tactic might be valuable. Do your students think that e-mail has created a proliferation of communication that makes it harder (not easier) to be productive? Why or why not? Have your students post their responses on the discussion board.

Video Style: Have your students buy or check out a video camera for their computer.

Request that all students be online at the same time/date so that students can use the video camera equipment. Conduct a short video conference regarding a project you have assigned or simply ask your students to introduce themselves. Ask your students if it is a help to them to have a face to go with a name. Does this help or hinder communication?

Ask them to respond during the video conference, not on e-mail.

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MINI CHAPTER 4: FINDING A JOB CHAPTER OPENER Virtually all students want to get a job after they finish college—for some, it may be their first job, whereas others are looking for career advancement. In this chapter, students learn to effectively market themselves, search for jobs, and interview and negotiate with a company so that their future job searches will be successful.

DETAILED LECTURE OUTLINE I.

Marketing Yourself A. Developing a Résumé 1. A résumé is a fact sheet that outlines your work history, experience, and accomplishments. a. A chronological résumé lists jobs in the order in which you held them, beginning with the present. i. Use this type of résumé if you’re staying in the same field or just getting started in the job market. . b. A functional résumé details work history by pointing out skills and achievements, not titles and companies worked for. i. This is a good type of résumé to use when you’re switching fields.

2. Getting started a. Consider the following before you start typing: i. What are your strengths and weaknesses? ii. What type of skills do you possess? iii. What do you want from an employer? b. Aside from technical skills, think about soft skills such as personality traits and interpersonal skills. c. Organization is key. i. Organize your résumé clearly, with bold headings and bulleted information. ii. The following headings can help you organize a basic chronological résumé: Contact Information, Objective, Education, Experience or Work History, Skills/Interests, and References.

3. Contact information a. Your contact information is typically centered at the top of the page, with your name in the largest font.

4. Objective a. An objective is a short summary of the job you’re seeking and how your skills will apply to that job.

5. Education a. Begin your education list with your most recent educational experience. i. Be sure to detail your degree, major, minor, dates of attendance, and the name and location of the school.

6. Experience or work history .

a. List your previous work experience chronologically, starting with the most recent, and include each company’s name, location, your dates of employment, and your title or position.

7. Skills/Interests a. Include your hidden talents or skills, such as whether you speak a foreign language or are knowledgeable about a certain software package. b. Also include the extracurricular activities and professional organizations you belong to that relate to your career field.

8. References a. References can attest to your work ethic and skills. b. You should have three professional references expecting to be called on to help you.

B. Résumé Showdown!

1. To get yourself noticed, you need to make your résumé pop.

C. Writing a Cover Letter 1. A cover letter introduces you to a prospective employer. a. Tip #1: Tailor your cover letter to fit the job you’re applying for b. Tip #2: Indicate what you can do for the employer. c. Tip #3: Clearly explain why the company should hire you. d. Tip #4: Keep it short.

D. ePortfolios 1. An eportfolio is a collection of work displayed in the form of photographs, pictures, audio clips, and video clips.

2. You can compile your work in a binder or save it on a portable storage device and bring it with you to interviews.

3. You can also create your own website that has a list of all of your accomplishments.

II.

.

Search Strategies A. Networking 1. Networking is the process of building relationships that can potentially create business opportunities.

2. An elevator pitch is a brief statement that summarizes your skills and what you can offer. You should be able to deliver it in the space of a short elevator ride.

3. When you attend networking events, be prepared. a. Dress to impress. b. Take along your business cards and copies of your résumé. c. Before attending an event, try to find out what companies or type of companies will be there.

B. Spot the Truth C. Internet Research 1. If you’re sure of the field you want to work in, create a list of potential employers. a. Find each company’s website and read about each company’s history and its mission and vision statements.

2. You can also look online for job openings and contact information.

D. Newspapers 1. As with online postings, classified ads can be a starting point for your job search.

E. Recruiters 1. The job of a recruiter is to find qualified employees to work for a company.

2. They may get in touch with you to learn more about your capabilities or determine whether you’re a good fit for a particular company.

3. You can contact a recruiter yourself if you’re seeking help with your job search.

F. Cold Calling Pros and Cons 1. Cold calling is a method of job hunting in which you make unexpected and uninvited phone calls to potential employers to express your interest, inquire about openings, and request interviews.

2. If you decide to make cold calls, there are some things you should do before you start dialing: a. Make a list of companies that interest you. b. Make preliminary calls to obtain the name, title, and phone number of the person in charge of the department you’re interested in working for. c. Send your cover letter and résumé directly to the person you want to impress before you make a call. d. Call the people you sent your résumé to and request an interview.

G. College Campus Career Resources 1. Your college’s career center can help you determine your skills and strengths, focus on your goals, explore potential career paths, and find current job openings.

2. Also check your career center’s website for links to other informational sites that can help you.

H. Informational Interviews 1. The goal of the informational interview is to gain firsthand knowledge about a company or job from someone who currently works in the field.

2. When you meet for the informational interview, you should have a list of questions to ask.

III.

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Interviewing and Negotiating A. Interview Red Flags 1. It is illegal to ask interview questions about your race, gender, sexual orientation, religion, age, national origin, marital status, or family matters.

B. Preparing for the Interview 1. Go over everything on your résumé.

2. Research the company.

3. Practice your answers to standard interview questions.

4. Stage a mock interview with a friend.

C. Interview Questions 1. By preparing your responses to common interview questions ahead of time, you’ll boost your confidence and give yourself a little room to relax.

2. Try to arrive about 30 minutes early, as you may have to fill out some paperwork before the interview.

3. A list of universal interview questions is included in this section.

4. Faculty should refer to the LIST which includes 10 Interview Tips that students will find helpful.

D. During the Interview 1. When you meet your interviewer, give a firm handshake, smile, and make eye contact.

2. Have questions prepared to ask at the end of the interview.

3. As about the overall responsibilities of the position, the day-to-day tasks associated with it, travel requirements, and any other questions you might have.

4. Avoid asking directly about the salary in your initial interview.

E. Interview Take-Alongs 1. You should have a briefcase or folder as well as: a. Copies of your résumé b. A list of your references c. A portfolio if you have made one d. Paper and a pen e. Directions f. A cell phone, but leave it in the car or turn it off during your interview 2. At the end of the interview, if you still want the job and you feel you’re a good fit, say so directly. a. Ask the interviewer what the next step entails.

3. Following up with a personal thank-you note or e-mail is also highly recommended.

F. Negotiating Strategies 1. Before you negotiate, figure out a reasonable salary for the position you’re interested in.

2. Using websites such as Salary.com, research the median salary for your profession.

3. Ask for a day to consider the salary offer.

4. Don’t forget that you can negotiate factors other than salary.

5. Make it clear that you want the job, make reasonable requests, and have a positive attitude.

6. Sell yourself and defend your goal if there is a specific salary or benefits that you want and that are in line with the job.

7. Be sure to obtain the agreement in writing.

8. If you decide to turn down the offer, let the company know you are still interested in a position if something else opens up.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITIES Supplemental In-Class Activity 1 Prepare to Be Assimilated: Writing a Collective Résumé Activity Overview: Students pool their collective skills and experience to write a group résumé.

Time Limit: 30–45 minutes What to Do: • • •

•

Provide each student with the position announcement shown in the handout found on the following page.

Have each student make up a list of his/her skills and experience relevant to doing the job.

Divide the class into groups of four to five students. Have each group create a functional “group résumé” for the position, using elements from the résumés of each of the students in the group. For example, if one student has done strategic planning and another has done departmental goal setting, both jobs should be listed on the résumé.

When all of the résumés are finished, have each team present their résumé to the class. Have the class select the team that should get the job, based on their résumés.

Don’t Forget: Remind students that functional résumés are not date driven—they do not have to list the group's jobs by date, but rather, they should list the relevant skills and accomplishments of the group in order of importance. Also, remind students not to forget nonwork activities and accomplishments that may be related to the job of General Manager. For example, a student who organized a community fund-raising campaign has valuable organizational and financial management skills.

Wrap-Up: The class will critique each group’s résumé and offer suggestions for improvement.

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Supplemental In-Class Activity 1 Handout Prepare to Be Assimilated: Writing a Collective Résumé—Job Posting Management Consultant* JOB PURPOSE: Supports the work of the company’s Chief Executive Officer focusing on the establishment and optimization of day-to-day operations in the company.

DUTIES & RESPONSIBILITIES: 1. Advise management team on key planning issues and make recommendations on important business decisions; 2. Strategic planning and resource allocation; 3. Establish operational processes/process improvement; 4. Manage strategy implementation, in particular regarding budgets and timelines; 5. Ensure quality control of all company output; 6. Ensure all department heads are fully informed of operational objectives; 7. Set operational and/or performance goals for each department which are aggressive, achievable, and tied to long-term goals; 8. Establish and monitor performance reporting systems; 9. Monitor department performance against performance goals to ensure that progress is being made; 10. Conduct regular meetings with department heads to ensure that priorities are clear and coordination is good; 11. Ensure activities comply with organizational requirements for quality management, legal stipulations, and general duty of care; 12. Facilitate resolution of issues among departments; 13. Take charge in high-priority crises; 14. Any other reasonable tasks and duties assigned by Management and/or any changes in the role due to organizational restructuring and realignment.

JOB REQUIREMENTS: A. Work Experience • At least 10 years of extensive experience and judgment to plan and accomplish goals in a film production company or related industry.

B. Skills/Knowledge • Has ability to lead, plan, and manage change; • Has passion, or the willingness to become immersed in work; • Has initiative, ability to set priorities, and strong organizational/time management skills; • Has excellent negotiation and communication skills; public speaking a plus.

C. Education .

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Requires a business or management degree or equivalent practical experience combining filmmaking and management.

(*Source: http://www.creativeplanetnetwork.com/forums/showthread.php?104390Management-Consultant&p=279784 downloaded 7/23/14)

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Supplemental In-Class Activity 2 Mock Interviews Activity Overview: Students write résumés and take turns interviewing each other for desired jobs.

Time Limit: 30 minutes in class, plus 1 hour of homework What to Do: Ahead of time, assign students to find a job posting in which they would be interested, and write a résumé and cover letter specific to that job. Then, in class, pair the students up. The students should swap résumés and then take turns being the interviewee and interviewer. Each should make notes on where the other could make improvements in both the verbal and nonverbal responses of the interview. Alternatively, you could have a few volunteers that would be interviewed in front of the class, with you being the interviewer. Afterward, students could critique the responses (and perhaps even some of the interviewer’s questions).

Don’t Forget: Remind students to use the questions found in the “Interview Sample Questions” box in the text during the interview. Also, it may be helpful to teach students how to create situational interview questions. To do this, tell students to look at the job posting, and try to identify two or three key activities of the job. Then, they should ask candidates about what experience they had with those areas, using the following format: “Tell me about a time when you (had to deal with a difficult customer). Start by giving me a little background on the situation, then tell me about the task you were expected to do, or the responsibility you had in that situation. Tell me about a specific action that you took, and the results of that action.” Students will be surprised at how much information they get when they use this type of question.

Wrap-Up: A brief discussion to determine what students found to be common problems in an interview. Be sure to ask students if they were tempted to ask illegal questions and why—what information did they want to get that would be relevant to the job? Could they have restructured their questions to get the information they wanted in a more legitimate way?

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ENHANCING THE ONLINE COURSE Internet Résumé: Have your students search the Internet for “help with résumé” sources.

Ask them to develop a résumé according to one of the sites. They should post the résumé and the “help” source on the discussion board. Ask the class to review those résumés posted and compare them with the résumés shown in the text. Which résumé formats do your students think will be most effective? What differences are there between a “hard copy” résumé and an online résumé? Ask your students to post the answers on the course blog.

Résumé Partners: Put your students into groups as partners online. Have each student create an online résumé, using the textbook as a guide. The partners should critique each other’s résumé, e-mailing comments back and forth until each student has a “perfect” workable résumé to submit for a grade (or use for the next job opportunity).

Cover Letter Search: Ask your students to identify at least three cover letters from online sources (employment agency websites, online employment service sites, etc.). Have your students choose the best example and write a cover letter to match the online résumé you have assigned to them. Have them post the letters on the course blog or turn them in (with the résumés) for a grade.

Cover Letter Types: Have your students search the Internet for one example of each of the three types of cover letter: application; prospecting; and networking. Have the students post these to the course, so that all students have access to examples of each.

Multimedia Portfolios: Ask your students to use online sources (open sources), personal photos, projects, and so on, to create a five minute multimedia portfolio which will highlight their personal accomplishments, work history, projects, and professionalism.

The students should be able to upload this to your course platform, so that you can grade it. They should also put the information on a CD or a flash drive and have it ready for their next job interview. Be sure to stress the importance of professionalism in this project.

Make it clear to your students that they should use photographs that show them in professional dress; videos in which the students are speaking clearly and professionally (without any slang); and that all photographs and graphics should be about work, be in good taste, and emphasize the excellent characteristics of the student as a worker/ professional. Take points off for any responses that appear to be right out of “Facebook” or some other online social tool.

Job Network: Have your students use the Internet to identify three possibilities for inperson networking, such as local breakfast networking groups. Also ask them to identify three online networking groups. Post the results to the course blog, so that all the students will have access to the information.

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MINI CHAPTER 5: PERSONAL FINANCE CHAPTER OPENER If students want to learn to manage a business, they have to learn how to manage their own money first. This chapter provides an invaluable introduction to managing their finances, including how to create a financial plan, manage personal credit, handle the financing of a car, use insurance and investments to protect assets, and incorporate tax payments into their personal budget.

DETAILED LECTURE OUTLINE I.

Personal Finance A. Introduction 1. Personal finance is about setting goals, making choices, and following through. See Figure MC5.1.

2. Money management is a key component of personal finance and generally includes the following: a. Determining what you have b. Setting goals for what you want or need c. Planning how to achieve your goals B. Do You Need Tools to Help Manage Your Money?

1. Many online resources and software tools can help you manage your money.

II.

Creating a Financial Plan A. Step 1: Take a Financial Inventory 1. List everything of value that you own (your assets) and then subtract from that total everything you owe (your debts), including any loans and credit card balances you might have. a. The remaining amount is your net worth. See Table M5.1.

B. Step 2: Set Financial Goals 1. Next you can begin to set financial goals, both short-term and long-term goals. a. Short-term goals should be measurable and realistic goals that can be completed in a time frame of less than a year. b. Long-term goals can be more motivational.

2. Prioritize your goals by identifying them as wants and needs.

C. Step 3: Know Where Your Money Goes 1. List all the expenses you incur in a month, similar to the list shown in Table M5.2. a. Fixed expenses are expenditures that don’t change from month to month, such as your rent and car payments. b. Variable expenses are monthly payments you have to make that may change from month to month, such as gas, food, clothing, and entertainment.

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c. Periodic expenses are items such as taxes or donations that you make but not on a monthly basis. d. Also note the category of unexpected expenses shown in Table M5.2.

D. Step 4: Create a Budget 1. A budget, or a spending plan, should be realistic in terms of the expenses you must pay.

2. It should also include savings as a regular fixed expense.

3. Initially, your savings should accumulate so that you have a “rainy day fund” that is equal to at least one month’s worth of bills. a. Eventually this fund should be built up to cover three to six months of fixed expenses.

4. Compound interest is interest that is earned not only on your principal (the actual amount of money you set aside as savings) but also on the interest you earned by doing so.

E. Step 5: Execute the Plan 1. Pay off all unpaid credit card debt.

2. If you have outstanding loans, see if you can reduce the interest rate or consolidate into a more manageable payment.

3. To reduce impulse buying, try using cash only.

F. Step 6: Monitor and Assess Your Plan 1. Revisit your plan periodically and make adjustments as necessary.

2. Look at your budget every month and make adjustments every year.

III.

Managing Your Personal Credit A. Credit Is Your Ability to Buy Things Now and Pay for Them Later.

B. When Used Responsibly, Credit Cards Can Be a Good Thing.

C. Some Tips to Help You Manage Your Personal Credit 1. Check the interest rate and annual fee on your credit card.

2. Don’t charge if you can’t pay.

3. Establish a credit history in another way. a. Begin with a single store credit card or a single-purpose credit card, such as a gas card. b. Using these cards responsibly by making occasional purchases and paying your bill in full every month demonstrates your ability to use credit wisely.

D. Know Your Credit Score.

1. By law, every individual is entitled to one free credit report each year.

2. Go to www.annualcreditreport.com and follow the instructions on the website to get your credit report.

IV.

Car Considerations A. Getting Wheels 1. Decide whether to buy used or new. a. Consider a “new used car” which is a car that is only a few years old, has been well maintained, and has low mileage.

2. Buying versus Leasing. See Table M5.3.

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V.

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Insurance and Investments A. Insuring Your Present and Future 1. Health insurance is a must. a. A good place to begin is HealthCare.gov.

2. Disability insurance pays you benefits should you become disabled and are no longer able to earn a living.

3. Car insurance is required by law by most states. There are three types of car insurance coverage: a. Liability insurance covers damage and injuries you have caused to someone else. b. Collision insurance covers damage to your vehicle if you collide with a moving or stationary object. c. Comprehensive insurance covers damage to your car from theft, fire, or non-collision-related accidents.

4. Homeowner’s and renter’s insurance protect your home and contents. a. Homeowner’s insurance also comes with liability coverage to protect you if someone is injured while on your property.

5. Life insurance replaces income lost due to your death to those who are dependent on you, such as a spouse, children, parents, or other family members.

B. Investing Now and for the Future 1. Learning as much as you can about the various investment opportunities that are available to you is a useful part of your financial planning.

C. How Fast Can Your Investment Double in Value?

1. The rule of 72 is an easy way to figure out how long it will take to double your money at a given investment rate.

2. All you have to do is divide the investment’s interest rate into 72.

D. Investing for Retirement 1. You may not be able to rely on Social Security to fully meet your financial needs after you retire.

2. If you work, your employer may have a retirement plan you can join.

3. If you are self-employed or your employer doesn’t offer retirement benefits, set up your own retirement program. a. Individual retirement accounts (IRAs) are special savings accounts created by the government. i. You put pretax money into an IRA, thus reducing your current taxable income. ii. You don’t pay tax on money in the account until after you have retired and withdrawn the money. b. A Roth IRA is another type of retirement account, but it differs from a traditional IRA in several ways. c. The Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) is another type of retirement tool. i. You can move some of your self-employment income into a retirement account and defer paying taxes.

d. Pension plans are retirement plans established by your employer. There are two kinds: i. Defined benefit plans pay a certain percentage of your salary after you retire. ii. With a defined contribution plan, the employer contributes a percentage of each paycheck that you have specified into your account. a.) To encourage you to contribute to the plan, many companies will match your investment or a portion of it.

4. 401(k), 403(b), and 457 Plans a. These plans are forms of defined contribution plans.

VI.

Taxes A. Everyone who earns income is required to file an income tax return.

1. Even if you owe no taxes, you must file a return.

B. The IRS allows taxpayers to either take a standard deduction or to itemize deductions.

C. How much tax are you paying?

1. Table M5.4 summarizes the U.S. income tax rates single people paid in 2013.

2. Income taxes are computed on a marginal tax rate; tax rates progressively increase as income increases.

D. Not all income is taxable income, however.

1. Standard deductions and personal exemptions can be subtracted from what you make.

NOTE: End the lecture by asking students to write down the muddiest points or main points of the lecture. This will allow you to know what might need to be reviewed during the next lecture.

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SUPPLEMENTAL ACTIVITY Supplemental In-Class/Homework Activity Keeping a Penny Journal Activity Overview: In this exercise, students track their spending for two weeks and analyze where they could save money.

Time Limit: 5 minutes per day for 2 weeks, plus 30 minutes to analyze expenses and write paper What to Do: •

Ask students to keep a “penny journal”—keeping track of every cent they spend for two weeks.

•

At the end of the two-week period, have students write a paper entitled “How I Spend My Money.” The paper should include: o An analysis of the amount of money spent on “wants” versus the amount of money spent on “needs.” o A prioritization of “wants”—which wants bring the most gratification to the student? Which are impulse purchases that could be avoided? o An analysis of variable expenses, periodic expenses, and unexpected expenses. o An estimate of how much money the student would have to bring in every month to cover expenses. o A discussion of how the student feels about the way he or she is spending money. Is the student comfortable, worried, happy, or sad with their finances as they stand now?

Don’t Forget: During the two-week “penny journal” period, students are likely to need reminders to keep up their journals. Tell students to think of their journals as a checkbook register—if they write down what they’ve spent as soon as they spend it, they won’t forget anything.

Wrap-Up: Finances are deeply personal for many people, so you will want to keep the class discussion of this project general. You can ask questions such as “What surprised you the most about the way you spent money?” and “In general, how many of you spent more than you earned over the two-week period?” Then ask students to talk about their strategies for keeping their spending in check. Also, it would be helpful to point out that a budget that doesn’t include wants is unrealistic—the goal should be to prioritize those wants and develop a plan for acquiring them that doesn’t use credit or require more money than the student has available to spend.

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ENHANCING THE ONLINE COURSE Financial Plan Graphic: Have your students create a graphic illustrating the steps required to create a Personal Financial Plan. Have them explain all the steps thoroughly and post on the course blog.

(Note: Personal financial information is private and many students will not want to share actual financial information with a professor, even for an assignment that will help the student in the long run. Be sure to give your students assignments that ask for generic information which the students can use as a tool later on. Complete the information in a way that does not end up shared on the course blog.)

Financial Plan Template: Ask your students to search online for templates for a Personal Financial Plan. Many investment companies and other financial counseling companies have templates (fill-in-the-blank financial tools) that can be used to help individuals create an initial financial plan. Ask students to identify these and other resources and post them on the course blog or discussion board.

Financial Goals: Ask your students to set five financial goals they would like to achieve in the next 5 years. Have them create a five-slide PowerPoint and e-mail it to the course site (for your eyes only), using open source graphics to illustrate what they want to achieve and why. Use this as an extra credit project to provide incentives for students to think about their financial situation and goals.

Budget Graphics: Ask your students to develop a budget for one week, creating a one page graphic illustrating the budget components. Have the students turn this in as an online assignment. You may also want to discuss each budget privately (online) with the student, especially if the budgets submitted show extraordinary expenditures in some areas. The role of the professor is not to criticize anyone’s spending, but to point out areas that the students may want to review for themselves.

Credit HELP: Ask your students to search online for credit counseling services. They should identify at least three seemingly “legitimate” not-for-profit groups that seek to help individuals with credit problems. What other sources can be identified which do not look appear to be truly legitimate “counselors”? Ask your students about how they would distinguish “real” credit counselors. Have them post their responses to the discussion board.

Develop an Interest: Require your students to report on the interest and annual fees of up to three of their credit cards. Have them search the Internet for interest fee tables. Are their cards in line with the interest rates they are able to pay? What other online websites can they find to help them understand the rates and fees charged? Do the major credit card companies offer any tips? What are they and where are they located on the Web?

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