Business Essentials, 11E Ronald J Ebert Ricky W Griffin Solution Manuals

Type:

Solution Manual

Resource:

Business Essentials

Edition:

11th Edition

Author(s):

Ronald J. Ebert Ricky W. Griffin

INTRODUCTION TO BUSINESS BUSG 1301 SYLLABUS

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

INSTRUCTOR INFORMATION Professor: Phone: Email: Office Hours: TBA TEXTBOOK INFORMATION: Ebert and Griffin. Business Essentials 11e, Prentice Hall, 2017 SEMESTER/LOCATION/TIME Spring College Campus: M and W, 11:30 AM to 1:00 PM 16 Weeks: January 17 to May 14, 201X CRN 30792 CREDIT: 3 SEMESTER HOURS PREREQUISITES None COURSE GOALS The primary objective is to give the student an understanding of basic business principles. Global business, entrepreneurship, management, marketing, information technology, and financial management will be discussed. Another purpose of this course is to provide an opportunity for the student to learn first-hand about a business through the interview process.

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

2.

3.

4.

5.

6.

Discuss how businesses achieve success by demonstrating ethical behavior.

Explain the strategies for business success in the relationship era.

Demonstrate the use of empowerment in management.

Describe the elements of customer-driven marketing.

Demonstrate the use of technology in business.

Discuss the basic elements of financial management and investing.

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

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

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

Copying from another student’s test paper.

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

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

Collaborating with another student during a test without authority.

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

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

Purchasing a test and submitting it.

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

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

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

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

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

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

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

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

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

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

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

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Week 1

Date

Lecture topic and choice of In-Class Exercises* (all exercises are listed; choose among them) Course introduction and overview The U.S. Business Environment For the online course, use: What do you know about business Scanning the environment Comparing economic systems Simulation: Supply and Demand

Chapter

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

Ethical judgment making Can ethics be taught?

Simulation: Ethics & Social Responsibility

Social

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3

Entrepreneurship, New Ventures, and Business Ownership For the online course, use: The role of small business The wide world of risk Entrepreneurship and the growth of businesses What’s the next big thing?

How can we succeed in the software industry?

Conjuring up profits?

Simulation: Are You an Entrepreneur?; Getting Your Business Off the Ground

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4

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

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Business Plan Part 1 5

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

SWOT analysis I can’t believe this has happened!

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5

Who creates corporate culture?

Simulation: Plan for Success 6

Organizing the Business For the online course, use: Organizational structure Centralization versus decentralization Making the grade Who runs the grapevine?

6

TEST 1: Chapters 1–6 7

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

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

Simulation: Improving a Business

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Business Plan Part 2 8

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

Motivation in global firms Simulation: Team Management

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

Transformational vs. transactional Is John Paul DeJoria a charismatic leader?

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

Simulation: HR Management/Hiring a New Employee

10

Business Plan Part 3 11

Marketing Processes and Consumer Behavior

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For the online course, use: Assessing the marketing environment Data mining Social networking and job seeking Never give a German a yellow rose Simulation: Product Development 12

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

Getting a stimulus boost with pricing Simulation: Pricing Strategies and Objectives

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Distributing and Promoting Products For the online course, use: Why do they sell where they do?

Getting a stimulus boost with promotion What’s the best way to reach them?

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TEST 2: Chapters 7–11 13

Information Technology (IT) for Business For the online course, use: IT devices CereProc and new products, especially for new markets Is that ethical?

Simulation: Technology Direction

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

Interpreting financial statements Annual reports Choose an investment Simulation: OBM & Financial Statements

15

Business Plan Part 5 15

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

Your check is not in the mail Simulation: Adapting to the Economic Environment

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Managing Business Finances

17

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

What’s wrong with a little inside scoop?

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

This forces students to look critically through the chapter.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Teams of students discuss types of economic systems.

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Time Limit

20 min.

25 min.

30 min.

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

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

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

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

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

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

Managers must understand their environment to understand how to operate and compete within it.

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

2. Global Business Environment. The global business environment refers to the international forces that affect a business; various factors including international trade agreements, international economic conditions, and political unrest affect the global environment at both the general and immediate levels.

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

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

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

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

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

Time Limit: 20 minutes Use In-Class Activity 2: Small Group Discussion: Scanning the Environment Time Limit: 25 minutes

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

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

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

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

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

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

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

KEY TEACHING TIPS •

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

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

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

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

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

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

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

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

Critics of government intervention were quick to label the bailout as a move toward socialism.

KEY TEACHING TIPS •

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

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

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

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

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Ask students to give their opinions about the government bailout of banks and financial institutions, as well as corporations in other industries, such as the automobile

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manufacturers. In addition, you could ask students to research and report on any new stories concerning the bailout that appear in publications such as the Wall Street Journal.

It is never too early to get students to regularly read the business news!

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

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

• How is the economic system different in this country?

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

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

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

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

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

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

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

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

KEY TEACHING TIPS •

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

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

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

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

QUICK QUESTION • Which level of competition best describes the market in each of the following scenarios? o Your local Pizza Hut (monopolistic competition)

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o o o o

A local farmer selling apples for applesauce (perfect competition) Cell phone service (oligopoly) Apple store (monopolistic competition) Local utility/power company (monopoly)

HOMEWORK Visit a Shopping Mall!

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

At-Home Completion Time: 1 to 1.5 hours

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

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

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

2. Gross Domestic Product (GDP): The GDP is the total value of all goods and services produced within a given period through domestic factors of production; GDP is a measurement of aggregate output. Gross national product (GNP) refers to the total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located. a. Real Growth Rate: Real growth depends on output increasing at a faster rate than population; the real growth rate in 2013 of the U.S. economic system was 1.8 percent while the population grew at a rate of 0.77 percent, thus indicating the real growth rate is modest. b. GDP per Capita: GDP per capita means GDP per person. GDP divided by total population equals GDP per capita. c. Real GDP: Real GDP means that GDP has been adjusted to account for changes in currency values and price changes. d. Purchasing Power Parity: Purchasing power parity is the principle that exchange rates are set so that the prices of similar products in different countries are about the same.

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

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

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

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

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

2. Unemployment. Unemployment is the level of joblessness among people actively seeking work in an economic system; when unemployment is high, a surplus of available workers exists. Unemployment is sometimes a symptom of a recession, when aggregate output declines, or of a depression, a prolonged and deep recession. For example, during downturns in the business cycle people in different sectors may lose their jobs at the same time. As a result, overall income and spending may decline to the extent that businesses begin to implement cost saving measures—including reduction in force (downsizing), leading to more unemployment.

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

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

KEY TEACHING TIPS •

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

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

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

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

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

At-Home Completion Time: 1–2 hours

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Learning Catalytics is a "bring your own device" student engagement, assessment, and classroom intelligence system. It allows instructors to engage students in class with realtime diagnostics.

Students can use any modern, web-enabled device (smartphone, tablet, or laptop) to access it.

For more information on using Learning Catalytics in your course, contact your Pearson Representative.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 1-1. What are the benefits of businesses? Can a business negatively affect society?

Visit MyBizLab for suggested answers. (Learning Objective 1 – AACSB – reflective thinking) 1-2. What are the factors of production? Is one factor more important than the others? If so, which one? Why? The five factors of production are labor, capital, entrepreneurs, physical resources, and information resources. All five factors are crucial; however, their relative importance depends on the product and industry. In the software development business, for example, labor and information resources are especially important, but the business couldn’t survive without capital and physical resources (computers), and it wouldn’t have been launched without an entrepreneur. (Learning Objective 2 – AACSB – application of knowledge) 1-3. What is a demand curve? A supply curve? At what point do they intersect?

The curve that describes the range of possible prices that a buyer will pay for a range of quantities demanded by a buyer is the demand curve. The curve that describes the range of prices that a seller can charge for a range of quantities supplied by the seller is called the supply curve. The point where the demand curve and the supply curve intersect is the point at which the intentions of buyers and sellers coincide. The price at this point is the equilibrium price. (Learning Objective 3 – AACSB – application of knowledge) 1-4. Why is inflation both good and bad? How does the government try to control it?

Visit MyBizLab for suggested answers. (Learning Objective 4 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 1-5. Identify and describe at least three trends in the external environment that affect college enrollment. Explain how each trend affects colleges and universities.

Visit MyBizLab for suggested answers. knowledge)

(Learning Objective 1 – AACSB – application of

1-6. Give an example of a situation in which a surplus of a product led to decreased prices.

Similarly, give an example of a situation in which a shortage led to increased prices. What eventually happened in each case? Why? Answers will vary; however, any clearance sale illustrates the concept of surplus driving

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down prices. The classic example of a shortage is scalpers selling event tickets at inflated prices. A specific example is Nike’s new releases of Air Jordan shoes, in very limited numbers, creating heightened interest and intense demand initially. In both cases, the market eventually determines a price at which all the supply can be sold. (Learning Objective 3 – AACSB – application of knowledge) 1-7. Explain how current economic indicators, such as inflation and unemployment, affect you personally. Explain how they may affect you as a manager.

Answers will vary, but all students should include prices paid for consumer goods and the availability of desirable jobs. Managers are affected by inflation because it tends to drive up wages and by unemployment because it affects their ability to find workers. Also, both inflation and unemployment affect consumer and industrial demand, which play a key role in management. (Learning Objective 4 – AACSB – application of knowledge) 1-8. At first glance, it might seem as though the goals of economic growth and stability are inconsistent with one another. How can you reconcile this apparent inconsistency?

A nation’s economic growth can be measured through its aggregate output, resulting standard of living, GDP, and productivity. Economic stability, on the other hand, refers to the condition in which the amount of money available in an economic system and the quantity of goods and services produced in it are growing at the same rate. Growth is involved in both, thus resolving the apparent inconsistency. (Learning Objective 4 – AACSB – reflective thinking) APPLICATION EXERCISES 1-9. Visit a Local Shopping Mall: 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 only one store in the mall sells shoes, that store represents a “local” monopoly. Note businesses that have direct competitors (two jewelry stores) and show how they compete with one another.

Answers will vary, but students should focus on the criteria for competition discussed in the chapter. For example, businesses with direct competitors operate within monopolistic competition; style, color, quality levels, and brand names often differentiate products. If only a few sellers of a product exist, as in an oligopoly, products will be quite similar, and a change in price by one seller will mean a change in price by all sellers. (Learning Objective 3 – AACSB – application of knowledge) 1-10. Interview a Business Owner: Interview a business owner or senior manager. Ask this individual to describe for you the following things: (1) how demand and supply affect the business, (2) what essential factors of production are most central to the firm’s operations, and (3) how fluctuations in economic indicators affect his or her business.

Answers will vary, but students should recognize that demand and supply affect every

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business in some way. Typical factors of production cited in this answer include capital, labor, physical resources, information resources, and entrepreneurship. Economic indicators affect businesses differently at different times, depending on whether they are manufacturers or retailers. Ultimately, price increases in an industry will affect the buying power of consumers, which will affect how much is produced and purchased. (Learning Objective 3 – AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 1-11 TO 1-14 (Learning Objectives 2 and 3 – AACSB – interpersonal relations and teamwork, analytical thinking, application of knowledge) Groups should consider domestic business environment, global business environment, technological environment, political-legal environment, sociocultural environment, and economic environment when identifying three trends that will create business opportunities.

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

• Who are my customers?

• Where are my customers located?

• Is my business idea easily copied?

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

TEAM EXERCISE: PAYING THE PRICE OF E-BUSINESS 1-15 TO 1-18 (Learning Objective 3 – AACSB – interpersonal relations and teamwork, analytical thinking, application of knowledge) 1-15. What form of competition best characterizes this market?

This market is best characterized as monopolistic competition: many sellers, many buyers, and differentiation required to attract buyers. In this scenario, differentiation will include equipment available, classes offered, quality of instructors, quality of customer service, and cleanliness of facility.

1-16. Develop specific pricing strategies based on each of the following situations: • A month after dropping prices by $5 per month, one of your competitors returns to your current pricing.

• Two of your competitors drop their prices even further, reducing membership costs by $8 per month. As a result, your business falls off by 25 percent.

• One of the competitors has announced that it will keep its prices low, but it will charge members $2 per session for high-demand classes such as Pilates.

• Each of the competitors’ that lowers the prices makes an adjustment, with reduced rates for families and couples, but they plan to return to $40 per month for single members.

• All four providers (including you) have reduced their monthly fees. One goes out of business, and you know that another is in poor financial health.

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Scenario 1: Answers will vary, but should take into account the likelihood of this situation occurring. Because a competitor changes prices does not mean that you must follow.

Scenario 2: Again, following the trend and reducing prices is not mandatory, especially when you know you cannot afford it. What you can do is clearly indicate to customers and potential customers what makes your products and services (classes, equipment, facility) worth the additional $8 per month.

Scenario 3: A strategy for this scenario will be similar to that of Scenario 2, but specifically noting that your facility does not charge extra for any classes, regardless of demand.

Scenario 4: Consider whether you can match the reduced family and couples pricing, though you know you cannot reduce your price for individuals. The focus still needs to be on differentiation from your competitors, showing what advantages or benefits your gym offers.

Consider adding programs specifically for families that are unique to your gym.

Scenario 5: Having reduced your prices is causing you financial problems, as you expected.

However, if supply is diminishing through the reduction and/or weakness of competitors, that means demand for the remaining services should increase. This increase in demand should result in increased customers for your gym. You may be able to consider increasing your fees again shortly.

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

Classes that other gyms do not offer, or schedules that meet customer demand better than the competitors can draw in new buyers. Social events, group training for an upcoming 10K, for example, could attract new members. Offering family oriented services, such as children’s classes, or even childcare, would be unique. The main point that students should focus on is that a price war is not a winnable strategy. Newsletters and relationship building activities (since working out with friends is a well-known motivational tool) can keep people connected, to each other and the gym.

1-18. Is it always in a company’s best interest to feature the lowest prices?

It is definitely not always in a company’s best interest to feature the lowest price. If that is the only point of differentiation between a company’s product and its competitors’ offerings, then customers will perceive that price is the most important differentiation. That will lead to a price war, and, in the long run, no company can win. It is a much better strategy to inform customers of why your product or service is worth paying a higher price.

EXERCISING YOUR ETHICS: GETTING CAUGHT OUT IN THE COLD (Learning Objective 2 and 3 – AACSB – ethical understanding and reasoning, reflective thinking) 1-19. What are the roles of supply and demand in this scenario?

Huma anticipates that the supply of heating oil will be higher this winter, resulting in the ability to charge less than last winter. She also believes that demand will increase by offering the ability to lock in a price, as that price is lower than people paid in the past. Paying a fixed

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price per gallon provides cost certainty to customers. Information resources are an important factor of production that leads to this recommendation.

1-20. What are the underlying ethical issues?

Underlying ethical issues revolve around generating maximum pricing versus generating an acceptable profit, while giving customers an even better deal than the locked in price of $3.80 per gallon.

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

Answers will vary, but students should at least acknowledge the ethical issues.

CASES: WHAT GOES UP…CAN ALSO COME DOWN! (Learning Objectives 3 and 4 – AACSB – application of knowledge, reflective thinking) 1-22. What has happened to gasoline prices since the beginning of 2015? You can find monthly average price data from the U.S. Energy Information Administration at www.eia.gov.

Answers will likely vary somewhat based on students’ interpretation of the data. Price trends will also be affected by geographic differences in supply, demand.

1-23. Explain how the concepts of the demand and supply of petroleum combine to determine market prices.

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

1-24. What economic indicators are most directly affected by energy prices?

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

1-25. Does the global energy situation increase or decrease your confidence in a capitalistic system based on private enterprise?

Students will have totally different perspectives, generating much discussion.

1-26. Should there be more government intervention in the exploration for and pricing of petroleum products? Why or why not?

What role would the government play in regulating the petroleum industry? There will be much debate about whether there should be government intervention in the petroleum

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industry. Students should be asked if it is good for competition and society for the government to intervene. The discussion should focus on the long run implications.

TAKING A BITE OUT OF INTERNET RADIO (Learning Objectives 1 and 3 – AACSB – application of knowledge, reflective thinking) 1-27. Identify the external environments of business that will affect the success or failure of Apple’s iTunes Radio.

Students should focus on the competitive, social, technological, and economic factors that will affect the success or failure of Apple’s iTunes radio.

1-28. What factors will influence the demand for iTunes Radio?

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

1-29. In terms of degrees of competition, how would you describe the market for Internet radio?

Do you think that this will change in the next five years? If so, how?

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

1-30. To customize your listening experience, Internet radio services collect data on your listening habits. Are you comfortable with this use of “big data?” Why or why not?

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

1-31. Do you think that Apple will be successful in this new venture? Do you think that it was a wise decision for them to enter the already crowded market?

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

Once students have answered the questions, discuss their answers as a class. As students discuss their answers, make sure they touch on some of the following points. Technological changes are frequent and sometimes market changing. Even since the case was written, the music-streaming market has changed, and Apple’s place in that market is changing through the company’s purchase of Beats, and its addition of news and sports content to iTunes Radio. Economically, students should consider the various price points offered by the various competitors and how much price is likely to influence a user. How much does loyalty matter to users? Do specific features offered by iTunes Radio, Spotify, Rdio, Pandora, or any of the others help create loyalty and preference?

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Chapter 2: Understanding Business Ethics and Social Responsibility Chapter Overview Just because others see something as ethical doesn’t mean you will agree. There is not always a yes/no, right/wrong, black/white answer to everything. We all develop a personal code of ethics that we carry over into our jobs. Sometimes we decide what is ethical based on what is acceptable to others—even though the behavior may be unethical.

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

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

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

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

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

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

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

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

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

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Description Students share their views on business ethics.

Students discuss how ethical norms affect ethical judgments.

Students discuss varying opinions on ethics training as a class.

Time Limit 20 min.

15 min.

30 min.

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

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

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

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

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

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

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

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

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

C. Assessing Ethical Behavior

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

Ethical norms include: 1.

2.

3.

4.

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

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

Justice: Is it consistent with what’s fair?

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

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

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

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

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

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

• What are some examples of conflicts of interest?

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

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

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

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

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

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

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

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

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

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

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

2. Unfortunately, the recent spate of corporate scandals (Enron, bailouts of banks, GM, and Chrysler) colors the public’s perception of business in negative hues. However, with growing concerns about climate change and calls for more sustainable business practices, many businesses at least appear to have again moved toward a more responsible approach to doing business.

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

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acceptable and even expected in business.

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

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

Time Limit: 20 minutes HOMEWORK Social Responsibility Now is a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. This assignment asks students to think about their own personal code of ethics and the ethical framework they use to make decisions.

At-Home Completion Time: 30 minutes Key Teaching Tip, especially for Online Classes The End of Chapter activity, Building Your Business Skills, To Lie or Not to Lie: That Is the Question is a good online assignment. Have students post their responses in Step 1 to the class discussion board. For Step 3, have students work as small virtual teams to draft a corporate code of ethics. Let their fellow classmates critique and post comments.

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

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

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

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

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

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

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

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

C. Responsibility Toward Employees 1. Legal and Social Commitments: Recruiting, hiring, training, promoting, and compensating are the basis for social responsibility toward employees; a company that provides its employees with equal opportunities without regard to race, sex, or other irrelevant factors is meeting both its legal and its social responsibilities. A whistle-blower is an employee who discovers and tries to end a company’s unethical, illegal, or irresponsible actions by publicizing them. Most organizations now have whistleblower policies to protect whistleblowers from retaliation.

D. Responsibility Toward Investors Improper Financial Management: Insider trading occurs when someone uses confidential information to benefit from the purchase or sale of stocks. Misrepresentation of finances is where unethical managers project profits that they do not expect to get or hide losses and expenses

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incurred to boost paper profits. Misrepresentation of finances: In maintaining and reporting its financial status, every corporation must conform to generally accepted accounting principles.

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

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

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

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

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

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

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

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

KEY TEACHING TIPS •

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

•

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

•

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

•

Remind students that contemporary social consciousness varies, depending on how

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turbulent the social, political, and economic times are.

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

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

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

At-Home Completion Time: 1 hour

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

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

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

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

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

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

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

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

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

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

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Learning Objective 2-6

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 2-1. What factors determine an individual’s ethics? For you, which factor has been most significant?

Visit MyBizLab for suggested answers. (Learning Objective 1 – AACSB – analytical thinking, application of knowledge) 2-2. What factors determine an individual’s ethics? For you, which factor has been most significant? (Same question as 2-1) Stakeholders include customers, employees, investors, suppliers, and the firm’s local communities. Most businesses should be concerned with all stakeholder groups, although areas of emphasis may differ for individual businesses. (Learning Objective 2 – AACSB – analytical thinking) 2-3. What are the major areas of social responsibility with which businesses should be concerned?

The major areas include the environment, customers, employees, and investors. (Learning Objective 3 – AACSB – analytical thinking) 2-4. What are the four basic approaches to social responsibility?

The four basic approaches to social responsibility are: • Obstructionist: Does as little as possible to promote social responsibility.

• Defensive: Meets minimal legal requirements regarding social responsibility.

• Accommodative: Exceeds minimum requirements only by special request.

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

(Learning Objective 4 – AACSB – analytical thinking) 2-5. How does government shape the social responsibility of organizations?

Governments influence organizations through direct and indirect regulation. (Learning Objective 5 – AACSB – analytical thinking) QUESTIONS FOR ANALYSIS 2-6. In your opinion, which area of social responsibility is most important? Why? Are there areas other than those noted in the chapter that you consider important?

Visit MyBizLab for suggested answers. (Learning Objective 4 – AACSB – application of knowledge)

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2-7. What role should government play in social responsibility? Should government create more regulations to encourage businesses to uphold their responsibility to stakeholders? Or, should government take a laissez-faire approach and allow businesses to be only as socially responsible as they choose?

Visit MyBizLab for suggested answers. (Learning Objective 5 – AACSB – reflective thinking, ethical understanding and reasoning) 2-8. The Foreign Corrupt Practices Act makes it illegal for U.S. firms to bribe government officials in other countries. What challenges could this create for a company doing business abroad?

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

It is an accepted business practice in many countries to bribe government officials to “facilitate” projects. Since this is illegal under the Foreign Corrupt Practices Act, this puts American companies at a disadvantage. If the company does bribe a foreign official there are tremendous ethical as well as legal and financial considerations. (Learning Objective 5 – AACSB – application of knowledge, ethical understanding and reasoning) APPLICATION EXERCISES 2-9. Describe your personal code of ethics. Be sure to include what you think is right and wrong, as well as your ethical framework for making decisions.

Students’ personal code of ethics will probably focus on personal relationships, honesty, lying etc. This exercise gives students an opportunity to consider the impact of their ethical behavior. (Learning Objective 1 – AACSB – application of knowledge) 2-10. Using newspapers, magazines, and other business references, identify at least one company that takes each of the four stances to social responsibility: obstructionist, defensive, accommodative, and proactive. For each company, highlight its actions that support your conclusion.

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

Companies taking an accommodative stance meet their legal and ethical requirements, but also go further in certain cases. Companies taking a proactive stance will go above and beyond what is required of them in meeting the needs of stakeholders. (Learning Objective 4 – AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 2-11 TO 2-14 (Learning Objective 6 – AACSB – application of knowledge, interpersonal relations and teamwork, ethical understanding and reasoning)

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This exercise challenges the students to be proactive and think about possible ethical dilemmas their company may face. The team responses will vary but many teams will choose to complete a formal statement of company practices and business ethics since this is a proactive approach to prevent future problems.

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

TEAM EXERCISE: TO LIE OR NOT TO LIE: THAT IS THE QUESTION 2-15 TO 2-18 (Learning Objective 1 – AACSB – application of knowledge, ethical understanding and reasoning) 2-15. What personal, social, and cultural factors do you think contribute to lying in the workplace?

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

2-16. What personal, social, and cultural factors do you think contribute to lying in the workplace? (Same question as 2-15) Answers will vary, but most students will cite examples that reflect combinations of contradictory ideas.

2-17. If you were your company’s director of human resources, how would you make your code of ethics a “living document?”

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

2-18. If you were faced with any of the ethical dilemmas described in Step 1, how would you handle them? How far would you go to maintain your personal ethical standards?

Students’ answers will depend on who might be harmed in the lies. Students should recognize that inflating sales and revenue data on official company statements to increase stock value potentially harms stakeholders and the reputation of the company more than merely telling someone on the phone that the boss is “in a meeting” when he or she is not.

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

EXERCISING YOUR ETHICS: THE CASE OF ORPHAN DRUGS (Learning Objective 2 and 3 – AACSB – application of knowledge, ethical understanding and reasoning) 2-19. Putting yourself in the shoes of the financial manager, which course of action would you

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recommend?

Answers will vary, but students may notice that defending social responsibility yields personal PR benefits. This also happens on a larger scale to companies that promote social responsibility.

2-20. Are the short-term consequences of your decision different from the long-term consequences? Describe the short- and long-term impacts.

Answers will vary, but many students will likely accept that businesses should act in socially responsible ways as long as such actions are in compliance with the law and meet the needs of stakeholders. Students should observe that while the orphan drugs may not be economically profitable, providing them to the limited customer base might be “socially beneficial” in that the positive publicity the company receives can outweigh the financial implications. In the long term, this can drive customers to favorably view the company.

However, economically, the long-term financial impact could be negative. Students should know that pharmaceutical companies already offer financial assistance or reduced pricing to people, even for approved, non-orphan drugs.

2-21. How could the government encourage companies to commercialize “orphan” drugs that treat or cure rare conditions but are not economically desirable? If you were a member of Congress, would you support government intervention in this situation?

Answers will vary, but students should note that legislative and regulatory avenues are available to Congress to provide encouragement. Tax incentives are one possibility.

CASES: SIMPLY DIVINE (Learning Objectives 3 and 4 – AACSB – application of knowledge, ethical understanding and reasoning) 2-22. While Divine Chocolate has embraced the concept of fair trade, their products are not organic. On their website, they argue that purely organic production methods could result in greater instability in production because cocoa is very disease-prone. Do you think that Divine has an ethical obligation to require farmers to become organic? Why or why not?

Answers will vary. Students should keep in mind the need to balance costs vs. benefits, especially when the stated intent is to improve the livelihood of the farmers.

2-23. How would you describe Divine Chocolate’s approach to social responsibility? How do they balance their responsibilities to their stakeholders?

Stakeholders include customers, employees, investors, suppliers, and local communities.

Social responsibility includes responsibility toward the environment, customers, employees and investors. Approaches include four stances: obstructionist, defensive, accommodative, and proactive. Students are likely to determine that Divine Chocolate is either accommodative or proactive in its approach. Balancing responsibilities likely focuses heavily

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on suppliers, communities, and customers, as investors will benefit based on the success of the company’s decisions regarding the other stakeholders.

2-24. Do you pay attention to fair-trade products in your own purchasing behavior? For what kinds of products might you be willing to pay a premium price to help those who produce the ingredients?

Answers will vary depending on students’ tastes, incomes, etc. Do you pay attention to fairtrade products in your own purchasing behavior? For what kinds of products might you be willing to pay a premium price to help those who produce the ingredients? (Same as above) 2-25. Under what circumstances might fair trade actually cause harm? To whom? At what point would fair-trade tradeoffs no longer be acceptable?

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

WHEN MOTHER NATURE STORMS IN (Learning Objective 5 – AACSB – application of knowledge, ethical understanding and reasoning) 2-26. After Hurricane Sandy hit, Lowe’s committed to maintaining prices on emergency goods.

Do you think that other retailers acted similarly? Why or why not?

Many students will probably respond that many retailers did not maintain prices but instead took of advantage of the situation. Other students will note that many other retailers acted ethically and responsively.

2-27. Do you think that social responsibility is good for business? What would motivate a profitseeking company like Whirlpool to incur the expense of donating appliances to the rebuilding effort?

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

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

2-28. How would you characterize Home Depot’s approach to social responsibility? Be sure to support your conclusion.

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

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2-29. How would you characterize Home Depot’s approach to social responsibility? Be sure to support your conclusion.

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

2-30. What is the appropriate role of government in the event of a natural disaster such as Hurricane Sandy?

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

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Chapter 3: Entrepreneurship, New Ventures, and Business Ownership Chapter Overview Have you ever wanted to be your own boss? Think of going to work when you want to. Think of how it would be to call your own shots. Although it’s anything but easy, starting your own business can be rewarding. The U.S. economic system welcomes entrepreneurship and offers various forms of business ownership. This chapter discusses small business, its importance to the U.S. economy, and the popular areas of small business. It looks at: • • • • • •

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

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

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

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

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

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

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

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

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

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

6. Class Discussion: Conjuring Up Profits?

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

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

Time Limit 15 min.

30 min.

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

20 min.

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

45 min.

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

30 min.

Students identify what makes a successful company, at least in terms of usage, financially successful.

30 min.

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

What Is a “Small” Business?

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

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

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

2. Innovation. Small business produces 13 times as many patents per employee as large patenting firms.

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

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

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

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

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

5. Finance and Insurance. These firms account for about 4 percent of all firms with fewer than 20 employees. Many are affiliates of or agents for larger national firms.

6. Manufacturing. More than any other industry, manufacturing lends itself to big Copyright © 2017 Pearson Education, Inc.

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business. Still, about 4 percent of firms with fewer than 20 employees are involved in manufacturing.

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

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

KEY TEACHING TIP •

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

QUICK QUESTION •

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

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

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

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

A. Entrepreneurial Characteristics Successful entrepreneurs are often distinguished from others through a set of characteristics, including: 1. Resourcefulness 2. A concern for customer relations 3. A desire for autonomy 4. The ability to handle ambiguity 5. A desire for risk-taking 6. A need for personal freedom KEY TEACHING TIPS •

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

•

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

QUICK QUESTIONS •

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

•

What are some common characteristics shared by all entrepreneurs?

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

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

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

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

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

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

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

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

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

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

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

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

2. Franchising: A franchise agreement involves two parties, a franchisee (the local owner) and a franchiser (the parent company). Franchisees benefit from the parent corporation’s experience and expertise. The franchiser may pick the store location, negotiate the lease, purchase equipment, and supply financing. Franchisees receive ready-made businesses but also expert help in running them. Startup costs vary quite widely. For example, a McDonald’s franchise has an initial fee of at least $1 million. Probably the most expensive franchises are professional sports teams and cost on average $957 million.

3. Starting from Scratch: Risks with this approach are greater than with buying an existing business. However, starting from scratch does allow the entrepreneur to operate without the commitments, policies, errors, etc., of a predecessor. The owner is free to choose lenders, equipment, inventories, locations, suppliers, and workers.

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

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

2. SBA Financial Programs: Under the SBA’s 7(a) loans program, small businesses may borrow from commercial lenders with the SBA guaranteeing to repay a maximum of 75 percent of a loan over $150,000. The SBA’s special purpose loans target businesses with special needs, such as those meeting international demands. For loans under $35,000, the SBA offers a micro-loan program.

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

3. Other sources of financing include overseas financing and online companies that focus on small businesses.

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KEY TEACHING TIPS •

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

•

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

•

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

QUICK QUESTIONS

• What is the purpose of a business plan?

•

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

•

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

•

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

•

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

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

Time Limit: 45 minutes

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

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

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

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

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

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

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

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

2.

3.

4.

Managerial incompetence or inexperience Neglect Weak control systems Insufficient capital

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

2.

3.

4.

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

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KEY TEACHING TIPS •

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

•

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

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

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

Time Limit: 30 minutes

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

Noncorporate Business Ownership A. Sole Proprietorships A sole proprietorship is owned and usually operated by one person; about 74 percent of all U.S. businesses are sole proprietorships.

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

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

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

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

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

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

Master Limited Partnerships is a form of ownership that sells shares to investors who are repaid from the firm’s profits. The master partner retains at least 50 percent ownership and runs the business.

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

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together for their common benefit. They give members greater production power, greater marketing power, or both, though they are limited to serving the specific needs of their members.

KEY TEACHING TIPS •

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

•

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

•

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

•

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

•

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

QUICK QUESTIONS •

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

•

What are some of the advantages and disadvantages of partnerships?

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

At-Home Completion Time: 60 minutes

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

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

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

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

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

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

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

1. Corporate Governance. Defined by the firm’s bylaws, corporate governance involves stockholders, the board of directors, and corporate officers. a. Stockholders are the owners of a corporation. Corporations sell shares, called stock, to investors who then become stockholders, or shareholders. Profits are distributed among stockholders in the form of dividends, and corporate managers serve at stockholders’ discretion. b. The board of directors is the governing body of the corporation and communicates with stockholders and other stakeholders, set policies, and are legally responsible for

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

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

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

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

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

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

KEY TEACHING TIPS •

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

•

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

•

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

•

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

QUICK QUESTIONS •

What is meant by “double taxation?”

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•

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

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

Time Limit: 30 minutes

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

At-Home Completion Time: 30 minutes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What is my product or service?

Who are my customers?

Where are my customers located?

Is my business idea easily copied?

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

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

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

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

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

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

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

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In-Class Activity 6: Conjuring up Profits?

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

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

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

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

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

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

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

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

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

Visit MyBizLab for suggested answers. (Learning Objective 1 – AACSB – application of knowledge) 3-2. Which industries are easiest for a small business to enter? Which are hardest? Why? The easiest industries for new start-ups include services, which is the fastest-growing segment of small business. In addition, start-ups in retailing, construction, and wholesaling are relatively easy. Start-ups in finance and insurance may be more difficult because these businesses are mostly affiliates of or agents for larger national firms. Start-ups in manufacturing and transportation are difficult because of the higher initial outlay of cash required.

(Learning Objective 1 – AACSB – application of knowledge) 3-3. What are the primary reasons for new business failure and success?

Reasons for failure include managerial incompetence or inexperience, neglect, weak control systems, and insufficient capital. Reasons for success include hard work and dedication, market demand for the products or services being provided, managerial competence, and luck. (Learning Objective 4 – AACSB – application of knowledge) 3-4. What are the basic forms of noncorporate business ownership? What are the key advantages and disadvantages of each?

The basic forms of noncorporate business ownership include proprietorships and partnerships. Proprietors answer to no one but themselves, and they enjoy easy entry and exit into and out of the market. Further, tax laws permit owners to treat sales revenues and operating expenses as part of their personal finances, paying taxes based on their personal tax rate. However, proprietors experience unlimited liability, making them liable for all debts incurred by the business. Finally, proprietors face a potential lack of continuity and can depend only on their own resources and, perhaps, their limited managerial and financial capabilities. The partnership, on the other hand, can grow by being able to add new talent and money. In addition, the skills and experience of one partner can complement the skills and experience of another partner. As with the proprietorship, big drawbacks facing a partnership are unlimited liability and potential lack of continuity. (Learning Objective 5 – AACSB – reflective thinking) QUESTIONS FOR ANALYSIS 3-5. After considering the characteristics of entrepreneurs, do you think that you would be a good candidate to start your own business? Why or why not?

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Visit MyBizLab for suggested answers. (Learning Objective 2 – AACSB –application of knowledge, reflective thinking) 3-6. If you were going to open a new business, what type would it be? Why? Answers will vary, but many students will choose businesses within those industries that offer ease in market entry, primarily because resource availability may be limited to most students; they may not have built much personal credit and are likely not at the peak of their income-earning capacity. (Learning Objective 3 and 4 – AACSB – application of knowledge) 3-7. Would you prefer to buy an existing business or start from scratch? Why?

Visit MyBizLab for suggested answers. (Learning Objective 4 – AACSB − application of knowledge, reflective thinking) 3-8. Why might a closely held corporation choose to remain private? Why might it choose to be publicly traded?

Such corporations may choose to remain private if control retention is the aim. Many closely held corporations choose to become public to generate additional funding. (Learning Objective 6 – AACSB –application of knowledge) APPLICATION EXERCISES 3-9. Interview the owner/manager of a sole proprietorship or a general partnership. What characteristics of that business form led the owner to choose it? Does he or she ever contemplate changing the form of the business?

Answers will vary, but most students will discover that proprietors in small businesses are attracted to the simplicity in starting up and in being their own boss, in spite of the disadvantage of unlimited liability. Those contemplating changing the form of business ownership may be considering the advantages of additional capital and/or forms of managerial expertise added to the business. (Learning Objectives 2 and 5 – AACSB – application of knowledge) 3-10. Although more than half of all small businesses don’t survive five years, franchises have a much better track record. However, it can be difficult to buy a franchise. Research a popular food industry franchise, such as Panera Bread, Sonic, California Tortilla, or Subway, and detail the requirements for net worth and liquid cash for the franchisee as well as up-front and annual fees.

This should be an interesting and eye opening exercise. Students should carefully evaluate the costs and the various success rates among popular restaurant concepts. A good source of information for this exercise is Restaurant News. (Learning Objective 3 – AACSB – application of knowledge)

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

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

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

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

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

EXERCISING YOUR ETHICS: BREAKING UP IS HARD TO DO (Learning Objective 5 – AACSB – ethical understanding and reasoning, analytical thinking) 3-19. What are the reasons the business has been successful? How did each partner contribute to the success?

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The business presumably is successful because it offers products and services that customers find valuable. Each partner contributed to the business based on the individual strengths they brought to the partnership. This led to a balance of contributions that worked well.

3-20. Looking ahead, what are the biggest risks to their venture?

Risks include Mark needing to perform well in areas that are not his strengths, but the biggest risk may be the status of Mark and Connie’s interpersonal relationship. This relationship was the basis for initially creating the partnership, so if the relationship changes, it can risk the success of the business.

3-21. Is it fair for Connie to work fewer hours than Mark? What changes could they make to create equity and fairness in their agreement?

Answers will vary, but students will want to consider whether changes should be made to the partnership agreement to account for the changing contributions by Mark and Connie. If Mark feels the 50/50 arrangement is no longer appropriate, the two will need to determine what the new ratio should be. Connie will need to show how working only two days instead of the original four, plus the stated inventory and payment problems, justifies a continuation of the original agreement. For the partnership to continue, all tasks should be reviewed and responsibilities evaluated and reassigned.

CASES: IT ALL STARTED WITH A LATE FEE (Learning Objective 6 – AACSB – analytical thinking, application of knowledge) 3-22. What are some of the primary reasons Netflix has been successful?

Netflix has been successful because it has focused on convenience and ease of use for which consumers are very willing to pay. It continually innovates to stay ahead of competitors.

3-23. Netflix is a corporation. Why do you think the firm uses this form of ownership?

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

3-24. What threats might derail Netflix’s success? What steps might the firm take today to thwart those threats?

Just as Netflix has driven Blockbuster out of business, it is possible that another competitor could emerge that would be a threat to Netflix. Students might suggest a strategic alliance with television and movie producers to secure Netflix’s position. Netflix is already taking steps in this direction with the original series it now offers.

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3-25. Suppose Reed Hastings asked you for advice on how to make Netflix better. What would you tell him?

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

ICE CREAM HEADACHE (Learning Objective 3 – AACSB – analytical thinking, application of knowledge) 3-26. What would be the advantages of buying a Cold Stone Creamery franchise as opposed to starting a business from scratch?

Answers will vary, but some students may find the added difficulty in starting from scratch challenging, but preferable due to the increased chance of success. Others will likely want to benefit from a well-established franchise. After all, the corporation provides startup assistance and ongoing support.

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

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

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

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

3-29. How would you research a franchise purchase before making the decision to invest?

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

3-30. Do you think that you would be interested in owning a Cold Stone Creamery franchise?

Why or why not?

Answers will vary depending on students’ interest.

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

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

•

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

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

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

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

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

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

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

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

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

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

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

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

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Time Limit 20 min.

20 min.

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

The Contemporary Global Economy The world economy is becoming a single interdependent system through the process of globalization. The total volume of international trade is more than $19.3 trillion. Exports are products that are made domestically and shipped for sale abroad; imports are products that are made abroad but sold domestically. International trade is becoming increasingly important to most nations and their largest businesses. Governments and businesses are more aware of the benefits of globalization to businesses and shareholders. New technologies have made travel, communication, and commerce faster and cheaper. In addition, competitive pressures push firms into foreign markets to keep up with competitors.

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

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

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

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

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

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

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

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

KEY TEACHING TIPS •

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

•

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

•

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

•

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

HOMEWORK Now is a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. The assignment asks students to research per capita income levels in various countries.

At-Home Completion Time: 45 minutes

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

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

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

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

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

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

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

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

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

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

KEY TEACHING TIPS •

Students often confuse balance of trade with balance of payments. Make sure they

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understand that a country’s balance of trade is the difference between that country’s exports and imports.

•

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

•

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

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

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

• What countries are currently members of the European Union?

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

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

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

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

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

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

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

KEY TEACHING TIPS •

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

•

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

•

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

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

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

1.

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

2.

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

3.

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

Planning and decision-making are geared to international markets. Headquarters locations are almost irrelevant. It is important not to underestimate the economic impact of multinational firms. In 2013, the largest 500 multinationals accounted for nearly $2 trillion in profits from $31.1 trillion total revenues. They employed tens of millions of people, paid billions in taxes, and brought equipment and services from thousands of other firms across the world.

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

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

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

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

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

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

KEY TEACHING TIPS •

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

•

Remind students that independent agents often act as sales representatives.

QUICK QUESTIONS • What are licensing arrangements?

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

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

• How many Japanese multinational companies can you name?

• How many European companies can you name?

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

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

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

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

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

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

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

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

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

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

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

At-Home Completion Time: 30 minutes

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

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

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

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

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

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

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

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

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

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

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KEY TEACHING TIPS •

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

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

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

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

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

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

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

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

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

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

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

3.

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

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

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

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

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

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

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

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

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

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

Visit MyBizLab for suggested answers. (Learning Objective 1 – AACSB – analytical thinking) 4-2. What are the three possible levels of involvement in international business? Give examples of each.

The three levels are importing/exporting, international business, and multinational business.

Examples will vary. (Learning Objective 3 – AACSB – analytical thinking) 4-3. What are the elements of national competitive advantage?

The elements of national competitive advantage are factor conditions, demand conditions, related and supporting industries, and strategies, structures, and rivalries. (Learning Objective 3 – AACSB – analytical thinking) 4-4. Describe the five international organizational structures Students should focus on the levels of involvement and organizational structures discussed in the chapter. Some firms merely import or export. Others may utilize an independent agent that represents the company in foreign markets. Licensing allows a company to grant exclusive rights to a foreign company to manufacture or market their products. Branch offices allow the domestic company to maintain its own employee base overseas. Finally, a strategic alliance allows a domestic company to partner with a foreign company in working toward a common purpose. (Learning Objective 3 – AACSB – analytical thinking) QUESTIONS FOR ANALYSIS 4-5. List all the major items in your bedroom, including furnishings, and identify the country in which each item was made. Develop a hypothesis about why each product was made in the United States or abroad.

Answers will vary, but students may indicate that many electronics items, for example, are imported from Japan, South Korea, China, and Taiwan; technological expertise among companies there is often perceived as being superior. Linens and clothing, for example, have likely been imported from a variety of countries. (Learning Objective 4 – AACSB – analytical thinking, application of knowledge) 4-6. Describe the United States in terms of the five cultural orientations.

When discussing the first dimension of social orientation, students should note the United States emphasis on individualism with the interests of the individual taking precedence. On

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

Research suggests that Americans also are more tolerant regarding uncertainty and ambiguity. On the fourth dimension of goal orientation Americans appear to display moderately aggressive goal behavior. On the final dimension, time orientation, research suggests that people in the United States have an intermediate time orientation compared to other countries. (Learning Objective 4 – AACSB – analytical thinking, application of knowledge) 4-7. Do you support protectionist tariffs for the United States? If so, in what instances and for what reasons? If not, why?

Visit MyBizLab for suggested answers. (Learning Objective 5 – AACSB – application of knowledge) 4-8. Do you think that a firm operating internationally is better advised to adopt a single standard of ethical conduct or to adapt to local conditions? Under what kinds of conditions might each approach be preferable?

Visit MyBizLab for suggested answers. (Learning Objective 5 – AACSB – analytical thinking and application of knowledge) APPLICATION EXERCISES 4-9. The World Bank uses per-capita income to make distinctions among countries. Use Web or database research to identify at least three countries in the following categories for last year: high-income countries, upper-middle-income countries, lower-middle-income countries, and lower-income countries. In addition, identify the source of the data that you used to draw these conclusions.

Students will consult various sources to better understand the huge disparities in wealth between the high-income, upper-middle, and lower-middle income countries.

(Learning Objective 1 – AACSB – analytical thinking, application of knowledge) 4-10. China is one of the fastest-growing markets in the world. Use Web or database research to uncover how to best describe China according to the five cultural dimensions. Cite the sources for your information.

Answers and sources will vary, but students should focus on cultural dimension differences and the impact on businesses operating in China. (Learning Objective 4 – AACSB – analytical thinking, application of knowledge)

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

TEAM EXERCISE: WEIGHING THE TRADE-OFFS 4-14 TO 4-17 (Learning Objective 3 – AACSB – application of knowledge, interpersonal relations and teamwork, ethical understanding and reasoning) This exercise should generate a lively discussion with passionate arguments since many students may have experienced outsourcing first hand or know someone who has been outsourced.

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

Outsourcing offers advantages of helping firms focus on their core activities and avoid getting sidetracked on secondary activities and reducing costs by locating certain business functions in areas where costs are low. Offshoring carries the practice of outsourcing to other countries.

However, disadvantages include limitations depending on the need for personalized assistance.

Students, as required in the questions, also need to look beyond simply the cost benefits to the organization, and look at the impacts on the various stakeholders, including the employees and the community.

EXERCISING YOUR ETHICS: PAYING HEED TO FOREIGN PRACTICES (Learning Objective 4 – AACSB – application of knowledge, ethical understanding and reasoning) 4-18. What are the key ethical issues in this situation?

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

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

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

4-20. What would you do?

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

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CASES: THE DOOR OPENS (Learning Objectives 2, 3, 4 and 5 – AACSB – application of knowledge, ethical understanding and reasoning) 4-21. How will opening Cuba to international travel affect the travel industry in the United States and other countries? What are the potential benefits of virtually open travel to Cuba to Cuban citizens as well as the Cuban government?

Students will have differing answers based on their perceptions of the ethics of the embargo.

The travel industry in the United States will be the industry to see the most potential benefits, as travel by U.S. citizens has been severely restricted for over 50 years. Citizens have been able to travel to Cuba via other countries for several years. This leads to a potential negative impact on the travel industry of those other countries, as U.S. citizens will no longer need to travel via Canada or other countries. Potential benefits of virtually open travel to Cuba to Cuban citizens include the potential for increased income, as well as exposure to products and social and cultural ideas from the visitors. Economic benefits of tourism can benefit the Cuban government by helping with the balance of trade, potentially moving Cuba from its lower-income economic position into a higher category.

4-22. How have changes in the structure of the global economy affected the U.S. embargo, which has been in effect for around 50 years? More specifically, how can U.S. companies deal with changing environmental challenges—economic, political and legal, and cultural— in their relations not only with Cuba but also with other countries in Latin America?

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

4-23. How might U.S. businesses best prepare themselves for a possible elimination of the embargo?

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

NOT MY CUP OF TEA (Learning Objective 4 – AACSB – analytical thinking, application of knowledge) 4-24. What motivates companies like Starbucks to expand into international markets with little perceived interest for their product?

Starbucks recognizes that to achieve sustainable growth, it needs to expand beyond its domestic borders. Although, the Chinese are currently consumers of large amounts of coffee, tastes change over time. Since many Chinese are travelling internationally, they are increasingly exposed to different cultures and products.

4-25. How has Starbucks adapted to Chinese culture?

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

4-26. How will expansion in the ready-to-drink market help or hinder sales in their Starbucks stores?

Answers will vary depending on students’ perception of cultural changes. Students should consider whether ready-to-go drinks will add to the revenue stream of the Starbucks locations, or negatively impact sales levels as fewer people will use Starbucks as a place to meet people and spend time.

4-27. China has a collectivist culture. How do you believe that this will affect managers in a Starbucks store?

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

4-28. If China wished to slow Starbucks’ expansion, what legal barriers would be most helpful?

How would these barriers affect Chinese consumers and businesses?

China could erect trade barriers such as using local content laws requiring a large percentage of the products sold in Starbucks originate in China. The Chinese could also use their business practice laws making it more difficult to open additional Starbucks.

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

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

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

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

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

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

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

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

2. What should my business plan look like?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DESCRIPTION OF BUSINESS What will your business do?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Chapter 5: Managing the Business Chapter Overview What makes a good manager? Think back to a favorite manager with whom you have worked.

What made that manager effective? Perhaps the manager assigned special roles in setting organizational goals. Or perhaps he or she was an exceptional communicator, expressed empathy, or was an effective motivator.

Now think back to a “poor” manager you’ve worked with. What made that manager ineffective?

Maybe he or she was too controlling, lacked communication skills, or showed favoritism toward subordinates. Whatever the reason, many people’s future managerial roles will be affected by their past experiences.

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

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

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

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

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

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

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

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

5. Up for Debate: Who Creates Corporate Culture?

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

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

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

Students are divided into teams to discuss crisis management.

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

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Time Limit 30 min.

30 min.

30 min.

20 min.

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

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

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

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

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

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

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

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

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

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

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

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

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

KEY TEACHING TIPS •

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

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

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

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

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

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

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

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

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

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

1. Top Managers. This level is responsible for the firm’s overall performance and effectiveness. Top managers set general policies and formulate strategies, approve all significant decisions, and represent the company in dealing with stockholders, the board of directors, other businesses, and government bodies. Common titles for top managers include president, vice president, treasurer, chief executive officer (CEO), and chief financial officer (CFO).

2. Middle Managers. This level is responsible for implementing the strategies, policies, decisions, and goals set by top managers. Titles such as plant manager, operations manager, and division manager designate middle-management slots.

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

Those who hold such titles as supervisor, office manager, project manager, and group leader are first-line managers.

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

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

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

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

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

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

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

KEY TEACHING TIPS •

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

•

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

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

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

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

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

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

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

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

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

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

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

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2. Human Relations Skills Absolutely necessary for managerial success, human relations skills are skills in understanding and getting along with people. These skills are important at all management levels, though most important for middle managers. Good communications skills are key to understanding others and maintaining good relations.

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

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

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

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

1. Global Management Skills. Businesses now demand managers who can understand cultural differences and the motives and practices of foreign competitors. Managers must also understand how to collaborate with others around the world on a real-time basis, and understand international operations.

2. Management and Technology Skills. New forms of technology increase the manager’s need to process, organize, and interpret a plethora of information. While new forms of technology have added to a manager’s ability to process information, these new forms have also made it even more important to organize and interpret an ever-increasing wealth of input, by developing effective technology skills.

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

At-Home Completion Time: 45 minutes

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

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

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

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

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

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

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

3. Functional Strategy. With functional strategy, managers in specific areas decide how best to achieve corporate goals by performing their functional activities as productively as possible.

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

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

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

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

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

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

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

KEY TEACHING TIPS •

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

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

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

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

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

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QUICK QUESTIONS •

What are the purposes of goal setting?

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What is included in your college’s mission statement?

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What is the difference between environmental analysis and organizational analysis?

Use In-Class Activity 2: Class Discussion: How Do Your Goals Stack Up? Time Limit: 30 minutes Use In-Class Activity 3: Small-Group Discussion: SWOT Analysis Time Limit: 30 minutes

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

Contingency Planning and Crisis Management

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

A. Contingency Planning Contingency planning is planning for change; it identifies ways in which a company will respond to change. It involves identifying aspects of a business or its environment that might entail changes in strategy and identifying alternatives.

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

KEY TEACHING TIPS •

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

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

Use In-Class Activity 4: Up for Debate: I Can’t Believe This Has Happened!

Time Limit: 20 minutes

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

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

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

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

QUICK QUESTIONS •

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

In a beauty salon?

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

Use In-Class Activity 5: Up for Debate: Who Creates Corporate Culture?

Time Limit: 30 minutes HOMEWORK Comparing Corporate Cultures Now is a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. The assignment gives students an opportunity to compare and contrast the corporate cultures of two local companies with which they are familiar.

At-Home Completion Time: 30 minutes

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

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

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

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

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

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

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

Time Limit: 30 minutes What to Do: 1. Ask students to write down one or two of their long-term goals, focusing on the five-yearplus horizon. (10 minutes) 2. Ask students to write down one or two intermediate goals—focusing on a one- to five-year horizon—that may help them to achieve their long-term goals. (10 minutes) 3. Ask students to identify one or two short-term goals—covering a range of less than one year—that may help them to achieve their intermediate goals. (10 minutes) Don’t Forget: Remind students that the achievement of short-term goals can support the achievement of intermediate goals, which can ultimately support long-term goals.

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

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In-Class Activity 3: Small-Group Discussion: SWOT Analysis Activity Overview: This activity asks students to brainstorm in small groups in order to complete a SWOT analysis.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups, asking each group to identify internal strengths (S), weaknesses (W), external opportunities (O), and threats (T) surrounding their college or university. (20 minutes) 2. Reassemble the class and discuss each group’s input. (10 minutes) Don’t Forget: This exercise could be completed as an individual activity prior to asking for student input.

Wrap-Up: Wrap up the discussion by reminding students that strengths, weaknesses, opportunities, and threats surrounding an organization can sometimes be obvious. However, different individuals can sometimes perceive these factors quite differently. For example, what one person perceives as a threat may be perceived as an opportunity by another.

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In-Class Activity 4: Up for Debate: I Can’t Believe This Has Happened!

Activity Overview: This activity is designed to get students talking about crisis management.

Time Limit: 20 minutes What to Do: 1. Divide the class into small groups and ask each group to assume you have been suddenly called away for the next three weeks, but that class must go on. Appropriate course material, course objectives, and all syllabus content must be covered in a classroom setting—but there is no time to bring in a replacement instructor. Instead, the students themselves are responsible.

2. Each group must decide on the best way to continue. How can material and objectives be adequately covered? Who should carry out the instruction? (20 minutes) Don’t Forget: For smaller class sizes, you might complete this as an individual activity.

Wrap-Up: Be prepared to explain what would and would not feasibly work from an instructor’s perspective as groups present their plans.

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In-Class Activity 5: Up for Debate: Who Creates Corporate Culture?

Activity Overview: This activity asks students to share their thoughts on corporate culture.

Time Limit: 30 minutes What to Do: 1. Divide the class into three-member groups and ask them to discuss among themselves who creates corporate culture. Ask the groups to consider these conversation starters: (15 minutes) a. If top managers create corporate culture, how do they get everyone else to follow? b. If first-line managers or employees create corporate culture, how do they get top managers to go along with it? c. How often does corporate culture change? d. When corporate culture changes, what typically causes the change?

2. Reassemble the class and discuss each group’s answers. (15 minutes) Don’t Forget: Corporate culture is not always a direct result of top managers’ actions. Sometimes corporate culture is created by first-line managers, employees, or even everyone in the organization.

Wrap-Up: Remind students that the input they provide is likely a result of their own work experience. Some corporate cultures change often and quickly, whereas others tend to be more static.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 5-1. Describe the roles and responsibilities of top, middle, and first-line managers.

Top managers are strategic planners responsible for corporate performance and formulating the mission, goals, and overall corporate strategy. Middle managers are tactical planners responsible for implementing top management’s strategies. First-line managers spend most of their time working with and supervising employees. (Learning Objective 2 – AACSB – analytical thinking) 5-2. What are the four main purposes of setting goals in an organization?

The four main purposes are (a) to provide direction and guidance for managers at all levels; (b) to help firms allocate resources; (c) to help define corporate culture; and (d) to help managers assess performance. (Learning Objective 4 – AACSB – analytical thinking) 5-3. Identify and explain the three basic steps in strategy formulation.

The three basic steps in strategy formulation include (a) setting strategic goals that stem from the organization’s mission statement; (b) analyzing the organization and its environment for strengths, weaknesses, opportunities, and threats; and (c) matching environmental threats and opportunities against the organization’s strengths and weaknesses. (Learning Objective 4 – AACSB – analytical thinking) 5-4. What is corporate culture? How is it formed? How is it sustained?

Visit MyBizLab for suggested answers. (Learning Objective 6 – AACSB – analytical thinking) QUESTIONS FOR ANALYSIS 5-5. Relate the five basic management skills (technical, human relations, conceptual, decisionmaking, and time management) to the four activities in the management process (planning, organizing, leading, and controlling). For example, which skills are most important in leading?

The planning practices identified will vary from strategic to tactical to operational in nature.

Further, every organizational structure varies, depending on the number of people working in the organization. Leading or motivating, depends on the number of subordinates or group members present and, perhaps, the types of diversity. Controlling is the one function that ties back to the planning process; if the plan is not going according to expectations, changes are made to guide the organization in the right direction. (Learning Objective 3 – AACSB – application of knowledge)

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5-6. Identify managers by level and area at your school, college, or university.

Visit MyBizLab for suggested answers. (Learning Objective 2 – AACSB – application of knowledge) 5-7. What specific types of contingency plans would a company need to develop in an area where hurricanes are common?

Visit MyBizLab for suggested answers. (Learning Objective 5 – AACSB – application of knowledge) 5-8. What differences might you expect to find in the corporate cultures of a 100-year-old manufacturing firm based in the Northeast and a 1-year-old e-commerce firm based in Silicon Valley?

The older firm is likely to have many established traditions, norms, and layers of management. Decision making is probably concentrated at the top of the organization. Cultural elements are likely to be rather conservative. The newer e-commerce firm probably has a culture that stems directly from the personality of its founders. The firm likely has a flat hierarchy, and all employees likely use their conceptual and decision-making skills. Most cultural elements are probably fluid and freewheeling. (Learning Objective 6 – AACSB – application of knowledge) APPLICATION EXERCISES 5-9. Interview a manager at any level of a local company. Inquire about the manager’s education and work experience. Which management skills are most important for this manager’s job?

Answers will vary, but students should cover each of the management activities and skills.

(Learning Objective 3 – AACSB – application of knowledge) 5-10. Compare and contrast the corporate cultures of two companies that do business in your community. Give examples of the culture of each company.

Answers will vary, but students should focus on areas where the firms are likely to be similar, such as in the type and extent of skills that managers typically use, and different, such as target markets, philosophies, and management styles. (Learning Objective 6 – AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 5-11 TO 5-16 (Learning Objectives 1, 2, 3, 4, 5, and 6 – AACSB – interpersonal relations and teamwork, analytical thinking, application of knowledge) In this exercise students are focusing on the expertise necessary to successfully run their business. They should incorporate information from their SWOT analysis to determine their goals and strategies. The students should also incorporate lessons learned from this chapter to develop detailed contingency plans.

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TEAM EXERCISE – DREAMS CAN COME TRUE 5-17 TO 5-20 (Learning Objective 4 – AACSB – interpersonal relations and teamwork, written and oral communication, application of knowledge) This exercise helps students focus on developing a mission statement and how to derive appropriate goals based on the company’s mission.

5-17. Working with your group, develop a mission statement for Dream Vacations. Why is developing a mission statement important?

Example mission statements will vary. A mission statement defines how an organization will achieve its purpose in the environment in which it conducts its business, its reason for being.

It’s difficult to develop other goals if this one is unclear or undefined.

5-18. Considering Dream Vacations’ mission statement and the information provided in the case, what are the company’s long-term goals? How should Arturo measure these goals?

Long-term goals involve looking into the future more than five years. Answers may vary but should address the types of trips, types of customers, and destinations on which Dream Vacations expects to focus. What goals the students identify will determine the methods of measurement.

5-19. What intermediate goals will help Dream Vacations meet their long-term goals and realize their mission? What types of corrective action should Arturo take if the company fails to meet these goals?

The scenario identifies two intermediate-term goals of growing at least 10 percent per year over the first five years through advertising and referrals, and expanding into multiple offices within two years. Are these goals that help Dream Vacations meet the long-term goals? If not, additional intermediate-term goals must be developed. Corrective action must be designed that is specific to the goals. It may be necessary to identify what is influencing the growth to examine if advertising and referrals are effective.

5-20. Identify Dream Vacations’ short-term goals. Are short-term goals more or less important than long-term goals?

Short-term goals are focused on developing relationships with resorts in various areas. Both long- and short-term goals are important. Long-term goals focus on the bigger picture of where an organization wants to head while short-term goals involve taking steps that lead to achieving the long-term goals. Therefore, both are important and must be interrelated.

EXERCISING YOUR ETHICS: TIME FOR THE AX? (Learning Objective 1, 2, 3, 5, and 6 – AACSB – ethical understanding and reasoning, reflective thinking) 5-21. Which management functions are involved in setting goals and measuring performance?

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Planning is the management function responsible for determining what the organization needs to do and how best to get it done, i.e., setting goals. Controlling is the process of monitoring performance to make sure that the firm is meeting its goals.

5-22. What are the ethical issues in this situation?

The key ethical issue is focused on the fact that different people with different reputations and work ethics both fell short of quota. Should they be treated the same, when Bill has extenuating circumstances that likely impacted his performance this year? Is there a way to motivate Jane to work harder and reach her quota?

5-23. What do you think most managers would do in this situation?

Some managers will go by the strictest guidelines: fire or place on probation those who fall short of the targeted growth level. They will not look at the individual situations. Most others will look at the individuals involved, their past performance, and make a decision based on the bigger picture.

5-24. What would you do?

Answers will vary, but students should acknowledge that it is often difficult to make personnel decisions. They should explain their recommendations, not simply make the “easier” decision.

CASES: WANT TO KNOW THE FUTURE? JUST GOOGLE IT… (Learning Objectives 1 and 3 – AACSB – application of knowledge, reflective thinking) 5-25. Describe examples of each of the management functions illustrated in this case.

This case cites the example of the two company founders engaging in planning and analysis when diversifying through key acquisitions and alliances. This case also describes the function of leading to ensure Google continues to foster a highly productive company culture of innovation.

5-26. Which management skills seem to be most exemplified in Sergey Brin and Larry Page?

Sergey Brin and Larry Page display technical, interpersonal, conceptual, communication, and decision-making skills. The case discusses their technical skills in creating the algorithms and their conceptual and diagnostic skills in applying it to the business functions at Google.

The case also alludes to their decision-making skills in making acquisitions.

5-27. What role have goals and strategy played in the success of Google?

Sergey Brin and Larry Page clearly had goals and a strategy in mind for their company but take a much more informal approach to strategic planning and goal setting versus many more

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traditional companies. Google operates more on short- and intermediate-term goals than well-publicized long-term goals.

5-28. How would you describe the corporate culture at Google?

The students will likely describe corporate culture at Google as very casual with an emphasis on creativity and innovation.

WHEN OLD IS NEW AND NEW IS OLD (Learning Objectives 3 and 4 – AACSB – analytical thinking, application of knowledge, reflective thinking) 5-29. As CEOs, both Ullman and Johnson were involved in each of the four management functions. Briefly describe the types of decisions that the CEO of JCPenney must make as they relate to each of the four functions.

Students should describe the strategic nature of the decisions that the CEO of JCPenney must make to create a viable business plan, reorganize the functional departments, lead and inspire the employees to create a new company culture, and control to ensure the company’s survival. As stated in the case, there will have to be thoughtful and continued analysis.

5-30. The text describes a variety of skills that are essential to management. Which two skills do you think will be most important for new CEO Ellison?

Although answers will vary, most students will probably consider conceptual and decisionmaking skills to be the most important to Marvin Ellison’s success.

5-31. Do you think that Ron Johnson changed the mission of JCPenney or just implemented new strategies? Be sure to support your conclusion.

5-32. What do you think were Ron Johnson’s biggest mistakes?

5-33. Do you think that Ellison will be successful in rescuing JCPenney, or is it too late?

The last three questions of this case should generate a lively discussion with passionate answers focusing on failed strategy, too quick implementation, lack of careful analysis, and the ultimate question of the company’s long-term viability.

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Chapter 6: Organizing the Business Chapter Overview Like a thumbprint, every organization has a unique structure. Some new business start-ups begin with a simple structure and over time evolve into an elaborate structure. All organizational structures change, but some change more quickly than others.

This chapter presents the building blocks of organizational structure—specialization and departmentalization. It also describes centralization and decentralization, delegation, and authority as the key ingredients in establishing the decision-making hierarchy. Along the way, the chapter looks at the differences among functional, divisional, matrix, and international organizational structures and examines the most popular new forms of organizational design.

Finally, the chapter explores the informal organization and intrapreneuring.

Learning Objectives 6-1. Discuss the factors that influence a firm’s organizational structure.

6-2. Explain specialization and departmentalization as two of the building blocks of organizational structure.

6-3. Describe centralization and decentralization, delegation, and authority as the key ingredients in establishing the decision-making hierarchy.

6-4. Explain the differences among functional, divisional, matrix, and international organizational structures and describe the most popular new forms of organizational design.

6-5. Describe the informal organization and discuss intrapreneuring.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Ice-Breaker: Organizational Structure

2. Small-Group Discussion: Centralization versus Decentralization 3. Up for Debate: Making the Grade 4. Up for Debate: Who Runs the Grapevine?

Description Students consider their college’s organizational chart and chain of command and discuss the relationships of the layers of management and why the organizational chart is specifically structured the way that it is.

Students consider the advantages of centralization and decentralization.

Students are divided into teams to discuss the advantages and disadvantages of intrapreneurship at FedEx. Students are divided into teams to discuss “who” within the organization most likely creates the grapevine.

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Time Limit

30 min.

30 min.

30 min.

30 min.

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CHAPTER OUTLINE Learning Objective 6-1: Discuss the factors that influence a firm’s organizational structure.

What Is Organizational Structure?

Organizational structure is the specification of the jobs to be done within an organization and the ways in which those jobs relate to one another.

A. Organization Charts Organizational charts are prepared to clarify structure and to show employees where they fit into a firm’s operations. The chain of command represents the hierarchy of who reports to whom in the organization.

B. Determinants of Organizational Structure Numerous factors influence the planning and creating of an efficient organizational structure.

Managers not only consider the organization’s purpose, mission, and strategy, but also the organization’s size and environment.

KEY TEACHING TIP •

Remind students that organizational structure refers to the specification of jobs within a firm and how those jobs relate to one another. It can be viewed as the way in which employees’ positions and departments are connected in an organization’s framework.

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Many factors play a part in determining an organization’s optimal structure, including the organization’s mission, strategy, size, and environment. Most organizations change their structures on a continuing basis.

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Students should recognize that the first step in developing the structure of any business involves specialization, departmentalization, and the establishment of a decision-making hierarchy.

QUICK QUESTIONS •

What does an organization chart tell us?

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How does the need to specialize increase as a firm grows?

Use In-Class Activity 1: Ice-Breaker: Organizational Structure Time Limit: 30 minutes

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Learning Objective 6-2: Explain specialization and departmentalization as two of the building blocks of organizational structure.

The Building Blocks of Organizational Structure The first step in developing the structure of any business involves three activities: specialization, departmentalization, and establishing the decision-making hierarchy.

A. Specialization Job specialization, a natural part of an organization’s growth, is the process of identifying the specific jobs that need to be done and designating the people who will perform them. Job specialization may even involve breaking jobs into small components prior to assigning them to individuals.

B. Specialization and Growth. In a very small organization, the owner may perform every job.

As the firm grows, however, so does the need to specialize jobs so that others can perform them. Specialized jobs are learned more easily and can be performed more efficiently than non-specialized jobs. It is possible to overspecialize, however, leading to boredom, carelessness, and lack of satisfaction.

C. Departmentalization Departmentalization is the grouping of similar or related jobs into logical units.

Departmentalization allows the firm to treat each department as a profit center—a separate company unit responsible for its own costs and profits. Several types of departmentalization exist: 1. Functional Departmentalization. Organizations are divided according to a group’s functions or activities. Examples include a firm’s production, marketing, human resource, accounting, and finance departments.

2. Product Departmentalization. Organizations are divided according to the products or services being produced.

3. Process Departmentalization. Organizations are divided according to production processes used to create a good or service.

4. Customer Departmentalization. This grouping of jobs simplifies shopping by providing identifiable store segments.

5. Geographic Departmentalization. Organizations are divided according to the areas of the country or world that they serve.

6. Multiple Forms of Departmentalization. Larger companies tend to adopt different types of departmentalization for various levels.

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KEY TEACHING TIP •

An interesting point to make is that larger companies tend to adopt different types of departmentalization for various levels of the company.

QUICK QUESTIONS •

What type of company might opt to use process departmentalization?

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What type of company might opt to use functional departmentalization?

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What type of company might opt to use customer departmentalization?

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Learning Objective 6-3: Describe centralization and decentralization, delegation, and authority as the key ingredients in establishing the decision-making hierarchy.

Establishing the Decision-Making Hierarchy The decision-making hierarchy is created by assigning tasks, performing tasks, and distributing authority.

A. Distributing Authority: Centralization and Decentralization Some managers make the conscious decision to retain as much decision-making authority as possible at the higher levels of the organizational structure; others decide to push authority as far down the hierarchy as possible.

1. Centralized Organizations. In a centralized organization, authority is held by upperlevel managers. Centralization is common in companies in relatively stable and predictable environments.

2. Decentralized Organizations. In a decentralized organization, authority is delegated to lower levels of management. Decentralization is typical in firms that have complex and dynamic environmental conditions.

3. Tall and Flat Organizations. Tall organizations are multi-tiered, characterized by many layers of employees, and are more centralized; flat organizations have few layers of employees and are more decentralized.

4. Span of Control. A manager’s span of control is the number of people managed by one supervisor; many factors can lead to a wide or narrow span of control.

B. The Delegation Process Delegation begins when responsibility is granted to a subordinate from a supervisor.

Responsibility is the duty to perform an assigned task; authority is the power to make the decisions necessary to complete the task. Accountability is the obligation employees have to their manager for the successful completion of the assigned task.

C. Three Forms of Authority Forms of authority develop when individuals are delegated authority and responsibility in a firm. Various forms of authority may be found in any given company.

1. Line Authority. This authority flows vertically up and down the chain of command.

2. Staff Authority. This authority is found among departments of advisors and counselors, including specialists, such as lawyers, engineers, accountants, and human resource personnel. These individuals help line departments in making decisions, but do not have the authority to make final decisions. While staff members generally provide services to management, line managers are directly involved in producing the firm’s products.

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3. Committee and Team Authority. This is the authority that is granted to committees and teams that play central roles in the firm’s daily operations. Employee committees or teams are typically empowered to plan and organize their own work and to perform that work with minimal supervision.

KEY TEACHING TIPS •

Remind students that in a centralized organization, most decision-making authority is held by upper-level managers; in a decentralized organization, decision-making authority is delegated to levels of management at various points below the top.

•

Make sure students understand that a flat organizational structure tends to have fewer layers of management, whereas a tall organizational structure has many layers of management.

•

Students often forget exactly what delegation involves: (1) the assignment of responsibility, (2) the granting of authority, and (3) the creation of accountability.

•

Students can remember line authority because it is the type of authority that flows up and down the chain of command.

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Students often forget that staff members help line departments in making decisions but do not usually have the authority to make final decisions.

•

Students often perceive that span of control should involve controlling as many employees as possible. Ability to effectively control any number of employees depends on the complexity of the project and the skills required, so increased complexity or skill levels required decreases the number of employees that can be effectively managed.

QUICK QUESTIONS •

How many employees do you think you can effectively control? What are some factors that inhibit or enhance a manager’s span of control?

•

Why do managers sometimes have trouble delegating authority?

•

What are some examples of managers who use line authority, staff authority, and committee and team authority? Might one type of authority be easier to use than another?

Use In-Class Activity 2: Small-Group Discussion: Centralization versus Decentralization Time Limit: 30 minutes

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HOMEWORK Interview a Manager Now is a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. This assignment asks students to interview a manager to gain first-hand knowledge of how the delegation process is actually carried out at a local service business.

At-Home Completion Time: 1 to 2 hours

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Learning Objective 6-4: Explain the differences among functional, divisional, matrix, and international organizational structures and describe the most popular new forms of organizational design.

Basic Forms of Organizational Structure Four basic forms of organizational structure reflect the general trends followed by most firms: functional, divisional, matrix, and international.

A. Functional Structure Often used by most small- and medium-sized firms, functional organizations divide job responsibilities by functional areas, such as marketing or finance. As firms grow, accountability becomes more difficult, so firms tend to move away from this structure.

B. Divisional Structure Corporate divisions usually operate under this structure as relatively autonomous businesses under the larger corporate umbrella. Divisions are departments that resemble separate businesses in that they produce and market their own products. The structure relies on product departmentalization.

C. Matrix Structure Sometimes a “combination” structure—one that combines two separate structures—works better than either simpler structure alone. A so-called matrix structure is organized along two dimensions, instead of just one, by combining, for example, a functional and a divisional structure. It can add flexibility and adaptability to a firm.

D. International Structure International organizational structures have been developed in response to the need to manufacture, purchase, and sell in global markets. These structures frequently change as a company becomes more globalized.

E. New Forms of Organizational Structure Among the most popular new forms of organization are team organization, virtual organization, and learning organization.

1. Team Organization. Team organization relies mostly on project-type teams; people float from one project to another as dictated by their skills and the demands of the projects.

2. Virtual Organization. This organization has little or no formal structure; this organization exists only in response to its own needs. Employees, facilities, and subcontracted services will change based on project needs.

3. Learning Organization. The learning organization works to integrate continuous improvement with continuous employee learning and development. The most consistent and logical strategy for achieving continuous improvement as a firm is to constantly upgrade employee talent, skill, and knowledge.

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KEY TEACHING TIPS •

Students often have a hard time grasping matrix structure, so make sure they understand that it utilizes two types of structures within the same organization; one structure is the “permanent” structure, and the “second” structure is superimposed on top of it.

•

Remind students that there are several forms of international structure, depending on the degree with which an organization depends on foreign companies to manufacture, purchase, and sell its products.

QUICK QUESTIONS •

Functional structure can be thought of as authority that is determined by the relationships between group functions and activities. What are the benefits of a functional structure?

•

With divisional structure, a firm organizes itself around product-based divisions. How can an organization benefit from a divisional structure?

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With matrix structure, a firm chooses to combine two separate structures. How can this be an advantage to the organization?

HOMEWORK Determine Type of Organization Now is a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment asks students to research a company at which they would like to work someday and determine how the company is organized. This assignment lets them investigate a company in which they have interest and learn about how it is organized and whether the organization type fits the mission.

At-Home Completion Time: 1 hour

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Learning Objective 6-5: Describe the informal organization and discuss intrapreneuring.

Informal Organization Frequently, the informal organization—everyday social interactions among employees that transcend formal jobs and job interrelationships—effectively alters a company’s formal structure.

A. Informal Groups Informal groups are groups of people who decide to interact among themselves. Informal organization can be just as powerful as formal organization.

B. Organizational Grapevine The grapevine or the rumor mill is an informal communication structure in which people communicate through ways that transcend the formal communication processes.

C. Intrapreneuring A relatively new concept, intrapreneuring, is encouraged among businesses as a way of enhancing creativity and flexibility in large, bureaucratic structures. It involves identifying and supporting inventors, the product champions, and the sponsors of new ideas, products, services, or processes.

KEY TEACHING TIPS •

Students should recall that in a team organization, people float from project to project as dictated by their skills and the demands of those projects.

•

Remind students that the virtual organization has little or no formal structure.

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Reinforce that a learning organization integrates continuous employee learning and development.

QUICK QUESTIONS •

What is the informal organization at your job?

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If your CEO is seen in a nightclub with someone other than his or her spouse, how long will it take the grapevine to disseminate that information?

Use In-Class Activity 3: Up for Debate: Making the Grade Time Limit: 30 minutes Use In-Class Activity 4: Up for Debate: Who Runs the Grapevine?

Time Limit: 30 minutes

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

IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker: Organizational Structure Activity Overview: This activity asks students to consider the organizational chart and chain of command at their college or university and invites them to discuss the relationships of the layers of management and why the organizational chart is specifically structured the way that it is.

Time Limit: 30 minutes What to Do: 1. Divide the class into four-member groups, asking each group to discuss the organizational chart and chain of command at their college or university. Who reports to whom? (10 minutes) 2. Ask each group to discuss the relationship of the layers of management at the college or university, as well as why the organizational chart is structured the way that it is. (10 minutes) 3. Reassemble the class and discuss each group’s findings. Are the groups consistent with one another in their discussions? (10 minutes) Don’t Forget: Students will likely identify many types of reporting relationships within the college or university. In addition, students will identify many reasons for the way the organizational chart at their school is structured, including factors that may not be included in the textbook discussion.

Wrap-Up: Bring the activity to a close by discussing the various reporting relationships evident in the college or university, as well as the different factors that might play a role in the design of the organizational structure, such as chain of command, span of control, delegation of authority, employee skill or certification level, and so on.

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In-Class Activity Decentralization

2:

Small-Group

Discussion:

Centralization

versus

Activity Overview: This activity encourages students to consider the advantages and disadvantages of centralization and decentralization within organizations.

Time Limit: 30 minutes What to Do: 1. Divide the class into four-member groups and ask them to come up with five advantages of centralization and five advantages of decentralization in organizations. (15 minutes) 2. Reassemble the class and discuss each group’s input. Which do they think is best? (15 minutes) Don’t Forget: Not everyone has worked in both a centralized and a decentralized organization; however, the advantages for each may become more evident as students think about their definitions.

Wrap-Up: Bring the activity to a close by reminding students that top managers make all (or most) of the decisions in a centralized organization, which may indicate that employees overall “learn” more in a decentralized organization. In a decentralized organization, employees may feel that their input is being heard and addressed in making specific decisions. On the other hand, it may be that cohesiveness may appear to be higher in some centralized organizations.

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In-Class Activity 3: Up for Debate: Making the Grade Activity Overview: This activity asks students to think about the advantages of intrapreneuring.

Time Limit: 30 minutes What to Do: 1. Ask students to read the Entrepreneurship and New Ventures feature in the textbook. Divide the class into groups of two or three students, and ask students to discuss how FedEx focuses on intrapreneurship. How has the company benefited from intrapreneuring? Has it faced any disadvantages from intrapreneuring? (10 minutes) 2. Ask the groups to discuss how FedEx’s success can be attributed to its commitment to decentralization. (10 minutes) 3. Reassemble the class as a whole and discuss each group’s input. (10 minutes) Don’t Forget: Before you begin, remind students that intrapreneurship is the process of creating and maintaining the innovation and flexibility of a small-business environment within the confines of a large, bureaucratic structure. Decentralization refers to the delegation of decision-making authority to levels of management at various points below the top.

Wrap-Up: FedEx perfected its hub-and-spoke system for increased speed and efficiency and developed a reputation for high-quality, reliable, and fast service. FedEx pioneered the use of bar codes and handheld PDAs for drivers and online, real-time package tracking. These are a few areas in which FedEx has proven to be intrapreneurial. Bring the activity to a close by highlighting FedEx’s ability to practice standardization in its daily activities, even as managers are encouraged to question, challenge, and develop new ideas.

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In-Class Activity 4: Up for Debate: Who Runs the Grapevine?

Activity Overview: This activity invites students to think more about the grapevine, focusing on whom within the organization may be most likely to create it.

Time Limit: 30 minutes What to Do: 1. Divide the class into two- or three-member teams and ask them to discuss within their groups where the grapevine begins within an organization. Is it top managers? Is it mostly males or females? Is the grapevine generated from specific departments? Is it generated from those people with the most seniority? (15 minutes) 2. Reassemble the class as a whole and debate the small groups’ thoughts. (15 minutes) Don’t Forget: The grapevine is not likely to be generated in the same way within every organization. In addition, information changes as it “moves” from person to person. Remind students that they will be merely considering generalizations in this activity.

Wrap-Up: Wrap up the discussion by reminding students that the grapevine can benefit managers within the organization; they can learn a lot about their workers by listening to what is filtering through the rumor mill. Therefore, some managers may be responsible for starting the grapevine. On the other hand, employees can also be responsible for beginning the grapevine as a result of overhearing information or making assumptions about other workers, departments, the company’s strategic plans, and so on.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 6-1. Describe the five basic forms of departmentalization.

Departmentalization follows one (or any combination) of five forms: a. functional departmentalization based on functions or activities b. product departmentalization based on products or services offered c. process departmentalization based on production processes used to create goods and services d. customer departmentalization based on customer types or customer groups e. geographic departmentalization based on geographic area (Learning Objective 2 – AACSB – application of knowledge) 6-2. What are the advantages and disadvantages of a centralized organizational structure?

In a centralized organization, decision-making authority is retained at the top levels of the organization. Centralized authority systems typically require multiple layers of management and thus tall organizational structures. Conversely, in a decentralized organization, most decision-making authority is delegated to lower levels of management. Decentralized firms tend to have relatively fewer layers of management, resulting in a flat organizational structure. (Learning Objective 3 – AACSB – application of knowledge) 6-3. What is the difference between responsibility and authority?

Responsibility is the duty to perform an assigned task; authority is the power to make the decisions necessary to complete that task. Responsibility and authority should be closely linked for any given assignment. (Learning Objective 3 – AACSB – application of knowledge) 6-4. Why do some managers have difficulties in delegating authority? Of these reasons, which do you think would be the most significant issue for you?

Visit MyBizLab for suggested answers. (Learning Objective 3 – AACSB – application of knowledge) 6-5. Why is a company’s informal organization important?

Visit MyBizLab for suggested answers. (Learning Objective 5 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 6-6. Draw up an organization chart for your college or university.

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College organization structures do differ, but most colleges will use a functional structure with a president as its head and cabinet members overseeing various departments such as academic affairs, finance, student development, advancement, and admission. If the student includes the academic divisions in the organization chart he/she will likely include Deans of Schools (or Divisions or Faculties) and individual departments that comprise each school.

(Learning Objectives 1 and 4 – AACSB – reflective thinking, application of knowledge) 6-7. Describe a hypothetical organizational structure for a small printing firm. Describe changes that might be necessary as the business grows.

Answers will vary, but the firm will probably begin with a centralized structure in which the owner will either perform or oversee every job. Various types of departmentalization will probably emerge as the firm grows, and it may become more decentralized as management delegates authority downward. With additional growth, the firm may advance from a functional to a divisional or matrix organization. (Learning Objective 4 – AACSB – application of knowledge) 6-8. Do you think that you would want to work in a matrix organization, such as Martha Stewart Living Omnimedia, where you were assigned simultaneously to multiple units or groups?

Why or why not?

Visit MyBizLab for suggested answers. (Learning Objective 4 – AACSB – application of knowledge, reflective thinking) APPLICATION EXERCISES 6-9. Interview the manager of a local service business, such as a fast-food restaurant. What types of tasks does this manager typically delegate? Is the appropriate authority also delegated in each case?

Answers will vary, but managers in fast-food restaurants typically delegate tasks like cleaning, cooking, serving, and so on. Depending on the size of the business, ordering, scheduling, and payroll functions may be delegated as well. (Learning Objective 3 – AACSB – application of knowledge) 6-10. Select a company where you would like to work one day. Using online research, determine if the company has a functional, divisional, matrix, international, team, virtual, or learning organization. Explain how you arrived at this conclusion. Do you believe that their organizational structure is consistent with the organization’s mission?

Answers will vary but after researching the company, the student should from viewing the company’s organizational chart determine the type of structure. An organization chart represents the firm’s structure and shows where employees fit into the hierarchy.

Organization charts depict the extent of line and staff authority, departmentalization, and span of control at various levels. (Learning Objective 4 – AACSB – application of knowledge)

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BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 6-11 TO 6-14 (Learning Objectives 3 and 4 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) This exercise will give the students the opportunity to analyze and reflect on the impact that organizational structure has on a company. Additionally, students should recognize that the structure, number of employees, and decision-making should evolve and change depending on various internal and external environmental factors. In this exercise students should discuss the nuances of putting together an effective employee team and organization.

TEAM EXERCISE: GETTING WITH THE PROGRAM 6-15 TO 6-17 (Learning Objective 3 – AACSB – analytical thinking, application of knowledge) 6-15. With the average computer programmer earning nearly $80,000, and with all competitive firms paying top dollar, why might organizational issues be critical in determining employee loyalty?

Dissatisfied employees can obtain other jobs easily, so firms will try to limit turnover by creating the most satisfactory work environment possible.

6-16. If you were a programmer, what organizational factors would make a difference to you?

Why? Answers will vary, but possibilities include variety of job tasks, degree of decision-making authority, international involvement, and job-related benefits.

6-17. As the company founder, how willing would you be to make major organizational changes in light of the shortage of qualified programmers?

Answers will vary, but students should demonstrate awareness that without making the changes needed to retain qualified programmers, the business is unlikely to thrive long-term.

EXERCISING YOUR ETHICS: I HEARD IT THROUGH THE GRAPEVINE (Learning Objective 3 – AACSB – ethical understanding and reasoning, reflective thinking) 6-18. What are the ethical issues in this situation?

The ethical issues revolve around the employer’s responsibility to the employees. By presenting an option that is actually not under consideration, management is undermining the employees’ trust. Once word gets out that layoffs, not pay cuts, were considered, employees can feel betrayed, scared about their future, and uncertain what to believe from management.

6-19. What do you think most people would do in this situation?

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Some employees may choose to stick it out (for various reasons), but others will choose to look for a job elsewhere or to retire. A 15 percent pay cut is significant and many employees will not be able to manage on a reduced paycheck. Employees’ loyalty to the company, satisfaction with their jobs and coworkers, will play a part in people’s decisions.

6-20. What would you do in this situation?

Answers will vary. The more uncertain the budget, the lifestyle, the family situation, the more likely an employee will look for something that appears to be more stable and, therefore, beneficial.

CASES: PUSHING THE PRODUCT (Learning Objectives 2, 3, 4 – AACSB – analytical thinking, application of knowledge) 6-21. Describe Abercrombie & Fitch’s organizational structure.

Students will identify at least 5 examples related to organization structure including functional and divisional organizational structures, multi-division, related diversification, specialization, and centralized decision-making.

6-22. In what ways does this structure help and hurt Abercrombie & Fitch?

Students will suggest that the organizational structure impacts the decision making, flexibility, coordination, and strategy. The students will probably note that the current structure enhances employee specialization and top down decision making and control but may make the company less flexible and slower to respond to environmental trends.

6-23. If Abercrombie & Fitch wanted to change its structure, what structure would you suggest?

Answers will vary from a return to a divisional structure and or a combination of structures.

HEARD IT THROUGH THE GRAPEVINE (Learning Objective 5 – AACSB – analytical thinking, application of knowledge) 6-24. Thinking about your office or college, what types of information are conveyed through the grapevine? How often is the information accurate?

Answers will vary depending on the size and type of company where the students are employed. Students should consider, though, whether the information types include what they perceive as important information or how much of the information more fits the description of informal gossip. The students’ perception of the accuracy of the information will be interesting to hear.

6-25. Does a flat organization encourage or discourage office gossip? What leads you to this conclusion?

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Students’ perspective will frame their answer to this question. Some students may think since there are fewer layers of managers and more subordinates that there will be more gossip. A flat organization should discourage office gossip because of decision making authority and, therefore, information is pushed lower in the hierarchy, enhancing the overall quality of communication and openness about providing information.

6-26. Do you think that the grapevine would be more or less active in a matrix organization?

Why? Because a matrix organization encourages more communication across departments, functions, and processes, the grapevine should need to be less active.

6-27. Many companies encourage their employees to form social relationships outside work to build a sense of camaraderie. How would these informal groups feed or limit the grapevine?

Level of employee satisfaction will be a determining factor in whether informal groups will feed or limit the grapevine. Dissatisfied employees can spread their negativity, but happy employees are more likely to focus on the employee relationships rather than issues with the organization.

6-28. Consider the following situation: You are the HR manager at a medium-sized business and the company’s executives have decided that they must cut the workforce by 5 percent. You don’t want to lay off anyone, so you “leak” information to a few people in the company that layoffs are imminent, hoping that this might motivate some employees to find jobs elsewhere. If people end up leaving on their own, you will not have to implement layoffs. Do you think that this is an ethical use of the grapevine? Why or why not?

Answers may vary. Students should consider what the impact on the company could be if valued employees that the company does not want to lose are among those that choose to leave based on the leaked information. Just because enough people may leave doesn’t mean that it is the people that the company would have chosen to lay off. Can a leak such as this impact employees’ trust in the direction of the company and in what managers say.

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Chapter 7: Operations Management and Quality Chapter Overview All goods and services production systems have their own unique production processes. These processes provide utility by adding customer value. Companies with different business strategies are best served by having different operations capabilities. Even very similar and competing businesses can produce output and manage quality with completely different production systems.

This chapter is dedicated to the study of operations and quality within both the manufacturing and service sectors. It explains the meaning of the term production (or operations) and describes the three kinds of utility that operations processes provide. It explains how companies with different business strategies are best served by having different operations capabilities and identifies the major factors considered in operations planning.

The chapter also discusses the information contained in four kinds of operations schedules—the master operations schedule, detailed schedule, staff schedule, and project schedule—and identifies the activities involved in operations control. Finally, it looks at the activities and underlying objectives involved in total quality management and explains how a supply chain strategy differs from traditional strategies for coordinating operations among firms.

Learning Objectives 7-1. Explain the meaning of operations and discuss the growth in the services and goods sectors in the U.S. economy.

7-2. Identify the three kinds of utility created by operations and the characteristics that distinguish service operations from goods production.

7-3. Explain how companies with different business strategies are best served by having different operations capabilities.

7-4. Identify the major factors that are considered in operations planning.

7-5. Discuss the information contained in four kinds of operations schedules—the master operations schedule, detailed schedule, staff schedule, and project schedule.

7-6. Discuss the two key activities required for operations control.

7-7. Identify the activities and underlying objectives involved in total quality management.

7-8. Explain how a supply chain strategy differs from traditional strategies for coordinating operations among firms.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Ice-Breaker: Are You Getting What You Paid For? 2. Up for Debate: Do You Really Have to Be on Time for That Meeting in Cairo?

Description Students discuss perceptions of service quality.

Students are divided into teams to discuss the advantages of punctuality and the types of job fields that require punctuality.

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Time Limit 25 min.

20 min.

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CHAPTER OUTLINE Learning Objective 7-1: Explain the meaning of operations and describe the three kinds of utility that operations processes help create.

What Does “Operations” Mean Today?

Service operations (or service production) provide tangible and intangible services; firms that only make tangible products are engaged in activities for goods operations (or goods production). The term operations (or production) refers to all the activities involved in making products—goods and services—for customers.

Growth in the Services and Goods Sectors Historically, agriculture was the dominant sector in the early years of the United States.

Thereafter, manufacturing grew, becoming the economic backbone from the nineteenth century into the mid-twentieth century. Services then began a rapid climb in economic importance in terms of both number of employees and percentage of gross domestic product (GDP)—the value of all goods and services produced by the economy, excluding foreign income. The service sector’s greater percentage of GDP has hovered above 65 percent while the smaller 11 percent of the workforce in goods-producing jobs produced 32 percent of the national income.

KEY TEACHING TIP Remind students that operations refers to all the activities involved in making products—goods and services—for customers.

QUICK QUESTION What is the difference between service operations and goods operations?

Use In-Class Activity 1: Ice-Breaker: Are You Getting What You Paid For? Time Limit: 25 minutes

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Learning Objective 7-2: Identify the characteristics that distinguish service operations from goods production.

Creating Value Through Operations Both services and goods provide consumers with utility, which is the ability of a product to satisfy a human want or need, thus adding customer value—in terms of form, time, and place.

Form utility is created merely through transforming raw materials into finished goods. Time utility is created when marketers make products available when consumers want them. Place utility is created when products are made available where they are convenient for consumers.

Operations (production) management is the systematic direction and control of the processes that transform resources into finished services and goods that create value for and provide benefits to customers. Operations (production) managers are responsible for ensuring that operations processes create what customers want and need.

A. Differences Between Service and Goods Manufacturing Both service and manufacturing operations transform raw materials into finished products. In service operations, finished products are not things, but are people with needs met and possessions serviced. Four aspects of service operations can make such operations more complicated than simple goods production: 1. Interacting with Customers. Manufacturing operations focus on physical goods, whereas service operations are a combination of goods and services.

2. Services Can Be Intangible and Unstorable. Intangibility refers to the untouchable value consumers receive in the form of pleasure, gratification, or a feeling of safety; unstorability refers to the idea that if a service isn’t used when available, it’s usually wasted.

3. Customer’s Presence in the Operations Process. Service operations often acknowledge the customer as part of the service transaction itself.

4. Intangibles Count for Service Quality. Customers use different measures to judge services and goods because services include intangibles, not just physical objects. Quality of work and quality of service are not necessarily the same thing.

B. Operations Processes An operations process is a set of methods and technologies used in the production of goods and services.

1. Goods Production Processes: Make-to-Order versus Make-to-Stock Processes. A make-to-order operation makes one-of-a-kind products, according to customer specifications. A make-to-stock operation produces standardized products in large quantities.

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2. Service Production Processes: Extent of Customer Contact. In high-contact systems, such as a city metro system, the customer must be a part of the service. Managers must therefore be concerned with issues of cleanliness, punctuality, and usability of ticket kiosks. In low-contact systems, such as a mail sorting office, customers do not have to be present while the service transaction is being performed.

KEY TEACHING TIPS •

Make sure that students understand that utility refers to the ability of a product to satisfy a want or need in terms of form, time, and place. Production adds customer value by providing utility.

•

Reinforce that goods are produced; services are performed.

•

Remind students that operations processes are methods and technologies used to produce a good or service.

•

Remind students that in a low-contact system, the service buyer doesn’t have to be present during the transaction; in a high-contact system, customers are part of the system.

QUICK QUESTIONS • What are examples of form, time, and place utility?

• Think of the last restaurant you patronized. Would you be more likely to complain about the quality of the food or the quality of the service?

• What is the intangible and unstorable nature of services?

• What are some examples of products produced in a make-to-order system? In a make-tostock system?

HOMEWORK Interview a Manager Now might be a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment asks students to interview a manager to access firsthand information involved in planning a service operation.

At-Home Completion Time: 1 to 2 hours

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Learning Objective 7-3: Explain how companies with different business strategies are best served by having different operations capabilities.

Business Strategy as the Driver of Operations Companies go about selecting the kind of production that is best for their business based on the firm’s larger business strategy. They aim to adopt the kind of production that achieves that strategy in the most efficient way possible.

A. The Many Faces of Production Operations Every company identifies a strategy that it can use for winning customer orders; such strategies often include quality, lower prices, flexibility, and dependability.

1. Business Strategy Determines Operations Capabilities. Operations capability refers to the activity or process that production must do especially well to outperform the competition.

2. Expanding into Additional Capabilities. Over time, excellent firms learn how to achieve more than just one competence.

KEY TEACHING TIP Remind students that operations capabilities are activities that production must do especially well; top-priority operations capabilities include quality, low price, flexibility, and dependability.

Firms choose to focus on one capability, and can learn to excel at more than one, over time.

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Learning Objective 7-4: Identify the major factors that are considered in operations planning.

Operations Planning Managers from many departments contribute to the firm’s decisions about operations management; this is a process of logical steps upon which the success of the firm depends. The overall business plan guides operations planning, as do qualitative and quantitative forecasts.

A. Capacity Planning The amount of a product that a company can produce under normal working conditions is its capacity. A firm’s capacity depends on how many people it employs and the number and size of its facilities. Operations wants to match capacity to demand.

B. Location Planning Facility location affects production costs and flexibility. Depending on the site of its facility, a company may either be capable of producing a low-cost product or may find itself at an extreme cost disadvantage. Goods production can be located where the economics work most favorably; services, though, must be located near customers.

C. Layout Planning Layout, the physical location or floor plan, determines whether firms can respond quickly and efficiently to customer requests for additional or different products or find themselves unable to match competitors’ speed and convenience.

1. Process Layouts. In a process layout, equipment and people are grouped according to function; this type of layout works especially well in make-to-order shops due to their flexibility advantage.

2. Product Layouts. In a product layout, one type of product is produced in a fixed sequence and is arranged according to its production requirements. It is efficient for large-volume, make-to-stock operations that mass-produce products quickly, often using an assembly line. While advantageous for large-volume production, a disadvantage is inflexibility when changes are required.

3. Fixed-Position Layouts. A fixed-position layout is necessary when, because of size, shape, or any other reason, managers cannot move the service to another production facility.

D. Quality Planning Any complete operations plan must ensure that products are produced to meet the firm’s standards of quality—the combination of characteristics of a product or service that bear on its ability to satisfy stated or implied needs. Performance refers to how well the product does what it is supposed to do; consistency refers to the sameness of product quality from unit to unit.

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E. Methods Planning In operations systems, methods improvement refers to methods implemented to reduce waste, inefficiency, and poor performance.

1. Improving Process Flows. A process flowchart is helpful in identifying the sequence of production activities, movements of materials, and work performed at each stage of the process.

2. Improving Customer Service. Customer service can be improved at various stages along the process flowchart.

KEY TEACHING TIPS •

Reinforce that operations planning includes capacity planning, location planning, layout planning, quality planning, and methods planning.

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Make sure students understand that capacity refers to the amount of a product a company can produce under normal conditions.

•

Students may forget that the best location for a manufacturer depends on proximity to supplies and customers, wage rates, labor availability, and the area’s infrastructure; the best location for a service provider depends largely on nearness to customers.

QUICK QUESTIONS •

In process layouts, equipment and people are grouped according to function. What is an example of a goods production system that uses a process layout?

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Product layouts make one product in a fixed sequence and are arranged according to their production requirements. What is an example of a goods production system that uses a product layout?

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Methods improvement focuses on procedures that can reduce waste and inefficiency within an organization. What are some ways in which waste could be reduced and inefficiency enhanced where you work?

HOMEWORK Methods Planning Now is a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. This assignment asks students to work with method planning and process flowcharts.

At-Home Completion Time: 1 hour

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Learning Objective 7-5: Discuss the information contained in four kinds of operations schedules—the master operations schedule, detailed schedule, staff schedule, and project schedule.

Operations Scheduling Operations scheduling involves developing timetables for acquiring the resources needed for production.

A. The Master Production Schedule A top-level master production schedule shows which products will be produced and when, in upcoming time periods.

B. Detailed Schedules A detailed schedule indicates daily work assignments with start and stop times for assigned jobs at each workstation.

C. Staff Schedules and Computer-Based Scheduling Staff schedules specify assigned working times in upcoming days for each employee on each work shift, and considers employees’ needs and the company’s efficiency and costs, including the ebbs and flows of demand for production. Computer-based scheduling can handle multi-shift activities for many employees—both part-time and full-time— accommodating vacation times, holiday adjustments, and daily adjustments in staffing for unplanned absences.

D. Project Scheduling 1. The Gantt Graphical Method: Named after its developer, Henry Gantt, a Gantt chart

breaks down large projects into steps to be performed and specifies the time required to perform each one.

2. Project Scheduling with PERT charts break down large projects into steps to be performed and specify the time required to perform each one; PERT also shows the necessary sequence among activities, from start to finish, and identifies the critical path, the most time-consuming set of activities, for completing the project.

KEY TEACHING TIPS •

Reinforce that the master operations schedule shows which products will be produced and when, as well as how much labor, material, and equipment resources are needed.

•

Make sure students understand the difference between detailed schedules and staff schedules.

QUICK QUESTION • How does an organization benefit from PERT scheduling?

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Use In-Class Activity 2: Up for Debate: Do You Really Have to Be on Time for That Meeting in Cairo?

Time Limit: 20 minutes

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Learning Objective 7-6: Discuss the two key activities required for operations control.

Operations Control Operations control requires managers to monitor performance by comparing results with detailed plans and schedules. If employees do not meet schedules or quality standards, managers can take corrective action. Follow-up, checking to ensure that production decisions are being implemented, is a key and ongoing facet of operations. Operations control includes materials management and quality control. Both activities ensure that schedules are met and products delivered, both in quantity and in quality.

A. Materials Management 1. Materials Management Activities for Physical Goods: Once a product has been designed, successful materials flows depend on five activities: Supplier selection means finding and choosing suppliers of services and materials to buy from. Purchasing is the acquisition of all the raw materials and services that a company needs to produce its products. Transportation includes the means of transporting resources to the producer and finished goods to buyers. Warehousing is the storage of both incoming materials for production and finished goods for distribution to customers.

Inventory control includes the receiving, storing, handling, and counting of all raw materials, partly finished goods, and finished goods.

B. Lean Production Systems: Just-in-Time Operations Lean production systems are designed for smooth production flows that avoid inefficiencies, eliminate unnecessary inventories, and continuously improve production processes. Just-intime (JIT) production, a type of lean system, brings together all needed materials at the precise moment they are required for each production stage, not before, thus, creating fast and efficient responses to customer orders.

C. Inventory Management Inventory Management is crucial for producing services. For many service firms, too, the materials stakes are high. The most important “inventory” used for many high-contact services is not physical goods but exists in the form of information about service product offerings, clients, their interests, needs, activities, and even their plans for interactions with other clients.

D. Quality Control Quality control means taking action to ensure that operations produce products that meet specific quality standards.

KEY TEACHING TIPS •

Reinforce that lean production systems are designed to avoid inefficiencies, eliminate unnecessary inventories, and improve production processes.

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•

Point out that operations control requires managers to monitor performance by comparing results with detailed plans and schedules and then making any necessary changes.

•

Make sure students understand that materials management is the process by which managers plan, organize, and control the flow of materials from sources of supply through distribution of finished goods.

QUICK QUESTIONS • What are some ways in which managers carry out the following materials management activities: supplier selection, purchasing, transportation, warehousing, and inventory control?

•

How might quality control be carried out at a bank? How might quality control be carried out at a fast-food restaurant?

• What is the difference between controlling quality and building quality into a product or service?

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Learning Objective 7-7: Identify the activities and underlying objectives involved in total quality management.

Quality Improvement and Total Quality Management It is not enough to control quality by inspecting products and monitoring service operations as they occur. Businesses must also consider building quality into products and services.

A. The Quality-Productivity Connection It’s no secret that quality and productivity are watchwords in today’s competitive environment.

Productivity is a measure of economic performance: It compares how much we produce with the resources we use to produce it. The more we can produce while using fewer resources, the more productivity grows and the more everyone benefits. Productivity refers both to the quantity and quality of what is produced.

B. Managing for Quality Total Quality Management (TQM) includes all of the activities necessary for getting quality goods and services into the marketplace; this process involves all parts of the business, including customers, suppliers, and employees. To bring all the interests of the stakeholders together, TQM involves planning, organizing, directing, and controlling.

1. The Cost of Poor Quality Producers of goods and services suffer financial distress from poor-quality service or products.

2. Quality Ownership: Taking Responsibility for Quality. With TQM, employees and suppliers ultimately accept quality ownership—the idea that quality belongs to each person who creates it while performing a job.

C. Tools for TQM Hundreds of tools have proven useful for quality improvement, ranging from statistical analysis of production data, to satisfaction surveys of customers, to competitive product analysis—a process by which a company analyzes a competitor’s products to identify desirable improvements. Five of the most commonly used tools for TQM are: 1. Value-Added Analysis. Value-added analysis refers to the evaluation of all work activities, material flows, and paperwork to determine the value that they add for customers.

2. Quality Improvement Teams. Quality improvement teams are groups of employees from various work areas who meet regularly to define, analyze, and solve common production problems.

3. Getting Closer to the Customer. Customers are the driving force for all business activity; the most successful firms keep close to their customers and know what they want in the products they consume.

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4. The ISO Series. ISO 9000 is a certification program attesting to the fact that a firm or laboratory has met the quality-management requirements set by the International Organization for Standardization. The ISO 14000 program certifies improvements in environmental performance. It requires a firm to develop an environmental management system: a plan documenting how the company has acted to improve its performance in using resources and in managing pollution.

5. Business Process Reengineering. Business process reengineering focuses on productivity and quality and entails rethinking each step in a process by starting over from scratch. Reengineering involves the redesign of business processes to achieve improvements in cost, quality, service, and speed.

KEY TEACHING TIPS •

Remind students that competitive product analysis is a process by which a company analyzes a competitor’s products to identify desirable improvements.

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Students often forget that quality improvement teams are comprised of groups of employees from various parts of the organization.

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Remind students that ISO 14000 guarantees that a company has an environmental management system, a plan documenting improved use of resources and pollution management.

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Remind students that business process reengineering involves focusing on improving a business process by rethinking each of its steps by starting from scratch.

QUICK QUESTIONS • What do companies try to achieve with value-added analysis?

• What are some examples of “internal” customers? What does “getting closer to the customer” mean?

• What does it mean when a company is ISO 9000 certified?

• Who is responsible for ensuring TQM within an organization?

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Learning Objective 7-8: Explain how a supply chain strategy differs from traditional strategies for coordinating operations among firms.

Adding Value Through Supply Chains A supply chain (or value chain) for any product is the flow of information, materials, and services that starts with raw-materials suppliers and continues through other stages in the operations process until the product reaches the end customer.

A. The Supply Chain Strategy Supply chain strategy is based on the idea that members of the chain, working as a coordinated unit, will gain competitive advantage.

1. Supply Chain Management. Supply chain management (SCM) looks at the supply chain as a whole in order to improve the overall flow through a system composed of companies working together. Each of the chain’s members gains competitive advantage in this situation.

2. Reengineering Supply Chains for Better Results. The results often include lower costs, faster service, and the coordination of flows of information and materials.

B. Outsourcing and Global Supply Chains Outsourcing is the strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials or services. Global outsourcing creates new operations jobs for supply chain management and, sometimes, the need for more or different types of employee training.

QUICK QUESTIONS • Who are the supply chain members for a manufacturer of baked goods?

• How can the reengineering of supply chains add value?

HOMEWORK Business Plan Now is a good time to assign Part 2 of the Business Plan. In this second section, students are asked to devise goals for their company, analyze the internal and external factors affecting their business, and discuss the organizational structure of their business.

At-Home Completion Time: 2 to 3 hours For the complete instructions for this part of the assignment, refer to the instructions at the end of this chapter. The entire business-planning project (including a sample business plan) can be seen in the Business Plan Project section of these Instructor’s Manual files.

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

IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker: Are You Getting What You Paid For? Activity Overview: This activity is designed to get students to think about how to perceive service quality.

Time Limit: 25 minutes What to Do: 1. Divide the class into groups of two to four members and ask each group to think of three services, such as cell phone service, restaurants, a barber or hair salon, insurance agent, or various repair services. (5 minutes) 2. Ask groups to think of ways in which buyers of those services measure the level of service quality they are receiving. (10 minutes) 3. Reassemble the class and ask each group to reveal what they discussed. (10 minutes) Don’t Forget: Measuring the quality of manufactured goods—often through durability, functionality, sturdiness, and so on—is often easier and provides more consistency than measuring service quality. Not everyone measures service quality in the same way.

Wrap-Up: Remind students that service quality is often measured by the tangible evidence of the service— such as a manicured lawn, a tailored suit, and so on. However, service quality can also be measured by examining the characteristics of the service performer; these might include reliability, assurance, responsiveness, etc.

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In-Class Activity 2: Up for Debate: Do You Really Have to be on Time for That Meeting In Cairo?

Activity Overview: This activity asks students to express their feelings about punctuality.

Time Limit: 20 minutes What to Do: 1. Divide the class into four-member teams. Ask each team to discuss some real-life situations that require them to be on time. Who benefits from punctuality? (5 minutes) 2. Ask the groups to discuss certain job fields that are time-clock driven. Why are they timeclock driven? Are there any situations discussed in Step 1 that require punctuality but in which punctuality is not entirely necessary? Relate punctuality to the concept of productivity as discussed in the chapter. (5 minutes) 3. Reassemble the class as a whole and ask students to discuss each group’s input. (10 minutes) Don’t Forget: Punctuality can be culture-driven; demand for punctuality is situation-specific.

Wrap-Up: Wrap up the activity by discussing the advantages of being on time.

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BUSINESS PLAN PROJECT PART 2 THE BUSINESS OF MANAGING Assignment Overview: The second part of the business plan project asks students to think about goals of their business, some internal and external factors affecting the business, as well as the organizational structure of the business. As part of this assignment, students are asked to complete a simple SWOT analysis, an organizational chart, and a floor plan. These analyses and charts will vary greatly depending on the scope of the business. Encourage as much detail as possible so students can get a clear picture of the true costs of owning a business. Make sure your expectations are clear as to what format (for example, handwritten or electronic) you would like to see the organizational charts and floor plans submitted.

Files to Provide Students: For this part of the project, students will be asked to complete Part 2: The Business of Managing. If students have already started working on the business plan project, they should continue using the student template they began working on in Part 1.

Part 2 Estimated At-Home Completion Time: If done well, this section will require a minimum of 2 to 3 hours. Instructor feedback will improve the quality of student responses so you may wish to spend class time working on the plan.

Homework Deliverable from Students: The length of this section should be somewhat consistent, although some variance can be expected in the organizational chart and floor plan, based on the size of the business. You should expect at least three to five pages in this section.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 7-1. Describe the three forms of utility created through production.

By converting raw materials and human skills into finished goods and services, production creates form utility. Time utility is value that is created by making products available when consumers want them. Place utility makes products available where they are convenient for consumers. (Learning Objective 1 – AACSB – application of knowledge) 7-2. What are the major differences between goods-production operations and service operations?

Service operations focus on performance, process and outcome, service characteristics, customer-service links, and service quality considerations. Services are largely intangible and more unstorable than most physical goods. Goods production operations focus on tangible product features and functions as well as on the production processes themselves, including production efficiency. (Learning Objective 2 – AACSB – application of knowledge) 7-3. What are the major differences between high-contact and low-contact service systems?

Visit MyBizLab for suggested answers. (Learning Objective 2 – AACSB – application of knowledge) 7-4. What are the five major categories of operations planning?

Capacity planning, location planning, layout planning, quality planning, and methods planning are the five major categories of operations planning. (Learning Objective 4 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 7-5. Although we typically use these terms with goods production, is your college a make-toorder or make-to-stock operation? Be sure to support your conclusion.

Visit MyBizLab for suggested answers. (Learning Objective 4 – AACSB – reflective thinking) 7-6. What type of business strategy is used at Disney theme parks? What specific operations activities are most important?

Disney theme park strategy focuses on quality and dependability. Most students will state that methods planning and operations control is very important since Disney focuses on customer services and consistency in theme park visitors’ experiences. Additional activities of importance will include layout planning and capacity planning so the theme park activities

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operate smoothly. Also, detailed scheduling for both staff and visitors will be a priority.

(Learning Objective 5 – AACSB – reflective thinking) 7-7. Develop a list of internal customers and internal suppliers for some business that you use frequently (or where you work), such as a cafeteria, a dormitory or hotel, or a movie theater.

Identify areas for potential quality improvement in these internal customer–supplier activity relationships.

Answers will vary greatly, but students should remember that internal customers and suppliers are those people or entities whose work is involved primarily with other workers inside of the organization. (Learning Objective 7 – AACSB – reflective thinking) 7-8. If you were a member of a quality improvement team at your college, what would be five specific high-impact recommendations that you would support?

Visit MyBizLab for suggested answers. (Learning Objective 7 – AACSB – application of knowledge) APPLICATION EXERCISES 7-9. Think of an everyday activity, either personal or professional, that you would like to streamline for faster performance or more convenience. It could be something like gassing up your car, going to work or school, enrolling in classes at school, or any other activity that involves several stages with which you are familiar. Describe how you would use methods planning as described in the chapter to improve the activity. Draw a process flowchart that shows the stages in the activity you chose, and then tell how you would use it.

Answers will vary, but process charts should include a logical starting point, show all the steps, and show the predecessor relationships—which tasks must be complete before a task can start. (Learning Objective 5 – AACSB – application of knowledge) 7-10. Interview the manager of a local service business, such as a restaurant or hair salon.

Identify the major decisions involved in planning that business’s service operations.

Answers will vary, but many managers will reveal that the top concern is delivering what the customer wants and the costs involved in creating and delivering the service.

(Learning Objective 2 – AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 7-11 TO 7-15 (Learning Objectives 2, 3, 4, 7 and 8 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Answers will vary but students should note regardless of the type of business, every business will have a service component. Remind students that service quality is often measured by the tangible evidence of the service and there will be different perceptions on service quality. When analyzing the key operations characteristics, students should focus on operations planning and

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the activities or processes that the business needs to consistently perform well to survive and flourish.

In analyzing the planned production activities students should consider lean manufacturing concepts to improve its business, how the layout of a facility affect its operations, how products offer different forms of utility to customers, and how companies’ activities impact the triple bottom line.

When looking at supply chain management the students should focus on the supply chain as a whole in order to improve the overall flow of their business.

TEAM EXERCISE: CALCULATING THE COST OF CONSCIENCE 7-16 TO 7-19 (Learning Objective 2, 6, and 7 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge, ethical understanding and reasoning) In this exercise the students will be faced with the real world dilemma of cost versus benefits.

Students will probably initially be very sympathetic to Ruth and her situation. The students will need to consider not only the quality issues but also, the company’s reputation, costs, profits, information from the previous chapters including chain of command, delegation, authority and Ruth’s apparent decision to not get input from upper management before making such an important decision.

7-16. If you were a customer, what would you hope the company would do? Would your answer be different if you were an investor or stockholder?

Answers will vary, but students should review Toyota’s response to its manufacturing problems. The customer may not perceive a problem (not all customers would likely ever complain), but is likely to notice the difference after the change of compressor is made. The customer is then going to respond favorably to the company’s service. Responsiveness is a positive. As a stockholder or investor, the response might be different due to the expense required. However, students should remember that negative experiences are costly and difficult to overcome (see Toyota and its delayed response and acceptance of responsibility).

7-17. How might Ruth’s boss, the Vice President for Operations, view the situation differently from Ruth?

Answers will vary, but hopefully the Vice President for Operations will not view the situation much differently from Ruth. The VP may focus more deeply on how to prevent such a problem from occurring in the future, as well as on the processes involved in replacing the compressors, to see if they can be streamlined.

7-18. Which is the best of the three options in the short term? What about in the long term?

The option that is most positive for the company, in the eyes of the customers, is the second option, the “quality and customers first” option. The other options risk negative reactions from customers. Short term and long term, the response should be the same.

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7-19. How could the company have avoided this situation?

Answers will vary, although quality control concepts should be at the center of the responses, with a focus on ensuring quality all throughout the operations processes (TQM), rather than focusing on fixing problems after they occur.

EXERCISING YOUR ETHICS: PROMISES, PROMISES (Learning Objective 4 – AACSB – ethical understanding and reasoning, reflective thinking) 7-20. What are the underlying ethical issues in this situation?

The salesperson should have communicated the potential contract with his or her boss, knowing that the contract would require a 20-percent increase in production capacity.

However, with a large layoff of employees previously—and knowing that the company needs the business—the salesperson may have assumed that production would not be a problem.

7-21. From an ethical standpoint, what is an appropriate response to the customer’s question?

What steps should you take in responding to it? Explain.

Answers will vary, but students should mention that you should be honest with the manager of King Kong Mufflers, letting him know that the company can react to the large order, that the company does have the production capacity, but that the workforce will need to be expanded, which may take a little time up front.

7-22. What would you say on the phone at this time to this customer?

Answers will vary, but students should keep in mind that proper delivery to the customer is a priority. Without the production capacity, that cannot be done.

CASES: PASSENGER AND AIRLINES: FRIENDS OR FOES? (Learning Objectives 4 and 5 – AACSB – analytical and reflective thinking, application of knowledge) 7-23. How would you define quality and how is quality measured in the airline industry? Are some measurements more useful than others? Explain.

Answers will vary based on the extent of the students’ airline travel and their experiences.

Most students will define quality in terms of safety, delayed departures, on-time arrival, employee rudeness, lost luggage claims, and overbooking. Most students will cite safety as being an important measure.

7-24. Some service activities, such as weather-delayed departures, cannot be totally controlled by airlines, but are affected by outside factors. Among all service activities that affect quality for

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customers, identify three or more that are totally controlled by airlines, and three or more that airlines cannot totally control. Should both sets of activities be included in the airlines’ quality ratings? Explain.

Controllable service activities: overbooking, lost luggage, and employee rudeness.

Uncontrollable activities: delayed departures (due to weather), cancellations, late arrivals.

Answers will vary about what activities should be included in airlines’ quality ratings.

7-25. Describe how process flowcharts may be helpful for methods improvement in airline service operations. What kinds of information would you hope to gain from the flowcharts?

Process flowcharts could help with handling passenger loads and luggage. Before creating the charts, you would need information on the type and length of activities, performance measures, historical trends, etc.

7-26. Identify a major U.S. airline that has received poor-quality ratings. Who are its customers, and what are the basic causes that led to declining quality?

Student answers will vary depending on the articles that the students used in their search but United and American Eagle will likely be mentioned due to on time arrival, increased baggage handling fees, etc. Many students will probably cite declining revenues, the economic downturn, and multiple mergers as reasons for declining quality.

7-27. U.S. airplane passengers must choose between two controversial security-screening procedures: full-body-image detection or probing pat-downs. How might these procedures affect customers’ perceptions of airlines’ services? What actions would you recommend be considered by airlines to overcome negative perceptions?

Students will probably answer that airline travel is preceded by an uncomfortable, unpleasant screening process that often puts passengers in a negative frame of mind before they even reach the gate and they are unenthusiastic about airline travel. Their answers will probably focus on more customer updates and information through electronic and online communication, and better training for employees to deal with unhappy customers.

TELECOMMUTING BOOSTS QUALITY AND PRODUCTIVITY…OR DOES IT? (Learning Objective 7– AACSB – analytical and reflective thinking, application of knowledge) 7-28. How would you define quality for Yahoo!’s situation in this case? Explain why.

Students will likely define quality in terms of timeliness, accuracy, and usefulness.

7-29. To figure out if Yahoo!’s telecommuting is less productive than it should have been, Mayer looked at the log of Yahoo!’s virtual private network to see how frequently employees checked in. What do you think of this as a measure of productivity and quality? What other measure(s) would you suggest instead of the one she used?

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Some students will agree and others will indicate that “checking in” might not be the best measure of productivity. Other measures cited by students will probably include: new product development, revenues, costs, and customer satisfaction.

7-30. Go to Yahoo!’s career website (https://careers.yahoo.com) and look at the kinds of jobs available. From these, identify two job descriptions that you recommend as appropriate for telecommuting. Identify two others that are appropriate for office-based employment.

Explain the reasons for your recommendations.

Students will likely break the jobs into two categories: those requiring “face” time, i.e., receptionist, maintenance staff and “lone wolf” types of positions such as computer programmers.

7-31. Consider businesses such as hotels, television broadcasting, or others that provide services/products to consumers. Suppose you want to improve the quality of such a service (choose one or two services). To do so, suppose you are considering allowing telecommuting by some employees, but requiring others to be office-based employees. Identify two kinds of work suitable for telecommuting and two kinds for office-only jobs. Explain your reasoning.

Again, students will probably break the jobs into two categories. Answers will vary depending on the businesses the students choose.

7-32. In general, how would you measure a service provider’s quality and productivity?

Recommend specific measures that will enable you to track changes in quality and productivity with the passage of time.

Students’ answers will probably include revenue, costs, customer satisfaction, and new product developments. Quantifiable measures lend themselves to tracking changes over time.

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CRAFTING A BUSINESS PLAN: PART 2: THE BUSINESS OF MANAGING MISSION STATEMENT Provide a brief mission statement for your business.

Hint: Refer to the discussion of mission statements in Chapter 5. Be sure to include the name of your business, how you will stand out from your competition, and why a customer will buy from you.

BUSINESS GOALS Consider the goals for your business. What are three of your business goals for the first year? What are two intermediate to long-term goals?

Hint: Refer to the discussion of goal setting in Chapter 5. Be as specific and realistic as possible with the goals you set. For example, if you plan on selling a service, how many customers do you want by the end of the first year, and how much do you want each customer to spend? If you plan on selling a good, how many do you hope to sell?

SWOT ANALYSIS Perform a basic SWOT analysis for your business, listing its main strengths, weaknesses, opportunities, and threats.

Hint: We explained previously what factors you should consider in your basic SWOT analysis.

Look around at your world, talk to classmates, or talk to your instructor for other ideas in performing your SWOT analysis.

MANAGEMENT Who will manage the business?

Hint: Refer to the discussion of managers in Chapter 5. Think about how many levels of management as well as what kinds of managers your business needs.

ORGANIZATION CHART Show how the “team” fits together by creating a simple organizational chart for your business. Make sure your organizational chart indicates who will work for each manager as well as each person’s job title.

Hint: Most businesses start off quite small. However, as you create your organizational chart, consider what your business will look like in the future. What different tasks are involved in the business? Who will each person report to in the organizational structure? Refer to the discussion of organizational structure in Chapter 6 for information to get you started.

FLOOR PLAN Create a floor plan of the business. What does it look like when you walk through the door?

Hint: When sketching your floor plan, consider where equipment, supplies, and furniture will be located. Ask your instructor how he or she would like you to submit the floor plan for your business.

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RAW MATERIALS AND SUPPLIES Explain what types of raw materials and supplies you will need to run your business. How will you produce your good or service? What equipment do you need? What hours will you operate?

Hint: Refer to the discussion of operations earlier in this chapter for information to get you started.

QUALITY ASSURANCE What steps will you take to ensure that the quality of the product or service stays at a high level? Who will be responsible for maintaining the quality of the product or service (or both)?

Hint: Refer to the discussion of quality improvement and Total Quality Management in this chapter for information to get you started.

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Chapter 8: Employee Behavior and Motivation Chapter Overview What motivates you to do well at your job? Is it money? Respect? Recognition? Every employee in an organization has his or her own set of motivating factors.

This chapter discusses the basic forms of behaviors that employees exhibit in organizations, as well as the nature and importance of individual differences among employees. It also explains the meaning and importance of psychological contracts and the person-job fit in the workplace.

Finally, the chapter presents some time-tested models and concepts of employee motivation, and some strategies and techniques used by organizations to improve employee motivation.

Learning Objectives 8-1. Identify and discuss the basic forms of behaviors that employees exhibit in organizations.

8-2. Describe the nature and importance of individual differences among employees.

8-3. Explain the meaning and importance of psychological contracts and the person-job fit in the workplace.

8-4. Identify and summarize the most important models and concepts of employee motivation.

8-5. Describe some of the strategies and techniques used by organizations to improve employee motivation.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Ice-Breaker: Balancing Inducements and Contributions 2. Up for Debate: What Are You Looking for in a Job? 3. Small-Group Discussion: Motivation in Global Firms

Description Students discuss the psychological contract between themselves and their jobs.

Students are divided into teams to express their opinions about important job criteria.

Students examine the challenges stemming from trying to motivate employees in a global company.

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Time Limit 20 min.

40 min.

25 min.

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CHAPTER OUTLINE Learning Objective 8-1: Identify and discuss the basic forms of behaviors that employees exhibit in organizations.

Forms of Employee Behavior Employee behavior is the pattern of actions by the members of an organization that directly or indirectly influences the organization’s effectiveness.

A. Performance Behaviors Performance behaviors are the total set of work-related behaviors that the organization expects employees to display. They directly contribute to productivity and performance.

B. Organizational Citizenship Organizational citizenship includes the positive employee behaviors that do not directly contribute to the bottom line. They provide positive benefits to the organization but in more indirect ways.

C. Counterproductive Behaviors Counterproductive behaviors detract from, rather than contribute to, organizational performance. Such behaviors include absenteeism, which occurs when an employee does not show up for work, and turnover, which occurs when people quit their jobs. These behaviors actually cost the organization.

KEY TEACHING TIPS •

Students should be able to identify employee behavior as the pattern of actions by members of an organization that directly or indirectly influences the organization’s effectiveness.

•

Reinforce that counterproductive behaviors include absenteeism, turnover, theft and sabotage, and sexual and racial harassment. You might ask students what counterproductive behaviors they have observed at their jobs.

QUICK QUESTIONS •

What are some typical performance behaviors expected of you in the workplace?

•

What are some examples of employee behaviors that exemplify organizational citizenship?

Use In-Class Activity 1: Ice-Breaker: Balancing Inducements and Contributions Time Limit: 20 minutes

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Learning Objective 8-2: Describe the nature and importance of individual differences among employees.

Individual Differences between Employees Individual differences are personal attributes that vary from one person to another; they may be physical, psychological, and emotional. Two basic categories include personality and attitudes.

A. Personality at Work Personality is the relatively stable set of psychological attributes that distinguish one person from another.

1. The “Big Five” Personality Traits. The “big five” personality traits include agreeableness, conscientiousness, emotionality, extraversion, and openness. Agreeableness is a person’s ability to get along with others. Highly conscientious people tend to focus on only a few things at one time in contrast to less conscientious people who often pursue a wider range of interests, but are also often disorganized with less self-discipline. People with positive emotionality are relatively more poised, calm, and secure. People with negative emotionality are more excitable, insecure, and reactive. Extraversion refers to a person’s comfort level with relationships and openness reflects how open or rigid a person’s beliefs are.

2. The Myers-Briggs Framework. Another interesting approach to understanding personalities in organizations is the Myers-Briggs framework. This framework, based on the classical work of Carl Jung, differentiates people in terms of four general dimensions.

These are: Extraversion (E) Versus Introversion (I), Sensing (S) Versus Intuition (N), Thinking (T) Versus Feeling (F), and Judging (J) Versus Perceiving (P). The MyersBriggs Type Indicator (MBTI) is a popular questionnaire that some organizations use to assess personality types. It is among the most popular selection instruments used today, with as many as 2 million people taking it each year. Research suggests that the MBTI is a useful method for determining communication styles and interaction preferences.

3. Emotional Intelligence. Emotional intelligence or emotion quotient (EQ) refers to the extent to which people are self-aware, can manage their emotions, can motivate themselves, express empathy for others, and possess social skills.

4. Other Personality Traits at Work. Locus of control is the extent to which people believe that their behavior has a real effect on what happens to them. A person’s selfefficacy is that person’s belief about his or her capabilities to perform a task.

Authoritarianism is the extent to which a person believes that power and status differences are appropriate within hierarchical social systems such as organizations. Selfesteem is the extent to which a person believes that he or she is a worthwhile and deserving individual. Risk propensity is the degree to which a person is willing to take chances and make risky decisions.

B. Attitudes at Work

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Attitudes reflect our beliefs and feelings about specific ideas, situations, or other people.

They are important because they are the mechanism through which we express our feelings.

1. How Attitudes Are Formed. Attitudes are formed by a variety of forces, including our personal values, our experiences, and our personalities. Any of the “Big Five” or individual personality traits may influence our attitudes.

2. Attitude Structure. Attitudes are usually viewed as stable dispositions to behave toward objects in a certain way. Attitudes contain three components: cognition, affect, and intention. Cognition is the knowledge a person presumes to have about something and is based on perceptions of truth and reality. Affect is a person’s feelings toward something, is similar to emotion, and is something over which we have little or no conscious control.

Intention guides a person’s behavior. Some attitudes, and their corresponding intentions, are much more central and significant to an individual than others.

3. Cognitive Dissonance. When two sets of cognitions or perceptions are contradictory or incongruent, a person experiences a level of conflict and anxiety called cognitive dissonance. It also occurs when people behave in a way that is inconsistent with their attitudes.

4. Key Work-Related Attitudes. People in an organization form attitudes about many different things. Employees are likely to have attitudes about their salary, their promotion possibilities, their boss, employee benefits, and so on. Especially important attitudes are job satisfaction, which reflects the extent to which people have positive attitudes toward their jobs, and organizational commitment, which reflects an individual’s identification with the organization and its mission. Managers can take actions to promote satisfaction and commitment. Treating employees fairly, and providing reasonable rewards and job security leads to employees that are more likely to be satisfied and committed. Allowing employees to have a say in how things are done can also promote these attitudes, as can designing jobs so that they are stimulating.

KEY TEACHING TIPS •

Remind students that individual differences may be physical, psychological, or emotional.

•

Make sure students understand that people with high EQs may perform better than others, especially in jobs that require high interpersonal interaction and involve influencing the work of others.

QUICK QUESTION What can you say about each of the “big five” personality traits?

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Learning Objective 8-3: Explain the meaning and importance of psychological contracts and the person-job fit in the workplace.

Matching People and Jobs Managers like to have a good match between people and the jobs they are performing.

A. Psychological Contracts A psychological contract is the overall set of expectations held by employees and the organization regarding what employees will contribute to the organization (contributions) and what the organization will provide in return (inducements). Recent trends in downsizing have led to changes in the psychological contract. Whereas firms used to offer some degree of job security as part of the psychological contract, now other forms of inducements like training and flexible work schedules are often needed to attract and retain people.

B. The Person-Job Fit The person-job fit refers to the extent to which a person’s contributions and the organization’s inducements match one another. Good person-job fit can result in higher performance and more positive attitudes. A poor person-job fit can have the opposite effect.

KEY TEACHING TIPS •

Students often have trouble understanding the concept of the psychological contract.

Make sure they understand that it is the set of employee expectations about the contributions that they will make to the organization, and the inducements the organization will provide in return.

•

Reinforce that a good person-job fit is one in which the employee’s contributions match the inducements the organization offers.

QUICK QUESTION How might a company benefit from high degrees of job satisfaction and organizational commitment among its employees?

Use In-Class Activity 2: Up for Debate: What Are You Looking for in a Job? Time Limit: 40 minutes HOMEWORK Interview a Manager Now is a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment asks students to interview a manager and identify sources of job satisfaction at that company.

At-Home Completion Time: 1-2 hours

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Learning Objective 8-4: Identify and summarize the most important models and concepts of employee motivation.

Basic Motivation Concepts and Theories Motivation is the set of forces that cause people to behave in certain ways. There are a number of major studies and theories of employee motivation.

A. Classical Theory According to the classical theory of motivation, employees are motivated solely by money.

Frederick Taylor, the father of scientific management, proposed that paying workers more money would prompt them to produce more.

B. Early Behavioral Theory The Hawthorne effect is the tendency for productivity to increase when workers believe they are receiving special attention from management.

1. Human Resources Model: Theories X and Y. McGregor’s Theory X is the managerial assumption that workers are lazy and need direction; Theory Y is the managerial assumption that workers are energetic, cooperative, and self-motivated. The value of these two theories lies in their ability to highlight and classify the behavior of managers in light of their attitudes toward employees.

2. Maslow’s Hierarchy of Needs Model. Maslow proposed that workers each have a set of needs that they seek to fulfill in their jobs, and these needs are arranged in a hierarchy of importance. These needs are physiological, safety, social, self-esteem, and selfactualization. Maslow further proposed that lower-level needs must be met before higherlevel needs; once one set of needs is met, it ceases to motivate behavior.

3. Two-Factor Theory. Herzberg proposed that job satisfaction depends on motivating factors, such as recognition in the workplace, as well as the presence of hygiene factors, such as work conditions. Hygiene factors do not enhance satisfaction, but they do prevent dissatisfaction. Research suggests that the theory works only in some situations. The practice also suggests that managers must first ensure that hygiene factors such as working conditions are acceptable, resulting in an absence of dissatisfaction. Then the managers must offer motivation factors as a way to improve satisfaction and motivation.

4. Other Important Needs. McClelland’s acquired needs theory hypothesized three other needs, the needs for achievement, affiliation, and power. The need for achievement comes from an individual’s desire to accomplish a goal or task as effectively as possible.

Need for affiliation is the need for human companionship, and the need for power is the desire to control one’s environment.

C. Contemporary Motivation Theory Recently, more complex models of employee behavior and motivation have been developed.

1. Expectancy Theory. This theory suggests that employees are especially motivated to work toward rewards when they have a greater probability of achieving them. This theory

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explains why people may not work as hard when their salaries are based solely on seniority, for example.

2. Equity Theory. This theory focuses on employees’ perceptions of fairness and unfairness in the workplace. Many people evaluate their treatment by the organization relative to the treatment of others.

KEY TEACHING TIPS •

To begin a discussion on motivation, you might want to ask students what motivates them on the job.

•

Remind students that according to the classical theory of motivation, workers are motivated by money; paying them more money should prompt them to produce more goods.

•

Make sure students understand the distinction between Theory X (workers are lazy) and Theory Y (workers want to do a good job).

•

Make sure students understand that hygiene factors affect motivation and satisfaction only if they are absent or fail to meet expectations.

•

Students often forget that equity theory focuses on social comparisons—people evaluating their treatment by the organization relative to the treatment of others.

QUICK QUESTIONS •

What is the theory behind scientific management?

•

Does the Hawthorne effect still apply to people in the workplace?

•

Why are Theory Y managers more likely to have satisfied and motivated employees?

•

Based on Maslow’s hierarchy of needs, what is an example of how physiological needs take precedence over safety and social needs?

•

How does expectancy theory apply when a student feels that the harder she or he studies for an exam the greater the likelihood of a good grade?

•

How is the comparison of employee inputs relative to outputs similar to the “psychological contract?”

Use In-Class Activity 3: Small-Group Discussion: Motivation in Global Firms Time Limit: 25 minutes

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HOMEWORK Satisfaction and Motivation Now might be a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. This exercise asks students to think about what makes employees satisfied and motivated.

At-Home Completion Time: 30-45 minutes

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Learning Objective 8-5: Describe some of the strategies and techniques used by organizations to improve employee motivation.

Strategies and Techniques for Enhancing Motivation Understanding what motivates workers is only one part of the manager’s job. The other part is applying that knowledge.

A. Reinforcement/Behavior Modification Positive reinforcement is used when a company or manager provides a reward when employees exhibit desired behaviors; punishment is used to change behavior by presenting people with unpleasant consequences if they exhibit undesired behaviors. Social learning occurs when people observe the behaviors of others, recognize their consequences, and alter their own behavior as a result.

B. Using Goals to Motivate Behavior Management by objectives (MBO) is a system of collaborative goal setting, extending through all levels of an organization. MBO is primarily concerned with the implementation of plans in organizations. Because employees contribute to setting the goals, they should accept and be committed to achieving them.

C. Participative Management and Empowerment In participative management and empowerment, employee suggestions and opinions are welcomed. Employees may feel more committed to the firm’s goals if they have helped to shape them. A key to success in this case is to invite participation only to the extent that employees want to have input and only if participation will have real value for an organization.

D. Team Structures Some companies benefit from using team management. Although teams are often less effective in traditional and rigidly structured bureaucratic organizations, they can help smaller, more flexible organizations make decisions quickly and effectively, enhance communication, and encourage organizational members to feel more like a part of an organization.

E. Job Enrichment and Job Redesign Both of these programs typically increase worker satisfaction in jobs that lack motivating factors.

1. Job Enrichment Programs. These programs attempt to add motivating factors to job activities. They can involve job rotation programs, or increasing responsibility or recognition.

2. Job Redesign Programs. These programs attempt to create a better fit between employees and their jobs by restructuring work. Job redesign can usually be carried out

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through combining tasks, forming natural work groups, and/or establishing client relationships. a. Combining Tasks. Enlarging jobs and increasing their variety can make employees feel that their work is more meaningful. b. Forming Natural Work Groups. People who perform different jobs on the same projects are candidates for natural work groups that help employees see the place and importance of their jobs in the total structure of the firm. c. Establishing Client Relationships. Allowing employees to interact with customers can increase job variety and give workers both a greater sense of control and more feedback about performance.

F. Modified Work Schedules 1. Work-Share Programs. These programs allow employees to share a single, full-time job. Employees appreciate the schedule flexibility to accommodate their personal needs, and firms can reduce turnover and save on the cost of benefits.

2. Flextime Programs and Alternative Workplace Strategies. Flextime programs allow workers to choose their working hours by adjusting a standard work schedule.

3. Alternative Workplaces. A rapidly growing number of U.S. workers do a significant portion of their work via telecommuting. Telecommuting allows employees to perform some or all of their jobs away from standard office settings.

4. Advantages and Disadvantages of Modified Schedules and Alternative Workplaces.

Some advantages include: (a) more freedom in employees’ personal lives; (b) ability of employees to coordinate work around family members’ schedules; (c) an increased sense of freedom for employees; and (d) higher commitment and satisfaction for employees.

Some disadvantages include: (a) the difficulty of accurately tracking working hours; (b) the lack of self-discipline to work without supervision as well as the lack of social interaction available in the workplace; and (c) employer perceptions that unobserved workers are not actually working.

KEY TEACHING TIP Students often confuse the following topics. Job enrichment is designed to add one or more motivating factors to job activities; job redesign acknowledges that different people want different things from their jobs.

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QUICK QUESTIONS •

What are examples of positive reinforcement and punishment in the workplace?

•

With management by objectives, managers and subordinates set goals and evaluate progress over time. What are some advantages and disadvantages of MBO?

•

Participative programs are not for everyone. What are some drawbacks of such programs?

•

What are some advantages and disadvantages of using teams in organizations?

•

In what types of situations might employees benefit from work-share programs and flextime programs?

•

What are some drawbacks of relying on telecommuting?

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

IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker: Balancing Inducements and Contributions Activity Overview: This activity asks students to think about the psychological contract between themselves and their jobs.

Time Limit: 20 minutes What to Do: 1. Divide students into three-member groups. Remind students what it means to have a psychological contract, and what person-job fit refers to. (5 minutes) 2. Tell each student to interview his or her partners, asking the partners to assess the balance of contributions and inducements at their jobs. Is the psychological contract even for both sides?

Do the contributions outweigh the inducements? If the contributions and inducements do not balance, what has to happen so they will be in balance? (15 minutes) 3. Reassemble the class and ask students to share the information they’ve obtained in their interviews. (10 minutes) Don’t Forget: Some students may not feel comfortable revealing the name of their employer in this scenario; if so, they can refer to the employer as “Company X.” Wrap-Up: Close with a recap of the psychological contract and highlight how a good person-job fit occurs when employee contributions and company inducements line up. Ultimately, this results in higher performance and more positive attitudes.

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In-Class Activity 2: Up for Debate: What Are You Looking for in a Job? Activity Overview: This activity asks students to express their opinions about important job criteria and compare these with other students.

Time Limit: 40 minutes What to Do: 1. Ask students to think about what is important to them in a job, ranking the following items, with 1 being the most important and 10 being the least important. (10 minutes) • • • • • • • • • •

Working Conditions Quality of Coworkers/Mentors Salary Benefits Location of Job Level of Challenge/Responsibility Training Programs Offered Advancement Opportunities Job Security Job Title

2. Divide the class into four-member teams.

3. Ask each team to compare their rankings. What conclusions can they draw? While they are doing this, students could potentially go to the board or an overhead slide and mark their rankings on a table you create; this would give you an overview of the class. (10 minutes) 4. Reassemble the class as a whole and have each group share their findings with the class. (10 minutes) 5. Look at the list of items that people ranked highest in general. Talk about how companies can actually accomplish these. For example, how would a company provide ideal working conditions for its employees? (10 minutes) Don’t Forget: There are no right or wrong answers to this exercise.

Wrap-Up: Wrap up the discussion by reminding students that this is the challenge in any organization— people are motivated by different things. Business owners and managers must find ways to motivate every employee so they have high job satisfaction.

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In-Class Activity 3: Small-Group Discussion: Motivation in Global Firms Activity Overview: This activity asks students to think about the increased challenges that stem from trying to motivate employees in a global company.

Time Limit: 25 minutes What to Do: 1. Divide the class into small groups and ask them to discuss what types of additional difficulties may arise when attempting to motivate employees in a global company as compared with a domestic company. (10 minutes) 2. Reassemble the class and discuss group comments. (15 minutes) Don’t Forget: Cultural differences can be difficult to assess; students may want to think of differences in perceptions of time, personal space, punctuality, reasons for working, and communication when completing this assignment.

Wrap-Up: Remind students that a good rule of thumb when motivating workers in a global company is to always treat employees with respect, to be sensitive to local cultures, and to follow laws of the host country; the rest might come a little easier.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 8-1. Describe the “Big Five” personality traits and how they contribute to employee performance.

The “Big Five” personality traits include agreeableness, conscientiousness, emotionality, extraversion, and openness. Answers should define the traits and elaborate on how they contribute to employee performance. (Learning Objective 2 – AACSB – application of knowledge) 8-2. What are the three components of attitudes? Be sure to describe each.

Attitudes reflect our beliefs and feelings about specific ideas, situations, or other people.

Attitudes are important because they are the mechanism through which we express our feelings. Attitudes are formed by a variety of forces, including our personal values, our experiences, and our personalities. Attitudes are usually viewed as stable dispositions to behave toward objects in a certain way and contain three components: cognition, affect, and intention. Cognition is the knowledge a person presumes to have about something. A person’s affect is his or her feelings toward something, and intention guides a person’s behavior. (Learning Objective 2 – AACSB – application of knowledge) 8-3. Compare and contrast the hierarchy of human needs with the two-factor theory of motivation.

The two are somewhat similar in that they both depict hierarchical needs; however, Maslow describes five basic needs, whereas Herzberg describes two categories of needs. In both cases, lower-level needs must be satisfied first. However, in Maslow’s model, when needs are met, they cease to be motivating, whereas in Herzberg’s model, hygiene factors only affect motivation when they are absent or fail to meet expectations. (Learning Objective 4 – AACSB – application of knowledge) 8-4. How can participative management programs enhance employee satisfaction and motivation?

Visit MyBizLab for suggested answers. (Learning Objective 5 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 8-5. Describe the psychological contract you currently have or have had in the past with an employer. If you have never worked, describe the psychological contract that you have with the instructor in this class.

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Visit MyBizLab for suggested answers. (Learning Objective 3 – AACSB – reflective thinking) 8-6. Do you think that most people are relatively satisfied or dissatisfied with their work? What factors do you think most contribute to satisfaction or dissatisfaction?

Visit MyBizLab for suggested answers. (Learning Objective 4 – AACSB – reflective thinking) 8-7. What is a psychological contract? Describe your most recent job in terms of your contributions and the organization’s inducements.

A psychological contract is the overall set of expectations held by employees and the organization regarding what employees will contribute to the organization and what the organization will provide in return. The individual makes a variety of contributions to the organization, such as effort, ability, loyalty, skills, and time. In return for these contributions, the organization provides inducements to the individual. These include tangible rewards such as pay and career and training opportunities, as well as intangible rewards, such as job security and status, and increased flexibility in working schedules. Answers will vary depending on students’ employment experience.

(Learning Objectives 3 and 4 – AACSB – reflective thinking) 8-8. What would you tell a low-skill worker performing a simple and routine job who wants more challenge and enjoyment from work?

Answers will vary, but many people would suggest that the worker improve his job skills— through training and education—that might open doors to more job variety. In addition, many students will suggest that the worker talk with his or her manager about enriching his current job. (Learning Objectives 4 and 5 – AACSB – reflective thinking) APPLICATION EXERCISES 8-9. Assume you are about to start your own business. What would you do from the beginning to ensure that your employees will be satisfied and motivated?

Answers will vary, but many will suggest that the employees be empowered to make certain decisions early on and that you commit a certain amount of resources early on for any additional training and education that they might want or need. (Learning Objective 5 – AACSB – application of knowledge) 8-10. Interview your employer or an administrator at your college. Ask the manager what they believe motivates their employees. Identify one or more theories of motivation that seem consistent with this manager’s approach.

Answers will vary, but should include discussions of the strategies reviewed in the chapter.

For some manufacturing companies, resources are plentiful and managers can afford to

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provide a higher-than-average wage and competitive benefits. Job enrichment and open communication throughout an organization are also satisfaction factors. A college environment will be more service focused, and will present different motivations for employees. (Learning Objective 5 – AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 8-11 TO 8-15 (Learning Objectives 1, 2, 4, and 5 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Answers will vary but students should note regardless of the type of business, every business will have employees. Setting expectations and managing and motivating those employees will be instrumental in determining the success of the business venture.

Remind students that choosing employees that best fit with the mission and the culture of the firm is challenging but results in higher levels of satisfaction from the employees. The many dimensions discussed in the chapter help students understand that each employee has individual motivations that are different in scope and balance from other employees. Finding the right rewards and methods of motivation is key.

Students need to consider how flexible they will be able to be in the inducements they offer to employees, especially in the early stages of a new venture. As the business grows, how will they modify their structure, and their management practices?

TEAM EXERCISE: TOO MUCH OF A GOOD THING, 8-16 TO 8-20 (Learning Objectives 3, 4, 5 – AACSB – analytical thinking, application of knowledge) Students must focus on using most of the concepts in the chapter, particularly regarding motivation strategies and individual behaviors, as well as performance behaviors, organizational citizenship, and the psychological contract with each employee. Cultural changes to the company’s operation will be required and may need to be phased in. Participatory management, or management by objectives, as systems of collaborative goal setting give employees a voice in how the company is managed and how they are rewarded. Earning employee commitment to the changes will be absolutely necessary for the needed changes to be successful.

EXERCISING YOUR ETHICS: TOO MUCH OF A GOOD THING (Learning Objectives 3, 4, 5 – AACSB – ethical understanding and reasoning, application of knowledge) 8-21. What are the ethical issues in this case?

The new HR manager is deeply concerned that the behavior modification approach demonstrates a lack of respect for employees.

8-22. What do you think most managers would do in this situation?

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Answers will vary, but students should recognize that proceeding with the behavior modification plan is a direct order from the supervisor. Therefore, as a suggestion, the HR manager will likely begin with a few broad rewards and punishments for common behaviors, then add to the list as all of the employees begin to feel comfortable with what is being implemented.

8-23. What would you do?

Answers will vary, but students will probably consider including elements of expectancy theory while implementing the behavior modification approach.

CASES: A LIVING WAGE (Learning Objectives 2, 3, 4 – AACSB – analytical thinking, application of knowledge) Students’ perspective will frame their answer to these questions based on their personalities and past experiences. Every person in an organization is fundamentally different from everyone else.

To be successful, managers must recognize that these differences exist and attempt to understand them. They also need to understand why people work.

8-24. Do you think that higher pay will result in higher productivity and lower turnover for Aetna? What leads you to this conclusion?

If Aetna employees are motivated by money, then, yes, higher pay should result in higher productivity and lower turnover. But this also will only be true if the increased pay actually is enough to make a difference in the employees’ ability to meet their financial and personal needs.

8-25. What factors motivate you personally?

Answers will vary but should take into account both tangible and intangible factors.

8-26. Explain Aetna’s decision in light of the classical theory of motivation.

The classical theory of motivation holds that workers are motivated solely by money.

However, Aetna, by the admission of the CEO, did not make the decision because of a belief in this motivation. In fact, while increased productivity likely will be a result of the increased pay, the decreased stress due to financial concerns and increased satisfaction and comfort at the company result in lower turnover and increased productivity.

8-27. How could Maslow’s hierarchy of needs help explain the relationship between pay and productivity?

Maslow’s hierarchy of needs explains the relationship between pay and productivity because pay falls into the physiological needs level of the Figure 8.3. The needs at the lower points of the figure must be met before the needs above that become relevant to an individual. Being

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secure in one’s salary will help meet that need and let the employee move up the pyramid and meet other needs. Increased productivity may result from increased pay, in this theory, because the employee will feel more secure and happier, and that often leads to increased productivity.

8-28. How could Maslow’s hierarchy of needs help explain the relationship between pay and productivity?

The expectancy theory does not fit with the Aetna decision, as all lower-wage employees received a wage increase; it was not a matter of reaching for, and achieving, a goal of earning a new and higher wage. There was not a performance-reward correlation. Equity theory doesn’t seem to fit either, as the pay increase was a blanket increase for all of the lowest-paid employees. The two-factor applies best to this case. Since pay fits into the list of hygiene factors or working conditions, increasing the pay of the lowest-paid employees moves that factor from the dissatisfaction of the scale toward the “no dissatisfaction” end. Ensuring that working conditions (including pay) are acceptable results in an absence of dissatisfaction.

Aetna can then focus on motivation factors to truly improve satisfaction and motivation.

8-29. Do you believe that companies have a social responsibility to pay higher wages? Why or why not?

Answers will vary. While it might be ideal to state that there is a social responsibility to pay higher wages, companies must balance the economic impact of higher wages with the skills and talents required to perform various tasks.

SEARCHING FOR A GREAT PLACE TO WORK (Learning Objectives 2, 3, 4, 5 – AACSB – analytical thinking, application of knowledge) 8-30. Page and Brin were young when they started Google. Do you think that they identified most with Theory X or Theory Y? Why? Most students will answer that Page and Brin most identified with Theory Y since they emphasized the need for “happy, motivated employees.”

8-31. Describe how Maslow’s needs hierarchy could be applied to Google’s approach to employee motivation.

Google’s approach is to emphasize the higher-level motivation factors such as social needs and self-esteem to motivate their workers.

8-32. Use Herzberg’s two-factor theory to explain how Google motivates employees.

Google pays their employees well and ensures that the working conditions exceed expectations so that the hygiene factors are irrelevant and can then motivate their employees through opportunities for achievement, recognition, and interesting work.

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8-33. Google is obviously a great place to work, but it’s probably not right for everyone. What types of people are best and least suited for work at Google?

Students’ answers will vary but probably individuals who desire a high degree of autonomy in their work, optimistic with a high degree of self-efficacy will probably do well at Google.

Individuals who need constant reinforcement, structure, etc., would probably not be well suited to Google.

8-34. Google has a fantastic package of compensation and benefits. To retain employees, will they have to continually add new perks? How could they avoid this?

Again, answers will vary depending on students’ perspective. Students will identify new work schedules, flex programs, etc., to motivate employees.

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Chapter 9: Leadership and Decision Making Chapter Overview Think of a really effective leader with whom you have worked. What made him or her such a good leader? Was it his or her personality? Was it the way he or she handled a crisis? All good leaders have their own “bag of tricks” to motivate, inspire, and influence their employees to work toward company goals.

This chapter focuses on several approaches to leadership and describes transformational and charismatic perspectives on leadership. It also looks at types of leadership substitutes and neutralizers, as well as several contemporary issues in leadership—seeing leaders as coaches and examining gender and cross-cultural issues in leadership. This chapter also: • • •

Discusses strategic leadership, ethical leadership, and virtual leadership.

Relates leadership to decision making.

Discusses both rational and behavioral perspectives on decision making.

Learning Objectives: 9-1. Define leadership and distinguish it from management.

9-2. Summarize early approaches to the study of leadership.

9-3. Discuss the concept of situational approaches to leadership.

9-4. Describe transformational and charismatic perspectives on leadership.

9-5. Identify and discuss leadership substitutes and neutralizers.

9-6. Discuss leaders as coaches and examine gender and cross-cultural issues in leadership.

9-7. Describe strategic leadership, ethical leadership, and virtual leadership.

9-8. Relate leadership to decision making and discuss both rational and behavioral perspectives on decision making.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Ice-Breaker: Are You a Leader or a Manager?

2. Small-Group Discussion: Transformational vs.

Transactional 3. Up for Debate: Is John Paul DeJoria a Charismatic Leader?

Description Students assess their own abilities as leaders and managers.

Students identify a business or political leader and identify transformational or transactional characteristics of that leader.

Students are asked to read the Entrepreneurship and New Ventures feature in the textbook and discuss the charisma of John Paul DeJoria.

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Time Limit 20 min.

20 min.

30 min.

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CHAPTER OUTLINE Learning Objective 9-1: Define leadership and distinguish it from management.

The Nature of Leadership Leadership includes the processes and behaviors used by someone, such as a manager, to motivate, inspire, and influence the behaviors of others.

A. Leadership and Management Leadership differs from management in a number of ways: A person can be a manager, a leader, both, or neither. Management focuses primarily on the activities of planning, organizing, leading, and controlling. Leadership, in contrast, is much more closely related to activities such as agenda setting, aligning, inspiring, and monitoring. Management in conjunction with leadership can help achieve planned orderly change, and leadership in conjunction with management can keep the organization properly aligned with its environment.

B. Leadership and Power Power is the ability to affect the behavior of others.

1. Legitimate Power is power granted through the organizational hierarchy, by rank and position. It is authority.

2. Reward Power is the power to give or withhold rewards ranging from salary increases to praise to interesting job assignments. If the subordinate values formal organizational rewards, the manager is not a leader; if the subordinate values informal rewards such as praise and recognition, the manager is showing leadership.

3. Coercive Power is the power to force compliance by means of psychological, emotional, or physical threat. It is accepted that these are not appropriate managerial behaviors, and a manager using this kind of power is likely to provoke resentment and hostility, and is less likely to be seen as a leader.

4. Referent Power is power based on identification, imitation, loyalty, or charisma. This is abstract and based on followers identifying in some way with a leader. Charisma is an intangible attribute that attracts loyalty and enthusiasm.

5. Expert Power is power derived from information or expertise. The more important the information and the fewer the people who have access to it, the greater is the degree of expert power possessed by any one individual. Generally, people who are both leaders and managers tend to have large amount of expert power.

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QUICK QUESTION •

What distinguishes leadership from management? In other words, can someone be a manager and not a leader, or a leader and not a manager?

Use In-Class Activity 1: Ice-Breaker: Are You a Leader or a Manager?

Time Limit: 20 minutes

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Learning Objective 9-2: Summarize early approaches to the study of leadership.

Early Approaches to Leadership A. Trait Approaches to Leadership The trait approach to leadership focuses on identifying the essential leadership traits in individuals. Although the trait approach was all but abandoned several decades ago, in recent years, it has resurfaced. A limited list of traits includes emotional intelligence, mental intelligence, drive, motivation, honesty and integrity, self-confidence, knowledge of the business and charisma. It is still undetermined whether these traits relate to leadership.

B. Behavioral Approaches to Leadership The behavioral approach to leadership focuses on the behaviors employed by effective leaders; this research led to the identification of two basic forms of leader behavior: taskfocused leader behavior, which occurs when a leader focuses on how tasks should be performed in order to meet certain goals and standards; and employee-focused leader behavior, which occurs when a leader focuses on the satisfaction, motivation, and well-being of his or her employees.

KEY TEACHING TIPS Students often confuse the various approaches to leadership. Remind them that the trait approach focuses on identifying traits that indicate leadership ability, including intelligence, dominance, self-confidence, energy, activity, and knowledge.

Remind students to keep the behavioral approach to leadership separate from the trait approach.

The behavioral approach focuses on behaviors used by effective leaders and can include taskfocused behaviors, employee-focused behaviors, or a combination depending on the situation.

QUICK QUESTIONS •

What is the difference between task-focused leader behavior and employee-focused leader behavior?

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The trait approach was all but abandoned several decades ago. Why?

HOMEWORK Interview a Manager Now might be a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. The assignment asks students to get a manager’s perspective regarding whether leadership can be taught.

At-Home Completion Time: 1 hour

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Learning Objective 9-3: Discuss the concept of situational approaches to leadership.

The Situational Approach to Leadership The situational approach to leadership assumes that the appropriate leader behavior varies from one situation to another. This approach was first proposed as a continuum of leadership behavior.

This continuum ranges from the one extreme of having the leader make decisions alone (i.e., task-focused) to having employees make decisions with only minimal guidance from the leader.

Leadership characteristics considered include: • The manager’s value system • Confidence in subordinates • Personal inclinations • Feelings of security Then, subordinate characteristics include: • Subordinates’ need for independence • Tolerance of ambiguity • Level of knowledge, experience, and motivation • The complexity of the task • The level of interest in the task Situation characteristics that affect decision making include: • The type of organization • Group effectiveness • The problem itself • Time pressures Three important situation approaches to leadership are (1) the path–goal theory, (2) the decision tree approach, and (3) the leader–member exchange model. The path-goal theory is an extension of the expectancy theory of motivation and suggests that the primary functions of a leader are to make valued or desired rewards available in the workplace and to clarify for the subordinate the kinds of behavior that will lead to goal accomplishment and valued rewards. The leader should clarify the paths to goal attainment. The decision tree approach concerns itself with only subordinate participation in decision making and assumes that the degree to which subordinates should be encouraged to participate depends on the situation. The leader-member exchange model stresses the importance of variable relationships between supervisors and each of their subordinates. It focuses on the differential relationships leaders often establish with different subordinates.

QUICK QUESTION •

The situational approach suggests that leaders can vary their use of authority to fit the situation. What are some situational characteristics that affect decision making?

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Learning Objective 9-4: Describe transformational and charismatic perspectives on leadership.

Leadership Through the Eyes of Followers Another recent perspective that has been adopted by some leadership experts focuses on how leaders are seen through the eyes of their followers.

A. Transformational Leadership Transformational leadership focuses on the importance of leading for change; it is the set of abilities that allows a leader to recognize the need for change, to create a vision to guide that change, and to execute the change effectively. Transactional leadership is essentially the same as management in that it involves routine, regimented activities. Only highly skilled leaders tend to be able to succeed in both transactional and transformational realms.

B. Charismatic Leadership Charismatic leadership is a type of influence based on a leader’s personal charisma; charismatic leaders are likely to have a lot of self-confidence, confidence in their beliefs and ideals, and a strong need to influence people. Charismatic leaders: 1. Envision likely future trends and set high expectations 2. Energize others by demonstrating personal excitement and confidence 3. Enable others by supporting them KEY TEACHING TIPS •

Remind students that some leaders are able to adopt either transformational or transactional perspectives, depending on their circumstances; others are able to do one or the other, but not both.

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Point out to students that someone with charisma is more likely to influence others than someone without charisma.

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It is worth noting that taking over a leadership role from someone who is highly charismatic is a challenge and early positive results are important for them to gain credibility.

QUICK QUESTION What attributes make a leader charismatic?

Use In-Class Activity 2: Small-Group Discussion: Transformational vs. Transactional Time Limit: 20 minutes Use In-Class Activity 3: Up for Debate: Is John Paul DeJoria a Charismatic Leader?

Time Limit: 30 minutes

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Learning Objective 9-5: Identify and discuss leadership substitutes and neutralizers.

Leadership Substitutes and Neutralizers A. Leadership Substitutes Leadership substitutes are individual, task, and organizational characteristics that tend to outweigh the need for a leader to initiate or direct employee performance. In other words, when certain individual abilities, experiences, training, knowledge, motivation, and/or professional orientation are present people can perform well without a designated leader. An ER specialist knows what to do whether a leader is present or not.

B. Leadership Neutralizers Leadership neutralizers are factors that may render certain leadership behaviors ineffective.

Examples of leadership neutralizers include norms, group cohesion, elements of the job, and organizational factors. An example would be an inexperienced leader assigned to a very experienced group with long standing performance norms and high productivity. Another example might be a worker on an assembly line—he or she can only work as fast as the belt moves and motivational attempt on behalf of leaders can necessarily change production rates, although such leadership might be able to reduce errors and absenteeism.

KEY TEACHING TIP Students often confuse leadership substitutes and leadership neutralizers. Leadership neutralizers are factors that can render various leadership behaviors ineffective. Leadership substitutes are characteristics that tend to outweigh the need for a leader to initiate or direct employee performance, meaning that sometimes, employees will perform their jobs capably without the direction of a leader.

QUICK QUESTIONS •

What are some examples of possible leadership neutralizers?

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Leadership substitutes are characteristics that outweigh the need for a leader to initiate or direct employee performance. What are some examples of leadership substitutes?

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Learning Objective 9-6: Discuss leaders as coaches and examine gender and cross-cultural issues in leadership.

The Changing Nature of Leadership A. Leaders as Coaches Many organizations are becoming less hierarchical, changing the role of the leader from “overseer” to “coach.” Mentoring helps less-experienced employees learn the ropes and better prepares them to advance within the organization. The role of the executive coach is also growing in organizations. This is where middle or even senior managers and leaders work with an external coaching consultant to develop a plan to enhance their own leadership, managerial, and life skills. The leader keeps a low profile and lets the group get its work done with little or no direct oversight, just as a coach would do during a game.

B. Gender and Leadership Contrary to stereotypes, female leaders are not necessarily more nurturing or supportive than male leaders; and male leaders are not systematically harsher, controlling, or task-focused than female leaders. Females do tend to be more democratic in making decisions; males tend to be more autocratic.

C. Cross-Cultural Leadership Culture encompasses both international differences and diversity-based differences within one culture. Cross-cultural factors play a growing role in organizations as their workforces become more diverse.

KEY TEACHING TIP Students often remember that culture refers to international differences among people, but they often forget that culture also includes diversity-based differences within one culture.

QUICK QUESTIONS •

Is the United States a collectivist culture or an individualist culture?

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“A new role for a leader is to become a coach, rather than an overseer.” Explain this statement. What has brought about this change in leadership focus?

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Do men and women tend to lead differently? If so, how?

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Learning Objective 9-7: Describe strategic leadership, ethical leadership, and virtual leadership.

Emerging Issues in Leadership A. Strategic Leadership Strategic leadership is a leader’s ability to understand the complexities of both the organization and its environment and to lead change in the organization so as to enhance its competitiveness.

B. Ethical Leadership Ethical leadership is a leader’s ability to maintain high ethical standards for his or her own conduct, to unfailingly exhibit ethical behavior, and to hold others in the organization to the same standards.

C. Virtual Leadership Virtual leadership refers to leadership that is exhibited when leaders and their employees work in locations that are far from one another.

QUICK QUESTIONS •

Virtual leadership involves managing employees who work in different locations than the manager. What are some advantages and disadvantages of virtual leadership from the manager’s perspective? How can a manager show leadership in this kind of environment?

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Learning Objective 9-8: Relate leadership to decision making and discuss both rational and behavioral perspectives on decision making.

Leadership, Management, and Decision Making Decision making—choosing one alternative from among several options—is a critical management skill.

A. The Nature of Decision Making Decision making is the act of choosing one alternative from among a set of alternatives.

1. Types of Decisions. Managers must make many different types of decisions. In general, however, most decisions fall into one of two categories: programmed and nonprogrammed. A programmed decision is one that is relatively structured or recurs with some frequency (or both). Nonprogrammed decisions, on the other hand, are relatively unstructured, are unique, and occur much less often.

2. Decision-Making Conditions. Just as there are different kinds of decisions, there are also different conditions in which decisions must be made. State of Certainty is when the decision maker knows with reasonable certainty what the alternatives are and what conditions are associated with each alternative. State of Risk is when the availability of each alternative and its potential payoffs and costs are all associated with probability estimates.

State of Uncertainty is when the decision maker does not know all the alternatives, the risks associated with each, or the likely consequences of each alternative.

B. Rational Decision Making There are a number of steps in the rational decision-making process.

1. Recognizing and Defining the Decision Situation. Step one is to recognize that a decision is necessary. A stimulus or spark must initiate the process; managers must develop a complete understanding of the problem, its causes, and its relationship to other factors.

2. Identifying Alternatives. Alternative courses of effective action must be developed; the more important the decision, the more attention is directed to developing alternatives.

Developing obvious, standard alternatives and creative, innovative alternatives is useful.

3. Evaluating Alternatives. Managers must weigh the pros and cons and the feasibility of all alternatives to the problem.

4. Selecting the Best Alternative. While many situations do not lend themselves to objective, mathematical analysis, managers and leaders can develop subjective estimates and weights for choosing an alternative. Finding multiple acceptable alternatives may be possible; selecting just one alternative and rejecting all the others might not be necessary.

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5. Implementing the Chosen Alternative. Implementation is sometimes fairly easy, but frequently is more difficult than anticipated. There is potential resistance at various stages of an implementation process, regardless of how thorough the selection process is.

6. Following Up and Evaluating the Results. Managers should make sure that the chosen alternative has served it original purpose. Several responses are available, if it is not working as expected and range from redefining the problem to implementation previously disregarded alternatives.

C. Behavioral Aspects of Decision Making While approaching decision situations logically is ideal, frequently decisions made with little regard for logic can turn out to be correct. Several ingredients in how these forces work are behavioral aspects of decision making.

1. Political Forces in Decision Making. Political forces contribute to the behavioral nature of decision making. A coalition is an informal alliance of individuals or groups formed to achieve a common goal.

2. Intuition. Intuition is an innate belief about something, often without conscious consideration. Intuition is often thought of as a “hunch.” While not as arbitrary as that sounds, it is actually based on experience and practice in making similar decisions.

3. Escalation of Commitment. Escalation of commitment occurs when managers become so committed to the course of action they have chosen that they stay with it, even when it appears to have been wrong.

4. Risk Propensity and Decision Making. Risk propensity is the extent to which a decision maker is willing to gamble when making a decision. Conservative managers are cautious and less likely to avoid mistakes or big losses. More aggressive managers may achieve big successes, but are also more likely to incur greater losses.

KEY TEACHING TIPS •

Remind students that they often engage in rational decision making, which occurs when a manager makes a decision by selecting and implementing a “best” alternative.

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A coalition is an informal alliance of individuals or groups formed to achieve a common goal; point out that this goal is often a preferred decision alternative.

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Remind students that when they have a “hunch,” it is intuition, which is an innate belief about something, often without conscious consideration.

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Point out that every individual has a varying level of risk propensity, which is the extent to which a person is willing to gamble when making a decision.

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QUICK QUESTIONS •

What are some typical constraints that can limit the identification of alternatives?

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If an alternative appears not to be working, what are the manager’s options?

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For what types of decisions would the rational decision-making model apply? Why?

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Escalation of commitment involves selecting a course of action and then becoming so committed to it that managers stay with it, even when it appears to be wrong. Why do some managers stay with a course of action even when they know it to be wrong?

HOMEWORK Airbus versus Boeing Now is a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment gives students a chance to further research the decisions made in the running example throughout the textbook by Boeing and Airbus and weigh the two companies’ decisions.

At-Home Completion Time: 45 minutes

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

IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker: Are You a Leader or a Manager?

Activity Overview: This activity provides students with a chance to interview a classmate, then discuss their own leadership potential with that classmate.

Time Limit: 20 minutes What to Do: 1. After reviewing the differences between “managers” and “leaders,” ask students to think about their own leadership and management potential. Assign each student to a partner, asking each one to briefly interview the other to find out how each would assess his or her own management and leadership potential. (10 minutes) 2. Reassemble the class and ask for volunteers who are willing to share any information about their own personal assessments and/or introduce their interviewee to discuss some of the topics discussed in the interview. (10 minutes) Don’t Forget: Some students will already have some managerial/leadership experience upon which to draw.

For those who don’t, ask them to consider a situation where they have been able to display management or leadership qualities (in a school club, sports team, or a circle of friends, for example); or, ask them to identify characteristics and behaviors in their own bosses that they admire, and then assess whether they could emulate those behaviors and characteristics. This may help them to better distinguish their leadership potential from their management potential.

Wrap-Up: Wrap up the discussion by reminding students that some managers are both leaders and managers.

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In-Class Activity 2: Small-Group Discussion: Transformational vs.

Transactional Activity Overview: This activity asks students to assess the leadership characteristics of selected leaders, identifying transformational and transactional characteristics among them.

Time Limit: 20 minutes What to Do: 1. Divide the class into small groups and ask each group to come up with a business or political leader with whom all are familiar. Based on the leader selected, each group should identify their selected leader as being either transformational or transactional. (10 minutes) 2. Reassemble the class as a whole to discuss each group’s input. (10 minutes) Don’t Forget: People can perceive leadership differently. Groups should make their assessments based on the descriptions of transactional and transformational leadership given in the textbook.

Wrap-Up: Bring the activity to a close by providing a quick overview of both types of leadership, identifying some cited leadership characteristics from the groups’ discussions for further definition.

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In-Class Activity 3: Up for Debate: Is John Paul DeJoria a Charismatic Leader?

Activity Overview: This activity asks students to assess the leadership characteristics of one of the most successful entrepreneurs in the world.

Time Limit: 30 minutes What to Do: 1. Ask students to read about John Paul DeJoria in the Entrepreneurship and New Ventures feature, considering his traits and behaviors as a leader and making notes about whether he was a charismatic leader. (10 minutes) 2. Ask the class as a whole to discuss those traits and behaviors that might indicate that John Paul DeJoria had a high or low level of charisma. (20 minutes) Don’t Forget: This assignment can be completed using any number of successful (or unsuccessful) entrepreneurs.

Wrap-Up: Bring the activity to a close by discussing how what one person views as charismatic may not be viewed as charismatic by another individual.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 9-1. What are the basic differences between management and leadership?

Visit MyBizLab for suggested answers. (Learning Objective 1 – AACSB – application of knowledge) 9-2. Summarize the basic premises underlying the trait approach to leadership.

The trait approach to leadership focuses on identifying specific leadership traits that may indicate one’s leadership potential. The premise was that leaders had certain traits in common and that evaluating someone based on their possession and strength of those traits would be a good indicator of someone’s leadership potential. (Learning Objective 2 – AACSB – application of knowledge) 9-3. What are leadership substitutes and neutralizers?

Leadership substitutes are individual, task, and organizational characteristics that tend to outweigh the need for a leader to initiate or direct employee performance. Leadership neutralizers tend to render certain leadership behaviors ineffective, based on the presence of the neutralizers; norms and cohesiveness in a group, for example, can be so strong that there is very little an individual manager can do to influence the group. (Learning Objective 5 – AACSB – application of knowledge) 9-4. List and briefly explain the steps in rational decision making.

The rational decision-making model begins with (1) recognizing and defining the decision situation. Recognize that a decision is necessary and define the problem. Decision makers then (2) identify alternatives, remembering that various constraints often limit the alternatives. Consider standard alternatives and creative innovative ones; (3) evaluate the alternatives on various criteria, including legal, financial, human, material and information resources or costs; (4) select the best alternative using a combination of objective and subjective analysis; (5) implement the chosen alternative, anticipating areas of potential resistance or problems; and (6) follow up and evaluate the results, and be prepared to respond if the alternative is not performing as expected. (Learning Objective 8 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 9-5. Describe the five types of power. Which type or types does your current supervisor exercise?

Visit MyBizLab for suggested answers. (Learning Objective 1 – AACSB – application of knowledge, reflective thinking)

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9-6. When is task-focused leader behavior most important? When is it more important for a leader to exhibit employee-focused behavior?

Students should discuss various scenarios where the leader needs to initiate or direct employee performance and focus on the task. They should also discuss various leadership neutralizers, which render task leadership behaviors ineffective, such as dealing with professionals and other highly-skilled employees. (Learning Objective 5 – AACSB – application of knowledge) 9-7. The impact of virtual leadership is likely to grow in the future. As a potential “follower” in a virtual leadership situation, what issues would be of most concern to you? What would the issues be from the perspective of the “leader” role in such a situation?

There are a number of concerns that followers typically have in virtual organizations. One concern is making sure instructions are clearly understood. In the absence of nonverbal communication, it is sometimes difficult to assess the relative importance of different tasks.

The second problem is loneliness and isolation. Research is showing that people who work from home sometimes feel isolated from the daily interactions that typically take place in organizations. One problem for the leaders of virtual organizations is that they must work harder to develop a positive work culture. Team leaders may not know their team members personally and this may make appropriate task assignments more difficult.

(Learning Objective 7 – AACSB – application of knowledge) 9-8. Identify a leader who you believe exhibits charismatic leadership and explain the behaviors that support this conclusion.

Visit MyBizLab for suggested answers. (Learning Objective 8 – AACSB – application of knowledge) APPLICATION EXERCISES 9-9. Overwhelmingly, the CEOs of the largest companies in the United States are white males, but women and minorities are making inroads. Identify a leader who is a member of a minority group and describe the challenges that he or she faced and overcame.

Answers will vary but will focus on the behavioral aspects of political forces and coalitions, intuition, escalation of commitment, and risk propensity that especially impacts minority leaders. (Learning Objective 8 – AACSB – application of knowledge) 9-10. In 2012, Marissa Mayer was appointed president and CEO of Yahoo!. In her tenure with Yahoo!, she has made a number of bold decisions, not all of which were popular. Research Mayer’s career, especially at Yahoo!. What type of leader is Mayer? How would you describe her leadership style? Do you think she is effective?

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There will be a range of answers with some students describing her leadership style in terms of her behaviors; others will focus on her decision-making style, and still others will focus on her gender and its impact on her decisions. Students’ thoughts on her effectiveness will depend on their perspectives on the ethics of her decisions and whether they agree with them.

(Learning Objective 2, 3, 4, 6, and 7 – AACSB – reflective thinking) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE, 9-11 TO 9-15 (Learning Objectives 2, 3, 4, 5 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Answers will be determined by the type of business (bricks and mortar, e-commerce, etc.), the team’s perspective on the role the leader needs to play, each team member’s preferred leadership style, the number and type of employees, the skills and experience levels of the employees, etc.

When answering these questions, the students should be reminded of the type of traits/skills and decisions the leader might need to possess: 1: Communication; 2: Financial; 3: Strategic/tactical decisions; 4: Ethical; 5: Interpersonal; 6: Vision; etc.

TEAM EXERCISE: FORCING THE HAND 9-16 TO 9-19 (Learning Objectives 3, 4, 5, and 8 – AACSB – ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking) This exercise should encourage thoughtful discussion on the nature of leadership, responsibilities of a leader, the decision-making process, and the impact a leader’s personality has on an organization.

EXERCISING YOUR ETHICS: EXERCISING CHARISMA (Learning Objective 8 – AACSB – ethical understanding and reasoning, reflective thinking) 9-20. What are the ethical issues in this situation?

Three options were presented, with varying degrees of risk. Ethically, students must consider the risk factors present in the various alternatives suggested and analyze the potential risks and rewards of each alternative. Students must also consider the power style that might be used. Is using coercive power ethical?

9-21. What do you think most managers would do in this situation?

Answers likely will vary, but the cautious decision or risk-averse recommendation is to not support the CEO’s plan. It not only puts the company and employees’ jobs at risk, but also their retirement funds. Replacing those funds probably will be more difficult than finding another job. Enron is an appropriate example of a company that took a similar action to what the CEO here is suggesting.

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9-22. What would you do?

Answers will vary, but students will want to keep a high degree of ethics in mind when making such decisions.

CASES: CINNA-YUM (Learning Objectives 1, 2, 3 and 4 – AACSB – analytical and reflective thinking, application of knowledge) 9-23. What personal traits does Kat Cole possess that aid her as a leader?

Traits Kat Cole seems to possess include intelligence, self-confidence, energy, activity, and knowledge, and likely, charisma.

9-24. How would you describe Kat Cole’s leadership style?

Students should review the three theories of situational approaches to leadership. Most students are likely to identify Kat Cole’s leadership style as being based on the path-goal theory. Given the statements she makes in the case about what leadership is, and what success looks like, this seems to be the best match.

9-25. Do you believe that Kat Cole’s gender affects her leadership style? Why or why not?

To an extent, anyone’s gender will affect their leadership style, in the same way that their experience, education, and background will also be factors. Students should recognize this.

9-26. What are three important lessons from Kat Cole’s career path?

Answers will vary depending on the students’ perspectives and experiences. Lessons to take away, though, include appreciating her willingness to take risks, her understanding the need to continue learning and expanding her skills and contacts via multiple avenues (corporate, nonprofits and boards), and her general understanding of what leadership actually means and how to show it.

THE MAN BEHIND THE GENIUS (Learning Objectives 2, 4, 8 – AACSB – analytical thinking, application of knowledge) 9-27. Do you think Steve Jobs was a charismatic leader? What leads you to this conclusion?

Most students will think that Steve Jobs was a charismatic leader, citing various behavioral characteristics such as confidence, desire for excellence, intelligence, etc.

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9-28. Jobs enjoyed almost cult-like loyalty among his employees. Why do you think people clamored to work for Apple under Jobs’s leadership?

Answers will vary but many students will cite the challenge and excitement of working with a ground-breaking leader such as Jobs.

9-29. What challenges face employees working for a leader such as Jobs?

Answers will vary but most students will probably focus on Steve Jobs’ high standards, drive, perfectionism, and lack of compassion.

9-30. Describe Jobs with respect to intuition, escalation of commitment, and risk propensity.

Again, answers will vary with most students seeing Jobs as an extremely confident, intuitive risk taker, and someone who was absolutely certain when he made up his mind about something.

9-31. Do you think that you would have enjoyed working for Apple during Jobs’s leadership?

Why or why not?

Answers will vary depending on students’ own comfort with the traits they observe that Steve Jobs possessed as a leader and what he demanded of Apple employees relative to their confidence in their ability to meet his standards.

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Chapter 10: Human Resource Management and Labor Relations Chapter Overview Human resource management involves a steady stream of activities. An HR manager’s job revolves around a set of functions including HR planning, staffing, developing employees, appraisal, and compensation and benefits.

This chapter covers each of these functions, including how managers plan for their organization’s HR needs and ways in which organizations select, develop, and appraise employee performance. The chapter also describes the main components of a compensation system and some of the legal issues involved in hiring, compensating, and managing workers.

Finally, the chapter discusses workforce diversity, the management of knowledge workers, the use of a contingent workforce and why workers organize into labor unions.

A career in HR management can be rewarding, but given the dynamic nature of the external environment, keeping abreast of changes and incorporating those necessary changes into these HR management functions is also challenging.

Learning Objectives 10-1. Define human resource management, discuss its strategic significance, and explain how managers plan for their organization’s human resource needs.

10-2. Discuss the legal context of human resource management and identify contemporary legal issues.

10-3. Identify the steps in staffing a company and discuss ways in which organizations recruit and select new employees.

10-4. Describe the main components of a compensation and benefits system.

10-5. Describe how managers develop the workforce in their organization through training and performance appraisal.

10-6. Discuss workforce diversity, the management of knowledge workers, and the use of a contingent workforce as important changes in the contemporary workplace.

10-7. Explain why workers organize into labor unions and describe the collective bargaining process.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Ice-Breaker: Writing a Job Description 2. Up for Debate: Performing Appraisals, Laying It On the Line 3. Small-Group Discussion: What Motivates Employees?

Description Students write a job description for both the instructor’s job and the student’s job.

Students are divided into teams to discuss the steps involved in determining whether to fire someone.

Students consider what incentives might motivate workers.

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Time Limit

45 min.

30 min.

30 min.

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CHAPTER OUTLINE Learning Objective 10-1: Define human resource management, discuss its strategic significance, and explain how managers plan for their organization’s human resource needs.

Defining Human Resource Management Human resource management (HRM) is the set of organizational activities directed at attracting, developing, and maintaining an effective workforce.

A. The Strategic Importance of HRM Human resources are critical for effective organizational functioning. The importance of HRM has grown dramatically in the last several years due in part to the recognition that human resources are a valuable means for improving productivity, and today’s awareness of the costs associated with poor human resource management. Effectiveness of HR performance directly impacts the bottom-line performance of the firm. Human capital reflects the organization’s investment in attracting, retaining, and motivating an effective workforce while talent management recognizes that people represent a portfolio of talents that can be managed and used in ways best targeted to organizational success.

B. Human Resource Planning Human resource planning is the starting point for attracting qualified human resources.

1. Job analysis. Job analysis is a systematic analysis of jobs within an organization. The job analysis results in: (a) the job description, which lists the duties and responsibilities of a job; its working conditions; and the tools, materials, equipment, and information used to perform it; and (b) the job specification, which lists the skills, abilities, and other credentials and qualifications needed to perform the job effectively. Job analysis is needed to develop appropriate selection methods, create relevant performance appraisal systems, and set equitable compensation rates.

2. Forecasting HR Demand and Supply. Forecasting the supply of labor involves forecasting the internal supply—the number and type of employees who will be in the firm at some future date—and the external supply—the number and type of people who will be available for hiring from the labor market at large. a. Replacement Charts. Replacement charts list each important managerial position, who occupies it, how long that person will probably stay in it before moving on, and who is now qualified or soon will be qualified to move into it. b. Skills Inventories. Employee information systems (skills inventories) contain information on each employee’s education, skills, work experience, and career aspirations to aid in identifying qualified employees when a position becomes available.

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c. Forecasting the external supply of labor requires information from outside sources, such as state employment commissions, government reports, and figures supplied by colleges on the number of students in major fields.

3. Matching HR Supply and Demand. After comparing future demand and internal supply, managers can make plans to manage predicted shortfalls or overstaffing. Hiring new employees, retraining present employees, and investing in productivity-enhancing systems, can help meet shortfalls. Overstaffing can be handled by transferring employees, not replacing employees who quit, encouraging early retirement, and laying off workers.

During the Great Recession, many firms found it necessary to reduce the size of their workforce through layoffs. Others did not reduce their workforce but reduced the number of hours each employee spent at work.

KEY TEACHING TIPS •

Remind students that HRM is the set of organizational activities directed at attracting, developing, and maintaining an effective workforce.

•

Students often confuse these terms: A job description lists what you do in the job, including the duties and responsibilities; a job specification lists the skills and abilities you bring with you to the job.

•

Remind students that forecasting the supply of labor includes both an internal and external forecast.

QUICK QUESTIONS •

Why has the role of human resource management increased in importance in the last several years?

•

How can an HR manager benefit from the use of a replacement chart?

•

How can an HR manager benefit from the use of an employee information system?

Use In-Class Activity 1: Ice-Breaker: Writing a Job Description Time Limit: 45 minutes

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Learning Objective 10-2: Discuss the legal context of human resource management and identify the contemporary legal issues.

The Legal Context of HR Management A number of laws regulate various aspects of employee-employer relations, especially in the areas of equal employment opportunity, compensation and benefits, labor relations, and occupational safety and health.

A. Equal Employment Opportunity Numerous federal and state laws, federal guidelines, presidential executive orders, and judicial decisions mandate equal employment opportunity, which is nondiscrimination in employment on the basis of race, color, creed, sex, or national origin. Title VII of the Civil Rights Act of 1964 forbids discrimination in all areas of the employment relationship.

The Equal Employment Opportunity Commission (EEOC) has responsibility for enforcing Title VII, the Age Discrimination in Employment Act, and the Americans with Disabilities Act. A business with government contracts must have on file a written affirmative action plan—a written statement of how the organization intends to actively recruit, hire, and develop members of relevant protected classes.

B. Compensation and Benefits The Fair Labor Standards Act sets a minimum wage and requires the payment of overtime rates for work in excess of 40 hours per week. The Equal Pay Act of 1963 requires that men and women be paid the same amount for doing the same job. The Employee Retirement Income Security Act (ERISA) of 1974 ensures the financial security of pension funds by regulating how they can be invested. The Family and Medical Leave Act (FMLA) of 1993 requires employers to provide up to 12 weeks of unpaid leave for family and medical emergencies.

C. Labor Relations Union activities and management’s behavior toward unions constitute another heavily regulated area. The National Labor Relations Act (also known as the Wagner Act), passed in 1935, sets up a procedure for employees to vote on whether to have a union. The National Labor Relations Board (NLRB) was established by the Wagner Act to enforce its provisions. Following a series of severe strikes in 1946, the Labor-Management Relations Act (also known as the Taft-Hartley Act) was passed in 1947 to limit union power.

D. Health and Safety The Occupational Safety and Health Act of 1970 holds that every employer has an obligation to furnish each employee with a place of employment that is free from hazards that cause or are likely to cause death or physical harm.

E. Other Legal Issues 1. AIDS in the Workplace. Employers cannot legally require an AIDS test or any other medical

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examination as a condition for making an offer of employment. Organizations must treat AIDS like any other disease covered by law; employers cannot discriminate against a person with AIDS, and they should try to educate coworkers about AIDS. 2. Sexual Harassment. Sexual harassment is defined by the EEOC as unwelcome sexual advances in the work environment. The employer is responsible for changing the environment by warning, reprimanding, or firing the harasser. With quid pro quo harassment, the harasser offers to exchange something of value, such as a raise or promotion, for sexual favors. Lewd jokes, unwelcome comments, a work area decorated with inappropriate photographs, and so on constitute a hostile work environment. Harassment has been expanded to include unwelcome or inappropriate behaviors regarding ethnicity, religion, and age.

3. Employment-at-Will. The concept of employment-at-will holds that both employer and employee have the mutual right to terminate an employment relationship at any time for any reason, and with or without advance notice to the other. However, employees can bring suit based on grounds of wrongful discharge.

4. The Patriot Act. In response to the terrorist attacks of September 11, 2001, the U.S. Government passed legislation to increase its powers to investigate and prosecute suspected terrorists. The HRM implications are that certain individuals (including ex-convicts and aliens from other countries deemed by the U.S. State Department to have repeatedly provided support for acts of international terrorism) are ineligible to work with potentially dangerous biological agents. Other sections grant government investigators access to previously confidential personal and financial records.

KEY TEACHING TIPS •

Reiterate that protected classes consist of individuals who share characteristics—such as race, color, religion, gender, age, disability status, and national origin—as indicated by a given law.

•

Reinforce that sexual harassment includes (a) quid pro quo, in which the harasser offers something of value for sexual favors, and (b) hostile work environment, in which lewd behavior displayed by another employee is offensive. Also, remind students that harassment definitions have been broadened to include age, religious, and ethnic harassment.

QUICK QUESTIONS •

What is the purpose of an affirmative action plan?

•

What does OSHA guarantee?

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Learning Objective 10-3: Identify the tasks in staffing a company and discuss ways in which organizations recruit and select new employees.

Staffing the Organization Staffing the organization is one of the most complex and important tasks of good HR management.

A. Recruiting Employees Recruiting is the process of attracting qualified persons to apply for the jobs that are open.

Recruiting decisions go both ways: an organization is recruiting an employee, while the prospective employee is selecting a job.

1. Internal Recruiting. Internal recruiting means considering present employees as candidates for openings.

2. External Recruiting. External recruiting involves attracting people outside of the organization to apply for jobs.

Since hiring the wrong employee can be a costly error, companies look to strive for a good person-job fit. One tool used is the realistic job preview that provides the applicant with a real picture of what performing the available job would be like.

B. Selecting Employees The intent of the selection process is to gather from applicants the information that will predict their job success and then to hire the candidates likely to be most successful. The organization can only gather information about factors that can be used to predict future performance; validation is the process of determining the predictive value of that information.

1. Application Forms. An application form is a method of gathering information about the applicant’s work history, educational background, and other job-related data; the application form should not contain questions about areas unrelated to the job, such as gender, religion, or national origin.

2. Tests. Tests of ability, skill, aptitude, or knowledge relevant to a particular job are usually the best predictors of job success, although tests of general intelligence or personality are occasionally useful as well.

3. Interviews. In a structured interview, questions are written in advance, and all interviewers follow the same question list with each candidate; in an unstructured interview, questions are asked at random.

4. Other Techniques. Organizations often require applicants to take physical exams and drug tests. Some organizations also run credit checks on prospective employees.

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KEY TEACHING TIPS •

Remind students that new employees are found both internally and externally in the recruitment process.

•

Remind students that all applicant information gathered in the selection process can be used to predict job success.

QUICK QUESTIONS •

What are the benefits and drawbacks of internal recruiting? External recruiting?

•

When do you think tests are useful in the selection process?

•

Why are interviews sometimes a poor predictor of job success? In what way(s) might an interview be an accurate predictor of job success?

HOMEWORK Interview a Manager Now might be a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment asks students to interview an HR manager at a local company and identify the steps in the selection process for an open position at that company.

Note: To give students greater insight into the work of an HR manager, they may also want to ask the following questions: •

What are the greatest challenges facing someone in your position?

•

What is the best and least favorite part of your job?

•

What advice would you give someone who wants to get into this line of work?

At-Home Completion Time: 1 hour

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Learning Objective 10-4: Describe the main components of a compensation and benefits system.

A. Compensation and Benefits A major factor in retaining skilled workers is a company’s compensation system—the total package of rewards that it offers employees in return for their labor.

1. Wages and Salaries Wages are paid hourly for time worked. A salary is an amount paid per month or year for discharging the responsibilities of a job. Companies may set wages and salaries by looking at competitors’ rates. In addition, firms must decide how their wage and salary levels will compare for different jobs.

2. Incentive Programs Incentive programs are special pay programs designed to motivate high performance. a. Individual Incentives. A bonus may be awarded to employees upon their reaching a sales quota or performance goal. Merit salary systems link raises to performance levels in non-sales jobs. Pay-for-performance (or variable pay) goes to middle managers on the basis of companywide performance, business-unit performance, personal record, or all three factors. b. Companywide Incentives. These programs apply to all employees in a firm. In profit-sharing plans, a firm’s profits earned above a certain level are distributed to employees. Gainsharing plans distribute bonuses to employees when a firm’s costs are reduced through greater work efficiency. Pay-for-knowledge plans distribute pay to workers who learn new skills and become proficient at different jobs.

3. Benefits Programs Benefits are compensation other than wages and salaries, including health, disability, and life insurance, and paid vacations and holidays. Most companies are required by law to provide social security retirement benefits and workers’ compensation insurance (insurance for compensating workers injured on the job). Many public companies allow employees to use payroll deductions to buy stock at discounted prices. Counseling services, on-site child-care centers, and reduced fees at gyms are other types of benefits increasingly being offered. a. Retirement Plans. Retirement plans are set up to pay pensions to workers when they retire. Contributions are made either totally by the company or by both the company and the employee. In recent years more companies have run into problems because they have not set aside enough money to cover the retirement funds for their workers. Some major companies have stopped contributing toward retirement accounts while others have transitioned employees to riskier 401(k) plans.

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b. Containing the Costs of Benefits. To contain the costs of benefits, employees can select from a variety of benefit alternatives in what is known as a cafeteria benefits plan.

KEY TEACHING TIPS •

Point out that a compensation system includes more than just wages and salaries; it includes incentives and employee benefit programs.

•

Students often confuse the types of incentive plans: Profit-sharing plans distribute profits earned above a certain level to employees; gainsharing plans distribute bonuses to employees who achieve greater work efficiency; and pay-for-knowledge plans encourage workers to learn new skills.

QUICK QUESTIONS •

In what way(s) is variable pay a better motivator than a merit raise?

•

How can an organization benefit from offering incentive programs to its employees?

•

How does a cafeteria benefit plan allow a company to cut costs?

Use In-Class Activity 3: Small-Group Discussion: What Motivates Employees?

Time Limit: 30 minutes

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Learning Objective 10-5: Describe how managers develop the workforce in their organization through training and performance appraisal.

Developing the Workforce A. Training Training is a necessary practice if the organization wants to maintain a qualified and effective workforce. It usually refers to teaching operational or technical employees how to do the job for which they were hired. Development refers to teaching managers and professionals the skills needed for present and future jobs.

1. Assessing Training Needs. The first step in developing a training plan is to determine what needs exist. Not all performance issues are due to lack of training; motivation, poor equipment or poor supervision may be at fault. As training programs are being developed, the manager should set specific and measurable goals specifying what participants are to learn. Managers should also plan to evaluate the training program after employees complete it.

2. Common Training Methods. After a company hires new employees, it must acquaint them with the firm and their new jobs. Lectures, readings, role-playing, practice using tools and materials, and web-based activities are among the methods of training. The purpose of the training and the content being provided will determine the preferred training method(s). On-the-job training occurs while employees are at work. Off-the-job training takes place at locations away from work, such as in simulated work environments or in classrooms. Vestibule training focuses on safety, learning, and feedback, rather than on productivity.

3. Evaluation of Training. Typical evaluation approaches include measuring one or more relevant criteria (such as attitudes or performance) before and after the training, and determining whether the criteria changed. Trainees may say that they enjoyed the training and learned a lot, but the true test is whether their job performance improves after their training.

B. Performance appraisal Performance appraisals are designed to show workers precisely how well they are doing their jobs. Typically, the appraisal process involves a written assessment issued on a regular basis. As a rule, however, the written evaluation is only one part of a multistep process.

This process begins when a manager defines performance standards for an employee.

Performance appraisals measure an employee’s performance on job requirements and jobrelated goals. Most companies have a step-by-step process for dismissing or demoting employees. In addition, firms usually have a plan to decide which employees will remain employees when downsizing or making cutbacks.

1. Common Appraisal Methods. Two basic categories of appraisal methods commonly used in organizations are objective methods and judgmental methods. Objective measures

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of performance include actual output (number of units produced), scrap rate, dollar volume of sales, and number of claims processed. Judgmental methods, including ranking and rating techniques, are the most common way to measure performance, though they have flaws.

2. Errors in Performance Appraisal. Errors or biases can occur in any kind of rating or ranking system. One common problem is recency error, the tendency to base judgments on the subordinate’s most recent performance because it is most easily recalled. But an appraisal is meant to evaluate performance over an entire time period. Halo error is allowing the assessment of an employee on one dimension to “spread” to ratings of that employee on other unrelated dimensions.

One interesting innovation in performance appraisal used in some organizations today is called 360-degree feedback, in which managers are evaluated by everyone around them— their boss, their peers, and their subordinates.

3. Performance Feedback. The last step in most performance appraisal systems is giving feedback to subordinates about their performance. This is usually done in a private meeting between the person being evaluated and his or her boss. It should be focused on the facts: the assessed level of performance, how and why that assessment was made, and how it can be improved in the future.

QUICK QUESTIONS 1. What types of training are offered at your place of work?

2. What do you think would be the biggest challenges of giving an employee performance appraisal?

Use In-Class Activity 2: Up for Debate: Performing Appraisals, Laying It On the Line Time Limit: 30 minutes

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Learning Objective 10-6: Discuss workforce diversity, the management of knowledge workers, and the use of a contingent workforce as important changes in the contemporary workplace.

New Challenges in the Changing Workplace New challenges arise as the economic and social environments of business change.

A. Managing Workforce Diversity Workforce diversity is the range of workers’ attitudes, values, beliefs, and behaviors that differ by gender, race, age, ethnicity, physical ability, and other relevant characteristics; many U.S. organizations are now creating more diverse workforces, embracing more women, ethnic minorities, and foreign-born employees than ever before. As diversity can be a competitive advantage, knowing how to manage it in the workforce is vital.

B. Managing Knowledge Workers Traditionally, employees added value to organizations because of what they did or because of their experience; today, however, many employees add value because of what they know.

1. The Nature of Knowledge Work. Knowledge workers tend to work in high-tech firms and are usually experts in some abstract knowledge base; they require highly specialized training, and not every organization is willing to make the human capital investments necessary to take advantage of these jobs. Ongoing training is a continuing need, as updating skills is necessary to maintain the competitive advantage as technical skills change.

2. Knowledge Worker. Knowledge workers, which include computer scientists, engineers, physical scientists, and game developers require extensive training. Companies must provide this training or risk losing employees to firms that will support this need; additionally, firms must ensure they are compensating these employees at market rates.

A. Contingent and Temporary Workers 1. Trends in Contingent and Temporary Employment. A contingent worker is a person who works for an organization on something other than a permanent or full-time basis.

Independent contractors, on-call workers, temporary employees (usually hired through outside agencies), and contract or leased employees are categories of contingent workers.

A separate category is part-time workers. In 2008, 10 percent of employed U.S. workers fit into one of these categories. In 2015, the percentage has risen to almost 19 percent.

2. Managing Contingent and Temporary Workers. The keys to understanding how to use such workers involve careful planning and understanding their advantages and disadvantages within the organization. In addition, managers must assess the real cost of using contingent workers.

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KEY TEACHING TIP Remind students that workforce diversity is the range of workers’ attitudes, values, beliefs, and behaviors that differ by gender, race, age, ethnicity, physical ability, and so on.

Remind students that training is a vital responsibility of the firm, to create and maintain competitive advantage, enhance productivity, and increase job satisfaction among employees.

Students should understand that performance appraisals, while often uncomfortable, are a necessary part of the evaluation process and work to ensure good communication and performance by employees by providing feedback to them.

Remind students that temporary and contingent workers are valuable assets to the organization.

QUICK QUESTIONS •

How can an organization benefit from welcoming a diverse workforce?

•

How do knowledge workers add value to an organization?

•

What are some advantages and disadvantages of hiring contingent workers?

HOMEWORK Search for three companies that are considered great places to work.

Now might be a good time to assign Application Exercise 9 from the end-of-chapter materials as homework.

At-Home Completion Time: 1 hour

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Learning Objective 10-7: Explain why workers organize into labor unions and describe the collective bargaining process.

Dealing with Organized Labor A labor union is a group of individuals working together to achieve shared job-related goals, such as higher pay, shorter working hours, more job security, greater benefits, or better working conditions. Labor relations refers to the process of dealing with employees who are represented by a union. Collective bargaining is the process by which union leaders and managers negotiate common terms and conditions of employment for the workers represented by unions.

A. Unionism Today Since the mid-1980s, U.S. labor unions have experienced increasing difficulties in attracting new members. In 2014, only 11.1 percent of the U.S. labor force is represented by a labor union.

The Future of Unions. The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), as well as independent major unions such as the Teamsters and the National Education Association (NEA), still play a major role in U.S. business. Unions in the traditional strongholds of goods-producing industries continue to wield considerable power as well. But, even large and influential unions such as the United Auto Workers (UAW) were forced to make significant concessions during the large-scale restructuring of the U.S. auto industry in 2008-2009. Also, auto plant closures and consolidation will reduce the number of auto jobs in the future.

Another issue affecting the future of unionism is the geographic shift in the U.S. economy.

For the most part, unionism in the United States started in the North and Midwest regions and in cities such as Detroit, Pittsburgh, Cleveland, St. Louis, and Chicago, the industrial Midwest. But over the past several decades, there has been a pronounced shift as businesses have moved their operations to the South and Southwest, areas that do not have a strong union heritage.

B. Collective Bargaining Collective bargaining is the process by which labor and management negotiate conditions of employment for union-represented workers and draft a labor contract.

1. Reaching Agreement on Contract Terms. By law, union leaders and management representatives must negotiate “in good faith.” Each party will have its starting point on an issue, but also its zone in which it can compromise while meeting that side’s needs. If an agreement cannot be reached, the willingness of each side to use tactics such as strikes, or mediation or arbitration come into play.

2. Contract Issues. The contract can address any number of issues, including control over hiring policies and work assignments, working hours, overtime policies, rest period arrangements, differential pay plays for shift employees, and grievance procedures. Some of the issues that are typically most important to union negotiators are:

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a. Compensation. A cost-of-living adjustment (COLA) is one of the most common tools for securing wage increases. Wage reopener clauses provide for renegotiating wage rates at preset times during the duration of the contract. b. Benefits. Typical employee benefit issues include the cost of insurance, retirement, paid holidays, and working conditions. c. Job Security. In many cases, demands for job security include the promise that a company will not move to another location and that, if the workforce is reduced, seniority will be used to determine which workers lose their jobs.

3. When Bargaining Fails. An impasse occurs when, after a series of bargaining sessions, management and labor have failed to agree on a new contract or a contract to replace an agreement that is about to expire. Each side has tactics at its disposal once an impasse is reached. a. Union Tactics. When their demands are not met, unions may bring a variety of tactics to the bargaining table. Historically, one of the most common tactics has been a strike. A strike occurs when employees walk off the job and refuse to work. Beginning in the 1990s, the number of strikes per year has declined dramatically.

Other union tactics include picketing, in which workers march at the entrance to the firm with signs explaining their reasons for striking; boycotts, in which union members agree not to buy products of a targeted employer; and a work slowdown, in which workers perform their jobs at a much slower pace than normal. b. Management Tactics. Lockouts occur when employers deny employees access to the workplace. A firm can also hire temporary or permanent replacements called strikebreakers. In some cases, an employer can obtain legal injunctions that either prohibit workers from striking or prohibit a union from interfering with its efforts to use replacement workers.

4. Mediation and Arbitration. In mediation, a neutral third-party offers advice and suggestions in settling a labor-management dispute; in voluntary arbitration, the neutral third party dictates a settlement between the two sides, which have agreed to submit to outside judgment. Compulsory arbitration is used to settle disputes between the government and public employees.

KEY TEACHING TIPS •

Remind students that the official term describing the process of dealing with employees represented by a labor union is labor relations.

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•

Remind students that collective bargaining is much like the negotiation process. When involved with collective bargaining, both labor and management present demands and then focus on identifying the bargaining zone.

•

Be sure students understand that a contract involves many more topics than simply pay scales. Benefits and job security frequently are very important topics in a negotiation.

•

Students often confuse mediation and arbitration. Mediation involves a third party who makes recommendations to solve a dispute; arbitration involves a third party who makes a legally binding decision to solve a dispute.

QUICK QUESTIONS •

In most sectors, unions are in a weakened position compared with many decades ago.

How has this affected the way in which labor works with management?

•

What issues are typically most important to union negotiators when collective bargaining with management?

•

When bargaining fails between labor and management, what are some union tactics that can be brought to the bargaining table? Management tactics?

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

IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker: Writing a Job Description Activity Overview: This activity asks students to write a job description for an instructor and for a student.

Time Limit: 45 minutes What to Do: 1. Review what is included in a job description, then ask students to think about what variables should be included in their instructor’s job description and what should be included in a student’s job description, if one were to exist, making individual notes along the way. (10 minutes) 2. Split the class into small groups, asking members of each group to share what they came up with in Step 1. (10 minutes) 3. Ask each group to further discuss what should be included in their instructor’s job description and in a student’s job description, considering any other factors that might come to mind that have not already been discussed. Write a final job description for both instructor and student. (10 minutes) 4. Reassemble the class and discuss each group’s suggestions. (15 minutes) Don’t Forget: There are many roles that instructors play in a college or university other than what students see in the classroom.

Wrap-Up: Review the purpose of a job description, highlighting some of the major elements included in most college or university instructors’ job descriptions.

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In-Class Activity 2: Up for Debate: Performing Appraisals, Laying It On the Line Activity Overview: This activity asks students to consider the steps involved in determining whether to fire someone.

Time Limit: 30 minutes What to Do: 1. Divide the class into three-member groups and ask them to read the Entrepreneurship and New Ventures feature in the textbook. (10 minutes) 2. Ask groups to consider the points Dan Yoo describes in the case. Do you think these points make sense? Do they make sense for employees? Do they make sense for employers? (10 minutes) 3. Regroup the class as a whole and discuss each group’s input, then ask the class to come up with a final decision. (10 minutes) Don’t Forget: When a person has to be let go from a position, it is not personal. It is based on performance data.

Wrap-Up: Wrap up the activity by briefly discussing what students think the future of performance appraisals will look like. Things are changing in this area and the students will be in the middle of these changes.

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In-Class Activity 3: Small-Group Discussion: What Motivates Employees?

Activity Overview: This activity asks students to consider what companywide incentives might motivate workers who work in specific jobs.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and assign each group to one of the jobs below: (5 minutes) • Cook at a fast-food restaurant • Waitress at a local diner • Groundskeeper • Computer technician at a small firm • Janitor • College professor 2.

Ask each group to brainstorm what incentives would be especially motivating for a worker performing the assigned job; remind students to consider both tangible and intangible incentives. (10 minutes)

3.

Reassemble the class and ask each group to share their results, allowing all students to share input. (15 minutes)

Don’t Forget: This activity can be completed using any type of job as the basis for discussion. Remind students to consider “reasonable” costs to the company as they brainstorm for ideas.

Wrap-Up: Bring the activity to a close by recapping each group’s conclusion, reminding students that tangible incentives, such as various benefits packages, can be motivating but that intangible incentives, such as employee recognition programs, can also be motivating.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 10-1. What are the advantages and disadvantages of internal and external recruiting? Under what circumstances is each more appropriate?

Internal recruiting builds morale and motivation for other employees who see peers being promoted; in addition, with internal recruiting, there is no need to teach the culture and the nature of the business. In discussing disadvantages of internal recruiting, students will likely add that such recruiting may lead to fewer new ideas, may create other openings in the company that will need to be filled, and may create resentment among other employees who are not promoted. External recruiting, on the other hand, brings new ideas and expertise, increases workforce diversity, and provides new information about the competition and the marketplace. Disadvantages of external recruiting include increased training costs and temporary efficiency loss, loss of morale among current employees, and friction regarding salary differences if the outsider is more highly paid. (Learning Objective 3 – AACSB – application of knowledge) 10-2. Why is the formal training of workers so important to most employers? Why don’t employers simply let people learn about their jobs as they perform them?

Employers need to ensure that workers are performing their jobs correctly and efficiently in order to prevent costly errors. Also, in order to be socially responsible to employees, suppliers, shareholders, and customers, firms must train their workers in the latest technology, the most efficient production processes, and the nature of the industry. Letting people learn solely on the job increases risks, and decreases efficiencies for a longer period of time than if training is provided. (Learning Objective 5 – AACSB – application of knowledge) 10-3. What different forms of compensation do firms typically use to attract and keep productive workers?

Visit MyBizLab for suggested answers. (Learning Objective 4 – AACSB – application of knowledge) 10-4. What is a knowledge worker? What strategies do companies use to retain knowledge workers?

Knowledge workers are employees who add value to organizations because of what they know. To retain these workers, companies need to compensate them sufficiently. This may include financial compensation at market rates as well as training opportunities to help them maintain and update their knowledge and skills. (Learning Objective 6 – AACSB – application of knowledge)

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QUESTIONS FOR ANALYSIS 10-5. What are your views on drug testing in the workplace? What would you do if your employer asked you to submit to a drug test?

Visit MyBizLab for suggested answers. (Learning Objective 2 – AACSB – reflective thinking) 10-6. Workers at Ford, GM, and Chrysler are represented by the UAW. However, the UAW has been much less successful in its attempts to unionize U.S. workers employed at Toyota, Nissan, and Honda plants in the United States. Why do you think this is so?

These workers may feel they have satisfactory wages, adequate benefits, satisfactory working conditions, and reasonable job security. (Learning Objective 4 – AACSB – reflective thinking) 10-7. What are the advantages and challenges of having a diverse workforce?

Answers will vary, but many students will recognize that a diverse workforce provides more creativity, a variety of opinions and decision making styles, and opportunities for creating a competitive advantage. The challenges are those diverse opinions may create communication problems possibly creating conflict in the organization. (Learning Objective 6 – AACSB – reflective thinking) 10-8. How much will benefit considerations affect your choice of an employer after graduation?

What types of benefits would be most and least appealing to you and why?

Visit MyBizLab for suggested answers. (Learning Objective 4 – AACSB – reflective thinking) APPLICATION EXERCISES 10-9. Go online and search for at least three companies that are considered great places to work.

Describe the compensation, benefits, and perks at each of these companies. Of the three, which is most appealing to you and why?

Answers will vary but students will probably focus on companies that pay better, provide better benefits, and flexible working conditions, i.e., Google, etc. (Learning Objective 4 – AACSB – application of knowledge) 10-10. Interview the HR manager at a local company about their hiring processes. Describe how they recruit employees to apply for jobs, the steps in the selection process, and their orientation program for new employees.

Answers will vary based on the company and the position. However, most HR managers will

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reveal how certain recruitment tools work better than others, how certain jobs require preemployment testing, and how the value placed on the interview process may vary depending on the job or other factors. (Learning Objective 3 – AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE, 10-11 TO 10-15 (Learning Objectives 2, 3, and 4 – AACSB – interpersonal relations and teamwork, reflective thinking) Answers will be determined by the type of business (bricks and mortar, e-commerce, etc.), the numbers and types of employees needed, the competition, prevailing wages, projected company finances, normal industry practices, etc.

TEAM EXERCISE: HANDLING THE LAYOFFS 10-16 TO 10-20 (Learning Objectives 2 and 6 – AACSB – ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking) This should be an interesting discussion because students will bring their own perspectives on race, gender, and job performance to this exercise. Students should focus on job performance and contributions to the company when making their decisions but the discussion will be wide ranging covering the legal issues, diversity, perception, etc.

10-16. Students must keep in mind all the non-discrimination laws, including Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Age Discrimination in Employment Act, and others.

10-17. Answers will vary, but students must address the legal and ethical issues they identified in answering the previous question.

10-18. This is the time for students to compare notes, and again ensure that both legal and ethical issues are addressed.

10-19. The students must come to an agreement on which single employee will be laid off. The decision must be based on job performance and contributions to the company.

10-20. The Entrepreneurship and New Ventures feature provides some insight into how to communicate the decision to the employee who is to be laid off. The group must also determine how to communicate the decision to the remaining employees, as the firm does not want to lose them, or for them to lose faith in the company and its management.

EXERCISING YOUR ETHICS: OPERATING TACTICALLY (Learning Objective 7 – AACSB – ethical understanding and reasoning, reflective thinking) 10-21. What are the ethical issues in this situation?

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The key ethical issue is dishonesty—your manager is encouraging you to deliberately mislead employees and to actively interfere with organizing activities. Furthermore, terminating a key organizer is blatant intimidation.

10-22. What are the basic arguments for and against extreme measures to fight unionization efforts?

Basic arguments for extreme measures to fight unionization include the need to limit spending on human resources. Basic arguments against extreme measures include the questionable ethics of this approach and the negative impact on morale, which could negatively affect efficiency and effectiveness.

10-23. What do you think most managers would do in this situation? What would you do?

Answers will vary, but older, more experienced managers may be more likely to stand up to their bosses, refusing to mislead their employees.

CASES: A UNIQUE PARTNERSHIP DRIVES WEGMANS (Learning Objective 4 – AACSB – reflective thinking) When discussing this case, students should focus on the pros and cons of internal and external recruiting, recognizing that internal recruitment builds loyalty and often leads to lower employee turnover but recognizing that not every position can be filled from within.

Plus, external recruits can bring a different and valuable perspective.

When discussing the training program, students need to focus on the skills that the managers will ultimately need. The employee appraisal question should generate much discussion with many students basing their answers on how effective they think their company’s annual appraisal is.

10-24. If you were an HR executive at Wegmans, would you focus more on internal recruiting or on external recruiting? Would your strategy for higher-level positions differ from your strategy for lower-level positions? How would current economic conditions influence your strategy?

10-25. As an HR executive at Wegmans, you need to hire a group of new employees as part of your management-trainee program—people who will be put on a track leading, ultimately, to positions as store managers. Briefly outline your program for developing these employees.

10-26. If you were an employee at Wegmans, how would you expect your annual performance appraisal to be conducted? Given the company’s customer-relations strategy, which appraisal methods do you think would be most appropriate?

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A REALLY GREAT PLACE TO WORK (Learning Objective 4 – AACSB – reflective thinking) Students’ perspective will frame their answer to this question based on their current experience in the workforce, their experiences with wages and salaries, and other benefits described. Students at different life stages will find that different benefits appeal to them.

One possible trade-off is the location of the company, though Cary is near the Research Triangle area in North Carolina. Another trade-off is that the company is privately-held, meaning that publicly-traded stock options are unavailable as an incentive.

Policies and benefits that support the work/life balance include many of the benefits offered

by SAS Institute: a relatively short work week, childcare and bring-your-child-to-work occasionally, onsite pharmacies, farmer’s market, and health clinic. All of these add convenience and make life easier for the employees. Easier usually also means less stress, which is always a positive.

Challenges a manager faces in this environment still must revolve around job performance of the employees and contributions each employee makes to the company. The lack of turnover actually makes it even more important to evaluate employees as accurately as practical on these criteria.

10-27. After reading about SAS Institute, what would appeal to you most about working there?

10-28. What trade-offs is SAS making to offer the benefits and culture described?

10-29. What types of policies and benefits do you believe are most supportive of work/life balance?

10-30. What challenges might you face as a manager working in this environment? How could you overcome these challenges?

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CRAFTING A BUSINESS PLAN PART 3: PEOPLE IN ORGANIZATIONS This part of the business plan asks students to think about their employees, the jobs they will be performing, and the ways in which they can lead and motivate them. Students take the different job titles they created in the organizational chart in Part 2 and give thought to the skills that employees will need to bring to the job before they begin. They also consider the training they’ll need to provide employees after they are hired, as well as how they’ll compensate their employees. Part 3 of the business plan also asks students to consider how they’ll lead employees and keep them happy and motivated.

Files to Provide Students: For this part of the project, students will be asked to complete Part 3: People in Organizations (see below). If students have already started working on the business plan project, they should continue using the student.

Part 3 Estimated At-Home Completion Time: If done well, this section will require a minimum of 3 to 5 hours. As noted previously, because some companies will have more job descriptions and job specifications than others, you may want to limit the number you ask students to complete.

Homework Deliverable from Students: The length of this section should be somewhat consistent, although some variance can be expected depending on the size and complexity of the business. You should expect at least 3 to 5 pages in this section.

STUDENT BUSINESS PLAN PROJECT TEMPLATE PART 3: PEOPLE IN ORGANIZATIONS CORPORATE CULTURE What do you see as the “corporate culture” of your business? What types of employee behaviors, such as organizational citizenship, will you expect?

Hint: Will your business demand a casual environment or a more professional environment?

Refer to the discussion on employee behavior in Chapter 8 for information on organizational citizenship and other employee behaviors.

LEADERSHIP PHILOSOPHY What is your philosophy on leadership? How will you manage your employees day-to-day?

Hint: Refer to the discussion on leadership in Chapter 9 to help you formulate your thoughts.

JOB DESCRIPTIONS Looking back at your organizational chart in Part 2, briefly create a job description for each team member.

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Hint: As you learned in Chapter 10, a job description lists the duties and responsibilities of a job, its working conditions, and the tools, materials, equipment, and information used to perform it. Imagine your business on a typical day. Who is working and what are each person’s responsibilities? (Note that if your business is very large, you should ask your instructor how many positions he or she would like you to create job descriptions for.)

JOB SPECIFICATIONS Next, create a job specification for each job, listing the skills, credentials, and qualifications needed to perform the job effectively.

Hint: As you write your job specifications, consider what you would write if you were making an ad for the position. What would the new employee need to bring to the job in order to qualify for the position?

Insert Job Title #1: Insert Needed Skills/Credentials/Qualification for Job: Insert Job Title #2: Insert Needed Skills/Credentials/Qualification for Job: Insert Job Title #3: Insert Needed Skills/Credentials/Qualification for Job: TRAINING EMPLOYEES What sort of training, if any, will your employees need once they are hired? How will you provide this training?

Hint: Refer to the discussion of training in Chapter 10. Will you offer your employees on-the-job training? Off-the-job training? Vestibule training?

COMPENSATION A major factor in retaining skilled workers is a company’s compensation system—the total package of rewards that it offers employees in return for their labor. Part of this compensation system includes wages/salaries. What wages or salaries will you offer for each job? Why did you decide on that pay rate?

Hint: Refer to Chapter 10 for more information on forms of compensation. You may also want to check out sites like www.salary.com, which includes a salary wizard you can use to determine how much people with different job titles are making in your area and across the United States.

INCENTIVES As you learned in Chapter 10, incentive programs are special programs designed to motivate high performance. What incentives will you use to motivate your workforce?

Hint: Be creative and look beyond a simple answer, such as giving pay increases. Ask yourself, who are my employees and what is important to them? Refer to Chapter 10 for more information on the types of incentives you may want to consider.

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Chapter 11: Marketing Processes and Consumer Behavior Chapter Overview Many students think that marketing is merely sales or advertising. Actually, sales and advertising are just a small part of the overall marketing process. Think of a product that you buy often. You might not realize that everything about that product—from the time it is created, produced, packaged, and shipped to you—involves various facets of marketing.

This chapter explains the concept of marketing and discusses the five forces that constitute the external marketing environment. It also explains the purpose of a marketing plan, identifies the four components of the marketing mix, and discusses the necessity of identifying market segments. As the chapter unfolds, many variables surrounding both the consumer and organizational markets are discussed. A focus is provided on distinguishing features between products and services and the importance of branding and packaging. The chapter also discusses the consumer buying process, organizational markets, and key considerations in the new product development process. Finally, it looks at the challenges that arise in adopting an international marketing mix and the ways in which small businesses can benefit from an understanding of the marketing mix.

Learning Objectives 11-1. Explain the concept of marketing and identify the five forces that constitute the external marketing environment.

11-2. Explain the purpose of a marketing plan and identify its main components.

11-3. Explain market segmentation and how it is used in target marketing.

11-4. Discuss the purpose of marketing research and compare the four marketing research methods.

11-5. Describe the consumer buying process and the key factors that influence that process.

11-6. Discuss the four categories of organizational markets and the characteristics of business-to-business (B2B) buying behavior.

11-7. Discuss the marketing mix as it applies to small business.

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

Description

1. Ice-Breaker: Assessing the Marketing Environment

Students consider various elements from the marketing environment that affect specific industries.

Students consider all the valuable information they give to others about themselves.

Students are divided into teams to debate the advantages and disadvantages of using Social Networking to find jobs.

Students consider what a foreign visitor might notice about the American marketplace.

2. Small-Group Discussion: Data Mining 3. Up for Debate: Social Networking and Job Seeking 4. Small-Group Discussion: Never Give a German a Yellow Rose

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Time Limit 30 min.

20 min.

30 min.

30 min.

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CHAPTER OUTLINE Learning Objective 11-1: Explain the concept of marketing and identify the five forces that constitute the external marketing environment.

What Is Marketing?

The American Marketing Association defines marketing as “activities, a set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.”

A. Delivering Value Consumers buy products that offer the best value when it comes to meeting their needs and wants.

1. Value and Benefits. Value compares a product’s benefits with its costs; benefits include the product’s functions and emotional satisfaction associated with owning, experiencing, or possessing it. But, costs, expenditure of buyer’s time, and even the emotional costs of making a purchase decision factor into determining value. Value = Benefits/Costs. A satisfied customer perceives the benefits derived from the purchase to be greater than its costs.

2. Value and Utility. Products provide utility, which is the product’s ability to satisfy a human want or need. Marketing strives to provide four kinds of utility—form utility (designing products with features customers want), time utility (providing products when customers want them), place utility (providing products where customers want them), and possession utility (providing terms of sale that result in transferring product ownership to customers).

B. Goods, Services, and Ideas Consumer goods are tangible products that consumers purchase for final consumption; firms that sell these goods are engaged in consumer marketing. Industrial goods are products that are purchased by companies to be used in further production of goods; firms that sell products to other businesses are engaged in industrial marketing. Services are products with intangible (nonphysical) features, such as professional advice, improved safety procedures, timely information for decisions, haircuts, or arrangements for a vacation. Service marketing is the application of marketing for services.

C. Relationship Marketing Relationship marketing focuses on building long-lasting relationships between customers and suppliers. Customer relationship management (CRM) is an organized method that a business uses to build better information connections with clients, to strengthen relationships.

1. Data Warehousing and Data Mining for Building Customer Relationships. Data warehousing is the compiling and storage of consumer data; data mining allows for the Copyright © 2017 Pearson Education, Inc.

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sifting, sorting, and searching for previously undiscovered customer information and preferences. This leads to clearer pictures of customer preferences, and allows a business to build closer relationships.

D. The Marketing Environment Marketing decisions are affected by various influences in the external environment.

1. Political and Legal Environment. Political activities may result in favorable laws and regulations that may open new international business opportunities.

2. Sociocultural Environment. Elements from this segment of the environment include changing demographics, values and religion, buying behaviors, preferences, and activities as well as many other factors.

3. Technological Environment. Technological change happens so quickly in some industries that existing products become obsolete very quickly, while new-product introductions replace them.

4. Economic Environment. Economic conditions affect many facets of marketing, including consumer spending patterns and marketers’ plans for product offerings, pricing, and promotional strategies. Interest rates and inflation concern marketers, as does the general business cycle.

5. Competitive Environment. All marketers compete for the purchasing power of consumers. Marketers must convince buyers that they should purchase one company’s products rather than another’s. This sometimes occurs through product differentiation and consumer segmentation. Substitute products may not look alike or they may seem very different from one another, but they can fulfill the same need; brand competition occurs between similar products and is based on buyers’ perceptions of the benefits of products offered by particular companies; international competition matches domestic products against foreign products.

KEY TEACHING TIPS •

Students often forget that marketing is more than just advertising and sales. It is a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships.

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Make sure that students grasp the concept of utility—the ability of a product to satisfy a human want or need—as it is a difficult concept for some students.

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Consumer marketing involves the sale of consumer goods and services to consumers; industrial marketing involves the sale of industrial goods and services to other companies.

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•

Relationship marketing emphasizes building lasting relationships with customers and suppliers. What do organizations hope to gain from relationship marketing?

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Make sure students understand the distinction between data warehousing and data mining.

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Reinforce that every marketer is faced with forces from the external environment, including the political-legal, sociocultural, technological, economic, and competitive environments.

QUICK QUESTIONS •

How does a marketer create form utility, time utility, place utility, and ownership utility?

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What are some examples of consumer goods? What about industrial goods?

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Relationship marketing emphasizes building lasting relationships with customers and suppliers. What do organizations hope to gain from relationship marketing?

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Make sure students understand the distinction between data warehousing and data mining.

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What are some common political-legal factors that affect marketing?

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What are some common sociocultural factors that affect marketing?

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What are some common technological factors that affect marketing?

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What are some common economic factors that affect marketing?

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What are some examples of competing products?

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Why do marketers attempt to differentiate their products?

Use In-Class Activity 1: Ice-Breaker: Assessing the Marketing Environment Time Limit: 30 minutes Use In-Class Activity 2: Small-Group Discussion: Data Mining Time Limit: 20 minutes

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Learning Objective 11-2: Explain the purpose of a marketing plan and identify its main components.

The marketing plan is a detailed strategy for focusing marketing efforts on customers’ needs and wants. The plan identifies the marketing objectives, stating what marketing will accomplish in the future. It contains a strategy that identifies the specific activities and resources that will be used to meet the needs and desires of customers in the firm’s chosen target markets, so as to accomplish the marketing objectives.

Every well-founded plan should begin with objectives or goals, setting the stage for everything that follows. Marketing objectives, the goals the marketing plan intends to accomplish, are the foundation that guides all of the detailed activities in the plan. The marketing objectives themselves exist solely to support the company’s overall business mission.

A. Marketing Strategy: Planning the Marketing Mix Marketing strategy identifies the planned marketing programs, all the marketing activities that a business will use to achieve its marketing goals, and when those activities will occur. A company’s marketing managers are responsible for planning and implementing all the activities that result in the transfer of goods or services to its customers. Marketing strategy focuses on the needs and wants of customers in the chosen target markets. It also includes four basic components, known as the marketing mix. This mix consists of the “Four Ps” of marketing: product, pricing, place, and promotion.

1. Product. The product is a good, service, or idea designed to fill a consumer need.

Meeting consumer needs often requires that marketers change existing products. a. Product Differentiation. Product differentiation is the creation of a feature or image that makes a product differ enough from existing competitive products to attract consumers.

2. Pricing. Pricing must be set to support a variety of costs, yet prices cannot be so high that consumers turn to competing products. Low prices, for example, generally lead to larger sales volumes. High prices usually limit market size but increase profits per unit. High prices may also attract customers by implying that a product is of high quality.

3. Place (Distribution). Place refers to the where and how customers get access to the products they buy. Distribution activities are concerned with getting the product from the producer to the consumer. The place can be a retail store, direct delivery to the customer, or on the Internet. Marketers use channels to distribute products. Manufacturers can sell to other companies that then sell to retailers that sell to the final consumers. Others only sell to retailers, and others sell directly to the final consumers.

4. Promotion. Promotion refers to techniques of communicating information about products. Promotion includes a combination of personal selling and/or nonpersonal selling, including advertising, sales promotion, and public relations and direct or interactive marketing.

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a. Advertising is any form of paid nonpersonal communication used by an identified sponsor to persuade or inform potential buyers about a product. b. Personal selling is person-to-person sales, frequently used in business-to-business marketing. The retail situation, though, is also personal selling. c. Sales promotion involves one-time direct inducements to buyers. These inducements may include premiums (free gifts), coupons, or package inserts, meant to tempt consumers to buy the products. These are “deals” of limited duration. d. Public relations includes all communication efforts directed at building goodwill.

5. Blending it all Together: Integrated marketing strategy ensures that the Four Ps blend together so that they are compatible with one another and with the company’s nonmarketing activities as well.

KEY TEACHING TIPS •

Reinforce that although price may be the easiest of the Four Ps to change, a price that is too high fails to attract buyers, and a price that is too low yields little profit.

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Make sure students understand that place is concerned with all of the activities involved in getting products from producers to consumers.

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Reinforce that promotion refers to techniques—advertising, personal selling, sales promotions, publicity, and PR—for communicating information about products.

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Remind students that the marketing mix consists of product, price, promotion, and placement. It is affected by variables such as consumer characteristics, consumer needs, emerging marketing, and competition.

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Stress that the elements of the marketing mix—the Four Ps—are treated similarly by small businesses and large businesses, only the implementation may change.

QUICK QUESTIONS •

What are the 4Ps?

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What is an integrated marketing strategy and why is it important?

HOMEWORK CRM and the Marketing Mix Now is a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. This assignment is designed to get students thinking about how to use the different elements of the marketing mix to create an ongoing relationship with customers.

At-Home Completion Time: 30 minutes

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Learning Objective 11-3: Explain market segmentation and how it is used in target marketing.

Target Marketing and Market Segmentation Target markets are groups of people or organizations on which a firm’s marketing efforts are focused. Market segmentation divides a market into categories with similar wants and needs who can be expected to show interest in the same products. Segmentation is a strategy for analyzing consumers, not products.

Identifying Market Segments Members of a market segment must share common traits that will affect their purchasing decisions. The most important variables are: A. Geographic Segments Consumers in certain geographic regions exhibit characteristics and buying patterns that are typical of those regions. Geographic variables are the geographical units, from countries to neighborhoods that may be considered in a segmentation strategy.

B. Demographic Segments Demographic variables describe populations, including such traits as age, income, gender, ethnic background, marital status, race, religion, and social class. A segment can focus on a single trait, or on a combination of traits.

C. Geo-demographic variables Geo-demographic segmentation is a combination strategy. Geo-demographic variables are a combination of geographic and demographic traits. Looking at people through this combination of traits is becoming the most common segmentation tool.

D. Psychographic Segments Psychographic variables include lifestyles, opinions, interests, and attitudes as these impact people’s decision process.

E. Behavioral Segmentation Behavioral segmentation uses behavioral variables to market items, including such categories as usage rate (light, moderate, heavy user), situation (holiday, seasonal) or uniqueness (very specific features of the product).

KEY TEACHING TIP The variables that can be used to divide a market into segments include geographic segmentation, demographic segmentation, geo-demographic segmentation, psychographic segmentation, and behavioral segmentation. Frequently, target markets are identified based on some combination of variables.

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QUICK QUESTIONS •

What demographic variables would affect your purchase of a cell phone?

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Would other variables affect your purchase of a cell phone, such as behavioral or psychographic variables?

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How can psychographic variables—unlike geographic and demographic variables—be changed by marketing efforts?

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Learning Objective 11-4: Discuss the purpose of marketing research and compare the four marketing research methods.

Marketing Research Marketing research, the study of what customers need and want and how best to meet those needs and wants, is a powerful tool for gaining decision-making information. Its role is to increase competitiveness by clarifying the interactions among a firm’s stakeholders, marketing variables, environmental factors, and marketing decisions.

A. The Research Process Market research can occur at almost any point in a product’s life cycle. Typically, however, it’s used in developing new or altered products.

1. Study the current situation. What is the need and what is being done to meet it?

2. Select a research method. In choosing from a wide range of methods, marketers must consider the effectiveness and costs of different options.

3. Collect data. Secondary data are already available from previous research. When secondary sources are unavailable or inadequate, researchers must obtain primary data, new data from newly performed research. Primary data is gathered for the specific purpose, while secondary data will have been gathered for other reasons, but can be applied to other studies.

4. Analyze the data. Data are of no use until organized into information.

5. Prepare a report. This report should sum up the study’s methodology and findings. It should also identify solutions and, where appropriate, make recommendations on a course of action.

B. Research Methods The success of a research study often depends on the method a research team uses. There are four basic methods of market research.

1. Observation. Observation involves watching and recording consumer behavior.

Information technology systems, including live camera feeds, electronic scanners and data files, data storage of television viewing and website activity, allow marketers to observe consumer preferences rapidly and accurately.

2. Surveys. One way to get useful information is by performing surveys, a method of collecting data in which the researcher interacts with people to gather facts, attitudes, or opinions, either by mailing out or e-mailing questionnaires, by telephone calls, or by conducting face-to-face interviews. Most surveys now are conducted online. Surveys can provide information that cannot be learned through observation.

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3. Focus Group. In a focus group, participants are gathered in one place, presented with an issue, and asked to discuss it. The researcher takes notes but provides only a minimal amount of structure and exerts minimal control. This technique allows researchers to explore issues too complex for questionnaires.

4. Experimentation. Experimentation compares the responses of the same or similar people under different circumstances or regarding different products, or product features.

HOMEWORK Market Research Now is a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment is designed to get students thinking about secondary data sources and how to apply it to target marketing and the basis upon which target markets are segmented.

At-Home Completion Time: 45 minutes

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Learning Objective 11-5: Describe the consumer buying process and the key factors that influence that process.

Understanding Consumer Behavior Consumer behavior is the study of the decision process by which people buy and consume products.

A. Influences on Consumer Behavior Influences on consumer behavior can include psychological (motivations, perceptions, ability to learn, attitudes), personal (lifestyle, personality, economic status), social (family, opinion leaders, and reference groups such as friends, coworkers, and professional associates), and/or cultural (culture, subculture, social class—background, occupation, income) elements. When consumers exhibit brand loyalty, they regularly purchase products because they are satisfied with the products’ performance or benefits. The influence elements have minimal impact when brand loyalty is strong.

B. The Consumer Buying Process Various models have been constructed to help marketers understand how consumers come to purchase products; marketers use this information to develop marketing plans. The consumer buying process includes five steps: 1. Problem/Need Recognition. The consumer recognizes a problem or a need.

2. Information Seeking. Consumers seek information from personal sources, marketing sources, public sources, and experience. Depending on the complexity of the purchase, the search for information may not be extensive.

3. Evaluation of Alternatives. Consumers compare products before deciding which one(s) meet their needs.

4. Purchase Decision. Ultimately, consumers make purchase decisions. Rational motives involve the logical evaluation of product attributes, such as cost, quality, and usefulness.

Emotional motives involve nonobjective factors and include sociability, imitation of others, and aesthetics.

5. Postpurchase Evaluation. Only satisfied customers will likely make repeat purchases.

KEY TEACHING TIP •

The consumer buying process consists of a series of steps taken by consumers when making purchases: (a) Problem/Need Recognition, (b) Information Seeking, (c) Evaluation of Alternatives, (d) Purchase Decision, and (e) Postpurchase Evaluation.

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QUICK QUESTIONS •

What are some examples of psychological influences and personal influences on consumers? What about social influences and cultural influences?

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What is the difference between rational motives and emotional motives when consumers make a purchase decision? Are emotional motives related to psychographics?

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What factors might consumers consider when evaluating alternatives in the consumer buying process?

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Learning Objective 11-6: Discuss the four categories of organizational markets and the characteristics of business-tobusiness (B2B) buying behavior.

Organizational markets and buying behaviors are quite different from consumer markets and consumer behaviors, even though many products eventually end up in the hands of consumers.

A. Business Marketing Organizational markets fall into four categories: service companies, industrial, reseller, and government/institutional markets.

1. Services Market. The services companies market encompasses the many firms that provide services to the purchasing public.

2. Industrial Market. The industrial market includes businesses that buy goods that are either converted into other products or goods that are used up during production.

3. Reseller Market. The reseller market consists of marketing intermediaries, such as wholesalers and retailers that buy finished products and resell them.

4. Government and Institutional Market. In addition to federal and state governments, the institutional market consists of nongovernment organizations, such as hospitals, churches, and museums, that also use supplies and equipment as well as legal, accounting, and transportation services.

B. B2B Buying Behavior Organizational buying behavior bears little resemblance to consumer buying practices.

Differences include the buyers’ purchasing skills and an emphasis on buyer-seller relationships.

1. Differences in Buyers. Industrial buyers are trained, professional, specialized, and expert, which is important given the amount of money at stake in industrial purchases.

2. Differences in the Buyer-Seller Relationship. Industrial buying situations often involve frequent, enduring buyer-seller relationships, emphasizing person selling by trained representatives who understand the needs of each customer.

C. Social Media and Marketing Social networking as used by marketers today refers to communications that flow among people and organizations interacting through an online platform that facilitates building social relations among its users.

1. Viral Marketing and Social Networking. Viral marketing is a form of marketing that relies on social networking and the Internet to spread information like a “virus” from person to person.

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2. Web-Driven Revenue with Social Networking. Although many major consumer companies have their own Facebook page, small businesses, too, use social media channels to increase revenues by networking with customers in target markets.

Viral marketing and social networking can lead to consumer awareness faster and with wider reach than traditional media messages, and at a lower cost.

D. The International Marketing Mix Foreign consumers differ from domestic buyers in language, customs, business practices, and consumer behavior. Marketing products internationally means mounting a strategy to support global business operations.

1. International Products Some products can be marketed internationally without modifications, whereas other products need to be modified to fit the needs of a local market.

2. International Pricing Many factors that affect domestic pricing also affect international pricing; additional factors affecting global pricing are the costs of transportation and selling abroad.

3. International Distribution Distribution networks in other countries may be costly. Many domestic marketers avoid time delays by buying existing businesses with already-established distribution and marketing networks.

4. International Promotion Many American promotional tactics do not succeed in other countries. Marketers must consider differences in language and culture when promoting products abroad.

KEY TEACHING TIP •

In the consumer market, buying and selling transactions are visible to the public. Equally important, though far less visible, are organizational (or commercial) markets.

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The industrial market involves different complexities from the consumer market, in particular due to the difference in buyers and the buyer-seller relationship.

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International marketing requires examining each of the 4Ps to determine what adaptations, if any, need to be made for selling in specific countries.

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Reinforce that marketers face an extreme advantage when distributing products abroad if they can deliver through already-established networks.

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QUICK QUESTIONS •

How are farmers and manufacturers, for example, included in the industrial market?

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What are the roles of wholesalers and retailers in the reseller market?

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How are consumer-seller relationships different from buyer-seller relationships?

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Why is social media especially important to small businesses? Remind students that one consideration when determining the difference between domestic pricing and international pricing is the higher cost of transporting and selling products abroad.

Use In-Class Activity 4: Small-Group Discussion: Never Give a German a Yellow Rose Time Limit: 30 minutes

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Learning Objective 11-7: Discuss the marketing mix as it applies to small business.

Small Business and the Marketing Mix Far more small businesses fail than succeed. The successful small businesses have learned skillful application of the marketing mix and careful consideration of each element in the marketing mix.

A. Small-Business Products Understanding the target market and the targeted group’s wants is critical.

B. Small-Business Pricing Profits are often determined by accurately assessing costs from the start. Haphazard pricing can sink a firm with a good product.

C. Small-Business Distribution The most critical aspect of distribution for small businesses is facility location, particularly relative to customer location. Small businesses can often react to changes in needs more quickly than larger firms.

D. Small-Business Promotion Understanding promotional costs, as well as benefits of chosen promotional tools, may be the most critical steps involved.

KEY TEACHING TIP Students need to understand that establishing the Marketing Mix is especially critical for small businesses.

Use In-Class Activity 3: Small-Group Discussion: Social Networking and Job Seeking Time Limit: 30 minutes

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

IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker: Assessing the Marketing Environment Activity Overview: This activity asks students to consider various elements from the marketing environment that affect specific industries.

Time Limit: 30 minutes What to Do: 1. Divide the class into five-member groups and assign an industry to each group. For example, you may use the automotive industry, fast-food industry, apparel industry, airline industry, and the banking industry. (5 minutes) 2. Ask each group to discuss how variables from each of the five environments highlighted in the textbook—the political-legal, sociocultural, technological, economic, and competitive environments—affect their assigned industry. (10 minutes) 3. Reassemble the class and discuss each group’s input. (15 minutes) Don’t Forget: With groups of five students, you can assign each student to analyze one of the environments.

After this activity is completed, you can ask students to further research their assigned industry to find additional environmental variables that are currently affecting it.

Wrap-Up: Review the five marketing environments presented in the textbook and some of the common variables that come from each. Remind students that, in many cases, the same variables from each respective environment affect a number of different industries.

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In-Class Activity 2: Small-Group Discussion: Data Mining Activity Overview: This activity asks students to think about all the valuable information about themselves that they give to others.

Time Limit: 20 minutes What to Do: 1. Divide students into small groups and ask them to discuss and make a list of all the locations where they freely give valuable personal information. (10 minutes) 2. Reassemble the class and compile the groups’ lists. Are the lists similar? For what purposes is this information used by others? (10 minutes) Don’t Forget: You can also use this activity as an in-class debate with students considering the pros and cons of data mining.

Wrap-Up: Bring the activity to a close by briefly discussing the purpose of data mining and its advantages and disadvantages from a consumer’s perspective.

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In-Class Activity 3: Up for Debate: Social Networking and Job Seeking Activity Overview: This activity asks students to debate the advantages of starting your own small company, in a highly competitive industry.

Time Limit: 30 minutes What to Do: 1. Divide the class into three-member groups and ask them to read the Entrepreneurship and New Ventures feature. (5 minutes) 2. Ask each group to discuss the following questions: (15 minutes) a. What are the advantages and disadvantages of being a small farmer, trying to sell your crops? b. What kind of resources would be useful to you, as the small farmer, and would help you learn what you need to know to be successful? Information about what different environments will have the most impact on your ability to succeed?

3. Bring the class together and debate the groups’ answers. (10 minutes) Don’t Forget: To remind the students that there is a lot more to being a successful business person than simply providing a product. What are the most important factors besides the product?

Wrap-Up: Bring the activity to a close by encouraging students to consider how many different tasks a business owner must perform to succeed, and the different environments that impact their decisions.

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In-Class Activity 4: Small-Group Discussion: Never Give a German a Yellow Rose Activity Overview: This activity asks students to consider what a foreign visitor might notice about the American marketplace.

Time Limit: 30 minutes What to Do: 1. Divide students into small groups and ask them to assume that they will be receiving a foreign visitor. At this point, individual groups can select the home country of their visitor if it will help with the assignment.

2. Tell each group to assume that the visitor wants to know what he or she might be able to observe about the American marketplace. In general, the visitor is curious about the various elements of the marketing mix. For example, in considering products, you might mention product assortment and the use of brands; for promotion, you might mention the most popular media options used for specific products and what consumers are attracted to in an advertisement. Ask each group to come up with some suggestions. (15 minutes) 3. Regroup the class and have each group share some of their suggestions. (15 minutes) Don’t Forget: Parts of the marketing mix can often be quite similar from one culture to the next; however, elements of the marketing mix can also vary, depending on the product and the culture into which the product is being sold.

Wrap-Up: Close the activity with a short discussion of the elements of the marketing mix and how these elements can change from one culture to the next, depending on the product and the culture into which the product is being sold.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 11-1. What are the five forces in the external marketing environment?

Five outside factors comprise a company’s external environment and influence its marketing programs: (1) the political and legal environment (2) the sociocultural environment (3) the technological environment (4) the economic environment and (5) the competitive environment. (Learning Objective 1 – AACSB – application of knowledge) 11-2. What is an integrated marketing strategy, what individual decision areas does it link together, and why is it an important concept?

An integrated marketing strategy ensures that the four Ps blend together so that they are compatible with one another and with the company’s nonmarketing activities. The four Ps are product, price, place, and promotion. The activities for each of the four Ps are designed to best meet the needs of each target market. Marketing begins with a product, a good, service, or idea designed to fill a customer’s need or want. The pricing of a product is often a balancing act. Prices must be high enough to support a variety of operating, administrative, research, and marketing costs, but low enough that consumers don’t turn to competitors, and also appropriate for the product’s image. In the marketing mix, place (or distribution) refers to where and how consumers get access to the products they buy. The most visible component of the marketing mix is promotion, a set of techniques for communicating information about products. If the decisions regarding each area do not fit with the other areas, the strategy will not be effective. (Learning Objective 2 – AACSB – application of knowledge) 11-3. What is market segmentation and how is it used in target marketing?

Market segmentation is a method of breaking consumers into mutually exclusive groups based on similar characteristics that are likely to affect consumption. By identifying and targeting segments that are most likely to purchase its products, an organization can tailor its marketing efforts in terms of product features and benefits, pricing, packaging, promotion, and distribution. (Learning Objective 3 – AACSB – application of knowledge) 11-4. How does the buying behavior of consumers differ from buyers in organizational markets?

Visit MyBizLab for suggested answers. (Learning Objective 5 – AACSB – application of knowledge)

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QUESTIONS FOR ANALYSIS 11-5. Select an everyday product (personal fitness training, CDs, dog food, cell phones, or shoes, for example). Show how different versions of your product are aimed toward different market segments. Explain how the marketing mix differs for each segment.

Answers will vary, but should include how students will tailor their marketing efforts in terms of product features and benefits, pricing, packaging, promotion, and distribution.

(Learning Objective 2 – AACSB – application of knowledge, reflective thinking) 11-6. Use the five-step model of rational decision making to describe the process of selecting a college. Does this model reflect the way that you made a decision about attending college?

Why or why not?

Visit MyBizLab for suggested answers. (Learning Objective 5 – AACSB – application of knowledge, reflective thinking) 11-7. Imagine being the marketing manager for a large U.S. hotel chain. How might the company have to adapt its marketing mix to move into foreign markets in South and Central America?

Students should at the minimum cite the economic and socio-cultural differences and how those differences will impact everything from the product itself (the look of the hotel, customer service expectations, etc.) price, place (location based on customer needs and wants), and promotion. (Learning Objective 6 – AACSB – application of knowledge, reflective thinking) 11-8. Choose an existing product that could benefit from viral marketing. Once you have identified the product, describe how you would use viral marketing to increase demand for the product.

Visit MyBizLab for suggested answers. (Learning Objective 6 − AACSB − application of knowledge, reflective thinking) APPLICATION EXERCISES 11-9. Identify a company with a product that interests you. Consider ways the company could use customer relationship management (CRM) to strengthen relationships with its target market. Specifically, explain your recommendations on how the company can use each of the four basic components of the marketing mix in its CRM efforts.

The students should focus on meeting customer’s needs and wants and ensuring the product meets customer’s expectations to create an ongoing relationship. The product and pricing strategies should reinforce the customer’s perceptions. The place and promotion strategies

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should reinforce the product and customer connection. (Learning Objectives 1, 2, and 7 – AACSB – application of knowledge, reflective thinking) 11-10. The U.S. Census collects an enormous amount of secondary data that is useful in marketing research. Go to the American Fact Finder home page at http://factfinder2.census.gov and collect data about people living in your zip code. Compare your zip code to your state as a whole in terms of factors such as age, race, household size, marital status, and educational attainment. Based on your data, what types of retail establishments would be especially appropriate to your area?

Answers will vary, but students should focus on data mining to build stronger enterpriseclient relationships. If a company has a clearer picture of a consumer’s preferences they can better tailor the product itself, its price, promotion, and distribution to fit the customer’s needs and preferences. (Learning Objectives 1 and 4 – AACSB – application of knowledge, reflective thinking) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 11-12 to 11-15 (Learning Objectives 2, 3, 4, 5 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) This assignment gives students an opportunity to design a complete marketing plan for their business. They should use the framework referenced in “Developing the Marketing Plan” and formulate an appropriate marketing strategy focused on the needs and wants of potential customers.

TEAM EXERCISE: HOME AWAY FROM HOME 11-16 TO 11-21 (Learning Objectives 1, 2, 3, 4, and 5 – AACSB – interpersonal relations and teamwork, reflective thinking) The students’ responses to the questions may vary dramatically due to the different perspectives.

Students should be encouraged to explore all the issues including: the target market (students and their parents), the environmental factors, political-legal, economic, competitive, etc. Students should also review the consumer buying behavior model and the market segmentation variables that will impact the purchase. Finally, the students should create a marketing mix plan based on their target market.

EXERCISING YOUR ETHICS: WEIGHING THE ODDS (Learning Objectives 1, 2, and 3 – AACSB – analytical and reflective thinking, ethical understanding and reasoning) 11-22. How would you characterize the particular ethical issues in this situation?

The key ethical issues are integrity, product safety, and communication. The company has invested enormous effort in information collecting and evaluating the safety and effectiveness of the product.

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11-23. From an ethical standpoint, what are the obligations of the quality control manager and the marketing manager regarding the introduction of the product in this situation?

Since there is a possibility that the product is harmful to some potential users and there could be liability issues if consumers are injured, the two managers are obligated to share the new data with company executives.

11-24. If you were the quality control manager, how would you handle this matter?

Answers will vary but most students will probably recommend postponement of the launch.

Students will want to consider the negative impact and again the legal liability if further studies are not conducted on this product.

CASES: BUILDING A BRAND WITH SOCIAL MEDIA (Learning Objectives 1, 2, 3, 5 – AACSB − analytical and reflective thinking, application of knowledge) 11-25. What forces in the external environment have created opportunities or challenges for Michelle Phan? Explain.

The sociocultural environment and the technological environment have created opportunities, while the competitive environment, and the economic environment create challenges for Michelle Phan.

11-26. Who is Michelle Phan’s target market?

Answers may vary somewhat. However, students should take psychographic, demographic, and behavioral variables into account to answer this question. Age, gender, education, income, lifestyle, attitudes, and interests are some relevant variables to consider.

11-27. Describe the consumer buying process for someone purchasing cosmetic products.

Where would videos and a service like Ipsy fit into this process?

The consumer buying process consists of a series of steps taken by consumers when making purchases: (a) Problem/Need Recognition, (b) Information Seeking, (c) Evaluation of Alternatives, (d) Purchase Decision, and (e) Postpurchase Evaluation. Students should run through all these steps in their answers, relating each step to the process of purchasing cosmetic products. Videos and Ipsy can fit into multiple steps, including Information Seeking, Evaluation of Alternatives, and Postpurchase Evaluation.

11-28. Go to the website for Phan’s beauty line with L’Oréal, www.emcosmetics.com. How does the product line appeal to Phan’s target market?

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Answers will vary. Students should explore the website in depth, and will notice that it is bright, active, quick-moving, easy to read, and easy to navigate. Promotional offers are prominently displayed. Ratings and prices are easy to find, as are reviews. Numerous tutorials are available.

WHERE HAS ALL THE MIDDLE GONE? (Learning Objectives 1, 2, 3, 4 – AACSB − analytical and reflective thinking, application of knowledge) 11-29. How would you best describe P&G’s marketing strategy for the situation presented in this case? Explain why.

P&G’s new marketing strategy is to reposition its products and target new market segments including the lower income and wealthier customers.

11-30. What elements of P&G’s external marketing environment, if any, are influencing the company’s marketing strategy? Explain your reasoning.

Most students will cite the economic, competitive environment, and the sociocultural forces as having the main impact on P&G’s new strategic plan.

11-31. Why do you suppose P&G’s marketing research includes face-to-face interviews for the situation described in this case? Would other forms of marketing research also be useful in this situation? Explain your reasoning.

Most students will probably conclude that face-to-face interviews would be most effective because it might be difficult to contact low-end customers and they want to gain the trust of the potential customers to gather in-depth info.

11-32. Explain the roles of target marketing and market segmentation as they apply in this case.

P&G is using demographic, psychographic, and behavioral variables to determine its target market and better meet the customers’ needs and wants.

11-33. In what ways are the components of P&G’s marketing mix being affected by the situation described in this case? Give examples to illustrate.

Most students will state that all of the components of the marketing mix: product, price, place, and promotion have been affected by the changes in the customer base for P&G. The products will have different features meant to appeal to either the lower end market segments, or the higher end market segments. Price will be reflected appropriately. Products targeting the high-end segment will be priced higher while products targeting the low-end segment will be priced appropriately lower than before. P&G will be selling each set of products at appropriately chosen retail outlets that will appeal to the market segments.

Promotions will also be modified to appeal to the low-end segments for “their” products and the high-end segments for “their” products.

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Chapter 12: Developing and Pricing Products Chapter Overview By now, students have grasped that the marketing mix—or the Four Ps—is built around the characteristics and needs of the target market. This chapter brings the Four Ps another step forward by discussing product and pricing.

As the chapter unfolds, many variables surrounding both the consumer and organizational markets are discussed, as well as a focus on distinguishing features between products and services and the importance of branding and packaging.

Specifically, the chapter identifies the various pricing objectives that govern pricing decisions and the price-setting tools used in making these decisions. It discusses pricing strategies and identifies the pricing tactics that can be used for setting prices.

Learning Objectives 12-1. Explain the definition of a product as a value package and classify goods and services.

12-2. Describe the new product development process.

12-3. Describe the stages of the product life cycle (PLC) and methods for extending a product’s life.

12-4. Identify the various pricing objectives that govern pricing decisions, and describe the price-setting tools used in making these decisions.

12-5. Discuss pricing strategies that can be used for different competitive situations and identify the pricing tactics that can be used for setting prices.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Ice-Breaker: Why Do They Charge More?

2. Up for Debate: Getting a Stimulus Boost with Pricing

Description Students consider pricing strategies behind some well-known competing brands.

Students are divided into teams to discuss the pros and cons of varying the pricing strategies for a product.

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Time Limit 30 min.

30 min.

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CHAPTER OUTLINE Learning Objective 12-1: Explain the definition of a product as a value package and classify goods and services.

What Is a Product?

In order to develop the marketing mix and plan their strategies effectively, marketers must consider what consumers buy when they purchase products; marketers must begin by understanding product features and benefits.

A. The Value Package Product features are the tangible and intangible qualities that are built into products; product benefits include what products can do emotionally or physically for consumers. Today’s consumer regards a product as a bundle of attributes, benefits and features, that taken together, are the value package.

B. Classifying Goods and Services Goods and services may be classified according to their prospective buyers; buyers may be classified as buyers of consumer products or buyers of organizational products.

1. Classifying Consumer Products. Convenience goods (such as milk and newspapers) and convenience services are consumed rapidly and regularly. They are inexpensive and are purchased often and with little output of time and effort. Shopping goods and shopping services are more expensive and are purchased less often than convenience products. Consumers often compare brands, sometimes in different stores. They may also evaluate alternatives in terms of style, performance, color, price, and other criteria.

Specialty goods and specialty services are extremely important and expensive purchases. Consumers usually decide on precisely what they want and will accept no substitutes. They often go from store to store, sometimes spending a great deal of money and time to get a specific product.

2. Classifying Organizational Products. Production items are goods or services that are used directly in the production process. Expense items are goods and services consumed within one year by other suppliers of services or producers of goods. Capital items are permanent, long-lasting goods and services that have expected lives of more than one year.

C. The Product Mix The product mix is the total assortment of all goods and/or services that a marketer makes available for sale.

1. Product Lines. A group of products that are closely related because they function in a similar manner (flavored coffees) or are sold to the same customer group (stop-in coffee drinkers) who will use them in similar ways is a product line. Product lines help a company to grow by broadening the customer base.

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KEY TEACHING TIPS •

Remind students that a value package is a combination of all the product features and benefits—all bundled together—that are found to be attractive to the consumer.

•

Make sure students understand the distinction between a product mix (the total assortment of all goods and services available from a marketer) and a product line (a group of products that function in a similar manner or are sold to the same customer group who will use them in similar ways).

HOMEWORK Product Features and Benefits Now might be a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. This assignment encourages students to consider the product benefits and how they are used to attract the chosen target market.

At-Home Completion Time: 30 minutes

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Learning Objective 12-2: Describe the new product development process.

Developing New Products To expand or diversify to survive, marketers must develop and successfully introduce streams of new products. Competition and shifting consumer preferences cause marketers to continually monitor and frequently change their offerings.

A. The New-Product Development Process Product development is a long, complex process. New products usually involve carefully planned and sometimes risky commitments of time and resources.

B. Product Mortality Rates. Estimates indicate that it takes 50 new product ideas to generate one product that reaches that marketplace; only a few of the survivors become successful.

Speed to Market. The quicker a product enters the marketplace, the more likely it is to survive. Introducing new products ahead of competitors allows companies to become market leaders.

C. The Seven-Step Development Process To increase their chances of developing a successful new product, many firms adopt some version of a seven-step process for developing physical goods.

1. Product ideas. Product development begins with a search for ideas for new products.

Ideas typically come from consumers, the sales force, R&D departments, suppliers, or engineering personnel.

2. Screening. This stage is designed to eliminate ideas that do not mesh with the firm’s abilities or objectives.

3. Concept testing. Once ideas have been screened, companies use market research to get consumers’ input about benefits and prices.

4. Business analysis. After gathering consumer opinions, marketers compare production costs and benefits to see whether the product meets minimum profitability goals.

5. Prototype development. Once the firm has determined the potential profitability of a product, engineering, R&D, or design groups produce a prototype. Expenses increase at this stage.

6. Product testing and test marketing. Applying lessons from the prototype, the company goes into limited production.

7. Commercialization. If test marketing proves positive, the company begins full-scale production and marketing.

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D. Variations in the Process for Services The development of services involves many of the same stages. Basically, steps 2, 3, 4, 6, and 7 are the same. There are, however, important differences in steps 1 and 5: Service ideas. The search for service ideas includes defining the service value package, identifying the tangible and intangible features that characterize the service, and stating service specifications. Service process design. Instead of prototype development, services require a three-part service process design that includes process selection (identifying each step of the service, including sequence and timing), worker requirements (stating employee behaviors, skills, capabilities, and interactions with customers during the service performance), and facility requirements that designate all equipment that supports delivery of the service.

KEY TEACHING TIP •

New product development is time intensive, expensive, and risky. Being the first to market with a product is only valuable if sound research indicates demand for a product or service with the value package being offered.

•

Most new products fail, and far more never even get the chance. Stress that high mortality rates indicate that out of many new ideas, only a few products reach the market.

QUICK QUESTIONS •

Can you think of any recent examples of a product that benefited from its speed to market?

•

Can you think of any recent examples of new products that did not meet expectations, or actually failed? What about successes?

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Learning Objective 12-3: Describe the stages of the product life cycle (PLC) and methods for extending a product’s life.

A. The Product Life Cycle Every product passes through a series of stages during its commercial life.

1. Stages in the Product Life Cycle. The product life cycle is a natural process in which products are born, grow, mature, decline, and die. The stages include: introduction, which begins when the product enters the marketplace; growth, when sales and profits climb; maturity, when sales growth begins to slow; and decline, when sales and profits continue to fall.

B. Extending Product Life: An Alternative to New Products 1. Product Extension. In product extension, an existing product is marketed globally instead of just domestically.

2. Product Adaptation. With product adaptation, the product is modified for greater appeal in different countries.

3. Reintroduction. Reintroduction means reviving, for new markets, products that are becoming obsolete in older ones.

C. Identifying Products Branding and packaging are two tools that allow consumers to identify products in the marketplace.

1. Branding Products Brand names are symbols for characterizing products and distinguishing them from one another; branding is the process of using symbols, names, logos, and colors to communicate the features and qualities of products.

Brand awareness is the brand name that first comes to your mind when you consider a particular product category. Firms compete to be “top-of-mind” for consumers; it is an expensive struggle that pays tremendous dividends when successful.

Product Placements. A product placement is a promotional tactic for brand exposure in which characters in television, film, music, magazines, or video games use a real product that is visible to viewers. Its marketing purpose is to be visible to viewers and potential consumers. It legitimizes the brand in the mind of the customer.

2. Types of Brand Names a. National Brands. These are brand-name products produced by, widely distributed by, and carrying the name of a manufacturer.

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b. Licensed Brands. These are brand-name products that carry the name of an organization or individual. Marketers exploit brands because of their public appeal, image and status that customers hope to gain by associating with them. c.

Private Brands. These are brand-name products that a wholesaler or retailer has commissioned from a manufacturer. These products can only be found in the stores of that wholesaler or retailer.

D. Packaging Products A product’s package serves several purposes; the packaging can serve as an in-store advertisement, a display for the brand name, an identifier of product features and benefits, and can reduce the risk of damage and increase the difficulty of stealing.

KEY TEACHING TIPS •

Reinforce that the product life cycle is a series of stages through which a product passes during its commercial life; the duration of a product’s life cycle varies.

•

Remind students that both product placements and viral marketing help marketers gain brand awareness.

•

Make sure students understand that branding is the process of using symbols, names, logos, and colors to communicate the qualities of a particular product made by a particular producer.

QUICK QUESTIONS •

What happens in the decline stage of the product life cycle?

•

How does successful branding lead to brand awareness?

•

Why is viral marketing sometimes more successful than traditional media options?

•

What is the difference between national, licensed, and private brands?

•

What are some purposes of packaging?

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Learning Objective 12-4: Identify the various pricing objectives that govern pricing decisions and describe the pricesetting tools used in making these decisions.

Determining Prices In pricing, managers decide what the customer pays and the seller receives in exchange for a product.

A. Pricing to Meet Business Objectives Pricing objectives are the goals that sellers hope to achieve in pricing products for sale.

Marketers’ pricing strategies are influenced by a variety of factors. Some companies have profit-maximizing pricing objectives, while others have market share pricing objectives.

Competition, social and ethical responsibilities, plus product and corporate image all can factor into the decision. The seller’s pricing decision is critical for determining the firm’s revenue, which is the selling price times the number of units sold.

REVENUE = SELLING PRICE X UNITS (QUANTITY) SOLD 1. Profit-Maximizing Objectives. Some companies that set prices to maximize profits, therefore, have profit-maximizing pricing objectives. Marketers attempt to set prices to sell the number of units that will generate the highest possible profits.

2. Market Share Objectives. Some firms want to dominate the market or secure high market share and, therefore, have market share pricing objectives. Market share is determined by estimating the total percent of the market that the marketer is currently supplying; a business may be willing to accept minimal profits or even losses to establish market share.

3. Pricing for E-Business Objectives. Because the Web provides a more direct link between producer and customer, buyers often avoid the added costs of wholesalers and retailers.

Marketing costs as well as prices for e-businesses can be somewhat lower because of this.

The ease of online comparison shopping can lead to cost efficiencies.

B. Price-Setting Tools Marketers must estimate the potential impact before deciding on final prices. Tools used for this purpose are cost-oriented pricing and breakeven analysis.

1. Cost-Oriented Pricing. Cost-oriented pricing considers the need to cover production costs and the cost of the merchandise. Markup is the amount added to an item’s total cost to earn a profit; markup is usually stated as a percentage of the product’s selling price. Using cost-oriented pricing, a firm will cover variable costs—costs, such as materials bought to make the product, that change with the number of units of a product produced and sold. It will also make some money to pay fixed costs—costs, such as annual rent, that must be paid regardless of the number of units produced and sold.

Selling price = Seller’s costs + Profit.

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Markup percentage =

Markup ×100% Sales price

2. Breakeven Analysis: Cost-Volume-Profit Relationships. Breakeven analysis assesses costs versus revenues for various sales volumes. It shows, at any particular selling price, the financial result—the amount of loss or profit—for each possible volume of sales. The breakeven point is how many of a product must be sold so that total revenues exactly cover both fixed and variable costs.

Breakeven Point (in units)

=

Total Fixed Cost Price – Variable Cost

KEY TEACHING TIPS •

Reinforce that pricing enables managers to decide what the firm will get in exchange for its products; pricing objectives are the goals they hope to achieve in pricing products.

•

Make sure students understand that cost-oriented pricing considers profit and a firm’s need to cover production costs and the costs of the merchandise.

•

Breakeven analysis can be a tough concept for students so you may want to reinforce the concept and the formula: Breakeven Point (in units) = Total Fixed Cost/Price – Variable Cost.

Review the shirt example in the textbook.

QUICK QUESTION How do marketers achieve profit-maximizing objectives and market-share objectives?

Use In-Class Activity 1: Ice-Breaker: Why Do They Charge More?

Time Limit: 30 minutes HOMEWORK Pricing Now might be a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment encourages students to consider the pricing objectives behind familiar products.

At-Home Completion Time: 30 minutes

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Learning Objective 12-5: Discuss pricing strategies that can be used for different competitive situations and identify the pricing tactics that can be used for setting prices.

Pricing Strategies and Tactics Pricing strategies are planned activities that affect the marketing mix. Pricing tactics are ways that managers implement a firm’s pricing strategies. It is much easier to change pricing than to change products or distribution channels.

A. Pricing Strategies 1. Pricing Existing Products. A firm can price existing products above, below, or at or near market price. Marketers that price products above market rely on the assumption that higher prices are accompanied by higher quality. Pricing below the market can succeed if the firm can offer a product of acceptable quality while keeping costs below those of the competitors.

2. Pricing New Products. If a marketer can differentiate a product from all others, the marketers may implement price skimming, in which price is initially set high to earn large profits. Such a strategy will attract competitors to enter the marketplace with lower prices. With penetration pricing, price is initially set low to create consumer interest and to stimulate trial purchases. Profit is low; therefore, the marketer relies on raising prices as consumer acceptance grows.

3. Fixed versus Dynamic Pricing for Online Business. Dynamic pricing works because information flow on the Web notifies buyers of changes in product availability. Examples of dynamic pricing include eBay’s traditional auction bidding while eBay’s Buy It Now is an example of fixed pricing.

4. Bundling. A bundling strategy groups several products together to be sold as a single unit, rather than individually. Cable or satellite TV/phone/internet packages are one example of a bundle. A discount on insurance by purchasing multiple policies (for home and car) is another way a bundle serves to benefit both the company and the consumer.

B. Pricing Tactics Price lining involves offering all items in certain categories at a limited number of prices. A store predetermines three or four price points at which a particular product will be sold. Price lining involves setting each price level with a specific type of customer in mind and then packaging and promoting products accordingly. Psychological pricing takes advantage of the fact that customers are not completely rational when making buying decisions. One type of psychological pricing, odd-even pricing, is based on the theory that customers prefer prices that are not stated in even dollar amounts. Discounts are price reductions designed to stimulate sales.

C. International Pricing. Sometimes products must be priced for what customers in other countries can afford. This may then involve developing products to fit that pricing. Another

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strategy calls for pricing products below cost to increase foreign market share; this practice is called dumping and is illegal in the United States.

KEY TEACHING TIPS •

Students often confuse these terms: With price skimming, price is initially set high to cover costs and generate a profit; with penetration pricing, price is initially set low to establish a new product in the market.

•

Reinforce that price lining offers all items in certain categories at a limited number of prices at price points, whereas odd-even pricing is based on the theory that customers prefer prices that are not stated in even dollar amounts, such as $.99 and $1.99.

QUICK QUESTIONS •

How has dynamic pricing benefited Web users over traditional fixed pricing strategies?

•

When might sellers resort to using discounts?

Use In-Class Activity 2: Getting a Stimulus Boost with Pricing Time Limit: 30 minutes

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

IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker: Why Do They Charge More?

Activity Overview: This activity asks students to consider pricing strategies behind some well-known competing products.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask each group to come up with four sets of competing products or services; in most cases, students will select products that are similar, but carry a different brand name, such as Blue Bonnet Margarine versus Prairie Farms Margarine. (10 minutes) 2. Ask students to discuss the “average” price of each product and be able to explain the reasoning for one brand’s price being higher than the competing brand. (10 minutes) 3. Reassemble the class as a whole and ask for each group’s input. (10 minutes) Don’t Forget: Students will come up with a variety of reasons for differing products’ prices. Some will be more difficult to explain than others. For example, almost everyone knows that a one-night stay at the Holiday Inn Express is less costly than a stay at the Ritz-Carlton because the Ritz-Carlton offers more amenities. Price differences between Del Monte spinach and Jolly Green Giant spinach might be more difficult to explain.

Wrap-Up: Bring the activity to a close by reminding students of the role pricing plays in the marketing mix and the common types of pricing strategies and tactics seen in the marketplace.

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In-Class Activity 2: Up for Debate: Getting a Stimulus Boost with Pricing Activity Overview: This activity asks students to discuss how firms are changing their pricing messages during economic downtimes.

Time Limit: 30 minutes What to Do: 1. Ask students to read the Managing in Turbulent Times feature of the textbook, making a list of as many pros and cons of relying on the different kinds of service providers as possible.

(10 minutes) 2. Divide the class into small groups to discuss their pros and cons of price discounts and surge pricing. Do the pros outweigh the cons? For whom? (10 minutes) 3. Reassemble the class to debate the pros and cons as a group. Do the pros outweigh the cons?

(10 minutes) Don’t Forget: Retailers are constantly looking for ways to get an edge in the marketplace. Remind students that retailers will use all of the 4 Ps (price, promotion, product, and place) to add value and try to get an edge in competitive markets.

Wrap-Up: Ask students to discuss whether they have used, or would use, a ride service such as Uber or Lyft, if it were available in their area. Have them consider why they would use, and what their expectations about the service would be.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 12-1. How does breakeven analysis help managers measure the potential impact of prices?

Breakeven analysis and cost-oriented pricing are usually used together to measure the potential impact on pricing objectives and cost prior to deciding on final prices. Both of these tools allow managers to identify prices that enable companies to reach their objectives.

Breakeven analysis specifically helps the managers to know at what demand level they will have covered production costs. (Learning Objective 4 – AACSB – application of knowledge) 12-2. Discuss the goal of price skimming and penetration pricing.

Price skimming allows marketers to recoup development costs and/or earn high profits early because the price is set high in the beginning. This strategy may be especially effective for products with few substitutes or competitors. Penetration pricing is an attempt to create awareness and stimulate trial purchases by setting prices low. Once consumer loyalty is built, marketers may be able to raise prices without losing customers. (Learning Objective 5 – AACSB – application of knowledge) 12-3. What are the various classifications of consumer and industrial products? Give an example of a good and a service for each category other than those discussed in the text.

The various classifications of consumer and organizational products include: • Consumer products—any product made for the end user to purchase and use • Convenience goods and services—candy, ATM services, take-out ice cream • Shopping goods and services—clothing, car repair, furniture • Specialty goods and services—houses, interior design, funeral services • Production goods—gym member demand for classes used to create new class schedule, plant products used to create pharmaceuticals, trees trimmed and turned into lumber • Expense items—inventory, repair bills, office supplies • Capital items—computer servers, long-term maintenance contracts (Learning Objective 1 – AACSB – application of knowledge) 12-4. How is the concept of the value package useful in marketing to consumers and industrial customers?

Visit MyBizLab for suggested answers. (Learning Objective 1 – AACSB – application of knowledge)

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QUESTIONS FOR ANALYSIS 12-5. Describe the four stages of the product life cycle and the marketing mix that is used in each. Provide at least one example of a product in each stage other than those provided in the text.

1. Introduction Stage, prices are high, there are few models, little competition, sales and profits are at their lowest, and companies focus on consumer awareness.

2. Growth Stage, prices drop, competition, sales and profit increase.

3. Maturity Stage is typically the longest stage with sales and profits peaking then declining, increased competition leads to lower prices and increased promotional expenses.

4. The final stage is the Decline Stage. Profits, sales, and promotion decline. Eventually, the product dies. Examples will vary.

(Learning Objective 3 – AACSB – application of knowledge, reflective thinking) 12-6. Some companies have very narrow product mixes, producing just one or two products, while others have many different products. What are the advantages of each approach?

Visit MyBizLab for suggested answers. (Learning Objective 2 – AACSB – application of knowledge, reflective thinking) 12-7. Suppose that a small publisher selling to book distributors has fixed operating costs of $600,000 each year and variable costs of $3.00 per book. How many books must the firm sell to break even if the selling price is $6.00?

Breakeven units = Fixed costs/(selling price – variable costs) Breakeven units = $600,000/($6 – $3) = 200,000 books Learning Objective 4 – AACSB – application of knowledge, reflective thinking) 12-8. Describe price skimming and penetration pricing. What types of new products would be best suited to price skimming? What types of products will be most successful with penetration pricing?

Visit MyBizLab for suggested answers. (Learning Objective 5 – AACSB – application of knowledge, reflective thinking) APPLICATION EXERCISES 12-9. For this exercise, select a car or truck that interests you and identify the target market.

Once you’ve identified the target market, describe the features of the vehicle that appeal specifically to the target market.

Students answers will vary but many will pick popular brands and describe the features in terms of price, comfort, gas mileage, service, reputation, etc. (Learning Objective 1 – AACSB – application of knowledge, reflective thinking)

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12-10. Select a product and analyze pricing objectives for it. What information would you want if you were to adopt a profit-maximizing objective or a market share objective?

Answers will vary, but may include profit-maximizing (a great deal of competitive information, including number of competitors, competitive prices, and so on) and market share (breakeven point, number of competitors, and their shares). (Learning Objective 2 and 4 – AACSB – application of knowledge, reflective thinking) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE, 12-11 TO 12-15 (Learning Objectives 2, 4, 5 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Depending on the type of business venture, teams’ product mix and pricing strategies will vary widely. Teams should be able to justify that their strategies are consistent with the needs and wants of the target market. They should know where in the Product Life Cycle their product(s) will be, and how many steps of the new product development process they might need to go through.

TEAM EXERCISE: THE PRICE IS RIGHT, 12-16 TO 12-20 (Learning Objectives 4 and 5 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) After completing the Action Steps, students will better understand the impact of pricing strategies, what pricing strategies are available to marketers, and the objectives companies try to achieve through pricing.

12-18. Using the information provided in the case, identify the fixed and variable costs.

Fixed costs include rent, employee salaries, and business manager’s salary. Variable cost is the cost from the vendor for each case.

12-19. Using the amounts calculated in Step 2, calculate the breakeven point at a sales price of $15, $20, $25, and $30. Based on these answers as well as your assessment about likely monthly sales, decide on the best price for the phone cases.

Formula is Breakeven Point in units = Total Fixed Cost/Price-Variable Cost 13000/15 – 5 = Breakeven @ $15 = 1300 units/month 13000/20 – 5 = Breakeven @ $20 = 867 units/month 13000/25 – 5 = Breakeven @ $25 = 650 units/month 13000/30 – 5 = Breakeven @ $30 = 520 units/month Students will notice that at the lowest price, the demand is the highest, so they are likely to choose $15 as the best price for the phone cases.

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EXERCISING YOUR ETHICS: DRIVING A LEGITIMATE BARGAIN (Learning Objective 1 – AACSB – ethical understanding and reasoning, reflective thinking) 12-21. How would you characterize the particular ethical issues in this situation?

The key ethical issues are integrity and communication. Matt has invested enormous effort in information collecting and evaluating alternatives, expecting that once he had made the purchase decision, the dealer would come through on its end of the bargain. One possibility is that the sales representative and the sales manager simply had not communicated, but this becomes an ethical issue when the sales representative has the responsibility to establish contracts without the authority to deliver results.

12-22. From an ethical standpoint, what are the obligations of the sales representative and the sales manager regarding the pricing of the product in this situation?

Since the contract has been signed, the minimal obligation of the car company is to offer the 2017 model at the 2016 price.

12-23. If you were Angela, the sales manager, how would you defend your actions?

Answers may vary. Students should focus on the ethical issues. Manufacturing delays are something Matt could know about or account for, when signing the contract.

12-24. If you were responsible for maintaining good customer relations at the dealership, how would you handle this matter, considering the interests of both the consumer and the business?

Answers will vary. Students will want to consider the negative impact on the local marketplace if the customer leaves completely dissatisfied. Especially, with social media, this situation could go viral. As noted in 12-22, the minimum offer should be a 2017 model at the 2016 price. Other options are available.

CASES: SINGING A DIFFERENT TUNE (Learning Objectives 4 and 5 – AACSB – analytical and reflective thinking, application of knowledge) 12-25. Considering the product life cycle, where would you place digital music downloads, such as iTunes? Explain your conclusion.

Digital downloads, while revolutionary when introduced, are no longer so. The product is likely in the maturity stage, if not the decline stage. Streaming is more popular than ever, and

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Apple’s revenue from iTunes has declined. Additionally, to compete with streaming opportunities, Apple introduced its own streaming service with iTunes Radio.

12-26. Who is the target market for iTunes? Do you think that this has changed over time?

The iTunes target market includes young adults as well as Baby Boomers looking to replace dated products, especially for the convenience factor. Students likely will believe that the target market has changed over time, as the younger target market is the one more likely to have moved more quickly to the music streaming alternatives. The younger target market has grown up with music being easily available electronically, and is less tied to paying for songs and albums, and to owning the music.

12-27. Would you advise iTunes to continue with the three-tier pricing system for music products or, instead, return to a one-price policy? Explain.

Answers will vary but many students will agree that the current strategy is working so there is no reason to change. Apple would possibly have to consider lowering its prices and or some form of “bundling” so customers would get better perceived value. Other students should point out that streaming has hurt Apple’s revenue stream, and that Apple should consider a different pricing policy.

12-28. Who is the target market for streaming music services?

Young adults may be the primary target market for streaming music services, followed by their parents and then Baby Boomers.

12-29. Most streaming services offer a free, ad-supported model as well as a subscription service. What are the advantages of each option to the provider, the musical artist, and the consumer?

The biggest advantage is to the provider. Both an ad-supported model and a subscription service create revenue streams for the company. The benefit of either to the musical artist depends on the contract between the provider and the musical artist. The advantages to the consumer include not needing a device that stores music, but one that simply plays music.

CHANGING PRICING TACTICS CAN COST A PRETTY PENNEY (Learning Objectives 4 and 5 – AACSB – analytical and reflective thinking, application of knowledge) 12-30. Describe the target market for JCPenney and Apple. How are they similar or different?

How does the target market each influence their pricing strategy?

JCPenney target customers are more likely middle aged and older females motivated by the “thrill” of the “hunt,” the excitement of a sale where everyone is trying to purchase the same product at a discount. For the JCPenney customer, it is the whole shopping experience not just the purchased product. The Apple target customers are younger, “tech savvy,” less price

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sensitive, and more interested in the product they are purchasing rather than the shopping experience. However, Apple retail stores are set up to enhance the shopping experience, so the experience is definitely part of the value package for Apple customers.

JCPenney customers are more price sensitive than Apple customers. Companies have to consider the target market when creating a pricing strategy since each segment is going to respond differently in terms of price and perceived value.

12-31. How are the products and product lines offered for JCPenney and Apple similar and different? What types of pricing strategies will be most effective for the product strategy of each company?

The differences in the product offerings clearly impact the pricing strategies. Apple offers a narrow product line, a few products with a few different models of each. Apple products are less “seasonal” and lend themselves to less of an urgency to sell. Apple’s pricing would be impacted more by competitors’ new products and introduction of their own new models.

Apple tends to use a price skimming strategy, as it is often first or a leader in a product area.

JCPenney offers a wide variety of products with quite a variety of quality images and price points. JCPenney products tend to be more fashion items that have to be sold in a relatively short season. Due to the competitive situation, JCPenney is likely more focused on a costbased strategy.

12-32. Consider the place (distribution) where customers go to purchase JCPenney products.

Next, consider where Apple customers go to purchase Apple products. How do you suppose differences in the companies’ distribution methods may result in differences in their pricing strategies?

Many Apple products are sold online and in multiple electronic retailers, Best Buy, etc. with narrow product offerings that can be sold under a “consistent” three-tier pricing strategy.

JCPenney’s is offering a wide product mix in a department store setting that does not tend to lend itself to a “one size” fits all approach to pricing.

12-33. After the demise of everyday low pricing, a pair of earrings once sold at a list price of $200 was marked up to $450. Although the newly revived deep discounts and coupons will considerably lower the actual price to consumers, the actual cost to the average consumer will be higher than $200. Do you think that this is ethical or unethical? Why? Students should point out that no one is forcing someone to buy the earrings. If a customer considers the value package to be worth the price, then there is not an ethical issue.

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Chapter 13: Distributing and Promoting Products Chapter Overview By now, students have grasped that the marketing mix—or the Four Ps—is built around the characteristics and needs of the target market. This chapter brings the Four Ps another step forward by discussing distribution and promotion.

Specifically, the chapter examines the meaning of distribution mix and identifies the different channels of distribution. Along the way, the chapter examines the role of wholesalers, different types of retailing, the role of e-intermediaries, and the major activities in the physical distribution process. Finally, the chapter looks at the objectives of promotion, the considerations in selecting a promotional mix, the tasks involved in personal selling, sales promotions, and publicity and public relations.

Learning Objectives 13-1. Explain the meaning of distribution mix and identify the different channels of distribution.

13-2. Describe the role of wholesalers and the functions performed by e-intermediaries.

13-3. Describe the different types of retailing and explain how online retailers add value for consumers on the Internet.

13-4. Define physical distribution and describe the major activities in the physical distribution process.

13-5. Identify the objectives of promotion and the considerations in selecting a promotional mix, and discuss the various kinds of advertising promotions.

13-6. Outline the tasks involved in personal selling and describe the various types of sales promotions.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Ice-Breaker: Why Do They Sell Where They Do? 2. Up for Debate: Getting a Stimulus Boost with Promotion 3. Up for Debate: What’s the Best Way to Reach Them?

Description Students consider distribution promotion strategies.

Time Limit and

Students are divided into teams to discuss the pros and cons of relying on direct marketing and promotions to help push products through distribution channels.

Students discuss different ways that a product can be promoted to one specific target market.

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30 min.

30 min.

30 min.

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Learning Objective 13-1: Explain the meaning of distribution mix and identify the different channels of distribution.

The Distribution Mix The distribution mix is the combination of distribution channels that a firm selects to get a product to end users.

A. Intermediaries and Distribution Channels Intermediaries help to distribute a producer’s goods, either by moving them or by providing information that stimulates their movement from sellers to customers. Wholesalers are intermediaries who sell products to other businesses for resale to final consumers. Retailers sell products directly to consumers. The nature of the product and the target market greatly affect whether intermediaries are used.

1. Distribution of Goods and Services. A distribution channel is the path that a product follows from producer to end user. a. Channel 1: Direct Distribution. In a direct channel, the product travels from the producer to the consumer or to the industrial buyer, without intermediaries. b. Channel 2: Retail Distribution. In Channel 2, producers distribute consumer products through retailers, whether its own retail outlets or other retailers. c. Channel 3: Wholesale Distribution. Wholesalers enter the distribution network primarily for the purpose of storage. d. Channel 4: Distribution by Agents or Brokers. Channel 4 uses sales agents or brokers who represent producers and sell to consumers, industrial users, or wholesalers. They receive commissions based on the prices of the goods they sell.

Sales agents generally deal in the related product lines of a few producers, and form long-term relationships to represent those producers and meet the needs of many customers. Brokers match numerous sellers and buyers as needed, often without knowing in advance who they will be.

2. The Pros and Cons of Nondirect Distribution. Nondirect distribution becomes higher priced for end users because each distribution link charges a markup or commission.

However, intermediaries can save consumers time by reducing the number of contacts made, and save consumers money by providing speed of delivery, storability, and less cost by buying cheaply in bulk from manufacturers and then passing savings on to final consumers. Intermediaries exist because they provide necessary services that get products efficiently from producers to users.

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B. Distribution Strategies 1. Intensive Distribution. Intensive distribution means distributing through as many channels and channel members as possible (both wholesalers and retailers). This method is usually used for low-cost consumer goods such as candy and magazines.

2. Exclusive Distribution. With exclusive distribution, a manufacturer grants the exclusive right to distribute or sell a product to a limited number of wholesalers or retailers, usually in a given geographic area. High-cost prestige products such as Rolex watches are sold in this manner.

3. Selective Distribution. Using selective distribution, a producer selects only wholesalers and retailers that will give a product special attention in sales effort, display and promotion advantage, and so forth. Furniture and appliances are examples of consumer products that use selective distribution.

C. Channel Conflict and Channel Leadership 1. Channel Conflict. Channel conflict occurs when members of the channel disagree over roles or rewards. Conflict may arise if one channel member has more power or is perceived as getting preferential treatment. Conflicts can defeat the purpose of the system by disrupting the flow of goods.

2. Channel Leadership. Usually one channel member—the channel captain —can determine the roles and rewards of the others. The channel captain often is a manufacturer or an originator of a service. But in some industries, an influential wholesaler or a large retailer such as Walmart may be a channel captain because of large sales volume.

KEY TEACHING TIPS •

The distribution channel strategy depends on the nature of the product and the target market.

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Each of the intermediaries plays a very specific role in distributing the product.

QUICK QUESTIONS •

What are some activities involved between manufacturing and retail? How is value added in these activities? Remind students of the various benefits that intermediaries provide in the distribution process.

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No intermediaries are involved in a direct channel. What are some products that flow through Channel 2?

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Channel 3 emerged as a way of reducing the need for floor space among retailers. What products might pass through Channel 3?

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Use In-Class Activity 1: Ice-Breaker: Why Do They Sell Where They Do? Time Limit: 30 minutes HOMEWORK Now might be a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. This assignment encourages students to consider the supply chain and how being a member affects its marketing decisions.

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Learning Objective 13-2: Describe the role of wholesalers and the functions performed by e-intermediaries.

Wholesaling Wholesalers perform various functions, which may include storing, providing an assortment of products, and offering delivery, credit, and product information.

A. Merchant Wholesalers Most wholesalers are independent operations that sell various consumer or business goods produced by a variety of manufacturers. The largest group, merchant wholesalers, buys products from manufacturers and sells them to other businesses. They own the goods that they resell and usually provide storage and delivery.

Full-service merchant wholesalers (about 80 percent of all merchant wholesalers) provide value-adding services, including credit, marketing advice, and merchandising services.

Limited-function merchant wholesalers provide fewer services, sometimes merely storage.

Drop shippers don’t even carry inventory or handle products; they take orders from customers, negotiate with producers to supply goods, take title to them, and arrange for shipment.

B. Agents and Brokers Agents and brokers, including online e-agents, serve as independent sales representatives for many companies’ products. Unlike wholesalers, agents and brokers do not own their merchandise. However, they serve as sales and merchandising arms for producers or sellers who do not have their own sales forces.

C. The Advent of the E-Intermediary E-intermediaries are Internet-based channel members (wholesalers) who perform one or both of two functions: (1) collect information about sellers and present it to consumers; or (2) help deliver Internet products to buyers.

1. Syndicated Sellers. Syndicated selling occurs when one website offers another commission for referring customers.

2. Shopping Agents. Shopping agents (e-agents) gather, sort, and present accurate information to help Internet consumers compare websites, stores, prices, and product features. Many consumers use e-agents when purchasing airline tickets or hotel rooms.

3. Business-to-Business Brokers. E-commerce intermediaries provide online value-adding services for business customers. The pricing process between B2B buyers and sellers of commodities and services can be outsourced, for example.

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Learning Objective 13-3: Describe the different types of retailing and explain how online retailers add value for consumers on the Internet.

Retailing Varying greatly in size, retailers represent the end of the distribution channel, making the sale of goods or services to final consumers.

A. Types of Brick-and-Mortar Retail Outlets U.S. retail operations vary by type, size, pricing strategies, location, range of services, or range of product lines.

1. Product-Line Retailers. Retailers that feature broad product lines include department stores, which are arranged into specialized departments and handle a wide range of goods, a variety of other services such as credit plans, while pricing can be used to help attract the chosen target market; supermarkets, which offer a wide selection at low prices, with self-service and wide selection; and specialty stores, which are small stores that carry a full line of related products in narrow product fields.

2. Bargain Retailers. Bargain retailers carry wide ranges of products and come in many forms: discount houses, which feature a large number of items at low prices; catalog showrooms, which allow customers to view displays, place orders, and wait briefly while clerks retrieve orders from warehouses; factory outlets, which are manufacturer-owned stores that avoid wholesalers and retailers by selling merchandise directly from factory to consumer; wholesale clubs, which offer large discounts on a wide range of brand-name merchandise to customers who pay annual membership fees.

3. Convenience Stores. Convenience stores offer ease of purchase of a narrow assortment of products with higher prices.

B. Nonstore Retailing Some retailers sell some or all of their products without stores. Vending machines are ideal for products such as snack foods, jukeboxes, cigarettes, and even videos (Redbox). Major types of nonstore selling include direct-response retailing, in which firms make contact with customers both to inform them about products and to receive sales orders. Mail order (or catalog marketing) is a popular form of direct-response retailing. Less popular in recent years is telemarketing—the use of the telephone to sell directly. In direct selling, companies sell door-to-door or through home-selling parties.

C. Online Retailing Over 85 percent of the world’s online population—over 1 billion customers— have made purchases on the Internet on such sites as iTunes and Amazon.com.

1. Electronic Catalogs. Electronic catalogs use the Internet to display products for both retail and business customers. Advantages include little cost in maintaining and accessing the catalog, as well as reducing mail distribution and printing costs.

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2. Electronic Storefronts and Cybermalls. Electronic storefronts allow consumers to collect information about products and buying opportunities, whereas cybermalls are collections of virtual storefronts representing diverse products. Convenience and accessibility of information are prime benefits.

3. Interactive and Video Retailing. Interactive marketing allows both retail and B2B customers to interact with multimedia sites using voice, graphics, animation, film clips, and access to live human advice. Video marketing lets viewers shop at home from TV screens by phoning in or e-mailing orders.

KEY TEACHING TIPS •

Students easily confuse the work of agents and brokers. Agents form long-term relationships to represent just a few producers, while brokers match numerous sellers and buyers.

•

Students often confuse the various types of bargain retailers. It may help to review the functions of each type: discount houses, catalog showrooms, factory outlets, and wholesale clubs.

•

Review the functions of nonstore retailing, including direct-response retailing, mail order, telemarketing, and direct selling.

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Emphasize the variety of e-intermediaries and the impact on marketing.

QUICK QUESTIONS •

How do online retailers benefit from the use of syndicated sellers?

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How do online consumers benefit from shopping agents (e-agents)?

•

How do online retailers and consumers benefit from electronic retailing?

•

How can consumers benefit from interactive and video marketing?

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Learning Objective 13-4: Define physical distribution and describe the major activities in the physical distribution process.

Physical Distribution refers to the activities needed to move products efficiently from manufacturer to consumer. Two primary activities include warehousing and transportation. Its purpose is to make goods available when and where customers want them, keep costs low, and provide services to satisfy customers.

A. Warehousing Operations Storing or warehousing, is a major part of distribution management. Private warehouses are owned by a single manufacturer, wholesaler, or retailer that needs storage space on a regular basis; public warehouses are independently owned and rent space to firms that need it. A growth area for storage is in storing digital data by using off-site digital storage services.

B. Transportation Operations Factors involved in choosing a transportation method include the nature of the product, the distance it must travel, the speed with which it must be received, and the customers’ wants and needs.

Transportation Modes. The most common modes are trucks, railroads, planes, water carriers, and pipelines. Differences in cost most often are related to delivery speed.

Trucks. The advantages of trucks include flexibility for any-distance distribution, fast service, and dependability.

Planes. Air is the fastest mode of transportation for physical goods. However, it is also the most expensive form of transportation.

High Speed Digital Transmission. Online transmission is a newer, faster, and less expensive means of distribution than all other modes. It is restricted to products such as music, images, movies, and software.

Water Carriers. Water is the least expensive mode, but also the slowest. Water carriers can reach many areas throughout the world.

Railroads. Railroads can economically transport high-volume, heavy, bulky items, such as cars, steel, and coal. However, their delivery routes are limited by fixed, immovable rail tracks.

Pipelines. Pipelines are slow and lack flexibility and adaptability. But for specialized products they provide economical and reliable delivery of products such as liquids and gases.

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C. Distribution through Supply Chains as a Marketing Strategy Instead of just offering advantages in product features, quality, price, and promotion, many firms have turned to supply chains that depend on distribution as a cornerstone of business strategy. This approach means assessing, improving, and integrating the entire stream of activities—upstream suppliers, wholesaling, warehousing, transportation, delivery, and follow-up services—involved in getting products to customers.

QUICK QUESTIONS •

How can intermediaries provide added value to customers?

•

What is the difference between a private warehouse and a public warehouse?

•

What are the advantages and disadvantages of relying on the following modes of transportation: trucks, planes, water carriers, railroads, and pipelines?

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Learning Objective 13-5: Identify the important objectives of promotion and the considerations in selecting a promotional mix, and discuss the various kinds of advertising promotions.

Promotion is any technique designed to sell a product; it is a message that a marketer sends to consumers about its product(s).

A. Promotional Objectives Marketers may use promotion to accomplish a number of tasks, such as communicating information, positioning products, adding value, or controlling sales volume. Positioning is the process of establishing an easily identifiable product image in the minds of consumers by fixing, adapting, and communicating the nature of the product itself.

B. Promotional Strategies 1. Pull Strategy. A pull strategy appeals directly to consumers who will demand the product from retailers.

2.

Push Strategy. Using a push strategy, a firm markets its product to wholesalers and retailers who then persuade customers to buy it.

Manufacturers frequently use a combination of pull and push strategies, appealing to customers to create demand for the product and to wholesalers and retailers to stock the item.

C. The Promotional Mix Marketers use five types of promotional tools: advertising, personal selling, sales promotions, direct or interactive marketing, and publicity and public relations. The best combination of these tools—the best promotional mix—depends on many factors. A marketer’s product, its target audience, and its budget are all important considerations in building the promotional mix.

Buyers must recognize the need to make a purchase prior to searching for product or service information. Buyers then compare competing products and services before purchasing one.

Buyers then evaluate the purchase. There are five stages to this process, and the marketer matches promotional tools with these steps: 1. When buyers first recognize the need to make a purchase, marketers use advertising and publicity to make sure buyers are aware of their products.

2. As buyers search for information about available products, advertising and personal selling are important methods to educate consumers.

3. Personal selling can become vital as buyers compare competing products. Sales representatives can demonstrate product quality, features, and performance in comparison with competitors’ product.

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4. When buyers are ready to purchase products, sales promotion can give consumers an incentive to buy. Personal selling can help by bringing products to convenient purchase locations.

5. After making purchases, buyers evaluate products and make a note of their strengths and deficiencies. Advertising and personal selling can remind consumers that they made wise purchase choices.

D. Advertising Advertising is paid, nonpersonal communication used by an identified sponsor to inform an audience about a product.

1. Advertising Media. Advertising media are specific communication devices for carrying a seller’s message to potential customers; advertising media include newspapers, television, direct mail, radio, magazines, and outdoor advertising. The combination of media through which a company advertises is called its media mix. a. Television. Although TV is the most widely used and expensive medium, the brevity of TV ads makes it a poor medium for educating viewers. b. Direct Mail. Direct-mail advertisements allow a seller to select its audience and personalize its message. However, many people discard it as junk mail. c. Newspapers. Newspapers provide excellent local coverage. However, they are generally thrown out and don’t allow advertisers to target audiences well. d. Magazines. Magazines provide for a high level of market segmentation, allow attractive artwork, and have long lives. However, they must be submitted well in advance, and ads may not appear in the best spots. e. Radio. Radio ads are inexpensive and audiences are largely segmented. However, radio ads go by quickly and people tend to use the radio as background while doing other things. f. Internet. Although Internet advertising has great target marketing potential, consumers don’t want to wade through Web pages cluttered with distracting graphics and pop-ups. g. Outdoor. Outdoor advertising—billboards and so on—are inexpensive, face little competition for consumers’ attention, and provide high repeat exposure. However, they can present only limited information, and advertisers have little control over audiences. h. Other. A combination of other media, including catalogs, sidewalk handouts, skywriting, phone calls, and door-to-door communication, are also available.

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2. Real-Time Ad Tracking. Advertisers always want better information about who looks at their ads and for how long. Accurate ad-watching behavior of shoppers in malls, theaters, and grocery stores is on the increase through the introduction of high-tech real-time surveillance. Companies like Google have become experts at feeding back ad data to their advertisers.

KEY TEACHING TIPS •

Remind students of the elements of the promotional mix and reinforce that many factors determine how a marketer designs its promotional mix, with target audience being the most important.

•

Reinforce that promotion refers to techniques for communicating information about products; it is a part of the communication mix—the total message a company sends to consumers about its products.

•

Point out that when designing the promotional mix, marketers match the best promotional tools with where buyers currently are in the decision-making process.

•

Ensure that students realize that to most effectively promote a product, marketers must find out who their customers are, to which media they pay attention, what messages appeal to them, and how to get their attention.

QUICK QUESTIONS •

What elements make up the media mix?

•

What are some advantages and disadvantages of using newspapers, magazines, radio, Internet, and outdoor advertising?

Use In-Class Activity 3: Up for Debate: What’s the Best Way to Reach Them?

Time Limit: 30 minutes HOMEWORK Advertising Media Now is a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. The assignment encourages students to think about the various media options used by marketers with well-known products by selecting a product and identifying as many media used in its promotion as they can.

At-Home Completion Time: 1 hour

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Learning Objective 13-6: Outline the tasks involved in personal selling and describe the various types of sales promotions.

Personal Selling In personal selling, a salesperson communicates one-to-one with potential customers to identify their needs and to line them up with the seller’s products. Personal selling requires a certain level of trust between buyer and seller, which must be established over time.

A. Personal Selling Situations Salespeople must consider the ways in which personal sales activities are affected by the differences between consumer and industrial products. Retail selling is selling a consumer product for the buyer’s personal or household use. Industrial selling is selling products to other businesses, either for the purpose of manufacturing or for resale.

In retail selling, the buyer usually comes to the seller, whereas the industrial salesperson typically calls on the prospective buyer. An industrial decision usually takes longer than a retail decision because it involves more money, decision makers, and weighing of alternatives.

B. Personal Selling Tasks In order processing, a salesperson receives an order and sees to its handling and delivery.

Creative selling can help to persuade buyers when the benefits of a product are not entirely clear. A company may use missionary selling when its purpose is to promote itself and its products rather than simply to close a sale.

C. The Personal Selling Process Perhaps the most complex and challenging of these three sales tasks is creative selling. The creative salesperson is responsible for starting and following through on most of the steps in the personal selling process: 1. Prospecting and qualifying. Prospecting is the process of identifying potential customers. In qualifying, prospects must be assessed to determine whether they have the authority to buy and the ability to pay.

2. Approaching. The approach refers to the first few minutes of a salesperson’s contact with a qualified prospect, the first impression.

3. Presenting and demonstrating. Next, the salesperson makes a presentation, a full explanation of the product, its features, and its uses. The presentation must link product benefits to the prospect’s needs.

4. Handling objections. No matter what product is for sale, prospects will have some objections. Objections indicate interest on the part of the buyer, but also pinpoint the parts of the presentation that concerned the buyer.

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5. Closing. The most critical part of the selling process is the closing, in which the salesperson asks the prospect to buy the product. Successful salespeople recognize the signs that a customer is ready to buy.

6. Following up. Follow-up is a key activity, especially in relationship marketing. For lasting relationships with buyers, good salespeople don’t end the sales process with the closing; they want sales to be so successful that customers will buy from them again.

D. Sales Promotions Sales promotions are short-term promotional activities designed to stimulate consumer buying, industrial sales, or cooperation from distributors, sales agents, or other members of the trade. Sales promotions are important because they increase the likelihood that buyers will try products.

The best-known forms of sales promotion are discount coupons, premiums, which are free or reduced-priced items, point-of-sale (POS) displays, loyalty programs, and trade shows.

Successful sales promotions provide potential customers with convenience and accessibility when the decision to buy occurs.

E. Direct (or Interactive) Marketing Direct (or interactive) marketing is one-on-one nonpersonal selling that tries to get consumers to make purchases away from retail stores and, instead, to purchase from home, at work, or by using a mobile device while traveling. When used by B2B businesses, direct marketing is primarily lead generation so a salesperson can close the sale where interest has been shown. In B2C businesses, it has primarily a selling goal. The advantage of direct marketing is that you can target the message to the individual and you can measure the results.

F. Publicity and Public Relations Publicity is information about a company, a product, or an event transmitted by the general mass media to attract public attention. Public relations is company-influenced publicity that seeks to build good relations with the public and to deal with the effects of unfavorable events.

KEY TEACHING TIPS •

Personal selling is used to communicate one-on-one with potential customers to identify their needs and align them with the seller’s products.

•

Review the tasks involved in personal selling: order processing, creative selling, and missionary selling.

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Reinforce that sales promotions include a number of short-term promotional activities designed to encourage consumer buying, industrial sales, or cooperation from distributors.

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•

Remind students of the flexibility and adaptability of direct (or interactive) marketing in targeting very specific customers.

•

Make sure that students understand the difference between publicity and public relations, as these two concepts are often confused.

QUICK QUESTION •

What are some types of sales promotions?

•

What are some differences between personal selling for consumer products or industrial products?

Use In-Class Activity 2: Up for Debate: Getting a Stimulus Boost with Promotion Time Limit: 30 minutes

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

IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker: Why Do They Sell Where They Do? Activity Overview: This activity asks students to consider distribution strategies behind some well-known competing products.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask each group to come up with four sets of competing products or services; in most cases, students will select products that are similar, but carry a different brand name, such as Blue Bonnet Margarine versus Prairie Farms Margarine. These should be products that are similar to each other but that are found in different types of places. (10 minutes) 2. Ask students to discuss the place each product is sold and be able to explain the reasoning for one brand being sold in one kind of place rather than a different place (convenience store and Whole Foods, for example). (10 minutes) 3. Reassemble the class as a whole and ask for each group’s input. (10 minutes) Don’t Forget: Students will come up with a variety of reasons for differing products being sold where they are sold. Some will be more difficult to explain than others. For example, almost everyone knows that a product purchased at Walmart often is less costly than a product from Kroger. But students may not understand why that is the case when the product appears to be the same, from their perspective.

Wrap-Up: Bring the activity to a close by reminding students of the role distribution plays in the marketing mix and the common types of distribution strategies seen in the marketplace.

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In-Class Activity 2: Up for Debate: Getting a Stimulus Boost with Promotion Activity Overview: This activity asks students to discuss how firms are changing their distribution messages during economic downtimes.

Time Limit: 30 minutes What to Do: 1. Ask students to read the Managing in Turbulent Times feature in the textbook, making a list of as many pros and cons of relying on direct marketing as possible. (10 minutes) 2. Divide the class into small groups to discuss their pros and cons of premiums, direct (or interactive) marketing, and integrated promotion and distribution. Do the pros outweigh the cons? (10 minutes) 3. Reassemble the class to debate the pros and cons as a group. Do the pros outweigh the cons?

(10 minutes) Don’t Forget: Retailers are constantly looking for ways to get an edge in the marketplace. Remind students that retailers will use all of the 4 Ps (price, promotion, product, and place) to add value and try to get an edge in competitive markets.

Wrap-Up: Ask students to clip advertisements from newspapers or magazines, or print online advertisements that show how retailers are seeking to use promotion to gain attention and boost demand. Get the students to bring them to the next class and vote on the one that is most innovative.

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In-Class Activity 3: Up for Debate: What’s the Best Way to Reach Them?

Activity Overview: This activity asks students to think about different ways that a product can be promoted to one specific target market.

Time Limit: 30 minutes What to Do: 1. Divide the class into four-member groups and ask each group to consider marketing a solarpowered vacuum cleaner to working women with fast-paced, on-the-go lifestyles. In their discussions, groups should consider the following: (15 minutes) a. Which elements of the promotional mix should be utilized? b. What are the best ways/places to promote this product to this specific target market?

2. Reassemble the class and discuss each group’s promotion suggestions. (15 minutes) Don’t Forget: Specific promotional mix elements do a better job than others in reaching or attracting specific target markets.

Wrap-Up: Bring the activity to a close by reviewing the elements of the promotional mix and how each element may or may not be suited in this scenario.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 13-1. Describe the types of distribution channels that may be used to get products from manufacturers to end users.

The channels of distribution are as follows: Channel 1 involves direct sales to consumers without intermediaries; Channel 2 involves a retailer; Channel 3 involves both a retailer and a wholesaler; Channel 4 includes an agent or broker before the wholesalers and retailers.

(Learning Objective 1 – AACSB – application of knowledge) 13-2. What are the three levels of market coverage? When is each most appropriate?

Intensive distribution means distributing through as many channels and channel members as possible (both wholesalers and retailers) for low-cost consumer goods such as snacks and magazines. With exclusive distribution, a manufacturer grants the exclusive right to distribute or sell a product to a limited number of wholesalers or retailers, usually in a given geographic area. The product is usually a high-cost prestige product, such as a luxury car.

Using selective distribution, a producer selects only wholesalers and retailers that will give a product special attention in sales effort, display and promotion advantage, and so forth.

Furniture and appliances are often marketed using selective distribution. (Learning Objective 1 – AACSB – application of knowledge) 13-3. Compare each of the major modes of transportation and identify at least one advantage of each.

The advantages of trucks include flexibility for any-distance distribution, fast service, and dependability. Air is the fastest mode of transportation for physical goods. Online transmission is a newer, faster, and less expensive means of distribution than all other modes.

Water is the least expensive mode, but also the slowest. Railroads can economically transport high-volume, heavy, bulky items, such as cars, steel, and coal. However, their delivery routes are limited by fixed, immovable rail tracks. Pipelines are slow and are used to transport liquids and gases. They are also inflexible, but for specialized products they provide economical and reliable delivery. (Learning Objective 4 – AACSB – application of knowledge) 13-4. Select four advertising media and compare the advantages and disadvantages of each.

Visit MyBizLab for suggested answers. (Learning Objective 5 – AACSB – application of knowledge) 13-5. What are the steps in the personal selling process?

The first step is prospecting and qualifying: the process of identifying potential customers and then prospects must be assessed to determine whether they have the authority to buy and

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the ability to pay. The second step is approaching. The approach refers to the first few minutes of a salesperson’s contact with a qualified prospect. Next, the salesperson makes a presentation, a full explanation of the product, its features, and its uses. The fourth step is handling objections. No matter what product is for sale, prospects will have some objections.

The next step is closing. The most critical part of the selling process is the closing, in which the salesperson asks the prospect to buy the product. The final step is follow-up, a key activity, especially in relationship marketing. (Learning Objective 6 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 13-6. Describe the four forms of non-store retailing. What types of products would be most appropriate for each and why?

Visit MyBizLab for suggested answers. (Learning Objective 3 – AACSB – application of knowledge, reflective thinking) 13-7. What are the major types of product line and bargain retailers? Identify at least one example of each type.

Retailers that feature broad product lines include department stores, which are arranged into specialized departments and handle a wide range of goods; supermarkets, which offer a wide selection at low prices; and, specialty stores, which are small stores that carry a line of related products.

Bargain retailers carry wide ranges of products and come in many forms: discount houses, which feature a large number of items at low prices; catalog showrooms, which allow customers to view displays, place orders, and wait briefly while clerks retrieve orders from warehouses; factory outlets, which are manufacturer-owned stores that avoid wholesalers and retailers by selling merchandise directly from factory to consumer; wholesale clubs, which offer large discounts on a wide range of brand-name merchandise to customers who pay annual membership fees. (Learning Objective 3 – AACSB – application of knowledge, reflective thinking) 13-8. Identify the major tools of sales promotion. At which stage of the consumer buying process is each most important? Why? Visit MyBizLab for suggested answers. (Learning Objective 5 – AACSB – application of knowledge, reflective thinking) APPLICATION EXERCISES 13-9. In addition to being a major online retailer, Amazon.com acts as an e-intermediary for many small to medium-sized businesses. Imagine that you are interested in selling refurbished cell phones. Using the information on Amazon’s website, how would you become a seller on Amazon? What costs are associated with selling your products through

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Amazon? If you decided to sell your products through your own website instead, what would be the pros and cons?

As a member of a supply chain, the company’s marketing mix has to be consistent with its partners’ strategy. A company cannot make unilateral decisions without considering the other members of the supply chain. For example, if a member increases its prices what is the impact on the other members. Students should also discuss how the supply chain process needs to be an integrated process. (Learning Objective 2, 3 – AACSB – application of knowledge, reflective thinking) 13-10. Go to YouTube and find a video advertisement that you think is particularly interesting.

What is the product being marketed and who is the target market? How does the advertisement appeal to the target market? Do you think that this is effective or not? Why? Students will probably find that TV and magazines are heavily used for nationally distributed products. In determining effectiveness, students should consider the target audience. Is the media mix reaching the target audience? (Learning Objective 5 – AACSB – application of knowledge, reflective thinking) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 13-11 TO 13-15 (Learning Objectives 1, 4, 5, 6 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) In this exercise students continue to develop their marketing plan by adding an appropriate distribution and promotional plan to their marketing mix. Determining promotion objectives and strategies leads to choosing the specific appropriate tools to successfully achieve the objectives.

Choosing the appropriate distribution mix relies on having earlier correctly identified your target market and the characteristics of the buyers. Knowing the costs of the tools you choose will help you stay within your budget.

TEAM EXERCISE: MAKING A DIFFERENCE 13-16 TO 13-19 (Learning Objective 5, 6 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) 13-16. As a group, develop your promotional objectives. What are the initial objectives of your promotional campaign? Will these change over time?

13-17. What role will each element of the promotional mix play in your promotional plan?

13-18. Develop a one- to two-page recommendation that you could present to the university’s leadership team.

13-19. Do you think that the promotional mix will change over time? How might it be different in three years? Be sure to address this in your proposal.

As students examine the guidelines, they must determine whether the objectives are the same for attracting students from Huge University as for attracting students from other North American colleges and universities. Why would the objective be the same? Will the elements of the promotional mix need to be different or can they be the same? Why? Once the program is a few

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years old, students should keep in mind that the message should be able to change and use the experiences of the students who completed the program to enhance the content of the promotions.

EXERCISING YOUR ETHICS: THE CHAIN OF RESPONSIBILITY (Learning Objective 4 – AACSB – ethical understanding and reasoning, reflective thinking) 13-20. What are the responsibilities of each party—the customer, the store, and the delivery firm—in this situation?

The responsibilities of each party in this situation are as follows: • Customer: To provide correct delivery information to the store.

• Store: To clearly communicate its delivery policies to consumers.

• Delivery firm: To make timely deliveries to the designated address and to clearly communicate its policies to the store.

13-21. From an ethical standpoint, in what ways is the store manager’s action right? In what ways is it wrong?

From an ethical standpoint, the store manager’s action is right and wrong as follows: • Right: Since the store fulfilled its obligation to the customer, fiscal responsibility would suggest that the store manager should not refund the customer’s money.

• Wrong: Since the package was not delivered to the bride, good customer service would suggest that the store manager should refund the money.

13-22. If you were appointed to settle this matter, what actions would you take?

Answers will vary, but students should recognize that customers typically broadcast a bad experience to many of their friends and colleagues, magnifying the impact of a dissatisfying experience.

CASES: STREAMING SUCCESS (Learning Objective 4, 5 and 6 – AACSB – application of knowledge, reflective thinking) 13-23. How would you describe the Netflix target market(s)? Explain your response.

The Netflix target markets include: the initial target group of teens and twenties but has now crossed over to the children’s market, and the over-40 demographic.

13-24. What factors led Netflix to change their distribution strategy? How has this change allowed them to change their product offerings?

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As technology changed, and buyers’ demands changed, Netflix moved from providing a physical product (DVDs) to providing an electronic product. Intermediaries play a tremendous role in this channel. Netflix collaborated with consumer electronic firms to enable delivery of streaming and producers of video content to provide their product.

13-25. How can legacy cable providers such as HBO compete with Netflix in the future?

Cable providers such as HBO can, and do, compete both by streaming videos and providing original content, as does Netflix. HBO moved in that direction earlier, though.

13-26. Describe Netflix’s promotional objectives. How have these changed in the last decade?

Answers will vary with many students focusing on the promotional objectives of: objective of increasing sales, communicating information about their new products, the added value and convenience of video streaming, and controlling their sales volume by adding original programming. Students should point out that the original content, in particular, is a more recent change, but that video streaming has enhanced Netflix’s growth capability.

13-27. How might Netflix use each element of the promotional mix? Which are most and least important? Why? Netflix’s promotional mix has included advertising, publicity, and a lot of word-of-mouth through social media. Over time, it has appeared to shift away from traditional advertising to more online and direct interaction with current customers using data mining. Personal selling is an element that does not really apply to the Netflix product. Advertising, social media, and sales promotions are most important as they keep the customer base informed and attract new users through promotions.

HOLLYWOOD’S NEW MARKETING CAMPAIGN: REVIVING CLASSIC MOVIES (Learning Objectives 5 and 6 – AACSB – application of knowledge, reflective thinking) 13-28. Describe the advertising mix being used in Hollywood’s new marketing campaign for classic movies.

The advertising mix has a heavy emphasis on impulse buying using sales promotion devices including: special packaging, point-of-purchase displays, and premiums as well as using current movie trailers.

13-29. What are the main reasons for the new campaign? How do you recommend they measure results?

To increase sales and revenues. Results can obviously be measured by changes in sales and net profits.

13-30. Where do DVD and Blu-ray discs fit in the product life cycle? How does this influence the marketing mix?

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DVD and Blu-ray discs are in the maturity section of the product life cycle, if not the decline section. The case discusses that disc revenue has been declining, but that the decline is much smaller for classic film titles. Therefore, it could be acknowledged that where the discs are in the PLC depends on the titles being marketed. It influences the marketing mix because the promotion tools themselves would be used differently for classic movie titles versus newer titles.

13-31. Who is the target market for Warner Bros. with their new subscription streaming service for classic TV shows and movies? What challenges do you expect that they will face?

Since the subscription streaming service offers classic TV shows and movies, the target market is the older consumers that watch and re-watch those shows and movies. Challenges can include competing with the offerings of the cable providers such as HBO, Starz, and Showtime, as well as non-premium cable channels that offer classic movies as standard fare.

A challenge will be persuading consumers to subscribe to yet another service and persuading consumers that the Warner Bros. product has enough unique features that are worth paying for.

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BUSINESS PLAN PROJECT: PART 4 The business plan project for Business Essentials is divided into six parts, corresponding to the book’s six main parts. The fourth part of the project is found on the following three pages. It is now time to get students working on Part 4…

CRAFTING A BUSINESS PLAN PART 4: PRINCIPLES OF MARKETING Assignment Overview: This part of the business plan asks students to think about marketing’s “Four Ps”—product, price, place (distribution), and promotion—and how they apply to their business. Students will list features and benefits as well as the points of difference for their product or service. After describing the product, the student must connect those described features and benefits to a targeted buyer. Once the targeted buyer has been named, students will describe advertising and promotional efforts to get the buyer’s attention.

Files to Provide Students: For this part of the project, students will be asked to complete Part 4: Principles of Marketing. If students have already started working on the business plan project, they should continue using the student template they began working on in Parts 1 to 3. A copy of the marketing template is available on the following page.

Estimated At-Home Completion Time: If done well, this section will require a minimum of 3 to 5 hours. Instructor feedback will improve the quality of student responses, so you may wish to spend class time working on the plan.

Homework Deliverable from Students: The length of student responses in this part of the plan will vary greatly, as critical or creative thinkers will often begin to distinguish themselves. At a minimum, you should expect 3 to 5 pages in this part, with exceptional students writing as many as 8 pages to fully explain all aspects of their marketing program.

STUDENT BUSINESS PLAN PROJECT TEMPLATE PART 4: PRINCIPLES OF MARKETING TARGET MARKET Describe your target market in terms of age, education level, income, and other demographic variables.

Hint: Refer to Chapter 11 for more information on the aspects of target marketing and market segmentation that you may want to consider. Be as detailed as possible about who you think your customers will be.

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PRODUCT FEATURES AND BENEFITS Describe the features and benefits of your product or service.

Hint: As you learned in Chapter 11, a product is a bundle of attributes—features and benefits.

What features does your product have—what does it look like, and what does it do? How will your product benefit the buyer?

PRODUCT DIFFERENTIATION How will you make your product stand out in the crowd?

Hint: There are many ways to stand out in the crowd, such as a unique product, outstanding service, or a great location. What makes your “great idea” special? Does it fill an unmet need in the marketplace? How will you differentiate your product to make sure that it succeeds?

PRICING What pricing strategy will you choose for your product, and what are the reasons for this strategy?

Hint: Refer to Chapter 12 for more information on pricing strategies and tactics. Since your business is new, so is the product. Therefore, you probably want to choose between price skimming and penetration pricing. Which will you choose, and why?

PLACE (DISTRIBUTION) ISSUES Where will customers find your product or service? (That is, what issues of the distribution mix should you consider?)

Hint: If your business will sell its product directly to consumers, what types of retail stores will sell your product? If your product will be sold to another business, which channel of distribution will you use? Refer to Chapter 12 for more information on aspects of distribution you may want to consider.

ADVERTISING How will you advertise to your target market? Why have you chosen these forms of advertisement?

Hint: Marketers use several different advertising media—specific communication devices for carrying a seller’s message to potential customers—each having its advantages and drawbacks.

Refer to Chapter 12 for a discussion of the types of advertising media you may wish to consider here.

PROMOTIONS What other methods of promotion will you use, and why?

Hint: There’s more to promotion than simple advertising. Other methods include personal selling, sales promotions, and publicity and public relations. Refer to the discussion of promotion in Chapter 12 for ideas on how to promote your product that go beyond just advertising.

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Chapter 14: Information Technology (IT) for Business Chapter Overview Information technology (IT) has had a tremendous impact on the business world in the last few years. Think of how much the Internet alone affects your life. Some people feel completely “out of touch” going just one day without it. We are connected to the remotest corners of the world.

Businesses have a variety of IT resources at their disposal, and information systems and how these systems are used play an integral role in businesses.

This chapter provides the latest details on business IT. It discusses the impacts IT has had on the business world and identifies the IT resources businesses have at their disposal. It also describes the role of information systems, the different types of information systems, and how businesses use such systems. Finally, it looks at the various threats and risks IT poses for businesses, as well as the ways in which businesses protect themselves from these threats and risks. Even if you are apprehensive about IT and its uses, this chapter will help you become more familiar with and comfortable with IT.

Learning Objectives 14-1. Discuss the impacts information technology is having on the business world.

14-2. Identify the IT resources businesses have at their disposal and how these resources are used.

14-3. Describe the role of information systems, the different types of information systems, and how businesses use such systems.

14-4. Identify the threats and risks information technology poses on businesses.

14-5. Describe the ways in which businesses protect themselves from the threats and risks information technology poses.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Ice-Breaker: IT Devices

2. Small-Group Discussion: CereProc and New Products, Especially for Small Markets 3. Up for Debate: Is That Ethical?

Description Students discuss various ways in which technological devices allow the class as a whole to create, store, exchange, and use information.

Students examine how information technology progress leads to the creation of new products.

Students are divided into teams to discuss the ethical issues surfacing when an employer has the ability to access and track employees’ computer usage.

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Time Limit

20 min.

30 min.

30 min.

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CHAPTER OUTLINE Learning Objective 14-1: Discuss the impacts information technology is having on the business world.

IT Impacts Information technology (IT) includes the various appliances and devices for creating, storing, exchanging, and using information in diverse modes, including visual images, voice, multimedia, and business data. E-commerce is the use of the Internet and other electronic means for retailing and business-to-business transactions. Businesses are using IT to bolster productivity, improve operations and processes, create new opportunities, and communicate and work in ways not possible before.

A. Creating Portable Offices Technology built into various devices offers businesses powerful tools that save time and travel expenses by enabling employees, customers, and suppliers to communicate from any location.

B. Enabling Better Service by Coordinating Remote Deliveries Company activities may be geographically scattered, but remain coordinated through a networked system that also provides better service for customers. Shipping from various locations is more cost-effective and efficient than gathering all the items in one place to then ship to the buyer.

C. Creating Leaner, More Efficient Organizations Networks and technology allow organizations to operate with fewer employees and simpler structures. IT communications provide better use of employee skills and greater efficiencies from physical resources.

D. Enabling Increased Collaboration Collaboration software and other IT communication devices enable greater collaboration among internal units and with outside firms.

E. Enabling Global Exchange The global reach of IT is enabling business collaboration on a huge scale and minimizes delays, holds down costs, and maintains quality.

F. Improving Management Processes With databases, specialized software, and interactive networks, instantaneous information is now accessible and useful to all levels of management.

G. Providing Flexibility for Customization IT networks and other IT advances create new manufacturing capabilities that enable businesses to offer customers greater variety and faster delivery cycles. Mass-customization allows manufacturers to produce in large volumes, with each item featuring the unique options the customer prefers. The standardized assembly line has become very adaptable.

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Customization and greater flexibility is also possible for service industries, including pet care, and travel.

H. Providing New Business Opportunities IT is creating entirely new businesses where none existed before.

I. Improving the World and Our Lives Numerous businesses across various industries use IT to create improvements that enhance the standard of living.

KEY TEACHING TIPS •

Remind students that information technology (IT) includes the various devices for creating, storing, exchanging, and using information in diverse modes, including visual images, voice, multimedia, and business data.

•

Students need to keep the meaning of standardization separate from mass-customization, which allows companies to produce in large volumes and provide unique features and options for customers.

QUICK QUESTIONS •

How are portable offices bolstering productivity?

•

How has IT allowed marketers to provide better service?

•

How does IT allow firms to create leaner, more efficient organizations?

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How has IT changed the nature of the management process within organizations?

Use In-Class Activity 1: Ice-Breaker: IT Devices Time Limit: 20 minutes HOMEWORK The Impact of IT Now might be a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. This assignment asks students to think about how IT systems affect their daily lives, and whether their encounters with IT leave them at risk for identity theft.

At-Home Completion Time: 30 minutes

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Learning Objective 14-2: Identify the IT resources businesses have at their disposal and how these resources are used.

IT Building Blocks: Business Resources Businesses have numerous IT resources at their disposal.

A. The Internet and Other Communication Resources The Internet is a gigantic system of interconnected computers belonging to millions of collaborating organizations and agencies—government, business, academic, and public— linked together by voice, electronic, and wireless technologies. The World Wide Web and its protocols provide the common language that allows information sharing on the Internet.

1. Intranets. Intranets are private networks of internal websites linked throughout an organization that are accessible only to employees.

2. Extranets. Extranets allow outsiders limited access to a firm’s internal information network.

3. Electronic Conferencing. Electronic conferencing allows groups of people to communicate simultaneously from various locations via e-mail, phone, or video, eliminating travel time and providing immediate contact.

4. VSAT Satellite Communications. VSAT satellite communications have a transmitterreceiver that sits outdoors with a direct line-of-sight to a satellite; the hub sends signals to and receives signals from the satellite, exchanging voice, video, and data transmission. It provides privacy because the organization’s system has total control over communications among its facilities, without dependence on other companies.

B. Networks: System Architecture A computer network is a group of two or more computers linked together by some form of cabling or by wireless technology to share data or resources, such as a printer; a client-server network is a common type of network used in businesses in which the clients are usually the laptop or desktop computers being used, and the servers are any number of computers that provide services shared by users. Cloud computing adds an externally located component, a remote storage service, which enhances user flexibility.

1. Wide Area Networks (WANs). Wide area networks (WANs) are computers linked over long distances (statewide or even nationwide) through telephone lines, microwave signals, or satellite communications.

2. Local Area Networks (LANs). In local area networks (LANs), computers are linked in a smaller area, such as all of a firm’s computers within a single building. The arrangement requires only one computer system with one database and one software system.

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3. Wireless Networks. Wireless networks use airborne electronic signals to link network computers and devices. For example, the BlackBerry system consists of devices that send and receive transmissions on wireless wide area networks (WWANS) of more than 500 service providers in 90 countries around the world.

4. Wi-Fi. A hotspot, or Wi-Fi access point, for the Internet is actually its own small network, called a wireless local area network (Wireless LAN or WLAN).

C. Hardware and Software Hardware includes the physical components, such as keyboards, monitors, system units, and printers; software includes the programs that tell the computer how to function, particularly system software and application software, and groupware.

KEY TEACHING TIP Make sure students understand the distinction between intranets (private networks accessible only to employees) and extranets (networks that allow outsiders limited access to a firm’s internal information).

QUICK QUESTIONS •

For what purposes might data conferencing be used? What about videoconferencing?

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What are the clients and what are the servers in a client-server network?

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What is the difference between a wide area network (WAN) and a local area network (LAN)?

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What are some benefits of Wi-Fi?

Use In-Class Activity 2: Small-Group Discussion: CereProc and New Products, especially for Small Markets Time Limit: 30 minutes

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Learning Objective 14-3: Describe the role of information systems, the different types of information systems, and how businesses use such systems.

Information Systems: Harnessing the Competitive Power of IT An information system is a system that uses IT resources and enables managers to take data— raw facts and figures—and transform that data into information—the meaningful, useful interpretation of data. Information systems managers operate the systems used for gathering, organizing, and distributing information.

A. Leveraging Information Resources: Data Warehousing and Data Mining Data warehousing involves the collection, storage, and retrieval of data in electronic files.

1. Data Mining. Data mining is the application of statistics and electronic technologies for searching, sifting, and reorganizing pools of data to uncover useful information.

2. Information Linkages with Suppliers. Coordinated planning avoids excessive inventories, speeds up deliveries, and holds down costs throughout the supply chain.

B. Types of Information Systems Each user group and department in an organization may need a special information system.

1. Information Systems for Knowledge Workers. Knowledge information systems support knowledge workers by providing resources to create, store, use, and transmit new knowledge for useful applications. Computer-aided design (CAD) helps knowledge workers design products by simulating them and displaying them in three-dimensional graphics. Computer-aided manufacturing (CAM) uses computers to design and control the equipment needed in a manufacturing process.

2. Information Systems for Managers. Each manager’s information activities and information system needs vary according to his or her functional area. a. Management Information Systems (MIS). Management information systems (MIS) support managers by providing reports, schedules, plans, and budgets that can then be used for making decisions. b. Decision Support Systems (DSS). Decision support systems (DSS) are interactive systems that create virtual business models and test them with different data to see how they respond.

KEY TEACHING TIPS •

Students often confuse this point: Data warehousing is the collection, storage, and retrieval of data in electronic files; data mining is the application of electronic technologies for searching, sifting, and reorganizing data to uncover useful information.

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Reinforce that an information system enables managers to collect, process, and transmit that information for use in decision making.

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Make sure students understand that a management information system provides reports, schedules, plans, and budgets that managers use to make decisions.

QUICK QUESTIONS •

When does data become information?

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How do knowledge workers benefit from knowledge information systems?

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What is the role of a decision support system (DSS)?

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What are some advantages that radio frequency identification can provide to individual stores and to the supply chain as a whole?

HOMEWORK System Architecture Now might be a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment asks students to assess the impact of changes in IT on higher education.

At-Home Completion Time: 1 hour

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Learning Objective 14-4: Identify the threats and risks information technology poses on businesses.

IT Risks and Threats IT has attracted abusers that are set on doing mischief, with severity ranging from mere nuisance to outright destruction.

A. Hackers Hackers are cybercriminals who gain unauthorized access to a computer or network, either to steal information, money, or property or to tamper with data. Hackers cost companies and organizations billions in money and jobs annually.

B. Identity Theft Identity theft is the unauthorized stealing of personal information to get loans, credit cards, or other monetary benefits by impersonating the victim. It is among the fastest-growing crimes in the U.S., with as many as 16.6 million victims each year.

C. Intellectual Property Theft Intellectual property includes products of the mind—something produced by the intellect, with great expenditure of human effort that has commercial value. Nearly every company faces the dilemma of protecting product plans, new inventions, industrial processes, and other intellectual property.

D. Computer Viruses, Worms, and Trojan Horses A computer virus exists in a file that attaches itself to a program and migrates from computer-to-computer as a shared program or as an e-mail attachment. Worms are a particular kind of virus that travels from computer to computer within networked computer systems, without needing you to open any software to spread the contaminated file. Unlike viruses, a Trojan horse does not replicate itself. It most often comes into the computer by masquerading as a harmless, legitimate software product or data file.

E. Spyware is unintentionally downloaded on a computer and crawls around to monitor the host’s computer activities. For example, Internet users open files that promise “free giveaways,” not suspecting that they are downloading spyware onto their systems.

F. Spam is junk e-mail sent to a mailing list or a newsgroup. It wastes time and bandwidth, decreasing productivity. Its damage in lost time and productivity is between $20 and $50 billion in the U.S. and could be $575 billion worldwide.

QUICK QUESTIONS •

Can hackers ever do good?

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How can identity theft be avoided?

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What types of damage might a worm and a Trojan horse do?

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Learning Objective 14-5: Describe the ways in which businesses protect themselves from the threats and risks information technology poses.

IT Protection Measures Businesses guard themselves against intrusion, identity theft, and viruses by using firewalls, special software, and encryption.

A. Preventing Unauthorized Access: Firewalls Firewalls are security systems with special software or hardware devices designed to keep computers safe from hackers. A firewall contains two components for filtering each incoming message: (1) the company’s security policy, which contains access rules; and (b) a router, which involves a “traffic switch” that determines on which network routes or paths to send each message after it is tested against the security policy.

B. Preventing Identity Theft The Fair and Accurate Credit Transactions Act (FACTA) strengthens identity-theft protections by specifying how organizations must destroy information, rather than simply dropping it in a dumpster. Documents must be shredded, pulverized, or burned, and electronic records must be permanently removed.

C. Preventing Infectious Viruses: Anti-Virus Software Anti-virus software protects systems by searching incoming e-mail and data files for “signatures” of known viruses and virus-like characteristics and quarantining such messages.

D. Protecting Electronic Communications: Encryption Software An encryption system works by encoding e-mails so that only intended recipients can open them. The system works by scrambling an e-mail message so that it looks like garbled nonsense to anyone who doesn’t possess the “key,” another part of the software that decodes encrypted e-mails.

E. Avoiding Spam and Spyware Anti-spyware and spam filtering software on business systems helps employees avoid privacy invasion and improves worker productivity.

F. Ethical Concerns in IT It is apparent that IT developments and usage are progressing faster than society’s appreciation for the potential consequences, including new ethical concerns. Ease of access to computers, mobile devices, and the Internet, together with messaging capabilities and social networking, promote widespread public exposure about people’s private lives, including personal information about how they think and feel. Just how this information should be used, by whom, under what conditions, and with what restrictions, if any, are issues teeming with ethical considerations.

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KEY TEACHING TIP •

Reinforce that an encryption system works by scrambling an e-mail message so that it looks like garbled nonsense to anyone who doesn’t possess the “key,” another part of the software that decodes encrypted e-mails.

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Remind students of the ethical issues associated with current information technology.

Ease of access to computers, mobile devices, and the Internet, together with messaging capabilities and social networking, promote widespread public exposure about people’s private lives, including personal information about how they think and feel. Just how this information should be used, by whom, under what conditions, and with what restrictions, if any, are issues teeming with ethical considerations. This should seem especially relevant to students, with the ubiquitous use of social media.

QUICK QUESTION What are a firewall’s two components for filtering incoming messages?

Use In-Class Activity 3: Up for Debate: Is That Ethical?

Time Limit: 30 minutes

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

IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker: IT Devices Activity Overview: This activity asks students to come up with a list of technological devices that reflect the many ways in which the class as a whole creates, stores, exchanges, and uses information.

Time Limit: 20 minutes What to Do: 1. Ask the class as a whole to brainstorm, coming up with a list of technological devices that they use in their personal lives, at work, or at school to create, store, exchange, and use information.

2. Ask the class to comment on these questions: a. Do students in the class as a whole use more or fewer devices than what you expected prior to brainstorming? b. In what way(s) do you see your individual use of these devices changing in the coming years? c. In what way(s) have these devices impacted your personal lives, such as at school, at the bank, while shopping, and so on?

Don’t Forget: Some people are more technologically savvy than others. Many students will say they take advantage of every gadget available, while others do not have Internet access at home.

Wrap-Up: Bring the activity to a close by reminding students that new technologies are always looming on the horizon and that no one can accurately predict how much IT will change and affect our lives in the future.

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In-Class Activity 2: Small-Group Discussion: CereProc and New Products, Especially for Small Markets Activity Overview: This activity encourages students to think about how information technology can be used to develop new products and services even in difficult economic times.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask them to read the Entrepreneurship and New Ventures feature in the textbook. (10 minutes) 2. Ask students to discuss the following questions within their small groups (10 minutes): a. What do you think about the idea of CereVoice and Voice Creation? If you were given the opportunity, would you invest in CereProc’s products? b. Think of another product of service that information technology might make viable. What would you call the product or service? What would be its unique selling points?

3. Regroup the class as a whole and discuss each group’s conclusions. (10 minutes) Don’t Forget: Information technology is rapidly changing. As new technologies become available so do new possibilities. Encourage your students to keep their eyes on technology blogs to keep abreast of new developments.

Wrap-Up: Bring the activity to a close by reminding students of the speed with which technology changes can take place. Also remind them that a product does not have to have a target market of millions or billions of users to be successful.

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In-Class Activity 3: Up for Debate: Is That Ethical?

Activity Overview: This activity asks students to discuss the ethical issues that may arise from an employer having the ability to access and track employees’ computer usage.

Time Limit: 30 minutes What to Do: 1. Divide the class into small groups and ask them to consider this tidbit that a coworker overheard at the water cooler: “I guess it was as simple as that! Once Jeremy looked into everything Jason had been doing on the Internet, he asked Jason to hit the road. He was playing card games, placing personal stock market transactions, and sending e-mails to his friends and wife. I guess we all need to be more careful.” Ask each group to discuss whether firing an employee based on their Internet activities is ethical; groups should take notes on the pros and cons of such a company policy. (15 minutes) 2. Reassemble the class as a whole and discuss each group’s conclusion. (15 minutes) Don’t Forget: Many companies have such policies stated clearly in the employee handbook; on the other hand, some employers may use such tactics as an excuse to get rid of an employee.

Wrap-Up: Bring the debate to a close by reminding students that company policies stated in the employee handbook must be adhered to. However, one side of the argument is: “If you don’t want me to use the Internet, then don’t give it to me.” The other side of the argument is: “While working on company time, I should do what the employer wants.” Most group comments will fall somewhere between those two extremes.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 14-1. Compare and contrast an intranet with an extranet.

An intranet is an organization’s private network of internally linked websites, accessible only to employees. An extranet is a system that allows outsiders limited access to a firm’s internal information network. (Learning Objective 1 – AACSB – application of knowledge) 14-2. How can electronic conferencing increase a company’s productivity and efficiency?

Visit MyBizLab for suggested answers. (Learning Objective 1 – AACSB – application of knowledge) 14-3. What are the advantages and risks of cloud computing?

The cloud enhances user flexibility, especially for employees working remotely because users can access e-mails and data files from any online location, rather than from one particular location. The cloud computing has become a cost saver for companies by eliminating the need for buying, installing, and maintaining in-house server computers, many of which have excessive unused storage capacity. The risks of cloud computing include hacking and privacy issues. (Learning Objective 2 – AACSB – application of knowledge) 14-4. Why should companies be concerned about hackers?

Hackers can cause serious damage: stealing company and customer information compromising company files and records. This can cause a company serious financial problems. (Learning Objective 4 – AACSB – application of knowledge) 14-5. What is intellectual property? Provide at least three examples.

Intellectual property is a product of the mind, something produced by the intellect, with great expenditure of human effort. Examples include new inventions, product plans, and manufacturing processes. (Learning Objective 4 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 14-6. Describe how a company might use data warehousing and data mining in its information system to better plan for new products.

Data warehousing involves the collection, storage, and retrieval of data in electronic files; data mining is the application of electronic technologies for searching, sifting, and reorganizing pools of data to uncover useful information. (Learning Objective 3 – AACSB – application of knowledge)

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14-7. How could an airline use data mining to make better business decisions?

Visit MyBizLab for suggested answers. (Learning Objective 1 – AACSB – application of knowledge) 14-8. How do your bank, employer, and e-mail provider protect your personal information from unauthorized use?

Visit MyBizLab for suggested answers. (Learning Objective 1 – AACSB – application of knowledge) APPLICATION EXERCISES 14-9. Consider your daily activities—as a consumer, student, parent, friend, homeowner or renter, car driver, employee, and so forth—and think about the ways that you are involved with IT systems. Make a list of your recent IT encounters and then recall instances in those encounters that you revealed personal information that could be used to steal your identity.

Are some encounters on your list riskier than others? Why or why not?

Answers will vary, but most students will mention their access to ATMs and their use of credit cards, often daily, in making consumer purchases. Students use IT regularly in course registration, online access to educational materials, even payment of fees. Identity theft can happen at any time, either during or after the sharing of personal information. (Learning Objective 2 – AACSB – application of knowledge, reflective thinking) 14-10. After reading the first section of this chapter, consider how IT has changed the business of higher education. Identify at least three functions, services, or activities that would not have been available 25 years ago. How do you think that colleges and universities will change in the future because of advances in IT? Answers will vary, but many students will mention online classes and testing, applying and registering for college/classes online, and accessing their academic records online.

(Learning Objectives 1, 2 – AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 14-11 TO 14-15 (Learning Objectives 2, 3, 4, 5 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Students should develop a comprehensive IT plan that focuses on meeting customers’ needs; improving efficiencies, operations, and processes; bolstering productivity, creating new opportunities, and communication and work. (sentence confusing, consider rewriting). They should also address the various threats and risks it poses for their businesses, as well as the ways to protect themselves from threats and risks information technology might pose for their business.

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TEAM EXERCISE: NEW AGE HELP DESK 14-16 TO 14-20 (Learning Objectives 1, 2, 3, 4, and 5 – AACSB – ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking) 14-16. Many of the company’s employees work from home. What benefits can the company and employee expect from allowing employees to do so? Are there some jobs where working from home is not appropriate?

14-17. The company has not had a consistent policy about the technology for those working from home. Should the company provide employees with a computer to use in their home office, or is this a responsibility of the employee? What are the benefits and costs of each?

14-18. How will you provide technical support to employees working from home? Would this be easier if the company provided the employee with a computer? Why or why not?

14-19. Are there additional data security risks with employees working from home? Describe the potential risks or concerns and how they might be addressed.

14-20. Briefly outline the policies, procedures, and guidelines that your department should propose in your first year on the job.

Students should initially focus on reviewing the types of tasks that lend themselves to working from home, and the types of tasks that require being in the office. After sorting this information out, the students should determine whether the company or the individual is responsible for providing the technology used in the home office. Answers may vary, but students should explain their reasoning. In this scenario, tech support is already an issue; students will have to take that into account when determining how to support the employees’ in their home offices.

Security is another serious issue that cannot be ignored. The students must address it, as they should, even in their home network.

EXERCISING YOUR ETHICS: TO READ OR NOT TO READ (Learning Objectives 1, 2, and 5 – AACSB – ethical understanding and reasoning, reflective thinking) 4-21. Given the factors in this situation, what, if any, ethical issues exist?

The ethical issues focus on the trust issues between employees and employer.

4-22. Do you think that the company is wise to monitor employees in this manner? Why or why not?

Answers will vary, but many students will recognize that companies do monitor employees’ activities to try to increase employee productivity but there is also the perspective of the trust issue from the employees’ perspective. Students should keep in mind that there is a trust issue from the employer’s perspective, as well.

4-23. If you discovered that an employee was spending a lot of time on non-work–related searches, how would you address the issue with the employee?

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Answers will vary, but many students will suggest that their advice would depend on the situation; the employee needs to understand that work obviously comes first.

CASES: THINK BEFORE YOU CLICK (Learning Objectives 1, 2, 3, and 4 – AACSB – analytical and reflective thinking, application of knowledge) 14-24. Think about recent spam e-mails and text messages that you have received. What kinds of information were the intruders seeking?

The intruders were seeking passwords, personal financial data, credit card numbers, etc.

14-25. Were you able to identify the e-mails and messages to be “scams” before opening them, or did you discover their real contents after you opened them? What might have alerted you to the risks?

Most students are technically savvy and immediately identified the “scams.”

14-26. In what ways might the “opened” message from a scammer be harmful to you? To your IT devices and systems?

An open message may carry a virus, spyware, or worm that can capture personal information and permit identity theft.

14-27. What steps can you take (or have you taken) to protect against such intrusions? What costs would be involved for gaining that protection?

Answers will vary but most students will probably mention firewalls and other anti-theft software.

14-28. Consider the various IT systems you use daily. What kinds of protection do they have to protect against invasion by cyber pirates?

Again, answers will vary depending on the IT devices used by students.

INFORMATION TECHNOLOGY FOR BETTER HEALTHCARE (Learning Objectives 1, 2, 3, and 4 – AACSB – analytical and reflective thinking, application of knowledge) 14-29. In what ways are the IT developments for healthcare presented in this case changing the activities, services, and organizational practices of hospitals and clinics? Explain your responses and give examples.

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IT developments that have impacted healthcare include devices that enhance patient care and operations, permitting more complicated surgeries, remote/virtual surgeries, and lower healthcare costs.

14-30. In what ways are healthcare customers being affected by the IT developments presented in this case? Are all of these effects positive, or might some be negative? Explain your response.

Healthcare customers are being affected by a myriad of IT developments including preventive care, surgery, recovery, and length of hospital care. Most of the developments are positive but there might be some negatives such as security issues.

14-31. How might doctors and hospitals change their marketing strategies as a result of these innovations?

Focusing on the innovations as providing benefits to the patients because of the less invasive nature of the surgeries, the shorter time for the surgery, and the ability for surgeons to “operate” remotely, are messages that are relevant to patients. Knowing that a doctor or a hospital has the state-of-the-art equipment available, and knows how to use it, can impact someone’s decision about what doctor or hospital to use for a procedure.

14-32. Suppose you are in charge of security for a hospital using the IT systems discussed in this case. Identify the kinds of IT risks and threats that should be expected. Beyond your own ideas, be sure to indicate other sources you would consult to help identify the risks and threats.

Risks could include release of patient information, hackers disabling the surgical systems, viruses and worms, spyware, and destruction of equipment. Most students will hire security experts to review the network security operations.

14-33. What protection measures can be taken to reduce the risks of intrusions and threats for the hospital’s IT systems (for the systems discussed in this case)? Describe how you would determine the costs for implementing those protection measures.

The IT system would need at the minimum anti-virus software, encryption software, a firewall to reduce the threat. Most students will weigh the costs versus the benefits of each protection measure.

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Chapter 15: The Role of Accountants and Accounting Information Chapter Overview Every organization relies on accounting information and financial statements in order to gauge business activity over periods of time. Accounting information can be thought of as a measuring stick of an organization’s performance in specific periods of time.

This chapter unfolds with a discussion of the role of accountants and an explanation of the types of accountants in the U.S. business system—public accountants, private accountants, management accountants, and forensic accountants. In addition, the chapter discusses the accounting equation as well as the three basic financial statements, showing how they reflect the activity and financial condition of a business. It also looks at the key standards and principles for reporting financial statements and describes how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business. Finally, the chapter ends with a discussion of the role of ethics in accounting—a subject that has received much press in recent years.

Learning Objectives 15-1. Explain the role of accountants and distinguish between the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.

15-2. Explain how the accounting equation is used.

15-3. Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.

15-4. Explain the key standards and principles for reporting financial statements.

15-5. Describe how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business.

15-6. Discuss the role of ethics in accounting.

15-7. Describe the purpose of the International Accounting Standards Board and explain why it exists.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Ice-Breaker: Do You Use Accounting?

2. Class Discussion: Interpreting Financial Statements 3. Small-Group Discussion: Annual Reports 4. Class Discussion: Choose an Investment

Description Students think about ways in which they use accounting in their personal lives.

Students determine in which financial statement specific pieces of information are included.

Students review financial information from annual reports of real companies.

Students calculate financial ratios and interpret their results.

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Time Limit 20 min.

20 min.

45 min.

30 min.

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CHAPTER OUTLINE Learning Objective 15-1 Explain the role of accountants and distinguish among the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.

What is Accounting and Who Uses Accounting Information?

Accounting is a comprehensive system for collecting, analyzing, and communicating financial information that is used to prepare financial statements and management reports. Bookkeeping is just one phase of accounting—the recording of transactions. Because businesses engage in thousands of transactions, ensuring consistent, dependable financial information is mandatory.

This is the job of the accounting information system (AIS)—an organized procedure for identifying, measuring, recording, and retaining financial information so that it can be used in accounting statements and management reports. Users of accounting information include business managers, employees and unions, investors and creditors, tax authorities, and government regulatory agencies.

The controller manages a firm’s accounting activities. As chief accounting officer, the controller ensures that the AIS provides the reports and statements needed for planning, controlling, decision making, and other management activities.

A. Financial versus Managerial Accounting 1. Financial Accounting. A firm’s financial accounting system is concerned with external information users—the firm’s external stakeholders: consumer groups, unions, stockholders, suppliers, creditors, and government agencies. It prepares reports such as income statements and balance sheets that focus on the activities of the company as a whole rather than on individual departments or divisions.

2. Managerial Accounting. Managerial (management) accounting serves internal users.

Managers at all levels need information to make departmental decisions, monitor projects, and plan future activities. Other employees also need accounting information. Engineers must know certain costs, for example, before making product or operations improvements, purchasing agents use information on materials costs to negotiate terms with suppliers, and to set performance goals, and salespeople need past sales data for each geographic region and for each of its products.

B. Certified Public Accountants (CPAs) Certified public accountants (CPAs) offer accounting services to the public, whether a business or individual client. They are independent from the clients they serve. They are licensed by a state after passing an exam prepared by the American Institute of Certified Public Accountants (AICPA), which also provides technical support and discipline in matters of ethics.

1. The “Big Four” Public Accounting Firms. The “Big Four” Public Accounting Firms, Deloitte Touche Tohmatsu (United States), Ernst & Young (United Kingdom), Copyright © 2017 Pearson Education, Inc.

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PricewaterhouseCoopers, PwC (United Kingdom), KPMG (Netherlands) account for onehalf of the total revenue generated by accounting firms active in the United States.

2. CPA Services. Most CPA firms provide auditing services, tax services, and management services. a. Auditing. An audit examines a company’s AIS to determine whether financial reports reliably represent its operations; an audit must follow generally accepted accounting principles (GAAP), which are the guidelines governing the content and form of financial reports. b. Tax Services. Tax services include assistance not only with tax-return preparation, but also with tax planning. c. Management Advisory Services. Management advisory services range from personal financial planning to planning corporate mergers.

3. Noncertified Public Accountants. This category includes accountants who do not take the CPA exam, who are preparing for it, or who are waiting for state certification.

4. The CPA Vision Project. The CPA Vision Project is a profession-wide program that was established to assess the future of accounting; a prime reason for the project is the decline in the number of people who have entered the profession in recent years. The CPA Vision Project identifies core competencies for accounting that will be necessary for the future CPA. C. Private Accountants and Management Accountants Private accountants are hired as salaried employees of a firm who perform day-to-day activities. Management accountants provide services to support managers in various activities. Many hold the certified management accountant (CMA) designation.

D. Forensic Accountants Forensic accounting is the use of accounting for legal purposes. Forensic accountants may be called on by law enforcement agencies, insurance companies, or law firms for investigative accounting and litigation support in crimes against companies, crimes by companies, and civil disagreements.

1. Investigative Accounting. Investigative accounting involves the investigation of a trail of financial transactions behind a suspected crime.

2. Litigation Support. Forensic accountants assist in the application of accounting evidence for judicial proceedings by preparing and preserving evidence for judicial proceedings, testifying as expert witnesses, and in determining economic damages in any case before the court. a. Certified Fraud Examiners. The Certified Fraud Examiner (CFE) designation is administered by the Association of Certified Fraud Examiners; the CFE’s activities

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focus specifically on fraud-related issues, including fraud prevention and deterrence, financial transactions, fraud investigation, and legal elements of fraud.

E. Federal Restrictions on CPA Services and Financial Reporting: Sarbox The Sarbanes-Oxley Act (2002) was enacted to restore public trust in corporate accounting practices; Sarbox restricts the kinds of nonaudit services that CPAs can provide.

1. Sarbox Compliance Requirements. The CFO and CEO must pledge that the company’s finances are correct and must vouch for the methods and internal controls used to get those numbers; Sarbox requires companies to provide a system that is safe for all employees to anonymously report unethical accounting practices and illegal activities without fear of retaliation.

KEY TEACHING TIPS • Remind students that accounting is a comprehensive system for collecting, analyzing, and communicating financial information, whereas bookkeeping is the recording of transactions.

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Point out that the controller manages a firm’s accounting activities.

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Make sure students keep these two points separate: Financial accounting is concerned with external information users; managerial accounting serves internal users and is not limited to managers.

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Make sure students understand the role of a CPA, who offers accounting services to the public and who is licensed by a state after passing an exam.

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Reinforce that generally accepted accounting principles (GAAP) are accounting guidelines governing the content and form of financial reports.

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In contrast to what students learned about the CPA, they should remember that private accountants perform day-to-day activities; most are management accountants who support managers in the organization.

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Students often see the work of forensic accountants as being especially interesting. You may want to spend some time discussing these accountants to pique their interest.

QUICK QUESTIONS •

Who uses accounting information and for what purpose do they use it?

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Outside of the company, who might have an interest in a company’s financial situation?

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What types of services do CPAs perform?

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What has occurred in the business environment that has prompted the need for forensic accountants and certified fraud examiners?

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The Sarbanes-Oxley Act of 2002 (Sarbox) is a critical piece of federal legislation enacted to restore public trust in corporate accounting practices. What are some of Sarbox’s provisions?

Use In-Class Activity 1: Ice-Breaker: Do You Use Accounting?

Time Limit: 20 minutes

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Learning Objective 15-2: Explain how the accounting equation is used.

The Accounting Equation Underlying all record-keeping procedures is the most basic tool of accounting—the accounting equation.

The accounting equation states that Assets = Liabilities + Owners’ Equity.

A. Assets and Liabilities An asset is any economic resource that is expected to benefit a firm or an individual who owns it; a liability is a debt that the firm owes to an outside organization.

B. Owners’ Equity Owners’ equity refers to the amount of money that owners would receive if they sold all assets and paid all debts. Assets - Liabilities = Owners’ Equity.

KEY TEACHING TIPS •

Make sure that students understand the accounting equation: Assets = Liabilities + Owners’ Equity

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An asset is any economic resource that is expected to benefit a firm that owns it; a liability is a debt that the firm owes. What are some examples of assets and liabilities found in organizations?

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Make sure students understand that owners’ equity is the money owners would receive if they sold all of a company’s assets and paid all of its liabilities.

QUICK QUESTION •

In what way(s) do businesses benefit from intangible assets?

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How does the term net worth fit into the accounting equation?

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Why is owners’ equity meaningful to investors and lenders?

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Learning Objective 15-3: Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.

Financial Statements Accountants summarize the results of a firm’s transactions and issue reports to help managers make informed decisions. Among the most important reports are financial statements, which fall into three broad categories—balance sheets, income statements, and statements of cash flows.

A. Balance Sheets Balance sheets display a firm’s financial condition at one point in time. They supply information about assets, liabilities, and owners’ equity.

1. Assets. An asset is any economic resource that a company owns and from which it expects to get some future benefit. a. Current Assets. Current assets include cash and assets that can be converted into cash within a year. The act of converting something into cash is called liquidating. Assets are normally listed in order of liquidity—the ease of converting them into cash.

Typically, assets range from cash to marketable securities to merchandise inventory. b. Fixed Assets. Fixed assets, including land, buildings, and equipment, have long-term use or value. Accountants use depreciation to spread the cost of an asset over the years of its useful life. c. Intangible Assets. Intangible assets have monetary value in the form of expected benefits. These usually include the cost of obtaining rights or privileges, such as patents, trademarks, copyrights, and franchise fees. Goodwill is the amount paid for an existing business beyond the value of its other assets.

2. Liabilities. Current liabilities are debts that must be paid within one year. Accounts payable are unpaid bills to suppliers for materials as well as wages and taxes that must be paid in the coming year. Long-term liabilities are debts that are not due for at least a year.

3. Owners’ Equity. Owners’ equity is broken down into paid-in capital and retained earnings. Paid-in capital is additional money invested in the firm by its owners. Retained earnings are net profits kept by a firm rather than paid out as dividend payments to stockholders.

B. Income Statements The income statement is sometimes called a profit-and-loss statement because its description of revenues and expenses results in a figure showing the firm’s annual profit or loss.

Profit (or Loss) = Revenues - Expenses 1. Revenues. Revenues are funds that flow into a business from the sale of goods or services.

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2. Cost of Revenues (Cost of Goods Sold). The cost of revenues section shows the costs of obtaining the revenues from other companies during the year (used for service providers).

Cost of goods sold are costs of obtaining materials to make products sold during the year (used for goods producers). a. Gross Profit. Gross profit is calculated by subtracting the cost of revenues from revenues obtained by selling the firm’s products. b. Operating Expenses. Operating expenses are resources that must flow out of a company if it is to earn revenues. Expense categories include research development, selling, administrative, and general expenses.

3. Operating and Net Income. Operating income compares the gross profit from operations against operation expenses. Net income (net profit or net earnings) is calculated by subtracting income taxes from operating income.

C. Statements of Cash Flows Required of all firms whose stock is publicly traded, the statement of cash flows shows a company’s yearly cash receipts and cash payments. This statement shows cash flows from operating, investing, and financing activities.

D. The Budget: An Internal Financial Statement A budget is a detailed statement of estimated receipts and expenditures for a future period of time.

KEY TEACHING TIPS •

Reinforce that financial statements include the summaries of a firm’s transactions and help managers make informed decisions; financial statements include balance sheets, income statements, and statements of cash flows. Go over each of the financial statements carefully with students.

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Make sure that students understand the distinction between current assets and fixed assets and that they can provide examples of each.

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Make sure students understand the difference between current liabilities and long-term liabilities and that they can provide examples of each.

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Explain that owners’ equity can be broken down into paid-in capital and retained earnings, and explain each of those concepts.

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Reinforce that you can find the company’s revenues and expenses in the income statement (or profit-and-loss statement). Revenues – Expenses = Profit (or Loss). Also point out the main areas of the income statement: revenues, cost of revenues, and operating expenses.

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Reinforce that revenues are the funds that flow into a business from the sale of goods or services; the cost of revenues (or the cost of goods sold) are the costs of obtaining materials to make products sold during the year (for goods) or the costs of obtaining the revenues from other companies (for services).

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Point out that a statement of cash flows describes yearly cash receipts and cash payments; it includes cash flows from operations, investing, and financing activities.

QUICK QUESTIONS •

What are some examples of operating expenses?

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Who might be interested in the information revealed in a statement of cash flows? Why?

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What might be included in a budget for a typical household in the United States?

HOMEWORK Using a Budget Now is a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. This assignment asks students to interview an accountant and ask how the firm uses budgets.

At-Home Completion Time: 1 hour Use In-Class Activity 2: Class Discussion: Interpreting Financial Statements Time Limit: 20 minutes Use In-Class Activity 3: Small-Group Discussion: Annual Reports Time Limit: 45 minutes

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Learning Objective 15-4: Explain the key standards and principles for reporting financial statements.

Reporting Standards and Practices Spelled out in GAAP, these practices and principles cover a range of issues. The purpose is to give external users confidence in the accuracy and meaning of financial information.

A. Revenue Recognition and Activity Timing Revenue recognition is the formal recording and reporting of revenues in financial statements, which takes place after the earnings cycle is completed. This occurs when 1) the sale is complete and the product has been delivered; and 2) the sale price has been collected or is collectible.

B. Full Disclosure This indicates that financial statements should not include just numbers; they should include management’s interpretation and explanation of those numbers.

KEY TEACHING TIP •

Remind students that full disclosure requires that financial statements include both the “numbers” and management’s interpretations/explanations of those numbers.

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Reinforce that two conditions must be met for an earnings cycle to be complete: the sale is complete and the product delivered; and the sale price has been collected or is collectible.

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Learning Objective 15-5: Describe how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business.

Analyzing Financial Statements Financial statements provide data, which can reveal trends and be applied to various ratios. These trends and ratios can be used to evaluate a firm’s financial health, its progress, and its prospects.

A. Solvency Ratios: Borrower’s Ability to Re-Pay Debt Solvency ratios provide measures of the firm’s ability to meet its debt obligations. They can be used to estimate short-term and long-term risk.

1. The Current Ratio and Short-Term Solvency. Short-term solvency ratios measure a company’s liquidity and its ability to pay immediate debts. The most commonly used of these is the current ratio, which measures a company’s ability to meet current obligations out of current assets. The higher the ratio, the lower the risk to investors. A 2:1 ratio is accepted as satisfactory.

2. Long-Term Solvency. Long-term solvency is calculated by dividing debt—total liabilities—by owners’ equity; this ratio illustrates the extent to which a firm is financed through borrowed money. The lower the debt, the lower the risk to investors and creditors. a. Leverage. Leverage refers to the ability to make otherwise unaffordable investments by borrowing funds.

B. Profitability Ratios: Earnings Power for Owners Profitability ratios are used for measuring potential earnings.

1. Earnings per Share. This ratio is calculated by dividing net income by the number of shares outstanding; this determines the size of the dividend that a firm can pay shareholders. As the ratio goes up, stock value increases because investors know that the firm can better afford to pay dividends.

C. Activity Ratios: How Efficiently Is the Firm Using Its Resources?

Activity ratios reveal the efficiency with which firms have used resources; an example is when annual sales revenues can increase without an increase in operating costs. These ratios are used for evaluating management’s use of assets.

KEY TEACHING TIPS •

Reinforce that the current ratio measures a company’s ability to meet current obligations out of current assets. The formula is Current Assets/Current Liabilities.

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Reinforce that long-term solvency indicates a company’s ability to repay debts in future years; the formula is Total Liabilities/Owners’ Equity.

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Point out earnings per share determines the size of the dividend a firm can pay shareholders; this can be determined using the formula Net Income/Number of Shares of Stock Outstanding.

QUICK QUESTIONS •

What do solvency ratios measure?

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How can high debt be desirable for a company?

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Of what value is earnings per share to an investor in analyzing the quality of the investment?

Use In-Class Activity 4: Class Discussion: Choose an Investment Time Limit: 30 minutes HOMEWORK Interview a Manager Now is a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment asks students to interview the manager of a local retailer, wholesale business, or manufacturing firm about the role of ethics in that company’s accounting practices.

At-Home Completion Time: 1 hour

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Learning Objective 15-6: Discuss the role of ethics in accounting.

Bringing Ethics into the Accounting Equation A. Why Accounting Ethics?

The purpose of accounting ethics is to maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession.

1. AICPA’s Code of Professional Conduct. The code of professional conduct for public accountants in the United States is maintained and enforced by the AICPA; the following areas are included: responsibilities, the public interest, integrity, objectivity and independence, due care, and conduct in scope and nature of services.

2. Violation of Accounting Ethics and GAAP. The majority of recent accounting wrongdoing has related to all of the six ethics-related areas.

3. Ethics Means Doing the Right Thing. Ethics remains an area where one person who is willing to “do the right thing” can make a difference.

KEY TEACHING TIP •

It is critical that students recognize the purpose of ethics in accounting: to maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession.

QUICK QUESTIONS •

What are the six ethics-related areas outlined by the AICPA in its Code of Professional Conduct?

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What is the connection between the Sarbanes-Oxley Act of 2002 and the recent widespread violations of accounting ethics?

HOMEWORK Business Plan Now is a good time to assign Part 5 of the business plan project. In this section, students consider their IT needs and costs and complete a balance sheet and income statement for their business.

At-Home Completion Time: 4 to 5 hours

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Learning Objective 15-7: Describe the purpose of the International Accounting Standards Board and explain why it exists.

A. International Accounting Standards Board Established in 2001 and housed at London, England, the International Accounting Standards Board (IASB) is an independent, nonprofit organization responsible for developing a set of global accounting standards, and for gaining the support and cooperation of the world’s various accounting organizations to implement those standards.

B. Why One Set of Global Practices?

Although more than 138 countries have adopted IASB’s accounting practices, nearly 50 others continue to use their national GAAPs. Twenty-two U.S.-based global companies such as Google, Caterpillar, and Microsoft may prepare different financial reports using local accounting practices for each country in which they conduct business.

1. Example Areas Targeted for Aligning U.S. GAAP and IASB Among the many differences between the practices of U.S. GAAP and IASB—some reports identify more than 400 such discrepancies—the following examples illustrate some discrepancies and proposals for convergence toward universal standards in financial reporting. a. b. c. d.

In valuing assets In revenue recognition In devaluing of financial assets In fair value disclosure

2. Timetable for Implementation The U.S. Securities and Exchange Commission has targeted 2015 as the earliest date that U.S. companies will be required to use IASB procedures for financial reporting.

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

IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker: Do You Use Accounting?

Activity Overview: This activity asks students to think about the ways in which they use accounting in their personal lives.

Time Limit: 20 minutes What to Do: 1. Ask students to make a list of ways in which they use accounting in their personal lives. They might want to consider the following questions when making up their lists: (15 minutes) a. How do you keep track of what money is coming in? b. How do you keep track of what money is going out? c. How do you budget your money? d. How do you plan for unexpected expenditures? e. What types of “tools” do you use to keep track of your financial information? f. At later points in your life, do you think you will account for your money differently? If so, how?

2. Ask students to share any relevant information that might benefit other students in the class.

(5 minutes) Don’t Forget: Everyone has his or her own unique way of keeping track of their financial situation; some will be more effective than others.

Wrap-Up: Remind students that we are all accountants to a certain degree. Bring the exercise to a close by briefly outlining accounting and previewing the types of accountants discussed in the chapter.

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In-Class Activity 2: Class Discussion: Interpreting Financial Statements Activity Overview: This activity asks students to determine in which financial statement specific pieces of information are included.

Time Limit: 20 minutes What to Do: 1. In advance, make a list of revenues, expenses, assets, debts, etc.

2. Ask students to account for each item on a balance sheet or income statement as you reveal the item; for each item, ask, “Where would this go?” (20 minutes) Don’t Forget: Another alternative is to ask students to individually write down their answers and then discuss each item revealed and the rationale for including it in either the balance sheet or income statement.

Wrap-Up: Wrap up the activity by providing a brief overview of the accounting equation, followed by a brief overview of the roles of the financial statements.

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In-Class Activity 3: Small-Group Discussion: Annual Reports Activity Overview: This activity gives students a chance to review actual financial information from annual reports of real companies.

Time Limit: 45 minutes What to Do: 1. In advance, ask students to bring a copy of a recent annual report to class. Make it clear that many companies post their annual reports online, so they can access the information they need on the Web. You may also want to bring a supply of annual reports in case students can’t get to them.

2. Divide students into groups of two and ask each group to review one of the annual reports. In particular, ask students to identify financial information that has been discussed in this chapter and discuss whether that information coincides with what has been presented in this chapter.

(30 minutes) 3. Reassemble the class as a whole and ask each group to reveal the financial status of their selected company. (15 minutes) Don’t Forget: Remind students to also pay attention to the opinion of each company’s auditing firm as revealed in the annual report.

Wrap-Up: Remind students of the use of the annual report, such as how potential investors in a corporation interpret such data prior to making a stock purchase.

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In-Class Activity 4: Class Discussion: Choose an Investment Activity Overview: This activity asks students to calculate financial ratios and interpret the results.

Time Limit: 30 minutes What to Do: 1. Ahead of time, ask students to bring an annual report of a corporation of their choice to class.

2. Divide the class into groups of two, asking each group to calculate the following ratios/information based on information they find in the annual report: (15 minutes) a. Current ratio b. Long-term solvency c. Earnings per share 3. Ask each group to discuss the following questions: (15 minutes) a. What is the company’s ability to meet currency obligations out of current assets? b. Is the company likely to be able to repay debts in future years? c. What might be the size of the dividend that the firm can pay shareholders?

Don’t Forget: Information needed to calculate the above figures should be present in any financial statement.

You may want to bring a supply of annual reports in case students can’t get to them, or make it clear that many companies post their annual reports online so students can access the information they need on the Web. Wrap-Up: Bring the activity to a close by providing a brief overview of short- and long-term solvency, as well as what earnings per share indicate.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 15-1. Who are the users of accounting information and for what purposes do they use it?

Visit MyBizLab for suggested answers. (Learning Objective 1 – AACSB – application of knowledge) 15-2. Who are the users of accounting information and for what purposes do they use it?

The three types of services performed by CPAs are auditing services, tax services, and management services. (Learning Objective 1 – AACSB – application of knowledge) 15-3. Explain the ways in which financial accounting differs from managerial accounting.

Financial accounting is concerned with external information users—the firm’s external stakeholders: consumer groups, unions, stockholders, suppliers, creditors, and government agencies, and focuses on the business as a whole. Managerial accounting serves internal users including managers, engineers, purchasing agents, and salespeople and focuses on the detailed information needed to make decisions within the organization. (Learning Objective 1 – AACSB – application of knowledge) 15-4. Discuss the activities and services performed by forensic accountants.

Forensic accountants may be called on—by law enforcement agencies, insurance companies, law firms, and business firms—for both investigative accounting and litigation support in crimes against companies, crimes by companies, and civil disagreements. (Learning Objective 1 – AACSB – application of knowledge) 15-5. What are the three basic financial statements, and what major information does each contain?

The balance sheet reflects a firm’s financial condition at one point in time by supplying detailed information about the firm’s assets, liabilities, and owners’ equity. The income statement reflects a firm’s profit or loss by comparing the firm’s revenues with its expenses.

The statement of cash flows describes a company’s yearly cash receipts and cash payments.

(Learning Objective 2 – AACSB – application of knowledge) QUESTIONS FOR ANALYSIS 15-6. If you were planning to invest in a company, which of the three types of financial statements would you most want to see? Why? Visit MyBizLab for suggested answers. (Learning Objectives 2 and 3 – AACSB – application of knowledge, reflective thinking)

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15-7. Use the accounting equation to determine your net worth. Identify your assets and liabilities.

With this information, how would you increase your net worth in the future?

Visit MyBizLab for suggested answers. (Learning Objective 3 – AACSB – application of knowledge, reflective thinking) 15-8. Consider possible reasons it is taking so long for IASB’s accounting standards to become fully adopted for use in the United States. Using the Internet as your source for information, identify three or more barriers that have deterred implementation of the standards, and explain how (or why) each has (or is) causing implementation delays.

Answers will vary but students will probably note the large numbers of countries that have to agree, the impact, cost of implementation, tax laws, shareholder impact, etc. (Learning Objective 2 – AACSB – application of knowledge, reflective thinking) APPLICATION EXERCISES 15-9. Interview an accountant at a local business, nonprofit organization, or government entity.

How does the firm use budgets? How does budgeting help managers plan business activities?

How does budgeting help them control activities? Give examples.

Answers will vary, but students will probably recognize that firms sometimes develop budgets from scratch, but more often by using previous years’ data. Budgets usually provide control for company spending or resource allocation. (Learning Objective 3 – AACSB – application of knowledge, reflective thinking) 15-10. Interview the manager of a local retailer, wholesale business, or manufacturing firm about the role of ethics in that company’s accounting practices. Is ethics in accounting an important issue to the manager? If the firm has its own private accountants, what measures are taken for ensuring ethical practices internally? What steps, if any, does the company take to maintain ethical relationships in its dealings with CPA firms?

Answers will vary, though most managers will attest that ethics are an extremely important consideration in their company’s accounting practices. Likely all those managers interviewed will mention their recipes for ensuring internal ethical practices. (Learning Objective 6 – AACSB – application of knowledge, reflective thinking) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 15-11 TO 15-15 (Learning Objectives 1, 2, and 3 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) In this assignment, the team will have the opportunity to see how they will use the three main financial statements, how choices impact their cash flow statement, understand the role financial data plays in creating a successful business, the role financial documents play in

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obtaining credit, and who on the team will be responsible for creating and maintaining the necessary data.

TEAM EXERCISE: CONFIDENTIALLY YOURS 15-16 TO 15-19 (Learning Objectives 1, 3, and 5 – AACSB – interpersonal relations and teamwork, application of knowledge) Answers for 15-16, 15-17, and 15-18 will vary somewhat depending on what three-year-period is used. Students must use the equations provided to determine ratios, and perform other calculations, and recognize trends.

15-16. Looking at Ford’s income statement, what has been the trend in sales (total revenue) as well as net income over the past three years?

15-17. As you have learned, gross profit is the difference between sales (or total revenues) and cost of sales (or cost of revenues). Gross profit percentage is calculated by dividing gross profit by sales (or total revenues). What is Ford’s gross profit percentage for the last three years? What does this data tell you about Ford’s pricing strategy and costs?

15-18. Looking at the balance sheet, what is Ford’s current ratio for the three most recent years?

What is the significance of these numbers?

15-19. How could a managerial accountant help Ford improve its profitability?

Managerial accounting focuses on internal users. Managers at all levels need information to make departmental decisions, monitor projects, and plan future activities. Other employees also need accounting information. Engineers must know certain costs, for example, before making product or operations improvements, purchasing agents use information on materials costs to negotiate terms with suppliers, and to set performance goals, and salespeople need past sales data for each geographic region and for each of its products.

EXERCISING YOUR ETHICS: GIVE AND TAKE WITH ACCOUNTING CLIENTS (Learning Objective 6 – AACSB – ethical understanding and reasoning, reflective thinking) 15-20. What are the ethical issues in this situation?

Katrina completed the work according to accepted accounting standards. The ethical issue is that she has maintained the accounting standards but by doing so, she will possibly lose a major client.

15-21. What are the basic arguments for and against Aaron Ault’s position in this situation? For and against Katrina Belinski’s position?

Aaron’s argument is that he is trying to reduce his tax bill and since the work was done towards the end of the year and the payment was possibly received in the current year, he does not see any problems with changing the dates and statements. Katrina’s position is that being

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a licensed professional prevents her from changing the financial statements. Additionally, revenue recognition ties into activity timing. The two conditions for recognizing revenue were met in this situation: the sale was completed and the product delivered, and the sale price is collectible.

15-22. What do you think that Ault and Belinski should do in this situation?

Answers will vary, but most students will agree that Katrina completed the work correctly and that Aaron should not ask Katrina to change the returns. If Katrina explains the ethical requirements for CPAs, maybe Aaron will better understand her position.

CASES: WALL STREET (Learning Objective 1 – AACSB – ethical understanding and reasoning, reflective thinking) 15-23. What factors do you think are most important in choosing among various methods to protect against fraud in a firm?

When choosing various fraud protection methods, costs and effectiveness would obviously be key factors.

15-24. Suppose you are hoping for a career as a CFE. How do recent trends in fraud provide new opportunities for such a career?

If the article is correct that fraudulent activities increase during an economic downturn and fraudulent activity has become more sophisticated, then there are new opportunities for a CFE to probe electronic records and cash transfers.

15-25. An external auditor, such as a CPA firm’s accountant, may suspect some irregularities in a client firm’s accounting practices. In what ways might a CFE be of assistance?

A CFE would have more expertise in pursuing and finding the fraud. The examiner has training in several areas that would apply in this instance, including fraud detection, evaluating accounting systems for weaknesses and fraud risks, and reviewing internal organizational controls for fraud prevention.

15-26. Consider the anti-fraud training for a company’s employees. Which four (or more) topics should be included in that training?

The training should include asset theft, review of financial statements, checking documentation, inventory review, cash accounts, revenue recognition, and activity timing, etc.

15-27. What ethical issues, if any, are involved in a decision to investigate a suspected case of fraud in a firm’s accounting activities?

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The broad scope of fraud—its costs, who commits it and how, and how it is detected—might affect the decision to investigate a fraud case. The purpose of ethics in accounting is to maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession. Without ethics, all of accounting’s tools and methods would be meaningless because their usefulness depends, ultimately, on truthfulness in their application. Accordingly, professional accounting associations such as the AICPA and IMA enforce codes of professional conduct that include ethics-related areas, such as the accountant’s responsibilities, the public interest, integrity, and due care.

FUTURE DIRECTIONS FOR THE MODERN ACCOUNTANT (Learning Objectives 1, 6, and 7 – AACSB – ethical understanding and reasoning, reflective thinking) 15-28. In what ways, if any, does the discussion in this case apply to managerial accountants rather than to CPAs? Explain your response.

This discussion applies to management accountants because of the internal focus and expectation of project management, consulting and evaluating strategic opportunities.

15-29. In what ways, if any, does the discussion in this case apply to forensic accountants rather than to CPAs? Explain your response.

This article also applies to forensic accountants since they use accounting for legal purposes and this article discusses the additional competencies of “assessment of risks and threats,” etc., now required of the modern accountant.

15-30. Consider the restrictions on CPA services by provisions of the Sarbanes-Oxley Act (Sarbox). In what ways, if any, does this case’s description of the modern accountant’s activities conflict with Sarbox? Explain your response.

CPA services and Sarbox could potentially conflict since the rules prevent a CPA from designing a financial system as well as auditing said system.

15-31. Ethics has a long-standing role in the accounting profession. Will the emerging role of the modern accountant bring with it a greater emphasis on ethics (as compared with traditional accounting)? Explain.

Many students will argue that today’s reporting requirements and the broader role of the modern accountant places a greater emphasis on ethics and the possibility of potential conflict.

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CRAFTING A BUSINESS PLAN PART 5: MANAGING INFORMATION Assignment Overview: The fifth part of the business plan project asks students to think about their business in terms of their business needs and costs. Specifically, students are asked to determine their IT needs and resources and are asked to complete a balance sheet and an income statement for their business.

Many students find this part of the plan especially challenging, and will have trouble estimating their costs. Remind them that the values they calculate in this part of the plan are estimates, and there is no surefire method for accurately measuring how a business may perform. You may want to spend some class time going over each question in this part of the plan and create a list of sources that students can use when calculating their costs.

Files to Provide Students: If you would like students to complete a balance sheet and an income statement for their businesses, a sample spreadsheet file is available for them to consult in the following pages. Full Business Plan templates are also available at www.mybizlab.com.

Part 5 Estimated At-Home Completion Time: If done well, this section will require a minimum of 3 to 5 hours. Instructor feedback is critical in this part of the plan, as most students will need some direction in gathering information that will help answer the questions related to costs.

Homework Deliverable from Students: The length of this section should be somewhat consistent, although some variance can be expected. You should expect about 4 to 5 pages in this section.

STUDENT BUSINESS PLAN PROJECT TEMPLATE PART 5: MANAGING INFORMATION IT RESOURCES What kind of IT resources will your business require?

Hint: Think about the employees in your business and what they will need in order to do their jobs. What computer hardware and software will they need? Will your business need a network and an Internet connection? What type of network? Refer to Chapter 13 for a discussion on IT resources you may want to consider.

CUSTOMER SERVICE How will you use information technology to keep track of your customers and potential customers?

Hint: Many businesses—even small businesses—use databases to keep track of their customers.

Will your business require a database? What about other information systems? Refer to Chapter 13 for more information on these topics.

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COSTS OF DOING BUSINESS What are the costs of doing business? Equipment, supplies, salaries, rent, utilities, and insurance are just some of these expenses. Estimate what it will cost to do business for one year.

Hint: Insert the costs associated with doing business in the table below. The list below provides some hints as to where you can get this information. Note that these are just estimates—just try your best to include accurate costs for the expenses you think will be a part of doing business.

HINTS FOR EACH EXPENSE IN THE TABLE: Rent: Refer to the floor plan. How many square feet is your place of business? What is the “going rate” per square foot for office space in your community? A real estate agent or a local SBA representative (www.sba.gov) can also be helpful in answering this question.

Salaries: Refer to the organizational chart. How much will each employee earn? How many hours will each employee be needed on a weekly basis? Once you’ve determined the weekly cost, expand it to a monthly and a yearly cost.

Supplies: Refer to the floor plan. How much will all the computers, equipment, and furniture cost? What kinds of general office supplies will you need? Most prices for this information can be found on an office supply Website, such as www.staples.com.

Advertising and Other Promotions: Refer to your marketing section. You have described how you wish to reach your customer—now you need to decide how much it will cost. If you are using television, contact the sales department at a local station. If you are using a newspaper, contact their advertising department. Salespeople are usually happy to answer your questions.

Utilities: These amounts will vary, depending on your business and what utilities you will pay. If your business looks like an office, this cost may be similar to what a homeowner pays. However, if your business involves making a product, then the costs will be significant. An SBA representative can be a good resource.

Insurance: This value will be affected by the nature of the business. More equipment will usually mean higher insurance costs. Again, contact an SBA representative for feedback.

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EXPECTED REVENUE How much will you charge for your product? How many products do you believe you can sell in one year (or how many customers do you think your business can attract)? Multiply the price you will charge by the number of products you hope to sell or the amount you hope each customer will spend. This will give you an estimate of your revenues for one year.

Hint: You will use the amounts you calculate in the costs and revenues questions in this part of the plan in the accounting statements in the next part, so be as realistic as you can.

INCOME STATEMENT AND BALANCE SHEET Create a balance sheet and an income statement (profit-and-loss statement) for your business.

This chapter has discussed income statements and balance sheets. This is a good opportunity to show students how to prepare a spreadsheet (see following pages) into which to put the financial information for an income statement and a balance sheet.

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Income Statement (Profit-and-Loss Statement) June

July

Aug.

Sept.

Oct.

Nov.

Dec.

……

YEARLY

Revenue (Sales) Category 1 Category 2 Total Revenue (Sales) Cost of Goods Sold Category 1 Category 2 Total Cost of Goods Sold Gross Profit Expenses Rent Expense Salary/Wage Expenses Supplies Expense Advertising Expense Utilities Expense Telephone/Internet Expense Insurance Expense Interest from Loans (if applicable) Other Expenses (specify) Total Expenses Net Profit

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Balance Sheet Assets Current Assets Cash Cash Value of Inventory Prepaid Expenses (insurance) Total Current Assets Fixed Assets Machinery and Equipment Furniture and Fixtures Real Estate/Buildings Total Fixed Assets Total Assets

Liabilities and Net Worth Current Liabilities Accounts Payable Taxes Payable Notes Payable (due within 12 months) Total Current Liabilities Long-Term Liabilities Bank Loans Payable (greater than 12 months) Less: Short-Term Portion Total Long-Term Liabilities Total Liabilities Owners’ Equity (Net Worth) Total Liabilities and Owners’ Equity Copyright © 2017 Pearson Education, Inc.

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ACTIVITIES ON MYBIZLAB – INSTRUCTOR TIPS BizSkills: OBM & Financial Statements Instructor Tips

Available at: mybizlab.com

Brief Synopsis/Objectives: In this BizSkill, students play the owner of a struggling restaurant.

They’re asked to figure out ways to turn the restaurant around. They must weigh the pros and cons of opening books, and listen to various suggestions from others about the best ways to improve the numbers.

At the end of the BizSkill, students should be able to answer the following questions: How to Best Use This BizSkill: A great way to use this BizSkill is to assign it as homework before your first lecture on the chapter. Ask students to print out their feedback page, and then have them do the BizSkill again at the end of the week to see whether their scores have improved.

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Chapter 16: Understanding Money and the Role of Banking Chapter Overview Do you remember your first summer job? Whether it was babysitting, delivering papers, or mowing lawns, think of how long it took to save just a few dollars. And most of us learned just how valuable those few dollars were once they were spent on something. Money is discussed in every introductory business class, and it is the one topic with which we are all familiar.

This chapter presents the different forms that money takes in the nation’s money supply and discusses the different types of financial institutions that compose the U.S. financial system. It also looks at how financial institutions create money and describes the means by which they are regulated. The functions of the Federal Reserve System are discussed, as are the tools that it uses to control the money supply. Finally, the chapter identifies three important ways in which the money and banking system is changing and touches on some of the institutions and activities in international banking and finance.

Learning Objectives 16-1. Define money and identify the different forms that it takes in the nation’s money supply.

16-2. Describe the different kinds of financial institutions that compose the U.S. financial system and explain the services they offer.

16-3. Explain how financial institutions create money and describe the means by which they are regulated.

16-4. Discuss the functions of the Federal Reserve System and describe the tools that it uses to control the money supply.

16-5. Identify three important ways in which the money and banking system is changing.

16-6. Discuss some of the institutions and activities in international banking and finance.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Ice-Breaker: How Much Would That Be in, Say, Chocolate Bars?

2. Up for Debate: Your Check Is Not in the Mail

Description Students consider the characteristics of money when making purchases using something other than “money.”

Students analyze the pros and cons of traditional check writing versus electronic payments.

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Time Limit 30 min.

20 min.

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CHAPTER OUTLINE Learning Objective 16-1: Define money and identify the different forms that it takes in the nation’s money supply.

What Is Money?

A. The Characteristics of Money Money has four main characteristics: 1. Portability—light and easy to handle 2. Divisibility—easily divisible into smaller parts with fixed values 3. Durability—can be replaced if it wears out; hard to counterfeit 4. Stability—while value fluctuates, on the whole is relatively stable and predictable B. The Functions of Money Money serves three functions: 1. It is a medium of exchange. We use money to buy and sell things.

2. It is a store of value. Money can be saved and used for future purchases.

3. It is a measure of worth. All products can be valued in terms of money.

Money adds convenience and simplicity to our lives, for consumers and businesses alike.

C. M-1: The Spendable Money Supply The value of money decreases when its supply is high; when the money supply is low, its value increases. A common measurement of the money supply is M-1, which counts only the most liquid forms of money, including currency (cash), checks, and checking accounts (demand deposits).

D. M-2: M-1 Plus the Convertible Money Supply M-2 includes everything in M-1 plus other forms of money that are not quite as liquid— items that are invested for the short term, but are easily converted to spendable forms. The major components of M-2 are M-1, time deposits, money market mutual funds, and savings accounts. M-2 accounts for most of the nation’s money supply.

E. Credit Cards and Debit Cards: Plastic Money?

Credit cards, however, are not money and, accordingly, are not included in M-1 or M-2 when measuring the nation’s money supply. Debit cards, however, do not create debt as money is transferred immediately from a bank account; they are included in M-1.

KEY TEACHING TIPS •

Point out that just about any object that can serve as money is portable, divisible, durable, and stable.

•

Explain each of the following characteristics of money: portability, divisibility, durability, and stability.

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•

Students often confuse the characteristics of money with the functions of money. At this point, a quick review of both may be helpful.

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Prior to the discussion of the M-1, M-2, it may be helpful to point out that the value of money depends on its supply—meaning how much is in circulation. For example, the value of money drops when supply is high.

•

Students should keep M-2 separate from M-1. M-2 includes M-1 plus other forms of money that are not quite as liquid, such as time deposits, money market mutual funds, and savings accounts.

QUICK QUESTIONS •

How is it that checking accounts can be counted as part of M-1?

•

Different cultures “put different spins” on monetary transactions. For example, money is exchanged with a good deal of respect, even down to the way it is handled, in Japan.

What are some other ways different cultures “put different spins” on money?

•

Why are credit cards not included in M-1 or M-2?

Use In-Class Activity 1: Ice-Breaker: How Much Would That Be in, Say, Chocolate Bars?

Time Limit: 30 minutes

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Learning Objective 16-2: Describe the different kinds of financial institutions that compose the U.S. financial system and explain the services they offer.

The U.S. Financial System A. Financial Institutions Financial institutions ease the flow of money from sectors with surpluses to those with deficits by attracting funds into checking and savings accounts.

1. Commercial Banks. Commercial banks are companies that accept deposits that they use to make loans, earn profits, pay interest to depositors, and pay dividends to owners. a. Commercial Interest Rates. Every bank receives a major portion of its income from interest paid on loans by borrowers. Banks can set their own interest rates.

Traditionally, the lowest rates were made available to the bank’s most creditworthy commercial customers. That rate is called the prime rate. Most commercial loans are set at markups over prime, like prime +1.

2. Savings Institutions. Savings institutions include mutual savings banks and savings and loan institutions. They are often called thrift institutions. a. Savings and Loan Associations. Savings and loan associations (S&Ls) accept deposits, make loans, and are owned by investors. b. Mutual Savings Banks. In mutual savings banks, all depositors are considered owners of the bank. All profits, therefore, are divided proportionately among depositors, who receive dividends.

3. Credit Unions. A credit union is a nonprofit, cooperative financial institution owned and run by its members. Its purpose is to promote thrift—careful management of one’s money or resources—and to provide members with a safe place to save and borrow at reasonable rates.

4. Nondeposit Institutions. A variety of other organizations take in money, provide interest or other services, and make loans. They are called nondeposit institutions because, unlike commercial banks, inflowing funds are intended for purposes other than earning interest for depositors. Four of the most important are pension funds, insurance companies, finance companies, and securities investment dealers (brokers). a. A pension fund is a pool of funds that is managed to provide retirement income for its members. Public pension funds include Social Security and retirement programs for state and local government employees. Employers, unions, and other private groups operate private pension funds. b. Insurance companies accumulate money from premiums and invest in stocks, real estate, and other assets. Earnings pay insurance claims.

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c. Finance companies specialize in making loans to businesses (needing capital or long-term funds) and consumers (small loans to individuals such as mortgages, personal loans). d. Securities investment dealers (brokers) buy and sell stocks and bonds for client investors and for their own accounts in hopes of reselling them later at a profit.

B. The Growth of Financial Services No longer is it enough for commercial banks to accept deposits and make loans. Most, for example, also offer bank-issued credit and debit cards, safe-deposit boxes, ATMs, electronic money transfer, online banking, and foreign currency exchange. In addition, many offer pension, trust, international, and brokerage services and financial advice.

1. Pension and Trust Services. Individual retirement accounts (IRAs) are tax-deferred pension funds that wage earners and their spouses can set up to supplement other retirement funds. Banks receive funds and invest them as directed by customers and provide information on IRA investment alternatives. Many commercial banks offer trust services—the management of funds left “in the bank’s trust.”

2. International Services. The three main international services offered by banks are currency exchange, letters of credit, and banker’s acceptances. Currency exchange exchanges U.S. dollars for another country’s currency to make a payment. A letter of credit is a promise by the bank to pay a firm a certain amount, if specified conditions are met. A banker’s acceptance promises that the bank will pay a specified amount at a future date.

3. Financial Advice and Brokerage Services. Serving as financial advisors, banks help customers manage their money by recommending different investment opportunities and serving as a securities intermediary.

4. Electronic Funds Transfer. Electronic funds transfer (EFT) systems transfer many types of financial information electronically. EFT systems provide automatic payroll deposit, ATM transactions, bill payment, and automatic funds transfer. a. Automated Teller Machines. Automated teller machines (ATMs) allow customers to withdraw money, make deposits, transfer funds, and check on account status.

KEY TEACHING TIPS •

Remind students that financial institutions include commercial banks, savings and loan associations, mutual savings banks, and credit unions.

•

Make sure students understand the distinction between EFT services and ATM services.

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•

Reinforce that financial institutions of all kinds have had to modify their services to maintain and attract customers.

QUICK QUESTIONS •

What are ways in which financial institutions have diversified in recent years?

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What was the traditional purpose of a savings and loan association?

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Who are considered the owners of mutual savings banks and credit unions?

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How are nondeposit institutions different from commercial banks?

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When might a letter of credit be used? When might a banker’s acceptance be used?

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How do consumers benefit from EFT?

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Learning Objective 16-3: Explain how financial institutions create money and describe the means by which they are regulated.

Financial Institutions as Creators of Money Financial institutions create money by taking in deposits and making loans, which expands the money supply. a. Regulation of the Banking System. Banks create money, therefore, the government regulates them via the Federal Reserve System and the Federal Deposit Insurance Corporation to ensure a sound financial system. This ensures that the failure of some will not cause the public to lose faith in the banking system itself. b. Federal Deposit Insurance Corporation (FDIC). The Federal Deposit Insurance Corporation (FDIC) insures deposits in member banks up to $250,000.

KEY TEACHING TIPS •

Ensure students understand the purpose of the FDIC.

•

Review how banks create money by taking in deposits and making loans.

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Learning Objective 16-4: Discuss the functions of the Federal Reserve System and describe the tools that it uses to control the money supply.

The Federal Reserve System The Federal Reserve System (the Fed) is the nation’s central bank.

A. The Structure of the Fed The Fed is comprised of a board of governors, a group of reserve banks, and member banks.

1. The Board of Governors. This group is comprised of seven members appointed by the president for 14-year terms; the board plays a major role in controlling the money supply through reserve requirements, discount rates, and open-market operations.

2. Reserve Banks. There are 12 banks in the Fed that hold deposits from and set the discount rate for commercial banks in their respective regions; reserve banks also largely contribute to the country’s check-clearing process.

3. Open Market Committee. The Federal Open Market Committee is responsible for formulating the Fed’s monetary policies to promote economic stability and growth by managing the nation’s money supply.

4. Member Banks. All nationally-chartered banks and some state-chartered banks are members of the Fed; depositor accounts in member banks are protected by the FDIC. 5. Other Depository Institutions. Although many state-chartered banks, credit unions, and S&Ls do not belong to the Fed, they are subject to its regulations, pay deposit insurance premiums, and are covered by the FDIC. B. The Functions of the Fed The Fed functions as the government’s bank and the banker’s bank and controls the money supply.

1. The Government’s Bank. The Fed produces the nation’s currency and lends money to the government by buying bonds issued by the Treasury Department to finance the national deficit.

2. The Bankers’ Bank. Individual banks that need money can borrow from the Fed and pay interest on the loans. In addition, the Fed provides storage for commercial banks, which are required to keep funds on reserve at a Federal Reserve Bank.

3. Check Clearing. The Fed also clears checks. With electronic payments, however, the number of paper checks processed is falling, with fewer than 16 billion cleared by the Fed in 2013.

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4. Controlling the Money Supply. The Fed is responsible for the conduct of U.S. monetary policy—the management of the nation’s economic growth by managing money supply and interest rates. Controlling these influences the ability and willingness of banks to loan money. a. Inflation is a period of widespread price increases throughout an economic system. It occurs if the money supply grows too large. Demand for goods and services increases, and the price of everything rises. b. Deflation occurs when the supply of goods outpaces the supply of money, so demand for goods and services falls. Decreasing prices lead businesses to cut output and also lead to rises in unemployment.

C. The Tools of the Fed In controlling the money supply, the Fed uses four main tools: reserve requirements, discount rate controls, and open-market operations.

1. Reserve Requirements. The reserve requirement is the percentage of its deposits that a bank must hold, in cash or on deposit, with a Federal Reserve Bank. High reserve requirements reduce the money available to lend; low requirements allow the money supply to expand.

2. Interest Rate Controls. As the bankers’ bank, the Fed loans money to banks. The discount rate is the interest rate that the Fed charges on loans made to member banks.

An increased discount rate reduces the money supply; a low rate encourages borrowing and lending. The federal funds rate is the rate at which commercial banks lend reserves overnight to each other.

3. Open-Market Operations. Open-market operations refer to the Fed’s sale and purchase of securities (usually U.S. Treasury notes and bonds) in the open market, as directed by the open-market committee. The Fed buys government securities from a commercial dealer, whose bank account is credited for the transaction, thus giving that bank more money to lend. This action expands the money supply. When the Fed sells securities, the opposite occurs as it allows the U.S. government to raise money and contract the money supply.

KEY TEACHING TIPS •

Reinforce that monetary policy is the management of the nation’s economic growth by managing money supply and interest rates; the Fed is responsible for monetary policy.

•

Remind students that the discount rate is the interest rate charged by the Fed for loans made to banks.

•

Make sure students understand that the Federal Reserve System (the Fed) is the central bank of the United States; it is comprised of a board of governors, 12 reserve banks, and thousands of member banks.

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•

Point out that some financial institutions don’t belong to the Federal Reserve System; however, they are still subject to the Fed’s regulations, pay deposit insurance premiums, and are covered by the FDIC.

QUICK QUESTIONS •

How does the Fed serve as the “government’s bank?”

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How does the Fed serve as the “bankers’ bank?”

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What typically happens to demand for goods and services, and their prices, during inflationary times?

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How does increasing the reserve requirement help to reduce inflation?

•

Remind students that the discount rate is the interest rate charged by the Fed for loans made to banks.

•

How does the Fed control the nation’s money supply through open-market operations?

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Learning Objective 16-5: Identify two important ways in which the money and banking system is changing.

The Changing Money and Banking System A. Government Intervention for Stabilizing the U.S. Financial System Government Emergency Investment. During the recent recession, the Fed invested heavily, mostly in lending programs to commercial banks, to allow them to get rid of bad investments and gain cash for lending to bank customers. The Troubled Asset Relief Program (TARP) was another source of funds to businesses and banks.

Assurances of Payment. In return for these investments, the loans to banks were secured by the banks’ assets, such as commercial loans and mortgages.

B. Anti-Crime and Anti-Terrorism Regulations The Bank Secrecy Act requires financial institutions to formulate methods, such as monitoring and keeping records of customer transactions, to deter funding of crimes.

Enforcement includes tracking and reporting on suspicious transactions, such as a sudden increase in wire transfers or cash transactions exceeding $10,000, to cut off funding of criminal and terrorist activities.

USA PATRIOT Act and the Customer Identification Program (CIP). The USA PATRIOT Act requires that financial institutions obtain and verify four pieces of information for every customer: name, address, date of birth, and social security number. A customer identification program (CIP) verifies identities, keeps records of customer activities and, for new customers, compares identities with government lists of terrorists.

C. The Impact of Electronic Technologies Investing in new technologies allows banks to improve their efficiency and customer service levels.

1. Automated Clearing House (ACH) Network. ACH is an electronic funds transfer system that provides interbank clearing of electronic payments for the nation’s financial institutions.

2. Check 21: Making the Paper Check Go Away. Check 21 allows banks to present a substitute check for payment instead of the original check. The result is much faster transactions.

3. Blink Credit Cards. This “contactless” payment system allows consumers to wave a card in front of the merchant’s terminal and be on his or her way.

4. Debit Cards. Debit cards allow the transfer of money between accounts and can be used to make retail purchases. In stores with point-of-sale (POS) terminals, customers insert cards that transmit information relevant to their purchases to terminals, after which the bank automatically transfers funds from the customer’s account to the store’s account.

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5. Smart Cards. Smart cards are plastic cards with an embedded computer chip that can be programmed with “electronic money.”

QUICK QUESTIONS •

How might check writers benefit from Check 21? How might financial institutions benefit from Check 21?

HOMEWORK Interview a Manager Now is also a good time to assign Application Exercise 10 from the end-of-chapter materials of the textbook as homework. This assignment asks students to interview the local manager of a bank and determine how requirements of the Bank Secrecy Act and the USA PATRIOT Act have affected the bank.

At-Home Completion Time: 1-2 hours Use In-Class Activity 2: Up for Debate: Your Check Is Not in the Mail Time Limit: 20 minutes

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Learning Objective 16-6: Discuss some of the institutions and activities in international banking and finance.

International Banking and Finance Electronic technologies permit nearly instantaneous financial transactions around the globe.

These business exchanges—the prices asked and paid—are affected by values of the currencies among the various nations involved in the transactions.

A. Currency Values and Exchange Rates With today’s global activities, travelers, shoppers, investors, and businesses often rely on banks to convert their dollars into other currencies. When it comes to choosing one currency over others, the best choice changes from day to day. Every currency’s value changes, reflecting global supply and demand—what traders are willing to pay—for one currency relative to others. The resulting exchange rate, the value of one currency compared to the value of another, reveals how much of one currency must be exchanged for another.

1. Strong Currency or Weak: Which Is Better? Most people would prefer a “strong” currency, right? But it depends on how it will be used. “Strong” means that the currency is selling at a higher price and worth more, while “weak” means that it is selling at a lower price and is worth less. This impacts any transaction involving multiple currencies and impacts prices for items in the countries involved, whether domestic or imported products. A weaker dollar makes foreign imports more expensive, so U.S. consumers can afford fewer imported products.

2. Bank Policies Influence Currency Values. In managing the money supply and interest rates, the Fed strongly influences the dollar’s strength against other currencies. The European Central Bank fills the role for the euro zone. Europe’s economic recovery is slower than desired when the euro is strong because euro-zone companies are less competitive against global counterparts.

3. Currency exchange rates matter to companies when they buy, sell, and invest with other companies around the globe. Those exchange rates can be the difference between making a living and losing money during any year. Prices for consumer products, such as electronics by Samsung and autos made in Sweden or Germany, depend on currency exchange rates, too.

B. The International Payments Process International payments are simplified through the services provided by their local banks.

Payments from U.S. buyers start at a local bank that converts them from dollars into the seller’s currency, such as into euros, for example, to be sent to a seller in, say, France. At the same time, payments and currency conversions from separate transactions also are flowing between French businesses and U.S. sellers in the other direction. When money inflows and outflows remain equal for both countries, as a result of international transactions, money does not have to “flow” between the two countries. If inflows and outflows are not in balance, then the flow of money—in either direction—is made to cover the difference.

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C. International Bank Structure Worldwide banking stability relies on a loose structure of agreements among individual countries.

1. The World Bank. The World Bank provides only a very limited scope of services, such as funding national improvements by making loans to build roads, schools, power plants, and hospitals. The resulting improvements eventually enable borrowing countries to increase productive capacity and international trade.

2. The IMF. The International Monetary Fund (IMF) promotes the stability of exchange rates, provides temporary loans to member countries, encourages members to cooperate on international monetary issues, and encourages the development of a system for international payments. The IMF makes loans to nations suffering from temporary negative trade balances. By making it possible for these countries to continue buying products from other countries, the IMF facilitates international trade.

QUICK QUESTIONS •

For what purposes has the International Monetary Fund been designed?

•

How do changes in currency exchange rates affect business decisions and results?

HOMEWORK Creating Money Now is a good time to assign Application Exercise 9 from the end-of-chapter materials of the textbook as homework. This assignment asks students to calculate exchange rates looking into the future.

At-Home Completion Time: 20 minutes

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

IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker: How Much Would That Be in, Say, Chocolate Bars?

Activity Overview: This exercise asks students to consider the characteristics of money when making purchases using something other than “money.”

Time Limit: 30 minutes What to Do: 1. Divide the class into groups of two.

2. Ask each group to consider making the following purchases: a. X number of cans of soda for X number of gallons of gasoline b. X number of hours of overtime for X number of extra vacation days per year c. X number of days without the use of a cell phone for X number of days use of a car 3. Ask each group member to interview his or her partner to determine just how many cans of soda he or she would be willing to “pay” for a gallon of gas; how many hours of overtime would be worth an extra one day of vacation from work; and how many days he or she would be willing to give up the use of a cell phone in order to have access to a car. (15 minutes) 4. Ask each group to discuss whether any “characteristics” of money are evident in these transactions. (5 minutes) 5. Reassemble the class and share some of the groups’ responses. (10 minutes) Don’t Forget: Students’ perceived values in each of the above transactions will vary greatly; for example, a student without a cell phone would not miss it much, etc.

Wrap-Up: Bring the activity to a close by providing a brief overview of the characteristics of money, relating them to the previous transactions.

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In-Class Activity 2: Up for Debate: Your Check Is Not in the Mail Activity Overview: This activity asks students to consider the advantages and disadvantages of replacing traditional check writing with electronic payments.

Time Limit: 20 minutes What to Do: 1. Ask students to work independently to make a list of pros and cons of using traditional check writing and a list of pros and cons of using debit cards. (10 minutes) 2. Bring the class together to discuss the pros and cons of each option. Which option does the class prefer? Why? (10 minutes) Don’t Forget: To come up with an overall class preference, you may want to take a vote.

Wrap-Up: Bring the debate to a close by highlighting some of the advantages and disadvantages mentioned for each option; remind students that check writing is expected to be completely replaced by electronic payments.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 16-1. Explain the four characteristics of money.

Visit MyBizLab for suggested answers. (Learning Objective 1 – AACSB – reflective thinking) 16-2. What are the components of M-1 and M-2?

M-1 consists of currency, demand deposits, and other checkable deposits. M-2 includes M-1 as well as time deposits, money market mutual funds, savings deposits, and overnight transactions. (Learning Objective 1 – AACSB – reflective thinking) 16-3. Explain the roles of commercial banks, savings and loan associations, credit unions, and nondeposit institutions in the U.S. financial system.

Commercial banks use deposits to make loans and to earn profits. Savings and loan associations accept deposits and make loans primarily for home mortgages. Nondeposit institutions, including pension funds, insurance companies, finance companies, and securities investment dealers, take in money, provide interest, and/or make loans. (Learning Objective 2 – AACSB – reflective thinking) 16-4. Describe the structure of the Federal Reserve System.

The Fed is made up of a board of seven governors, twelve Reserve Banks, and member banks. (Learning Objective 4 – AACSB – reflective thinking) QUESTIONS FOR ANALYSIS 16-5. As a consumer, when would you favor a strong dollar? What about a weak dollar? Would you consider these factors differently as an employee or employer?

Visit MyBizLab for suggested answers. (Learning Objective 6 – AACSB – reflective thinking) 16-6. Should commercial banks be regulated, or should market forces be allowed to determine the kinds of loans and the interest rates for loans and savings deposits? Why? Visit MyBizLab for suggested answers. (Learning Objective 5 – AACSB – reflective thinking) 16-7. Customers who deposit their money in online-only checking and savings accounts can often get higher interest rates than at brick-and-mortar banks. Why do you think that online banks can offer these rates? What might be some drawbacks to online-only banking?

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Online banks can offer higher returns because they do not have the same fixed assets required by main street banks. They also have the opportunity to offshore significant portions of their processes, thus keeping costs to a minimum. The disadvantage is that it is not possible to meet a bank representative face-to-face to discuss issues of personal finance.

(Learning Objective 5 – AACSB – reflective thinking) 16-8. Start with a $1,000 deposit and assume a reserve requirement of 15 percent. Now trace the amount of money created by the banking system after five lending cycles.

Cycle 1: $1,000 X 0.85 = $850.00 Cycle 2: $850.00 X 0.85 = $722.50 Cycle 3: $722.50 X 0.85 = $614.12 Cycle 4: $614.12 X 0.85 = $522.00 Cycle 5: $522.00 X 0.85 = $443.70 TOTAL = $3,152.32 (Learning Objective 4 – AACSB – application of knowledge) Cycle 1: $1,000.00

APPLICATION EXERCISES 16-9. The Federal Reserve Bank maintains historical and current data on exchange rates. Find detailed historical rates by going to http://www.federalreserve.gov/releases/h10/Hist/. If you used $5,000 to purchase Chinese Yuan five years from today, how many Yuan would you have received? What would those Yuan be worth today? (Use the data on the Fed site to calculate these values and explain your calculations.)

Currently there are 6.06 Chinese Yuan to $1. The current value would be 30,300 Chinese Yuan for $5,000. Over the last 5 years, the value of the dollar to the Yuan has declined approximately 12.5% so in 5 years you would receive approximately 26,512 Yuan.

(Learning Objective 6 – AACSB – application of knowledge) 16-10. Interview the manager of a local commercial bank. Identify the ways in which the bank has implemented requirements of the Bank Secrecy Act and the USA PATRIOT Act. What costs has the bank incurred to implement the federal requirements?

Answers will vary, but most managers willing to discuss this topic will mention how the Bank Secrecy Act requires financial institutions to formulate methods to deter funding of crimes. The USA PATRIOT Act requires that banks know customers’ true identities.

(Learning Objective 5 – AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE, 16-11 TO 16-15 (Learning Objectives 4 and 5 – AACSB – interpersonal relations and teamwork, analytical thinking, reflective thinking, application of knowledge) This exercise helps students focus on what they need to know to stay up to date on business news and keep track of how fiscal and monetary policy changes (including currency exchange rates,

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credit policies, etc.) and other external events might affect the company. The challenge is to make sense of what’s going on in the world and keep the company afloat.

TEAM EXERCISE: VIRTUAL BANKING: AN IDEA WHOSE TIME HAS COME? 16-16 TO 16-20 (Learning Objective 5 – AACSB – interpersonal relations and teamwork, ethical understanding and reasoning, analytical thinking, reflective thinking, application of knowledge) 16-16. Before hearing any of your group’s comments on this situation, and from the perspective of your assigned role, what are the advantages and disadvantages of becoming a virtual bank?

16-17. Join your group and share the advantages and disadvantages of becoming a virtual bank.

16-18. Do you think that going virtual would attract new customers? What types of customers would be most interested in virtual banking?

16-19. What are the potential risks of virtual banking for both the bank and the customer? How can each protect itself?

16-20. What new services might Key Savings and Loan be able to offer if they go virtual?

This could be a really interesting discussion. The students’ responses to the Action Steps will vary widely due to differences in perception. Many students will argue that a virtual bank will better serve customers and permit the bank to continue operations and employment for at least some employees. Other students will argue that a virtual bank will be attractive to younger customers but not appealing to the older generation and the majority of employees will lose their jobs.

EXERCISING YOUR ETHICS: TELLING THE ETHICAL FROM THE STRICTLY LEGAL (Learning Objectives 2 and 4 – AACSB – ethical understanding and reasoning, reflective thinking) 16-21. From the standpoint of a commercial bank, can you find any economic justification for ATM access fees?

From an economic standpoint, the fees can be justified since the bank is offering a service to noncustomers, and should be compensated for the cost of that service plus a fair profit margin. However, since the cost of the service is likely fairly minimal (as a comparison, processing an EFT is $0.105 and an electronic direct deposit is $0.925), students may find a $3 fee to be more than a fair profit. Perhaps continuing to charge the fee, but reducing it to a more palatable figure would be justified.

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16-22. Based on the scenario described for our bank, do you find any ethical issues in this situation? Or do you find the main issues legal and economic rather than ethical?

Answers will vary, and certainly legal and economic issues are present. Potential ethical issues revolve around the bank’s responsibility to the communities in which it operates.

Questions might include: • Is it right to charge people exorbitant fees (from a percentage standpoint) to access their own money?

• What if no other ATMs were available in certain communities?

16-23. As an officer for this bank, how would you handle this situation?

Answers will vary, but students will likely point out that ATM fees are legal and that banks must make money in order to operate. On the other hand, some students will mention how officers in a bank may be concerned with the bank’s image in the community and industry as a result of being targeted by groups, such as the U.S. Public Interest Research Group. Other banks have backed off after being targeted.

CASES: A TALE OF TWO WORLDS IN BANKING (Learning Objectives 1, 2, 3, 4 – AACSB – analytical thinking, reflective thinking, application of knowledge) 16-24. What are the advantages of banking regulation to consumers, businesses, and national economies? How could regulation be a disadvantage to banks themselves?

The government, consumers, and businesses, and, therefore, by extension, national economies, rely on banks as instruments of national policy for economic stability. In a global economy, stability is even more important. Regulation can be a disadvantage to banks themselves by adding costs to the operations of the bank. It can also limit their flexibility in developing revenue streams, to make money for themselves.

16-25. Banks have increasingly subsidized their traditional business models by charging new and higher fees to consumers and businesses. Do you think that this is ethical or unethical?

Answers may vary. While banks have both a goal and a right to be profitable, and to increase their profits, they also must not alienate their customers by charging or increasing fees for many services that used to be free or less costly. Especially when costs of many electronically-focused services are much lower than the “older” methods, bank customers can find the fees to be onerous. Both consumers and businesses do have options and can take their business to another institution. Just because something is legal does not mean it is ethical, or a wise business decision.

16-26. Why has the rate of bank failures fallen in recent years? Do you expect this trend to continue?

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Banks have fewer uncollectable loans. The failure rate has fallen due in large part to increased regulation, increased reserve requirements, and stricter rules for making loans.

Particularly since the economy is not back to where it was before the recession, it is likely the trend will continue.

16-27. Why do economically stressed countries with massive debt have difficulty borrowing outside money needed for economic recovery? Explain.

The first obstacle is difficulty borrowing outside money for economic recovery, although some have received emergency financing from the International Monetary Fund. Second, when national debt increases, the value of its currency falls on foreign exchange markets and its money then buys less than before, so each of its citizens suffers lower real wealth.

16-28. If banks are required to keep larger cushions of cash on hand rather than loaning out that money (as proposed in the Basel III Requirements), in what ways will the U.S. economy be affected?

High requirements mean that banks have less money to lend and the money supply is reduced. If the money supply is reduced, the value of it increases. When the supply is tightened, less money is available; financial transactions, spending, and business activity slow down. This means that the economy slows down.

GLOBAL TRADING PARTNER RESETS ITS ECONOMIC COMPASS (Learning Objectives 1, 2, 3, and 4 – AACSB – analytical thinking, reflective thinking, application of knowledge) 16-29. What is deflation? How would increasing the money supply in Japan result in an end to deflation?

Deflation occurs when the supply of goods outpaces the supply of money, so demand for goods and services falls. An increase in the money supply should help increase the demand for goods and services, thereby ending deflation. However, the prices trending downward and people holding off on purchases with the expectation of even lower prices is an issue.

The problem is the strong savings habit of the Japanese population must be overcome.

16-30. The Bank of Japan pumped lots of money into the Japanese economy using tactics similar to the Federal Reserve Bank in the United States. When the Fed wishes to put money into the economy, what tools do they use?

Tools the Fed can use to increase the money supply include lowering the reserve requirements that commercial banks must hold, lowering the discount rate, and buying securities on the open market.

16-31. Consider the ways that Japan’s economy would likely be affected by having a strong yen versus a weak yen. Compare and discuss the positive implications and the negative

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implications for both a strong and a weak yen.

When the yen is strong, it is selling at a higher price and is worth more. When it is weak, it is selling at a lower price and is worth less. When the yen is strong, Japanese companies are less competitive against global competitors. Conversely, when it is weak, Japanese companies are more competitive, which strengthens the economy, relative to global counterparts.

16-32. How will Japan’s new monetary policies have an impact on the U.S. economy? Identify and discuss the ways those policies will be felt in the United States.

By boosting consumer confidence, the government hopes to overcome the deflationary mindset, and increase large amounts of money into the economy. The policies will affect the U.S. by making Japanese products more competitive and thereby increasing the volume of Japanese goods imported into the U.S. Drawbacks may include U.S. companies’ having to reduce prices to compete with Japan in other markets and that U.S. exports to Japan may decrease because the Japanese consumers will have less purchasing power with a weaker yen.

16-33. Consider Japan’s trading status as the fourth-largest source of U.S. imports, and the fourth-largest market for U.S. goods exports. Would you expect that status to change soon relative to other U.S. trading partners such as Canada, China, Germany, and others? Explain.

It is likely that at least one of the two rankings will change. If Japanese exports to the U.S. increase, then it is possible for Japan to become the third largest supplier. It is not likely that it can move ahead of China, but may be able to move ahead of Canada or Mexico, at least in certain categories of goods. As the third-largest GDP in the world, it could become certainly moved up as an importer, but that will have to occur in spite of the lower purchasing power of a weaker yen, and rely on the desire of the Japanese to spend more easily than they have in the past.

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Chapter 17: Managing Business Finances Chapter Outline Retirement! Now there’s something that most students do not think about, yet it is something that we all must strategically plan for. This chapter introduces us to the concept of the time value of money and the principle of compound growth that is central to our creation of wealth—wealth that we will need to fund our retirements!

The chapter introduces the student to the investment opportunities offered by mutual funds and exchange-traded funds. It describes the role of securities markets and identifies the major stock exchanges in the world. The chapter introduces students to the concept of the risk-return relationship and discusses the value of diversifying an investment portfolio. Finally, the chapter examines how a firm can raise funds through equity or debt financing.

Learning Objectives 17-1. Explain the concept of the time value of money and the principle of compound growth, and discuss the characteristics of common stock.

17-2. Identify reasons for investing and the investment opportunities offered by mutual funds and exchange-traded funds.

17-3. Describe the role of securities markets and identify the major stock exchanges and stock markets.

17-4. Describe the risk-return relationship and discuss the use of diversification and asset allocation for investments.

17-5. Describe the various ways that firms raise capital and identify the pros and cons of each method.

17-6. Identify the reasons a company might make an initial public offering of its stock, explain how stock value is determined, and discuss the significance of market capitalization.

17-7. Explain how securities markets are regulated.

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LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE Activity 1. Ice-Breaker: What Should I Buy?

Description Students make preliminary purchasing decisions about stocks based on what they already know about the companies and the stock market in general.

Students are divided into teams to debate the ethics of insider trading.

2. Up for Debate: What’s Wrong with a Little Inside Scoop?

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Time Limit 30 min.

30 min.

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CHAPTER OUTLINE Learning Objective 17-1: Explain the concept of the time value of money and the principle of compound growth, and discuss the characteristics of common stock.

Maximizing Capital Growth Wise investment is the key to growing your money, especially if you are seeking to build capital to start your own business or simply as a cushion for a sound financial future. A number of concepts come into play when searching for investment opportunities.

A. The Time Value of Money and Compound Growth The time value of money is a concept that recognizes that if we invest money, it makes more money over time through the addition of compound interest. Compound growth is the cumulative growth from interest paid to the investor over given time periods. With each additional time period, an investment grows as interest payments accumulate and earn more interest, thus multiplying the earning capacity of the investment.

1. The Rule of 72 is a handy rule of thumb to estimate how long it will take to double an investment. You can find the number of years it will take to double an investment by dividing 72 by the annual interest rate of the investment (in percent). Thus, a 10 percent investment will take 7.2 years to double. Bottom line for investors: seek higher interest rates because money will double more frequently.

2. Making Better Use of Your Money. Each year, interest is added to our investments. If we continually reinvest the principal amount and the interest, the growth of our money will become larger each year.

B. Common Stock A stock is a portion of the ownership of a corporation. The company’s total ownership is divided into small parts, called shares, which can be bought and sold to determine how much of the company (how many shares of stock) is owned by each investor.

1. Common Stock. A share of common stock is the most basic form of ownership in a company. Individuals and other companies purchase a firm’s common stock in the hope that it will increase in value, provide dividend income, and enable shareholders to vote on major issues that are brought before the shareholders. a. Market value is the current share price in the stock market. b. Book value of common stock is stockholders’ equity divided by the number of outstanding shares.

2. Investment Traits of Common Stock. Common stocks are among the riskiest of all investments, though historically stock values rise over time. Growth prospects in various industries change from time-to-time.

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3. Dividend. A dividend is a payment to shareholders, on a per-share basis, out of the company’s earnings. Blue chip stocks are stocks of well-established firms that consistently provide investors with secure income from dividend payouts. Not all strong firms pay dividends, however. Some focus on reinvesting in the company toward future growth.

KEY TEACHING TIPS •

Remind students that compound interest will either work for them or against them. It works for them when they invest, but against them when they borrow.

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Reiterate that continued reinvestment of interest and principal maximizes the return achieved by the investment.

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Reinforce the point that a stock is a portion of the ownership of a corporation. Common stocks represent the most basic form of ownership in a company.

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Common stocks are risky securities, but blue chip stocks are issued by the strongest, most financially sound firms that often provide investors with steady income.

QUICK QUESTIONS •

What is meant by the time value of money? What is meant by compound growth?

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What is common stock?

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What is different about the market value and the book value of a share?

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What is a dividend? Why do some investors receive dividends?

Use In-Class Activity 1: Ice-Breaker: What Should I Buy? Time Limit: 30 minutes

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Learning Objective 17-2:

Identify reasons for investing and the investment opportunities offered by mutual funds and exchange-traded funds.

Mutual Funds Mutual funds are created by companies such as T. Rowe Price and Vanguard that pool cash investments from individuals and organizations to purchase a portfolio of stocks, bonds, and other securities. The portfolio is expected to increase in value and produce income for the fund and its investors.

A. Reasons for Investing Mutual funds are flexible in their investment goals. It is relatively easy to open a mutual fund account. The three most common objectives for opening a mutual fund account are: 1. Stability and Safety. Funds stressing safety seek only modest growth with little fluctuation in principal value regardless of economic conditions. These funds include money market mutual funds and other funds that preserve the fund holders’ capital and reliably pay current income.

2. Conservative Capital Growth. Preservation of capital and current income, alongside some capital appreciation, can be gained through balanced funds. These funds invest in a mix of municipal bonds, corporate bonds, and common stocks.

3. Aggressive Growth. Aggressive growth funds seek maximum long-term capital growth; they sacrifice current income and safety by investing in stocks of new and sometimes troubled companies, firms developing new products and technologies, and other high-risk securities.

B. Most Mutual Funds Don’t Match the Market Most, but not all, mutual funds are managed by “experts” who select the stocks, bonds, and securities in which the fund will invest. Some estimates indicate that up to 80 percent of mutual funds underperform a market’s average return due to management expenses and underperforming stocks. This has led to the development of passively managed or index funds to reduce the management costs of funds.

C. Exchange Traded Funds An exchange-traded fund (ETF) is a bundle of stocks (or bonds) that are in an index that tracks the overall movement of a market. ETFs can be traded like a stock.

1. Advantages of ETFs. ETFs offer three advantages over mutual funds: a. They can be traded throughout the day like a stock. b. They have low operating expenses. c. They do not require high initial investments.

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KEY TEACHING TIPS •

Students often confuse mutual funds and exchange-traded funds. While both are bundles of stocks or bonds, ETFs can be traded like a stock. Each share of the ETF rises and falls as the market process changes.

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Remind students that securities include stocks as well as corporate and municipal bonds and mutual funds; they represent secured, financially valuable claims on the part of investors.

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Reinforce that mutual funds are an attractive investment since a drop in the price of one or two stocks in the pool is likely to have little impact on the total value of the fund; this is especially true with index funds.

QUICK QUESTIONS •

What are mutual funds?

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Why might an investor find mutual funds attractive?

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What are the advantages of ETFs?

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Learning Objective 17-3: Describe the role of securities markets and identify the major stock exchanges and stock markets.

The Business of Trading Securities Stocks and bonds are referred to as securities because they represent secured, or financially valuable, claims on the part of investors. Stocks and bonds are sold in securities markets. By facilitating the buying and selling of securities, the securities markets provide the capital that companies rely on for survival.

A. Primary and Secondary Securities Markets Newly issued stocks and bonds are bought and sold in primary securities markets. To bring a new security to market, the issuing firm must get approval from the Securities and Exchange Commission (SEC)—the government agency that regulates U.S. securities markets.

Investment Banks issue and resell new securities, as well as create the distribution networks for selling the securities. Investment banks provide three important services: 1. They advise companies on the timing and financial terms of new issues.

2. They underwrite (buy and assume liability for) new securities, providing an issuing firm with 100 percent of the money (less commission and fees).

3. They create distribution networks to move new securities through groups of banks and brokers to individual investors.

B. Stock Exchanges A stock exchange is an organization of individuals that provides an institutional auction setting in which stock can be bought or sold.

1. The Trading Floor. Each exchange governs the places and times when trading occurs.

Trading is allowed only on the trading floor, which can be a physical location, or an electronic market. Trading floors today are equipped with a vast array of electronic communication equipment to display, buy, and sell data. In addition, a variety of news services provide up-to-the-minute information relevant to the business world. Any change in world events may affect share prices.

2. The Major Exchanges and Markets. Among the stock exchanges that operate on trading floors in the United States, the New York Stock Exchange is the largest. It faces stiff competition from the NASDAQ, electronic trading, and large foreign exchanges such as in London and Tokyo. a. The New York Stock Exchange (NYSE). The NYSE is a hybrid market that utilizes both electronic transfers as well as a trading floor in New York. Many firms list their stocks regionally, as well as on one of the national exchanges.

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b. Global Stock Exchanges. The value of shares listed on foreign exchanges continues to grow. Major overseas stock exchanges are found in Brazil, Tokyo, London, and Hong Kong. c. The NASDAQ. The NASDAQ was the first electronic stock market. NASDAQ orders are gathered and executed solely on a worldwide computer network. NASDAQ is working to replace trading floors of traditional exchanges. d. International Consolidation and Cross-Border Ownership. Analysts expect technological advances and regulatory factors to drive together the separate stock markets in various parts of the world. Stock markets that are not able to cope with voluminous electronic trades are likely to be forced out of business (or be taken over) as competitive pressures intensify. Competition has brought faster transactions and lower transaction fees for investors.

C. Non-Exchange Trading: Electronic Communication Networks. ECNs are electronic systems that bring buyers and sellers together at specified prices outside traditional stock exchanges. Their popularity has grown rapidly, primarily because they have made the transfer for shares easier and less costly.

D. Individual Investor Trading.

While many investors rely heavily on the advice they receive from brokers, more experienced and well-informed investors often prefer to invest independently without outside guidance.

1. Stock Brokers. Stock brokers receive and execute orders from non-exchange members and earn commissions as a result.

2. Discount Brokers. These brokers are fast and low-cost, providing no advice or sales consultations. They do offer online services such as stock research and industry analysis.

3. Full-Service Brokers. Consulting advice and personal financial planning are provided.

4. Online Investing. This is possible via convenient access to the Internet and is ideal for self-directed investors.

E. Tracking the Market Using Stock Indexes Investors have used stock indexes to track market performance for decades. Market indexes provide some summaries of overall market price trends.

Bull Markets. Bull markets are periods of rising stock prices in which investors are motivated to buy because they are confident of continuing rising prices. Bear Markets. Bear markets are periods of falling stock prices during which investors sell anticipating lower prices in the future. To qualify as a bear market usually means prices are about 20 percent lower than the peak prices.

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1. The Dow Jones. The Dow Jones Industrial Average (simply referred to as the Dow) is the oldest and most widely used index. It tracks the performance of the U.S. industrial sector by focusing on 30 blue-chip, large-cap companies. It is used as a barometer of the market’s overall movement and economic health, though it only considers 30 companies.

2. The S&P 500.

The S&P 500 is a broad index that tracks 500 large-cap companies from a number of sectors including IT, energy, industrials, financials, healthcare, consumer staples, and telecommunications.

3. The NASDAQ Composite.

Unlike the Dow and the S&P 500, the NASDAQ Composite includes all NASDAQ companies, totaling some 3,100 in its index. Because of its company roster, it is overweighted in technology firms.

4. The Russell 2000. The Russell 2000 is a specialized index that tracks the performance of the smallest U.S. companies based on their market capitalization.

5. Index-Matching ETFs. ETFs are available that track the performance of various indexes. For example, the Fidelity NASDAQ Composite Index Tracking Stock holds a portfolio of equities for tracking the NASDAQ Composite Index.

KEY TEACHING TIPS •

Remind students that a stock exchange is an organization of individuals formed to provide an institutional auction setting in which stock can be bought and sold.

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Students may not know that each stock exchange regulates the places and times at which trading may occur; the trading floor is the physical location where trading takes place, though much trading occurs electronically today.

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Make sure students understand the distinction between stock brokers, discount brokers, and full-service brokers.

QUICK QUESTIONS •

What is the role of an investment bank with regard to new issues of stock?

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What type of investor is most likely to be attracted to online trading?

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What type of investor would prefer the services of a full-service broker?

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Reinforce that the NASDAQ system gathers and executes orders on an intranet connecting more than 350,000 terminals worldwide; NASDAQ offers no trading floor.

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What are some differences between the NYSE and NASDAQ?

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Learning Objective 17-4: Describe the risk-return relationship and discuss the use of diversification and asset allocation for investments.

The Risk-Return Relationship Each type of investment has a risk-return relationship, which reflects the notion that safer investments tend to offer lower returns, and riskier investments tend to offer higher returns.

A. Investment Dividends, Appreciation, and Total Returns. Investors invest for different reasons. In evaluating a potential investment, investors examine returns from dividends, price appreciation, and total returns.

1. Dividends. The rate of return from stock dividends is known as the current dividend yield. This figure is generated by dividing the yearly dollar amount of the dividend yield by the investment’s current market value. The dividend yield is expressed as a percentage. It can be compared against yields from other investments.

2. Price Appreciation. Price appreciation is an increase in the dollar value (share price) of an investment. The profit realized from the increased market value of an investment is a capital gain.

3. Total Returns. Total returns are the sum of the dividend yield plus the stock’s price appreciation. It is calculated by the formula: Total Returns (%) = (current dividend payment + capital gain) / original investment X 100 B. Fantasy Stock Markets Fantasy stock markets are popular for learning how securities markets work, for trying various investment strategies, and earning a fantasy fortune (or going broke!). Internet-based games, including free ones such as Wall Street Survivor and How the Market Works, provide an investment experience that is educational, challenging, and entertaining. These learn-bydoing experiences can be a valuable resource for learning the “how to” of online investing.

C. Managing Risk with Diversification and Asset Allocation Most investors select a mixed portfolio of investments that provides an overall level of risk and return that feels comfortable.

1. Diversification. Through diversification, investors buy several kinds of investments rather than one kind; this strategy reduces investor risk by “not having all eggs in one basket.”

2. Asset Allocation. Asset allocation is the proportion of funds invested in each of the investment alternatives. These proportions can be changed at any time.

3. Performance Difference for Different Portfolios. A portfolio is the combined holdings of all financial investments of any individual or company. These investments include

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stocks, bonds, mutual funds, and real estate. Investment portfolios have different objectives ranging from aggressive high growth portfolios to stable income/low volatility portfolios.

KEY TEACHING TIPS •

Reinforce that safer investments tend to offer lower returns; riskier investments tend to offer higher returns.

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Remind students that diversification cuts risk, if only because not all of the funds invested are in one place.

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Learning Objective 17-5: Describe the various ways that firms raise capital and identify the pros and cons of each method.

Financing the Business Firm Although the business owner’s savings may be enough to get a firm up and running, businesses depend on sales revenues to survive. When current sales are insufficient to cover expenses, firms turn to other sources of funding. These typically begin with the owner’s personal savings, but often involve borrowing from banks, soliciting cash from private investors, or selling bonds to the public.

A. Secured Loans for Equipment Money to purchase new equipment often comes in the form of loans from commercial banks.

The borrower guarantees repayment of the loan by pledging the asset as collateral.

1. Principal and Interest Rates. The amount of money that is loaned and has to be repaid is the principal. Borrowers will also pay interest, expressed in the form of an annual percentage rate (APR). The interest amount is found by multiplying the APR by the loan principal.

B. Working Capital and Unsecured Loans from Banks Firms need more than fixed assets; they also need current, liquid assets available to meet short-term operating expenses. The firm’s ability to meet these expenses is measured by its working capital. Working capital is calculated as follows: Working capital = Current assets – current liabilities When the firm has negative working capital, it may need to borrow money from a commercial bank in the form of an unsecured loan. With an unsecured loan, the borrower does not have to put up collateral. But the bank will require the borrower to maintain a portion of the loan on deposit with the bank, known as a compensating balance. Firms with poor credit cannot qualify for unsecured loans.

Small business entrepreneurs underestimate the value of establishing bank credit as a source of funds, financial analysis, cash flow planning, and other services. Once a small business has credit, it can seek more liberal credit policies from other sources. Start-up firms can expect to pay higher interest rates than established companies, because they don’t have a track record. Evidence of a sound financial plan can help show the firm is a good credit risk.

Cash flow planning shows lenders that the borrower is using available financial resources prudently.

C. Angel Investors and Venture Capital When a firm needs additional sources of funds to pay for growth, it often seeks out angel investors. An angel investor invests some money in the firm, typically expecting a sizable ownership in the company in return for the investment. Angel investors can help firms grow

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rapidly by providing venture capital, private funds from wealthy individuals or companies that seek investment opportunities.

D. Sale of Corporate Bonds Corporations can raise funds by issuing corporate bonds. A corporate bond is an IOU guaranteeing the payment of interest during the life of the bond and the repayment of the principal when the bond matures (on a pre-set date).

1. Characteristics of Corporate Bonds. The bondholder (the lender) has no claim to ownership of the company and does not receive dividends. However, interest payments and repayment of principal are financial obligations. Each new bond has specific terms and conditions spelled out in the bond indenture. The conditions include the maturity date when the bond’s face value must be repaid.

2. Default and Bondholder’s Claim. If the borrower fails to make a payment then the bond is said to be in default. The lender may request a court order to enforce the terms of the bond. This is known as a bondholder’s claim. If a firm cannot pay the lender, it may have to file for bankruptcy.

3. Risk Ratings. To aid investors in making purchase decisions, several services measure the default risk of bonds. A rating of AAA is the best and safest rating. Lower ratings do not necessarily mean that the bond issue will not be successful, but the lower the rating the higher the interest rate charged is likely to be.

4. Flawed Ratings Misread Recession Risks. The financial crisis of 2008 raised many questions about whether the credit rating agencies are serving any good purpose. The nation’s largest public pension fund, the California Public Employees Retirement Fund (CalPERS) has filed a suit against the top three agencies—Moody’s, Standard & Poor’s, and Fitch. CalPERS officials relied on these credit ratings to make investments that turned sour or failed. Furthermore, the collapse of highly rated institutions such as Lehman Brothers, Goldman Sachs, and Citigroup has again raised questions about the credit rating agencies.

5. Mortgage-backed securities became a trillion dollar investment industry during the pre2007 housing market boom. Financial institutions bundled home mortgages into packages and resold them as securities. These investments were given favorable risk ratings by credit rating agencies. Unbeknownst to investors, some $3 trillion of mortgage-backed securities contained subprime mortgages—high-risk loans to applicants with bad credit, low income, and low down payments. These subprime mortgages had received high ratings (AAA) from the agencies. When a significant number of these mortgage holders defaulted in the housing market crash, investors were left with little or nothing for their investment, leading to a collapse of worldwide financial markets.

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KEY TEACHING TIPS •

Students often confuse stocks and bonds. A stock represents ownership in a corporation.

A bond represents debt, an issuer’s promise to pay the buyer a certain amount of money by a specified future date.

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Make sure that students understand the differences between government bonds, municipal bonds, and corporate bonds.

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Point out that secured bonds are “backed” by company assets in case of default, whereas unsecured bonds—or debentures—pledge no property as security.

QUICK QUESTION

• What are some circumstances under which a firm might want to issue bonds?

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Learning Objective 17-6: Identify the reasons a company might make an initial public offering of its stock, explain how stock value is determined, and discuss the significance of market capitalization.

Becoming a Public Corporation An Initial Public Offering (IPO) is a firm’s first sale of its stock to the public. Corporations consider various issues before deciding to take the firm public.

A. Going Public Means Selling Off Part of the Company Private owners lose some control when shares are sold to the public. Anyone owning a large proportion of the company’s shares gains a powerful position in determining who runs the corporation and how. While an extreme case, this is particularly seen if the stock price falls and another investor (a corporate raider) mounts a hostile takeover. Corporations are vulnerable to hostile takeovers if their stock prices become undervalued and the firm’s assets still have high value.

B. Stock Valuations Most investors look for long-term value in stocks, rather than their short-term price. In determining long-term value, investors typically examine the company’s financial health, its past history of results and future forecasts, its record for managerial performance, and overall prospects for competing successfully in the coming years.

1. Why Shares Differ in Price. Share prices can differ substantially from one stock to another for various reasons. These include the supply and demand of the stock and the desire of corporations to have their shares sell within certain price ranges.

2. Comparing Prices of Different Stocks. When evaluating the price of Pepsi and CocaCola an investor would compare dividends, price earning ratios, and historical performance consistency over a period of several years, along with indicators of each firm’s prospects for the future. An investor should not simply compare share prices.

C. Market Capitalization Market capitalization is the total value of the company’s outstanding shares, calculated by the current stock price multiplied by the number of outstanding shares. Firms with larger market caps are considered to be less risky investments than firms with smaller market caps.

D. Choosing Equity versus Debt Capital Firms can meet their capital needs through equity financing (putting the owners’ capital to work) or debt financing (from outside the firm). These both have pros and cons.

1. Pros and Cons of Debt Financing: a. Long-term Loans. Long-term loans are attractive because the number of parties involved is limited, they can be arranged quickly, and there is no need for public disclosure to account for how the loan is being used. On the other hand, long-term

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loans have the disadvantage that borrowers may not easily be able to find lenders and may face some restrictions as a condition for the loan. b. Corporate Bonds. The advantage of bonds is that they can raise large amounts of money when the company needs it. The disadvantage is that they can incur high administration costs and stiff interest payments. They require disclosure of the purpose of the loan or the firm’s business plans.

2. Pros and Cons of Equity Financing. Equity financing is sometimes a favorable option for companies. Equity financing includes issuing common stock or using the company’s retained earnings. Issuing new stock can be expensive when dividend payments need to be made. It may be more costly than paying bond interest. Using retained earnings for capital projects means that this money is not available for dividend payments; this may reduce the stock price and the total market capitalization.

QUICK QUESTIONS •

What is market capitalization?

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When might a fall in market capitalization leave a company open to a hostile takeover?

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Learning Objective 17-7: Explain how securities markets are regulated.

A. The Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is the regulation and enforcement agency that oversees the markets’ activities, including the ways securities are issued. The SEC was created in 1934 to prevent the kinds of abuses that led to the stock market crash in 1929. The SEC regulates the public offering of new securities by requiring that all companies file prospectuses before proposed offerings commence. To protect investors from fraudulent issues, a prospectus contains pertinent information about both the offered security and the issuing company.

B. Regulations against Insider Trading The SEC also enforces laws against insider trading—the use of special knowledge about a firm for profit or gain. It is illegal, for example, for an employee of a firm to tell others about an anticipated event that may affect the value of the firm’s stock before the information is made public. The SEC offers a reward to any person who provides information leading to a civil penalty for illegal insider trading.

Along with the SEC’s enforcement efforts, the stock exchanges and securities firms have adopted self-regulation by participating with the Financial Industry Regulatory Authority (FINRA) in detecting and stopping insider action, and violations of other industry regulations.

QUICK QUESTIONS •

In light of the crash in 2009, do you think the SEC is doing a good job regulating financial markets?

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What are the primary roles of the Securities and Exchange Commission?

Use In-Class Activity 2: Up for Debate: What’s Wrong with a Little Inside Scoop?

Time Limit: 30 minutes

HOMEWORK The Securities and Exchange Commission Now is a good time to assign Application Exercise 9 from the end-of-chapter materials in the textbook as homework. This assignment asks students go to www.sec.gov and research how a new security is approved by the Securities and Exchange Commission.

At Home Completion Time: 30 minutes

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HOMEWORK Researching Insider Trading Now might be a good time to assign Application Exercise 10 from the end-of-chapter materials in the textbook as homework. This assignment asks students to research a high profile insider trading case.

At Home Completion Time: 1 hour

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

IN-CLASS ACTIVITIES In-Class Activity 1: Ice-Breaker: What Should I Buy? Activity Overview: This activity asks students to make preliminary purchasing decisions about stocks based on what they already know about the companies and the stock market in general.

Time Limit: 30 minutes What to Do: 1. Ask students to assume that they are being given $20,000 to invest in four company stocks, but that they must choose from the following companies: • McDonald’s Corporation • Microsoft • Corning • Chesapeake Energy • Marketing Technologies, Inc. • JDS Uniphase • Walmart • Amazon.com • Google 2. Divide the class into three-member groups so students can discuss these companies before making their investment decisions. As students make their decisions, ask them to write down their rationale for selecting the stocks they did as well as how much they invested in each one. (15 minutes) 3. Assemble the class as a whole to discuss their choices: (15 minutes) a. How did students select their stocks? b. How much did they know about the companies in which they invested? c. Did the discussion with other group members affect their decisions? d. What factors affected the allocation of the $20,000?

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Don’t Forget: Some students will know more about investing than others.

Wrap-Up: Bring the activity to a close by discussing the importance of doing “homework” on a particular company before investing in it. Very few students (or potential investors) would know enough about any of the above companies to make a sound investment. Company reputation can mean a lot when an individual chooses to make an investment, but this type of investing is not always prudent.

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In-Class Activity 2: Up for Debate: What’s Wrong with a Little Inside Scoop?

Activity Overview: This activity asks students to debate the pros and cons and the key issues surrounding insider trading.

Time Limit: 30 minutes What to Do: 1. Divide the class into four-member groups and ask each group to make a list of the disadvantages of insider trading. Then ask each group to make a list of the advantages facing the market, brokers, and stockholders if insider trading were to be declared legal. Students can consider the following questions as conversation starters in their groups: (15 minutes) a. Would insider trading actually make the market more efficient? b. Who is really hurt in most cases of insider trading? c. Why is insider trading illegal?

2. Assemble the class as a whole and debate the pros and cons of insider trading. (15 minutes) Don’t Forget: In advance, consider giving students some time to research specific cases of insider trading as a supplement to this debate. The class can then discuss specific cases and the levels of perceived fairness in the results of each case.

Wrap-Up: Bring the debate to a close by outlining some of the major arguments presented in the debate.

Then, provide reasons for the illegal nature of insider trading.

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ANSWERS FOR END OF CHAPTER ACTIVITIES QUESTIONS FOR REVIEW 17-1. Explain the concept of the time value of money.

The time value of money stems from the principle of compound growth. With each additional time period, interest payments accumulate and earn more interest, thus multiplying the earning capacity of the investment. (Learning Objective 1 – AACSB – reflective thinking) 17-2. What do mutual funds and exchange-traded funds offer, and how do they work?

Mutual funds and ETFs offer an alternative to investing in individual stocks. Mutual funds pool cash and investments from individuals and organizations to purchase a portfolio of stocks, bonds, and other securities. Unlike most mutual funds that are actively managed, ETFs are a bundle of stocks (or bonds) that are in an index that tracks the overall market performance. (Learning Objective 2 – AACSB – reflective thinking) 17-3. What is a corporate bond? Why would a company use bonds as a source of financing?

Visit MyBizLab for suggested answers. (Learning Objective 5 – AACSB – reflective thinking) 17-4. How does the market value of a stock differ from the book value of a stock?

The book value of a stock is determined by dividing the shareholders’ equity in the firm by the number of outstanding shares. The market value is the current price of the share in the stock market. Investors hope that the market value is above the book value. (Learning Objective 6 – AACSB – reflective thinking) 17-5. How do firms meet their needs through debt financing and equity financing?

In order to fund expansion, firms might use debt or equity financing. Debt financing is when a firm enters into a long-term loan or issues a corporate bond. Equity financing is where the firm uses retained earnings or offers additional stock for sale. (Learning Objective 5 – AACSB – reflective thinking) QUESTIONS FOR ANALYSIS 17-6. After researching several stocks online, you notice that they have continually fluctuated in price. What might be the reason for this? Is a higher-priced stock a better investment than a lower-priced stock? What factors would you consider in purchasing stocks?

Stock prices can vary enormously depending upon a number of factors, including the company’s recent performance, future expectations, changes in the company’s competition,

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inflation rates, and general economic expectations for the economy. Market price is only one factor to be considered in a stock purchase. Investors also look at the track record of the company. (Learning Objective 6 – AACSB – reflective thinking) 17-7. In which type of fund do you think you would invest, a mutual fund or an exchange-traded fund? What is the difference, and why would you favor one over the other?

Visit MyBizLab for suggested answers. (Learning Objective 2 – AACSB – reflective thinking) 17-8. Suppose that you are a business owner and you need new equipment and immediate funds to meet short-term operating expenses. From what sources could you gain the capital you need, and what are some of the characteristics of these sources?

Visit MyBizLab for suggested answers. (Learning Objective 5 – AACSB – reflective thinking) APPLICATION EXERCISES 17-9. Go to http://www.sec.gov to research how a new security is approved by the Securities and Exchange Commission. What is the process involved and how long would it take? Next, contact a financial institution such as Merrill Lynch and request information about their procedures for issuing or reselling new securities. Share this information with your classmates.

When a corporation wants to offer a new security, it must file a registration statement with the SEC that contains the following information: the name and description of the corporation; a biography of directors and officers (President, CEO, CFO, etc.); the financial stakes of all insiders, directors, and officers and anyone holding more than 10 percent of the corporation’s securities; full and complete financial statements; the type of security for sale and how the money raised will be used; and disclosure of any previous legal proceedings that may impact the company. The SEC will review the registration to make sure there has been full disclosure and then allow the corporation to sell the security. The SEC Website (www.sec.gov) shows that this is often a speedy process.

As an alternative to getting individual students to contact brokers, you might want to invite a broker to make a presentation to the class. Many brokers will enjoy this, and it gives students a great opportunity for Q&A with financial professionals. (Learning Objective 7 – AACSB – application of knowledge) 17-10. There have been a number of high profile cases in recent years concerning insider trading.

Use an online search to find a case involving insider trading. Who was accused of insider trading and what was their relationship to the company? Were they convicted of insider trading, and if so, what was the penalty? Finally, how could the person accused of insider trading have avoided the charges?

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Student responses will vary but the Wall Street Journal would be an excellent resource for students. (Learning Objective 7 – AACSB – application of knowledge) BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 17-11 TO 17-15 (Learning Objectives 5 and 6 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Students should be encouraged to undertake a careful analysis of the pros and cons of debt and equity financing with an emphasis on a realistic analysis of the markets.

TEAM EXERCISE: MARKETS UPS AND DOWNS, 17-16 TO 17-19 (Learning Objective 6 – AACSB – interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge) Many factors, both internal and external, affect stock prices, such as the firm’s earnings, layoffs, labor problems, management issues, and mergers, as well as the state of the industry in general and any threats of political crisis, weather conditions, interest rate changes, and inflation and unemployment data and forecasts.

Global corporations are often affected by numerous external factors, sometimes including factors that have little impact on our own domestic market. Some external factors, such as oil prices, can impact stock in the very long run. In some cases, however, a mere change in CEO can impact the price of a stock; and, this impact is likely to be shorter-lasting. Political or legal changes within a country can impact businesses. Various actions from competitors—external factors—can be both long- and short-lasting, depending on those actions.

Students should provide some assessment of both internal and external factors that can impact the stock they chose to analyze. They should remember that “impact” can be positive or can be negative. They should acknowledge the difficulty of knowing all possible information about factors that affect stock price and judging accurately what kind of affect those factors will have.

EXERCISING YOUR ETHICS: ARE YOU ENDOWED WITH GOOD JUDGEMENT? (Learning Objective 2 – AACSB – ethical understanding and reasoning, reflective thinking) 17-20. Why might a conservative versus risky choice be different at a not-for-profit organization than at a for-profit organization?

The choice might be different, since the ultimate goal of a business is to maximize profit, while the ultimate goal of a nonprofit organization is to provide a service efficiently.

17-21. What are the main ethical issues in this situation?

The main ethical issues in this situation are how to best fulfill YDC’s responsibility to the students it serves, while most effectively stewarding the money entrusted to the organization through charitable donations.

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17-22. What action should the board take?

Answers will vary. Given the purpose of the organization and the intrinsic value of the funds being invested, many students may opt to remain conservative in their investment strategies.

However, given the disparity between the current return and the potential return, students could recommend the board follow the strategy of a mixed portfolio. This would involve diversifying from current very conservative strategy but not moving fully to the other, more aggressive strategy.

CASES: AN APPETITE FOR BEEF (Learning Objective 3 – AACSB – ethical understanding and reasoning, reflective thinking) 17-23. When the Coser and Ongaratto brothers started Fogo de Chao, what were their primary sources of financing?

Since it started simply as the two pairs of brothers in a shed with a grass roof, they began with self-financing, using their own funds.

17-24. After the Coser brothers acquired the Ongaratto brothers’ shares of the company, they brought in GP Investments, a Brazilian venture capital firm. What are the advantages and disadvantages of using venture capital to build a business venture?

Venture capital provides private funds from the investment firm. This can stabilize the financial situation for a business, allow it to pay down debt, or provide funds that enhance its ability to grow. However, the venture capital firm typically gains a significant ownership share of the business. This means the founders may be giving up some control in determining how the firm is run.

17-25. After the sale of Fogo de Chao to Thomas H. Lee Partners, the board and management team decided to issue an IPO of common stock. What were the goals of the IPO? The goals of the IPO were to repay some of the debt associated with the acquisition of Fogo de Chao and to fund additional expansion of the restaurant chain.

17-26. What are the benefits of an IPO as a source of financing? What other options did the company have?

The benefits of an IPO include reaching far more potential investors, thus providing access to a larger pool of funds. Debt financing and equity financing are the two options of acquiring more capital. Debt financing includes borrowing via long-term loans and issuing corporate bonds. However, these options create binding obligations on the company. Once a company has issued an IPO, issuing more common stock or increasing retained earnings are options.

These result in smaller dividends for shareholders, and may decrease the stock price.

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17-27. Would you consider investing in Fogo de Chao? Why or why not?

Answers will vary. Students should examine numerous factors, not simply the performance of the stock since the IPO. These factors include the company’s overall financial health, its past history of results and future forecasts, its record for managerial performance, and overall prospects for competing successfully in the coming years. What is the competitive situation?

What are the expansion plans, and where? Are there political or economic factors to consider in expansion?

17-28. If an investor had bought stock during the IPO, what would that investment be worth today?

Students must research using a Web source such as Yahoo! Finance to determine the current price of the Fogo de Chao stock. The stock was offered at $20 per share at the IPO in June 2015. Answers will vary depending on when the student researches the stock.

TIME TO GOGO? (Learning Objectives 4, 5, and 6 – AACSB – analytical and reflective thinking, application of knowledge) 17-29. Given the risk, what would motivate an investor to purchase stock in Gogo?

An investor would be motivated by the large return on investment should Gogo be able to penetrate the international market.

17-30. Why would Gogo sell stock rather than taking on additional debt financing? Do you think that this was a good decision?

They would sell stock because they are already highly leveraged and probably would not have gotten preferable credit terms. Additionally they do not have to pay interest to the stockholders.

17-31. What role did underwriters, such as Morgan Stanley, JPMorgan, and UBS, play in the IPO? Underwriters buy and assume liability for new securities. This provided Gogo with 100 percent of the money raised by the IPO, less commission. At that point, it also put the risk for the ability to sell the stock onto the underwriters, not Gogo.

17-32. Use a Web source, such as Yahoo! Finance or www.nasdaq.com to obtain the current price of Gogo stock. What has happened to the price of the stock over the last 6 months?

What about the last 2 years?

The answers will vary depending on when the student researches the stock.

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17-33. Using the data provided from the web source in the previous step, is Gogo a small- or large-cap stock? How would this affect the risk associated with this investment?

Answers will vary depending on when the student researches the stock. Students will also have to remember the definition of a large-cap stock vs. a small-cap stock in terms of market value.

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CRAFTING A BUSINESS PLAN PART 6: FINANCIAL ISSUES Assignment Overview: The final part of the business plan project asks students to consider how they’ll finance their business as well as how to create an executive summary for their plan. Remind students that although the executive summary is the final step in the project, it should be placed at the beginning of their completed business plans. Encourage your students to be concise as they write the executive summary, as investors look at the summary before reading the details of the plan.

Because this is the final part of the plan, you will probably want to ask students to submit not just Part 6, but the entire plan at this point.

Files to Provide Students: For this part of the project, students will be asked to complete Part 6: Financial Issues.

STUDENT BUSINESS PLAN PROJECT TEMPLATE PART 6: FINANCIAL ISSUES STARTUP COSTS How much money will you need to get your business started?

Hint: Refer back to Part 5 of the plan, where you analyzed the costs involved in running your business. Approximately, how much will you need to get your business started?

FINANCING How will you finance your business? For example, will you seek out a bank loan? Borrow from friends? Sell stocks or bonds initially or as your business grows?

Hint: Refer to Chapter 16 for information on securities, such as stocks and bonds. Refer also to Appendix I: Financial Risk and Risk Management and Chapter 3 for more information on sources of short-term and long-term funds.

EXECUTIVE SUMMARY Now, create an executive summary for your business plan. The executive summary should be brief—no more than two pages long—and should cover the following points: • • • • • • • •

The name of your business Where your business will be located The mission of your business The product or service you are selling Who your ideal customers are How your product or business will stand out in the crowd Who the owners of the business are and what experience they have An overview of the future prospects for your business and industry

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Hint: At this point, you’ve already answered all these questions so what you need to do here is put the ideas together into a “snapshot” format. The executive summary is really a sales pitch— it’s the investor’s first impression of your idea. Therefore, as with all parts of the plan, write in a clear and professional way.

Once you have written the executive summary, copy it and paste it at the beginning of your business plan—as the very first element.

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APPENDIX I Risk Management APPENDIX OUTLINE A. Coping with Risk 1. Step 1: Identify Risks and Potential Losses 2. Step 2: Measure the Frequency and Severity of Losses and Their 3. Step 3: Evaluate Alternatives and Choose the Techniques That Will Best Handle the Losses 4. Step 4: Implement the Risk-Management Program 5. Step 5: Monitor Results B. Insurance as Risk Management 1. Insurable versus Uninsurable Risks a. Predictability b. Casualty c. Unconnectedness d. Verifiability 2. Special Forms of Insurance for Business a. Liability Insurance b. Property Insurance c. Business Interruption Insurance d. Key Person Insurance e. Business Continuation Agreements

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APPENDIX II The Legal Context of Business APPENDIX OUTLINE A. The U.S. Legal and Judicial Systems 1. Types of Law a. Common Law b. Statutory Law c. Regulatory Law d. Keeping an Eye on Business e. Trends in Deregulation and Regulation 2. The U.S. Judicial System a. The Court System B. Business Law 1. Contract Law 2. Tort Law 3. Property Law 4. Agency Law 5. Commercial Law 6. Bankruptcy Law C. The International Framework of Business Law

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APPENDIX III Managing Your Personal Finances APPENDIX OUTLINE A. Building Your Financial Plan 1. Assessing Your Current Financial Condition 2. Develop Your Financial Goals B. Making Better Use of the Time Value of Money 1. Planning for the Golden Years 2. Time Value as a Financial-Planning Tool C. Conserving Money by Controlling It 1. Credit Cards: Keys to Satisfaction or Financial Handcuffs?

2. Save Your Money: Lower Interest Rates and Faster Payments 3. Declining Asset Value: A Borrower’s Regret D. Financial Commitments of Home Ownership 1. How Much House Can You Afford?

E. Cashing Out from Tax Avoidance (Legally) 1. The IRA Tax Break F. Protecting Your Net Worth 1. Why Buy Life Insurance?

2. What Does Life Insurance Do? 3. How Much Should I Buy? 4. Why Consider Term Insurance?

5. How Much Does It Cost?

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APPENDIX IV Unions and Labor Management APPENDIX OUTLINE

A. Why Do Workers Unionize?

B. The Evolution of Unionism in the United States 1. Early Unions 2. The Emergence of the Major Unions a. American Federation of Labor b. Congress of Industrial Organizations c. The AFL-CIO C. Unionism Today Trends in Union Membership 1. Trends in Union-Management Relations 2. Trends in Bargaining Perspectives 3. The Future of Unions 4. Contemporary Union Structure 5. Locals D. Laws Governing Labor-Management Relations 1. The Major Laws a. Norris-LaGuardia Act b. National Labor Relations (Wagner) Act c. Fair Labors Standards Act d. Taft-Hartley Act E. How Unions Are Organized and Certified F. Collective Bargaining 1. Reaching Agreement on Contract Terms 2. Contract Issues 3. When Bargaining Fails 4. Administering a Labor Agreement

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